[Senate Hearing 117-335]
[From the U.S. Government Publishing Office]
S. Hrg. 117-335
NOMINATION OF JEROME H. POWELL
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
ON
NOMINATION OF:
JEROME H. POWELL, OF MARYLAND, TO BE CHAIRMAN OF THE BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
__________
JANUARY 11, 2022
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available at: https: //www.govinfo.gov /
______
U.S. GOVERNMENT PUBLISHING OFFICE
48-289 PDF WASHINGTON : 2022
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
SHERROD BROWN, Ohio, Chairman
JACK REED, Rhode Island PATRICK J. TOOMEY, Pennsylvania
ROBERT MENENDEZ, New Jersey RICHARD C. SHELBY, Alabama
JON TESTER, Montana MIKE CRAPO, Idaho
MARK R. WARNER, Virginia TIM SCOTT, South Carolina
ELIZABETH WARREN, Massachusetts MIKE ROUNDS, South Dakota
CHRIS VAN HOLLEN, Maryland THOM TILLIS, North Carolina
CATHERINE CORTEZ MASTO, Nevada JOHN KENNEDY, Louisiana
TINA SMITH, Minnesota BILL HAGERTY, Tennessee
KYRSTEN SINEMA, Arizona CYNTHIA LUMMIS, Wyoming
JON OSSOFF, Georgia JERRY MORAN, Kansas
RAPHAEL WARNOCK, Georgia KEVIN CRAMER, North Dakota
STEVE DAINES, Montana
Laura Swanson, Staff Director
Brad Grantz, Republican Staff Director
Elisha Tuku, Chief Counsel
Corey Frayer, Professional Staff Member
Dan Sullivan, Republican Chief Counsel
Cameron Ricker, Chief Clerk
Shelvin Simmons, IT Director
Pat Lally, Hearing Clerk
(ii)
C O N T E N T S
----------
TUESDAY, JANUARY 11, 2022
Page
Opening statement of Chairman Brown.............................. 1
Prepared statement....................................... 45
Opening statements, comments, or prepared statements of:
Senator Toomey............................................... 4
Prepared statement....................................... 46
NOMINEE
Jerome H. Powell, of Maryland, to be Chairman of the Board of
Governors of the Federal Reserve System........................ 6
Prepared statement........................................... 48
Biographical sketch of nominee............................... 50
Responses to written questions of:
Chairman Brown........................................... 75
Senator Toomey........................................... 84
Senator Reed............................................. 98
Senator Menendez......................................... 100
Senator Sinema........................................... 104
Senator Rounds........................................... 105
Senator Kennedy.......................................... 106
Senator Cramer........................................... 107
(iii)
NOMINATION OF JEROME H. POWELL
----------
TUESDAY, JANUARY 11, 2022
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10 a.m., via Webex and in room 106,
Dirksen Senate Office Building, Hon. Sherrod Brown, Chairman of
the Committee, presiding.
OPENING STATEMENT OF CHAIRMAN SHERROD BROWN
Chairman Brown. The Senate Committee on Banking, Housing,
and Urban Affairs will come to order.
This hearing will be in the hybrid format, as we have done
many times. The witness is in person. The Senators can go
either way, and my Senate colleagues will be done by seniority,
whether you are here or whether you are remote, at the gavel.
So thank you all for joining us.
Yearning for a return to normalcy, millions of American
voters elected Joe Biden President of the United States more
than a year ago. The American people were exhausted by the
divisive rhetoric at neighborhood functions, and church
gatherings, and family dinners. They wanted someone who would
bring this country together based on our shared values, like
the dignity of work. They wanted an economy that works for
everyone, not just wealthy elites.
That is what we are delivering.
Think of where this country was a year ago. Domestic
terrorists breached this building a year and a week ago and
assaulting our democracy. Four million more people were out of
a job, and the hope of vaccines, for everyone, was just that--a
hope.
Today, we have made much progress. We have a President
committed to democracy, willing to stand in this breach, as he
put it last week. Vaccines and booster shots have dramatically
lowered the risk for most people, allowed Americans to go back
to work and our children to go back to school, safely.
We added 6.4 million jobs last year--6.4 million jobs--the
most since 1939.
The nomination we consider today represents another step in
President Biden's efforts to rebuild our economy. And the
President is putting results over partisanship, evidenced by
the gentleman sitting at the table, renominating a Federal
Reserve chair of the other political party.
Jerome Powell has served as Chair of the Federal Reserve
since 2018. He joined the Fed in 2012. He served the country
before that in a number of different roles, including as Under
Secretary for Finance at the Treasury Department during the
George H.W. Bush administration.
As Chair, together with President Biden, he has helped us
deliver historic economic progress. We passed the American
Rescue Plan, putting shots in arms and money in pockets. The
unemployment rate dropped to 3.9 percent, down from 6.7
percent--6.7 percent--when President Biden raised his right
hand. In December alone, we added 800,000 jobs, more than
doubling economists' expectations.
The economy has regained 84 percent of the jobs we lost
since the pandemic hit 2 years ago. And for some of my
colleagues who like to measure the strength of the economy only
by the stock market, it was up 20 percent at the end of 2021,
and last year hit record highs 70 different times.
We passed an historic jobs bill, the bipartisan
infrastructure package, a goal that Presidents, for decades,
Presidents of both parties failed to reach.
Chair Powell, along with Vice Chair nominee Lael Brainard,
whom we will hear from later this week, led the Federal
Reserve's unprecedented actions to stabilize our economy in the
face of a global pandemic.
To his credit, Chair Powell recognized the importance of
full employment and what that means for all workers,
particularly those at the margins of our economy. He held firm
against attempts to politicize the Fed, and prevented an
economic downturn from becoming far, far worse. He understands
that the best way to bounce back from this crisis is to get the
coronavirus under control with vaccines.
Today we are at a critical moment. For the first time in
decades, workers are finally--finally--starting to get a little
bit more bargaining power. Wages are growing faster, faster
than inflation, faster than we have seen in over a decade.
Americans are leaving jobs that did not work for them and
their families, and they are finding better ones, often with
higher paychecks. Corporations call this, quote, ``a labor
shortage.'' To me it looks like the free labor market at work
at its best.
Of course we still have many challenges. We have seen
severe supply chain disruptions caused by the pandemic, because
for decades corporations put short-term profits over long-term
resilience, lobbying this body for what turned out to be bad
trade agreements and bad tax policy. The fragile supply chains
stretching all over the globe are not easily fixed. These
disruptions, along with corporate opportunism, are raising the
cost of many consumer goods. That adds to all the costs that
have been growing more unaffordable for decades, from childcare
to prescription drugs to housing.
And while paychecks are starting to go up, wages are still
far from keeping up with corporate profits. We have only just
begun the work of empowering American workers and reorienting
our economy from Wall Street to Main Street.
Some are suggesting, though, that the Fed pull back on the
support of the broader economy and make it harder for people to
get jobs. That is generally what happens.
Economists' lingo tends to mask what we are really talking
about when it comes to the Fed's work, so let us be clear.
President Biden put it pretty well last week. Taking the
example of the price of cars, he said we have two options. We
can increase the supply of cars by making more of them, or we
can reduce demand for cars by making Americans poorer.
That is the choice we face. When people talk about
``cooling off'' the economy, what they really mean is making it
harder for people to find jobs and stopping paychecks from
growing. And we know how this goes. The ``cooling off'' never
seems to extend to corporate profits or executives' pay.
The Fed must not allow only Wall Street to recover while
working Americans are left behind. We have seen that story
unfold far, far too many times before.
Today, banks are quietly celebrating one of their most
profitable years ever, with huge bonuses and payouts. The Fed
must do more to stop consolidation in the banking industry from
hurting consumers and small businesses. It must encourage more
lending to Main Street, and crack down on stock buybacks and
risky bets at the biggest banks. And the Fed needs to take
seriously the systemic risks that threaten our economic
progress, like cryptocurrencies and stablecoins and, most
importantly, climate change.
Chair Powell has shown he understands. In his words,
``profound challenges for the global economy and financial
system,'' unquote. If confirmed, we expect him to take what he
has promised will be ``bold steps'' to tackle these risks.
Chair Powell and Vice Chair nominee Brainard have also
begun important work with the FDIC and the OCC to update the
Community Reinvestment Act regulations. Completing that update
is essential to increase banks' service to, and investment in,
all the communities that have been left on their own for too
long.
We also expect reform inside the Federal Reserve System.
That means increasing diversity at the Fed so that the people
making decisions for our economy actually reflect the workers
who power that economy, something the Fed's entire history has
been, frankly, shameful about.
As Chair Powell has said, ``If entrenched inequities
prevent some Americans from participating fully in our labor
markets, not only will they be held back from opportunities,
but our economy overall will not realize its potential.'' Good
words from the Chair on that. Many of us have appreciated those
words, but now we expect action.
In all of this work the American people must be able to
trust that the Federal Reserve works for them, that officials
are not abusing their positions for personal gain. Recent
revelations about the Fed's ethics scandal have confirmed a lot
of people's worst suspicions about Government officials. As
Chair of the Fed, Mr. Powell has a responsibility to restore
that trust.
The Fed plays a central role in how we want our economy to
work. We cannot have a Fed that returns to business as usual,
because, frankly, that did not work for most Americans.
Chair Powell, President Biden nominated you to grow the
economy for all Americans, not just those at the top, and to
protect that growth from threats to our financial system, like
risky Wall Street schemes, and cryptobubbles, and increasing
climate disasters. We expect you to meet these challenges, and
I believe you have shown the leadership to do so. We will be
watching closely.
Senator Toomey.
OPENING STATEMENT OF SENATOR PATRICK J. TOOMEY
Senator Toomey. Thank you, Mr. Chairman. Chairman Powell,
congratulations on your renomination. As I have said, I intend
to vote in favor of extending your chairmanship. Let me briefly
explain why.
There is broad bipartisan backing for Chairman Powell's
renomination because he has a record of acting thoughtfully and
constructively, especially in some very difficult
circumstances.
First, he did implement a number of modest, sensible
reforms that reduced regulatory burdens, including on small
banks, and helped to encourage economic growth. Second, when
the pandemic hit nearly 2 years ago and Governments worldwide
began to shut down their economies, credit markets seized up
and the economy teetered on the brink of collapse. But with
Congress' help, Chairman Powell acted swiftly and appropriately
to stabilize the financial markets and the economy.
And to his critics who claim that the regulatory reforms
that he has spearheaded would hasten the collapse of the
banking system, we now know that is clearly empirically false.
After the pandemic caused the economy to nearly collapse, our
country emerged with the most well-capitalized banks in
history. It was, and still is, abundantly clear that those
regulatory reforms did not come at the expense of financial
stability.
Of course, none of the Fed's pandemic actions came without
a cost. This negative-real interest rate environment continues
to distort markets, risk asset bubbles, and punish savers. And
the Fed has dramatically expanded its balance sheet with
trillions of dollars in Government bonds, effectively
monetizing a lot of debt and facilitating profligate Government
spending.
For the past 18 months, I cautioned that the Fed was
fighting the last war, a mystery pathogen that led Governments
to collectively shut down the global economy, when in fact a
new enemy had arrived, and that was inflation.
I am relieved the Fed has acknowledged inflation is running
well above and longer than its initial projections. In
response, the Fed has accelerated the termination of its bond
buying program, and FOMC participants appear to be accelerating
the process to normalize interest rates. These are welcome
developments.
But I remain concerned with the Fed's actions going
forward. First, I worry that the Fed's extraordinary response
to the crisis could become the new normal for monetary policy.
We are more than a year into a record economic expansion, with
unemployment at near all-time lows, and yet the Fed is still
today buying Government and agency securities.
Having continued QE throughout the recovery was, in my
view, a mistake. It has contributed to asset bubbles, distorted
markets, and a suboptimal allocation of capital, credit, and
resources, all of which ultimately lead to lower economic
growth.
Second, I worry that the Fed's new monetary policy
framework has contributed to the Fed being behind the curve, as
we are seeing inflation running at a 39-year high. Under this
new framework, the Fed intentionally tolerates above target
inflation for an indeterminate amount of time. Under the old
approach, the Fed may have acted last April when we first
passed a 4 percent inflation rate, and we have not seen that in
some time.
Beyond monetary policy, I am deeply concerned to see the
Fed, especially at the regional banks, wade into politically
charged areas like global warming and so-called racial justice.
Regional banks have hosted multiple symposia on these issues
that consistently embrace and advance a particular liberal
political agenda.
And the Fed itself joined the Network of Central Banks and
Supervisors for Greening the Financial System. The network's
stated aim is to use financial regulation to, and I quote,
``mobilize mainstream finance to support the transition toward
a sustainable economy,'' end quote. In other words, to direct
credit away from the fossil fuel sector.
The troubling politicization of the Fed puts its
independence and effectiveness at risk. The Fed has been
granted operational independence to protect monetary policy
from short-sighted political interests, and, in turn, the Fed
has operated largely apolitically to great effect.
There is a kind of bargain here. The Fed is given
independence on the assumption it will only engage in areas in
which it has a mandate. That makes sense.
But if the Fed is going to stray from its mandate and
become a political actor, advocating a certain set of social
policies, then there is no way it is going to maintain its
independence from the political branches of Government that are
actually responsible for those topics.
The Fed does not have a mandate to advance politically
charged causes that are irrelevant to its mandate, like global
warming or advancing so-called racial justice. And to make
matters worse, when I have sought to understand these
developments at the regional banks I have been met with
unacceptable noncompliance with reasonable requests.
So let me be clear. If this politicization continues
unchecked it will not end well for the Fed or for independently
driven monetary policy. As the Fed's leader, I hope you take
this seriously and rein it in to protect the Fed's legitimacy
and independence.
I have observed that the Fed has had the good sense to
adjust its behavior as the facts and circumstances regarding
inflation have come in differently than were expected.
Unfortunately, we have seen no such humility or recognition of
reality from the Biden administration or our Democratic
colleagues. They appear set on making the inflationary problem
worse, further causing declines in real wages, with more
reckless spending that gooses demand and regulatory and
protectionist policies that limit supply, that in combination
ultimately push prices for basic goods higher. The crisis we
face now is inflation complicated by policymakers who unwisely
behave as if it is still March of 2020.
The Fed cannot correct for policy failures like school
closures, Government-induced business shutdowns, or misguided
expansions of the welfare State, nor should it try.
Chairman Powell, the role of the Fed Chairman is crucial
for our shared economic prosperity. I was encouraged to see
your renomination, and I hope that you will do everything in
your power to ensure that the Fed operates within its limited
mandate to effectively support the American economy.
Chairman Brown. Thank you, Senator Toomey.
Chair Powell, please rise. Raise your right hand, please.
Do you swear or affirm that the testimony you are about to
give is the truth, the whole truth, and nothing but the truth,
so help you God?
Mr. Powell. I do.
Chairman Brown. Do you agree to appear and testify before
any duly constituted committee of the U.S. Senate?
Mr. Powell. I do.
Chairman Brown. Thank you. Please be seated.
Chair Powell, we welcome you to the Committee. If you would
like to introduce family or friends feel free. Please begin
your testimony. Thank you.
TESTIMONY OF JEROME H. POWELL, OF MARYLAND, TO BE CHAIRMAN OF
THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. Powell. Thank you. Is this on? Yes. Thank you.
I did not bring any family or friends here today, in light
of the limited seating circumstances, but I will mention them
in my testimony. Thank you.
Chairman Brown, Ranking Member Toomey, and other Members of
the Committee, thank you for the opportunity to appear before
you today. I would like to thank President Biden for nominating
me to serve a second term as Chair of the Board of Governors of
the Federal Reserve System.
I would also like to thank my colleagues throughout the
Federal Reserve System for their dedication, perseverance, and
tireless work on behalf of the American people. Their
commitment and expertise were essential to the Fed's response
to the COVID-19 crisis and remain vital to the implementation
of monetary policy as our economy continues to progress.
Particular thanks go to my wife, Elissa Leonard, and our
three children, Susie, Lucy, and Sam. Their love and support
make possible everything I do. My five siblings are all
watching, or will later claim to have watched, and we are
thinking of each other and of our parents today with love and
gratitude.
Four years ago, when I sat before this Committee, few could
have predicted the great challenges that would soon become ours
to meet. On the eve of the pandemic, the U.S. economy was
enjoying its 11th year of expansion, the longest on record.
Unemployment was at 50-year lows, and the economic benefits
were reaching those most on the margins. No obvious financial
or economic imbalances threatened the ongoing expansion. But
this attractive picture turned virtually overnight as the virus
swept across the globe.
The initial contraction was the fastest and deepest on
record, but the pain could have been much worse. As the
pandemic arrived, our immediate challenge was to stave off a
full-scale depression, which would require swift and strong
policy actions from across Government.
Congress provided by far the fastest and largest response
to any postwar economic downturn. At the Fed, we used the full
range of policy tools at our disposal. We moved quickly to
restore vital flows of credit to households, communities, and
businesses and to stabilize the financial system.
These collective policy actions, the development and
availability of vaccines, and American resilience worked in
concert, first to cushion the pandemic's economic blows and
then to spark a historically strong recovery.
Today the economy is expanding at its fastest pace in many
years, and the labor market is again strong.
As always, challenges remain. Both the initial shutdown and
the subsequent reopening of the economy were without precedent.
The economy has rapidly gained strength despite the ongoing
pandemic, giving rise to persistent supply and demand
imbalances and bottlenecks, and to elevated inflation. We know
that high inflation exacts a toll, particularly for those less
able to meet the higher costs of essentials like food, housing,
and transportation.
We are strongly committed to achieving our statutory goals
of maximum employment and price stability. We will use our
tools to support the economy and a strong labor market and to
prevent higher inflation from becoming entrenched.
We can begin to see that the postpandemic economy is likely
to be different in some respects, and the pursuit of our goals
will need to take these differences into account. To that end,
monetary policy must take a broad and forward-looking view,
keeping pace with an ever-evolving economy.
Over the past 4 years, my colleagues and I have continued
the work of our predecessors to ensure a strong and resilient
financial system. We increased capital and liquidity
requirements for the largest banks, and currently capital and
liquidity levels at our largest, most systemically important
banks are at multidecade highs. We worked to improve the
public's access to instant payments, intensified our focus and
supervisory efforts on evolving threats such as climate change
and cyberattacks, and expanded our analysis and monitoring of
financial stability. We will remain vigilant about new and
emerging threats.
We also updated our monetary policy framework, drawing on
insights from people and communities across the country, to
reflect the challenges of conducting policy in an era of
persistently low interest rates.
Congress has assigned the Federal Reserve important goals
and has given us considerable independence in using our tools
to achieve them. In our democratic system, that independence
comes with the responsibility of transparency and clear
communication, to keep the public informed and enable effective
legislative oversight. That duty takes on even greater
significance when the Fed must take extraordinary actions in
times of crisis. In order to facilitate that transparency, and
to earn your trust and that of the American people, I have made
it a priority to meet regularly and frequently with you and
your elected colleagues, and I commit to continuing that
practice if I am confirmed to another term.
The Federal Reserve works for all Americans. We know our
decisions matter to every person, family, business, and
community across the country. I am committed to making those
decisions with objectivity, integrity, and impartiality, based
on the best available evidence, and in the long-standing
tradition of monetary policy independence. That pledge lies at
the heart of the Fed's mission and is one we all make when we
answer the call to public service. I make it here again, with
force and without reservation.
Everything we do at the Federal Reserve is in pursuit of
the goals set for us by Congress. I am honored to have worked
in service to those ends since I joined the Fed in 2012, and as
Chair for the past 4 years.
Thank you. I look forward to your questions.
Chairman Brown. Thank you, Chair Powell.
Many working Americans are concerned about rising prices,
and I think President Biden's decision to renominate you to a
second term as Chair shows he is confident you will continue to
lead our economy through this ongoing crisis.
In November, you indicated that the rise of the Omicron
variant, 586,000 new cases daily over the last week, that the
rise of the Omicron variant posed significant risks to
employment and economic activity. Do you agree that higher
prices are related to the supply and demand imbalances that can
be traced directly back to the pandemic and the reopening of
the economy?
Mr. Powell. Yes, I do, for the most part, if you look back,
and you can trace to developments including strong demand and
also supply constraints.
Chairman Brown. Thank you. Last year, FSOC released its
report on climate-related financial risk which describes how
climate change is a threat to our financial stability. In the
past you have said, your words, ``climate change is an emerging
risk to financial institutions, the financial system, and the
economy,'' end quote.
Chair Powell, will the Fed follow the FSOC reports'
recommendations, including implementing climate stress tests
for the biggest banks?
Mr. Powell. We are looking at climate stress tests. I think
it is very likely that climate stress scenarios, as we like to
call them, will be a key tool going forward. I would stress
that those are very different from the regular stress tests
which affect capital. Climate stress scenarios at this stage
are really about assuring that the large financial institutions
understand all of the risks that they are taking, including the
risks that may be inherent in their business model regarding
climate change over time.
Chairman Brown. Will you make this a top priority if
confirmed to another term?
Mr. Powell. Yes, it will be. I would say, within
supervision, as I mentioned, that is likely to be a very
important priority over the coming years.
Chairman Brown. The position of Vice Chair of Supervision
but also yours.
Mr. Powell. Yes.
Chairman Brown. OK. It is the Fed's responsibility, as you
know, to promote financial stability. It means we need strong
financial safeguards in place to protect American workers and
families from risks in our financial system. It is all that.
Chair Powell, recently the Fed has refocused its full
employment objectives to make sure it includes workers of all
backgrounds. Can you agree that when all workers, including
women, including Black and Brown workers, are able to fully
participate in the workforce, that our economy grows, and do
you think it is important for the Fed to understand and
proactively address racial and gender disparities in wealth and
income and employment in our country?
Mr. Powell. So what we saw at the end of the last very
long, longest in our history, expansion was as the labor market
tightened the benefits began to go more broadly to those at the
lower end of the income spectrum and to groups that have been
more marginalized, from an economic standpoint. And that was
seen, I think, very broadly as a highly desirable set of
outcomes.
So our tools do not generally have direct distributional
effects, but I do think that we see now the great benefits that
a strong labor market can bring to, you know, right across the
whole population and for the whole economy.
Chairman Brown. But you are suggesting, from your answer,
that only when there is strong demand for labor do people who
are more on the margins of society, people of color, women,
people who have not done as well, only then will they benefit?
Does the Fed have responsibility beyond that?
Mr. Powell. Well, of course we have responsibilities in
bank supervision and community affairs and fair lending and
things like that, but just focusing on monetary policy, our
principle tool is interest rates, and they affect demand over
time. And I do think the main thing that we can do is to make
sure that, you know, consistent with the inflation side of our
mandate that we do foster a strong employment market.
Chairman Brown. Is part of that a more diverse workforce at
the Fed?
Mr. Powell. As you know, we work very hard to achieve
diversity, and as all major American institutions, public and
private, do these days, we certainly do. And think that having
a diverse workforce makes us better at doing our jobs. And so
it is an important focus and a high priority.
Chairman Brown. OK. Thank you. Senator Toomey.
Senator Toomey. Thank you, Mr. Chairman. Chairman Powell,
we all noted, with great interest, the shift in the Fed's
focus, the acceleration in the tapering and the indication that
FOMC members expect now a series of interest rate increases
this year. I am trying to understand where this leads to, and I
wonder if you could comment on the fact that if we had three or
even four 25-basis-point increases in overnight rates we would
still, in my view, have a very accommodative stance with
negative real short-term rates.
Is it your view that it is realistic to bring inflation
back to the target level if short-term interest rates are
negative? Real rates.
Mr. Powell. So the way I would look at it is this. What we
have now is a mismatch between demand and supply. We have very
strong demand in areas where supply is constrained,
particularly around goods, particularly around things like
cars. So how are those two things going to get better into
alignment? Well, part of the answer is going to be thorough
shifts in demand, and we think that part of it will be through
the return of greater supply.
So I do not think we look to get all of the realignment
between demand and supply through the demand channel, although
we should get some. But at the same time we do think that we
will get, over the course of this year, return to normal supply
conditions, and that is going to affect our policy.
I will say, though, you know, if we see inflation
persisting at high levels longer than expected, then if we have
to raise interest rates more over time we will. We will use our
tools to get inflation back, and the main reason is this, a
reason is this, that to get the kind of very strong labor
market we want, with high participation, it is going to take a
long expansion. We can see that participation is moving only
very slowly. And to get a long expansion we are going to need
price stability. And so, in a way, high inflation is a severe
threat to the achievement of maximum employment and to
achieving a long expansion that could give us that.
Senator Toomey. I think that is a very important point. Let
me also just ask you, as I mentioned, I understood the need for
quantitative easing, the extraordinary measures that we are
taking during the crisis. But I worry that the Fed's decision
to continue to use these policies, well after the crisis had
passed--and, in fact, we are in the midst of a strong
recovery--increases the risk of normalizing a behavior like
this bond buying.
So I think it is your view that it is important that this
not become normal routine part of Fed behavior, but could you
clarify that, and if it is important that this not become a
routine matter, how do we ensure that it does not?
Mr. Powell. So I guess I would start by saying that the
last two downturns, there has been nothing normal about them.
They have been two historically large downturns, and one being
the global financial crisis and one being the pandemic, and we
were called to use--to invent new tools and use all of our
tools.
So really, if we had a regular-way recession, a couple of
quarters of negative growth, a typical recession, then the
question would be, what do we need to do? So in this era of
very low interest rates there is not going to be as much room
to cut, but that would be the first thing that we would do.
Now just because we have been, and probably remain in an
era of very low interest rates, we would have to look at asset
purchases as the next tool in line, but I do not think we would
automatically use it unless it was necessary.
Senator Toomey. I would certainly hope that we would not
automatically use it. I would hope that there would be a very,
very high threshold to get over, especially when you consider
the ways in which it distorts the allocation of capital.
As I mentioned in my opening remarks, one of things I am
very concerned about is especially the regional banks having
strayed from the Fed's statutory mission on monetary policy
into inappropriate and overtly political advocacy. As one of
many, many examples, the Boston Fed conducted a virtual event
as part of its Racism and the Economy series, in which the
speakers routinely and adamantly called for defunding the
police, which has nothing to do with the Fed's mandate.
For 7 months now, I have been asking for information from
several regional banks about their political activism, and for
7 months they have simply refused to comply with my request. So
I have requested some documentation from the main Fed with
respect to this activity, all of which, by the way, is subject
to FOIA, in any case.
Now I am sure it is not your opinion that the Ranking
Member of the Senate Banking Committee is entitled to less
information than a member of the general public would get
through a FOIA requests, so can you commit to getting me the
information that is now long overdue?
Mr. Powell. So I am aware that you have submitted a FOIA
request, and we are processing it not. And I do not know what
is asked for. I do not whether it is actually covered by FOIA.
But to the extent that it is, you will, of course, get it.
Senator Toomey. I think it is very important that this
Committee and Congress understand how the Fed reaches decisions
to engage in political advocacy.
Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Toomey.
Senator Reed from Rhode Island is recognized.
Senator Reed. Thank you very much, Mr. Chairman, and
Chairman Powell, congratulations on your renomination. I
believe that President Biden has made two excellent choices,
yourself and Governor Brainard. I think you have worked
together, hand in hand, for many years. I think you will be a
superb team. And so I look forward to supporting your
nomination and Governor Brainard's nomination also for Vice
Chair. And let me join my colleagues in commending you for an
exceptional job with respect to the pandemic.
One of the interesting consequences of the pandemic and the
employment market is that we have seen wages rise. In fact, we
have seen them rise with respect to factory workers and
nonsupervisory personnel about 5.8 percent. And my concern is
would an increase in interest rates in any way begin to slow
down that rise or indeed reverse it?
Mr. Powell. So like you, and I think like everyone, we
think wages moving up is generally a good thing, but if you
look back through history there are times when wages have moved
up in a way that has fostered persistent inflation, and that
hurts everyone. And particularly it hurts people on fixed
incomes. So we do not see that right now, but we do see these
are the biggest wage increases in decades, and so we are
watching carefully.
You know, to the extent we are looking at this year, what
we see is an economy where the labor market is recovering
incredibly rapidly, really beginning around the middle of last
year that the unemployment rate has been dropping at more than
\3/10\ of a percent per month since last June. It is now below
4 percent, which is pretty close to, you know, half-century
low. So that part of the employment market is doing very well.
Meanwhile, inflation is running very well, very far above
our target, and what that is telling us is that the economy no
longer needs or wants the very highly accommodative policies
that we have had in place to deal with the pandemic and the
aftermath. So that is what that is really about.
We are really just going to be moving, over the course of
this year, to a policy that is closer to normal, but it is a
long road to normal from where we are. Right now we are very
highly accommodative, and it is really time for us to begin to
move away from those emergency pandemic settings to a more
normal level. It really should not have negative effects on the
employment market.
Senator Reed. Which it is ironic because, as you pointed
out in your opening statement, when you took over we had 11
straight years of significant economic growth, but that was not
translated into the wages of most working people, particularly
entry-level and non-factory workers, et cetera. And now we have
seen a situation where that is reversed, and I would hope that
we could continue that type of progress, and I know you will be
sensitive to that, going forward.
One of the interesting things about the situation we face
now is that the Fed tools are probably most effective at
reducing overall demand, but a lot of what we are facing is
supply problems. You know, the situation about automobiles, the
problem there, in fact, I think used cars are so expensive they
are distorting the inflation numbers significantly, and that is
a result of the shortage of microchips and other types of
chips, which is a result of the pandemic. These are supply
issues.
So to what extent will your dealing with demand help
supply, or maybe that is the real problem?
Mr. Powell. No, it really will not. We really cannot
directly affect the supply side conditions. That is why I
mentioned this really is a problem both of very strong,
elevated demand, particularly in a part of the economy, the
goods sector, the durable goods sector, things like washing
machines and cars and all of the things that people bought
during the course of the pandemic when they could not spend
money on travel and services. That is where spending is running
at level 20 percent above where it was before the pandemic, and
it has just kind of overwhelmed the supply chains, most of
which are global. In these days you are getting parts and fully
assembled products coming in.
So we can affect the demand side. We cannot affect the
supply side. But this really is a combination of the two.
Senator Reed. And the final point I want to make is that
the issue of climate change is absolutely critical. It is an
economic issue. I do not think you want to see a lot of banks
owning property that is literally under water. But if you look
at any of the analysis going forward that could be the case.
So I would hope that the Fed would view this as an economic
issue and pursue it as an economic issue that is going to
affect us dramatically. And my colleague, Senator Whitehouse,
has been one of the most staunch visionaries and advocates for
that position, and I hope the Fed is responsive.
Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Reed.
Senator Shelby, from Alabama, is recognized.
Senator Shelby. Thank you, Mr. Chairman. Chair Powell,
welcome back to the Committee. You have spent a lot of time
with us in the past.
Inflation is currently surging at its highest rate in 40
years. And while I appreciate the decision that the Fed has
made to begin tapering, I am concerned that the Fed missed the
boat on addressing inflation sooner. A lot of us are. And as a
result to that, the Fed, under your leadership, has lost a lot
of credibility.
I only have a little time so I have a number of questions,
and I know you can probably remember them, or maybe together we
will remember them all. But I would like to touch on this, if
you would, I would like for you to. Why did the Federal Reserve
initially forecast inflation to be transitory? Second, has your
view on the threat of inflation changed? Why? What assurances
can you provide here today that the Fed has a better grasp
today on inflation than a year ago, and so forth? And what
factors have caused the U.S. to have greater increases in
inflation compared to other developed countries? And I guess
last, yes, how important is price stability to the American
people?
That is a lot of questions, but these are all relevant to
your job. Thank you.
Mr. Powell. Respecting your time let me go right through
these. First, let me say price stability is half of our
mandate. There is no basis in the law for preferring maximum
employment over price stability, or vice versa. They are equal.
However, at different times one of them is farther away from
its goal, and that is the one that we need to focus on a little
bit more. Sometimes that is maximum employment. Sometimes it is
inflation. I would say now it is inflation.
So on inflation, why do we say transitory? We said that
because we thought that these supply side bottlenecks and
shortages would be alleviated much more quickly than they have
been. There is no empirical experience with this before. We
have not had the global supply chain collapse. We have not had
this kind of a labor force shock before. So we, and essentially
all other mainstream forecasters, forecasted that by now we
would be seeing much lower inflation, and that is not what
happened.
So what has changed is that, just as I mentioned, the
supply side constraints have been very persistent and very
durable. We are not seeing really a lot of progress. If you
look across, you know, the global supply chains and what is
happening domestically, look at our ports, look at Long Beach
and L.A., the two big ports on the West Coast for Asia, the
number of ships at anchor is still at a record level. So we are
not really seeing yet the kind of progress we, essentially all
forecasters, really thought we would be seeing by now, and that
is really what is driving it.
I think we did foresee the strong spike in demand. We did
not know that it would be so focused on goods, but that is
really what happened.
So I think we learned that. It was not that it was just--
this is a unique set of circumstances. Really, the United
States economy is so dynamic. The supply side adapts quickly.
You know, there are new companies being started and old
companies dying all the time. This is a situation where there
actually are hard constraints. People want to buy cars. Car
makers cannot make any more cars because there are no
semiconductors. So that has never happened. I cannot think of
another example of that, and that is true across.
So what factors, really it is the supply side. Did I miss
any? I would like to think I covered, at least touched all five
of those.
Senator Shelby. What have you really learned, and you would
share with your fellow Board of Governors, to get a grasp, as
much as you can, on inflation? Because a lot of us have been on
the Committee awhile and we remember what Dr. Volcker did with
the Fed under his leadership. It was draconian, but it worked.
I hope we will not have to do that, but you have got to do
whatever you have to do. Do you agree?
Mr. Powell. We have to achieve price stability, and I
believe we will, and I am confident we will. And again, it is
not just a question of restraining demand, although that will
be--right now we are stimulating demand with very highly
accommodative policy. As we move through this year we will, in
all likelihood--we do not know the future, but if things
develop as expected we will be normalizing policy, meaning we
are going to end our asset purchases in March, meaning we will
be raising rates over the course of the year. At some point,
perhaps later this year, we will start to allow the balance
sheet to run off.
And that is just the road to normalizing policy. That is
what we are going to be doing, and of course we are committed.
But we do believe, and I think widely it is believed that these
supply blockages will be alleviated too, so that there will be
more supply as well, more labor force, but people will be
coming back into the labor force. We will see more recovery,
although it has been slow, from participation. And we will see
these global supply blockages coming down. We will see some
more cars, although that is going to take some time. And that
will help as well, getting supply and demand back at the same
level.
Chairman Brown. Senator Menendez, from New Jersey, is
recognized.
Senator Menendez. Thank you, Mr. Chairman. Chair Powell,
let me start by reiterating a point that I have made,
unfortunately far too many times, and the latest batch of
nominees leads me to, once again, the conclusion that there is
serious diversity problem at the Federal Reserve.
Latinos are the country's largest minority. They make up
nearly 20 percent of the entire U.S. population. It is
outrageous that they have no representation in Fed leadership.
There has never been a single member of the Board of Governors
or regional bank president that has lived the experience of
being a Latino in the United States, and that means that the
voices of one-fifth of the country's citizens are repeatedly
drowned out when the Fed is making critical decisions on
economic policy, decisions that affect whether a Latino family
can afford their first home, find a job that pays a living
wage, send their children to college, save for a comfortable
retirement, or get a loan to expand their business.
In late October, several of my colleagues and I sent you a
letter requesting that you work closely with the Boston and
Dallas banks to recruit diverse candidates for their open
president positions. We received your response to that letter
just last week, and I have to be honest with you, the lack of
detail was thoroughly disappointing. I had been expecting you
to provide a more detailed update on the search process before
your confirmation vote, including what specific changes you
have made to the process and how they are going to lead to a
more diverse candidate pool, and I hope that you will do that.
While we face significant challenges with the Omicron
variant and supply chain disruptions that are both causing
families to face higher prices for a variety of goods, the fact
is that we are experiencing a strong recovery from an
unprecedented pandemic. Thanks to the American Rescue Plan and
other policies put in place by Congress and the Biden
administration, we gained an average of 537,000 jobs per month
since President Biden took office.
So Chairman Powell, if you are confirmed, how would you
continue to balance the Fed's dual mandate to keep price
increases manageable while not dampening the strong job and
wage growth that we have seen over the past year?
Mr. Powell. So by so many measures labor demand relative to
supply is at its highest level, really, than I can remember.
The level of job openings is at an all-time high as a
percentage of the labor force. The level of quits--labor
economists look at the level of quits as a real indicator of
how strong the labor market--the percentage of quits, the
number of quits is at an all-time high.
So the problem is not lack of demand for labor. The problem
is that there is a significant supply problem, which is
associated with the pandemic and a range of other factors.
Participation has not recovered, but as you can see, for people
who are in the labor force the unemployment rate is dropping at
historically fast levels.
So we do not have a labor demand problem to solve through
our policy. What we have is a labor supply problem. So what is
the threat? We are clearly on a path to have an even better
labor market over time. What are the big threats to our getting
there? Well I would say very near the top of the list is the
threat of price stability. If inflation does become too
persistent, if these high levels of inflation get entrenched in
our economy and in people's thinking, then inevitably that will
lead to much tighter monetary policy from us, and it could lead
to a recession, and that will be bad for workers.
So really, achievement of maximum employment, by which we
really mean continued progress in hiring and in participation,
is going to require price stability, and that is going to
require us to use our tools, to the extent they work on the
demand side, while we also expect some help from the supply
side.
Senator Menendez. Do you expect inflation to subside as
vaccinations increase and supply chains are repaired?
Mr. Powell. Over time, yes. Over time. The question is how
fast, and the risks that we are running in the meantime that
inflation psychology starts to get entrenched. But certainly I
believe that. And you make a great point about vaccinations.
Getting ahead of the pandemic, I mean, I do not think 2 years
ago we thought we would still be having record levels of cases,
and even close to record levels of hospitalizations. Getting
past the pandemic is the single most important thing we can do.
Senator Menendez. Now finally, according to the New York
Times, New Jersey and other parts of the Northeast were hit
particularly hard at the beginning of the pandemic and during
the most recent surge, while the Midwest was most strongly
affected in November of 2020, and the South at the end of last
summer.
How closely does the Fed look at differences in regional
performance when making policy decisions?
Mr. Powell. We have to focus on the national level, but of
course we follow, in this instance, the earlier Delta, for
example, COVID rolled around the country on a regional basis.
That is not so much the case with Omicron. It is so contagious,
and it is not the same everywhere, but it really is going
through the whole country at a pretty rapid rate. But we follow
that very, very carefully. I would say we did not know much
about vaccines and pandemics 2 years ago, but we have all had 2
years to learn.
But, you know, we defer to the experts, though. We do not
substitute our judgment on medical issues for the experts but
we talk to them all the time.
Senator Menendez. Right. Well I look forward to following
up with you on the diversity question.
Thank you, Mr. Chairman.
Chairman Brown. Senator Crapo is recognized, from Idaho,
from his office, I believe.
Senator Crapo. Yes. Thank you, Mr. Chairman, and Chair
Powell, welcome back to the Committee. When you last appeared
before I also asked you about an expected Fed report on digital
currencies. You indicated that delays in releasing the report
were because the Fed wanted to ensure that their analysis was
correct and complete, and that a release was expected in the
coming weeks. However, that report still has not been released.
Do you have an update you can share on the status of the
report, and are there problems with sharing this report with
Congress and the public on what the Fed may be proposing with
respect to possible centralizing public digital currency?
Mr. Powell. So the report really is ready to go, and I
would expect we will drop it--I hate to say it again--in coming
weeks. But it really is in a situation where it is ready to go.
The fall for us, given, you know, changes in monetary policy
and other things going on, it was hard to--we did not get it
quite to where we needed to get it. But it is effectively there
now and I will tell you, you know, within weeks we will be
publishing it.
And by the way, it is more going to be an exercise in
asking questions and seeking input from the public rather than
taking a lot of positions on various issues, although we do
take some positions.
Senator Crapo. Thank you. Well I hope that you will be able
to meet this couple of weeks projection. As you know, I have
been asking you and other members of the Fed about this for a
long time, and I really do believe that it is time that the Fed
releases this report so that we can engage in the further
discussion of it.
I want to also, with the rest of my time, go back to the
issue of inflation. I know you have talked about it a lot with
us this morning. In response to my question about inflation
last November, you confirmed that inflationary pressures would
certainly last, in your words, through the middle of this year,
this coming year. What do you now expect with the time we have
seen since you last answered these questions in front of the
Committee? What do you now expect inflationary pressures to
look like throughout this year?
Mr. Powell. I would not think things have changed much on
that front since last November. I think that inflationary
pressures do seem to be on track to last well into the middle
of next year. And if they last longer than that then I will
just say that our policy will continue to adapt. Our policy has
been adapting to this, you know, for some months, but if
inflation is going to last longer than that would potentially
imply more risk of its persistence and ultimately becoming
entrenched, and our policy will respond accordingly.
Senator Crapo. You just said well into the middle of next
year. Did you mean this year or next year?
Mr. Powell. I mean this year. You are right. I still think
it is 2021 sometimes.
Senator Crapo. OK. I thought so, but I wanted to be sure.
You know, with regard to a question of what is going to
happen over the next 3 to 4 months, as we try to deal with the
inflationary pressures we have described, if consumer price
inflation were to persist over the next 3 or 4 months at
somewhere between 5 and 7 percent as we are now seeing, and if
the unemployment rate were to remain about where it is now,
below 4 percent, what would we expect the tools that the Fed
would need to use would be?
And I noted in one of your responses on the inflation issue
earlier today I thought I heard you say that the Fed's
overnight interest rate would still, even after you may use it
as a tool, would still be very low. Could you just discuss--I
know you cannot predict the specificity, what the Fed would do,
but could you discuss what you expect interest rates to look
like as you utilize that tool?
Mr. Powell. Sure. So I think to your point, you know, we
are at a place where unemployment is now very low, historically
low, and inflation is well above target, and the economy no
longer needs this very highly accommodative stance of policy.
And I would expect that this year, 2022, will be a year in
which we take steps toward normalization. That will involve
raising the Federal funds rate, that will involve ending asset
purchases in March, and perhaps later this year, depending on
the run of things, we would also see ourselves beginning to
allow the balance sheet to shrink.
So I think that is the broad picture of what I see
happening. The committee has not made any decisions about the
timing of any of that, and I think we are going to have to be
both humble and a bit nimble here. You know, if you go back and
look at where we were a year ago today in the economy, you
know, vaccines were arriving, and I think in my thinking there
was the idea that that will really help us get past the
pandemic. It has helped a lot but yet we are at all-time record
cases and approaching record hospitalizations nationally.
So the thing has stayed with us longer, and I think we are
going to have to be open to the changing environment, and
monetary policy is going to have to adapt as we learn more. We
are going to learn a lot about the path of inflation,
particularly as it relates to these supply side blockages we
have had, over the first 6 months of the year, and every month,
really.
Senator Crapo. So do I understand, are you saying that if
the pandemic remains problematic and aggressive, that that
would impact the timing of any decisions the Fed might make in
terms of the Federal funds rate?
Mr. Powell. I would say it could, but, you know, what has
happened is the economy has made all these gains in the face of
two--during 2021, we had two major pandemic outbreaks, two
variant outbreaks, and really, the beginning of 2021, was
dominated by a very strong wave of the original COVID. And yet
the economy, we made tremendous progress in the labor market in
2021, and growth is at a multidecade high in 2021.
So I expect the economy to continue to be able to deal with
these outbreaks. I think it is likely, though, if the experts
are right and Omicron is going to go through really quickly,
and peak perhaps within a month and then come down after that,
I think it is likely you will see, you know, lower hiring and
perhaps a pause in growth and that kind of thing. But that it
should be short-lived. It should be, and then the economy, the
forecast for the rest of the year, or certainly for the next
quarter or two, would be a very positive one, very positive.
Senator Crapo. And if that happened, would that increase
the likelihood of Fed action to increase the Federal funds
rate, or would it delay that?
Mr. Powell. Sorry. If that all happens? So I think what we
are seeing is an economy that functions right through these
waves of COVID. My colleagues and I see that, and you see that
every quarter we write down projections of interest rates that
are individual projections. They are not a committee plan or
anything like that. But broadly speaking, all Members of the
Committee see interest rate increases coming this year. The
median was 3. But that is going to depend on data. It is going
to depend on the progress we see on the supply side, the
progress we see on inflation, and we honestly do not know.
There is risk on both sides, really, on growth and potentially
on inflation as well.
So we are going to have to be just very attentive to what
is happening in the economy and willing to adapt pretty nimbly
our policy as we go through the year.
Chairman Brown. Thank you, Senator Crapo.
Senator Tester, from Montana, is recognized.
Senator Tester. Yeah. Thank you, Mr. Chairman. I do not
know if there is any way to turn that mic down, but that was
almost painful. I mean, it was tough. Not your questions,
Crapo. Just the intensity.
First of all, Chairman Powell, I want to thank you for your
willingness to serve. I appreciate your work you have done,
working with the Federal Reserve Board throughout the health
and economic crisis that we have found ourselves in. And just
to say, as many have said before me, we appreciate your steady
hand.
In your opening statement you talked about climate change
and cyberattacks, taking those into account as part of the
things the Fed has to do. There was an interesting story in the
Post yesterday that talked about $145 billion this country
spent on disasters in 2021. December was the warmest ever, and
last year was the fourth-warmest year in history. I think that
is a conservative number, because I do not think it took in the
impacts of our crops and crop insurance and things like that.
I say that because I hope you will continue to gather as
much information as possible about what needs to happen as this
climate situation appears to be getting worse and not better as
time moves on. The American taxpayer deserves that.
Look, the challenges that we have had because of this
pandemic, it is fair to say that the Federal Reserve has helped
us get through this is in a major, major way. This question has
been asked before, but I am going to ask it again in a
different way. Could you compare the economy prepandemic,
pandemic, a year ago, and today, and tell me where we are at in
relation to those three different points of time?
Mr. Powell. Sure. So the prepandemic economy, that was a
very long, historically long, 10 years and 8 months expansion.
Growth was just modestly above potential every year, so we were
getting growth between 2 and 3 percent, and we think potential
growth is around 2 percent. So that implies a tightening labor
market.
So we had this long, relatively uninterrupted period of
growth, and what happened was unemployment kept coming down and
participation kept coming up, and that was very beneficial. So
you saw people around the edges of the labor market getting
more wages. We saw companies going to prisons and recruiting
people who were not going to get out for a couple of years. I
mean, it was a great labor market. So that is prepandemic.
So then the pandemic comes and it upends everything, and so
the question really is how is it going to be different? And we
are only beginning to see that because we are not out of the
pandemic. We are a long way from out of the pandemic,
potentially. So what are some of the things that we are seeing
that are with us now?
One of them is that the recovery in labor force
participation overall has been slower than hoped. Actually,
prime-age labor force participation has moved up a whole
percentage point, almost, last year, but overall that was
offset significantly by older people retiring, for older people
and not older people retiring. So we are seeing some
differences.
We are also going to see people working remotely. The wage
increases that we are seeing are still very skewed to the lower
end of the income spectrum. So there may be something happening
there where wages are just going to be higher for people. We do
not know whether any of this will persist, but those are some
of the things that we are seeing.
I know employers who are hiring younger people out of
school are finding that they have to have 1 day to work from
home, or they will go to someplace else where they can get
that. So it is a market right now where labor is very short,
and as result workers have a lot of leverage, and that may
persist. So I think there are a lot of different things.
Senator Tester. I have just got a limited amount of time
here, but could you speak a little bit about the importance of
the independence of the Fed? I remember, pretty clearly, the
kind of pressure that was put on you by President Trump to try
to politicize the Fed, and I commend you on keeping it
independent. Could you talk about why that is so important?
Mr. Powell. Sure. It is essential that we--we work for all
Americans, and that is what we do, and it is essential that we
do that without regard to political considerations, like
election cycles or particular political parties' views on
issues that are outside our mandate. You know, we have to focus
on the job Congress has given us, which is maximum employment
and price stability, and also the payment system and financial
stability and other things. But we have got to do that, and
that is what we need to do to justify our continued
independence, and we are committed to doing that.
Senator Tester. Thank you. Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Tester.
Senator Rounds, from South Dakota, is recognized.
Senator Rounds. Thank you, Mr. Chairman. Chairman Powell,
first of all, let me congratulate you again on being selected
to serve a second term as the Chair of the Federal Reserve, and
I do look forward to supporting your nomination.
I want to follow up a little bit with regard to the
discussion on inflation. Consumer price index rose 6.8 percent
in November. There appears to be a consistency along that line.
Part of that you have the opportunity to impact with regard to
the demand side. Can you talk to us about your discussions, or
at least your analysis of how much of the inflationary trends
we are seeing you have the ability to impact with your monetary
policy?
Mr. Powell. So again we do not have much ability to affect
the supply side, and if you look at where the really big
contributors are to the overshoot from inflation it is in the
goods section, still largely, and that is cars, that is new,
used, and rental cars, it is appliances, and----
Senator Rounds. What about food?
Mr. Powell. Food too.
Senator Rounds. Hamburger at over $5 a pound.
Mr. Powell. Yeah, no, and see, that is not something--we
cannot--I would say that there are supply side issues there
too, as you and I have discussed. But those are really outside
the range of our----
Senator Rounds. Would it be fair to say petroleum products
as well? Gas. The price of gas over $5 a gallon.
Mr. Powell. Yeah.
Senator Rounds. Those are items that are supply side. They
are not the demand side.
Mr. Powell. That is right.
Senator Rounds. And yet you have a responsibility to try
to, or at least your goal is to remain inflation about 2
percent or so.
Mr. Powell. Right.
Senator Rounds. But the supply side of this is a
significant part of the entire inflationary demand. Is it fair
to say that your focus is on the demand side and not the supply
side. Correct?
Mr. Powell. That is right. That is correct.
Senator Rounds. So what percent of that inflationary trend,
what percent of that are you trying to impact with the demand
side monetary policy that you have the ability to impact?
Mr. Powell. That would be hard to break it down in that
way. I would say it this way, though. Right now our policy is
very highly accommodative, so we are stimulating. We are not
restraining demand at all at this point. We are encouraging it.
We are trying to get to a place where we are more neutral, and
then perhaps tight, if that is appropriate?
Senator Rounds. But it is not political in nature. It is
economic in nature to say that the inflationary trends that we
are seeing are partially from the ability to of consumers, with
cash in their pockets, to be able to pay a higher price. But
second of all, it is because of the limitations and the
bottlenecks that we find within the supply side of our economy.
Correct?
Mr. Powell. Yes.
Senator Rounds. So let's just take food as an example. I
come from South Dakota where cows outnumber people, and yet we
have producers there that, on a regular basis, talk about the
fact that they do not see an increase in what they are
receiving for livestock, and yet our consumers across the
entire country are seeing huge increases in the price of meat,
and in between them, packers, four packers who control over 80
percent of the market showing record-high profits while
consumers pay huge, inflated prices. That is something which
has to be dealt with with policy and not necessarily something
that the Fed can impact. Correct?
Mr. Powell. That is really a competition policy question,
yes.
Senator Rounds. So do we have the same type of challenges
with regard to other items that people consume on a daily
basis? And by that I mean petroleum products are something that
I truly believe that the price rise in petroleum in '06, '07
really impacted the ability of people to actually pay their
mortgages or pay their rent, or for that matter, if they were
going to put food on the table before they were going to pay a
mortgage.
Do we have a similar type of situation developing here with
regard to individuals that are trying to get to work paying a
higher price for their gasoline, and now they are seeing the
possibilities of other things going by the wayside?
Mr. Powell. That is right. I mean, gas prices are high, and
those gas prices and food prices and heating oil prices, you
know, are the kind of things that affect people who are living
paycheck to paycheck, on a fixed income.
Senator Rounds. And not necessarily something that you can
do at the Fed, but nonetheless, it does impact inflation, and
it is something that would probably have to be addressed with
the regulatory environment that we have within this country
today.
Mr. Powell. We can have marginal effects on demand, but
really, when it comes down to energy and food, those are
largely importantly influenced by supply side issues.
Senator Rounds. Thank you, and I would just add this. I
know that with regard to regulations the Fed has been
considering whether or not make permanent adjustments on
separate items, the supplementary leverage ratio, or SLR, in
order to account for a significant influx of cash that
consumers have got. They are trying to put them into banks, and
yet the banks have to basically have capital to be able to
accept those deposits.
I would just hope, and I would consider that you continue
to look at considerations with regard to the adjustments on the
SLR so that we actually have the ability to accept those
deposits in the future, sir.
Mr. Powell. We will return to that. We want risk-based
capital to be binding not the leverage ratio. We do want to
make adjustments, but we want them to be done in ways that do
not reduce the overall bindingness of the capital requirements
on the largest firms. That is an important principle. But
within that we do think there are some things we may be able to
do on the SLR that honor that first principle.
Senator Rounds. Thank you, Mr. Chairman.
Chairman Brown. Senator Warner, from Virginia, is
recognized.
Senator Warner. Thank you, Mr. Chairman, and Chair Powell,
let me join my colleagues on both sides of the aisle in
thanking you again for your service.
I want to pick up a little bit where my friend, Senator
Tester, left off when he started talking about prepandemic
economy, pandemic economy, and postpandemic economy. You said
in your testimony that the postpandemic economy is likely to be
different in some respects, and that, quote, ``the pursuit of
the Fed's goals will need to take these differences into
account.''
What are some of those differences? You mentioned we are
seeing changes in employment patterns. We may need to see new
supply chains. Can you talk a little bit more about in that
postpandemic economy what those differences will be? How will
it affect the Fed's decisionmaking, and will there be actually
any economic indicators that might have a new emphasis or even
be new economic indicators in this postpandemic economy,
hopefully we get to.
Mr. Powell. We are just beginning to see this sort of
emerging from the fog, so it is all very indefinite.
But you mentioned supply chains. The supply chains we had
prepandemic were very efficient and pretty fragile. And so I
think companies, since the very beginning of the pandemic, have
been looking at ways to have more robust supply chains that
will not be subject to these kinds of disruptions that we have
had now for 2 years. That is one.
Another I mentioned earlier is labor force participation
has been much slower to come back than we had hoped for. The
level of employment that is consistent with price stability is
something that can evolve over time, and we have to deal with
the economy as we find it. Right now we have very high
inflation, and, you know, wages at multidecade highs, which are
not causing the current inflation at all but something that we
are watching.
And we want participation to come back, but has been quite
slow. We have to deal with the fact that it probably will take
a long expansion to draw people back into the labor market,
just to speak of two. There are many others.
Senator Warner. Well, for example, would childcare be one
of those factors? We still have a large percentage of the
workforce, particularly women in the workforce, participation
still down. If we do not find a way to provide adequate,
affordable childcare, is that not going to be a long-term
disruption?
Mr. Powell. It is clearly weighing on participation still,
although participation has moved back up among women as well.
But that part of the economy is suffering from a lack of
workers as much as any part is, and that weighs on
participation by people who depend on childcare, yes.
Senator Warner. I also think that on the supply chains a
lot of us, at the beginning of this pandemic, raised concerns
about being dependent on sole source, for example, whether it
is the base chemicals that go into our pharmaceutical drugs or
PPE coming from China. I think some of these changes are going
to be permanent. We now that the Congress needs to act to make
sure that we do not maintain that dependence, but I think it is
something we are going to need to continue to revisit.
I want to come to another topic that you and I have talked
about a long time. Out of the pandemic we saw a
disproportionate effect on minority communities. We lost
440,000 Black-owned businesses. A lot of the delivery
mechanisms that we put in place on the Paycheck Protection
Program, well-intentioned but clearly minority-owned businesses
did not do as well.
I am a big believer, and I thank folks on both sides of the
aisle, and I am going to call up my friend, Mike Crapo, on
this, we have a lot of money into the CDFIs and MDIs. But there
still remains challenges for these organizations.
For example, after the murder of George Floyd, private
sectors indicated they were going to put up about $200 billion
to help deal with racial wealth cap issues, but we continue to
hear that there are a number of entities that might want to,
for example, invest in MDIs, minority-owned depository
institutions, with no intent of changing control, but they
cannot make those investments because of potentially triggering
that regulation on change of control.
I think we are going to need some regulatory review here. I
think, as well, we need to look at, for example, a nonemergency
discount window that would be geared toward CDFIs and MDIs,
modeled after the seasonal discount windows that already exist
on nonemergency basis.
Can you speak to how you and the Fed can work with me and
others on this Committee to make sure that CDFIs and MDIs, that
are going to continue to play, I think, an increasingly
important role in serving underserved communities, do not get
blocked by some of these regulatory barriers?
Mr. Powell. Yeah. So we have talked about this a lot. We
are very focused on what we can do to support CDFIs and MDIs.
We did see, in the recovery from the pandemic, in a number of
cases where they were the ones who were there in poor
communities, delivering credit to a great extent. So they were,
in some cases, pretty effective.
Nonetheless, so what are we doing? As you know, under ECIP
we have been working with the other banking agencies to make
sure that those loans and investments can be made in a way that
gives attractive capital treatment. And, you know, there is
range of things that we are doing. We do want to foster
investment in CDFIs and MDIs under the law.
Senator Warner. I would just ask that we--and we can
continue this offline. But, you know, for those entities, and
private capital that wants to come into these institutions with
no intention of trying to take over control, whether we set up
a different class of stock or some ability for part of the
capital to flow into these without triggering the change of
control requirements that, frankly, at this point prevents a
lot of those investments.
So I appreciate what we have worked on so far, but much
more to do.
Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Warner.
Senator Tillis, from North Carolina, is recognized.
Senator Tillis. Thank you, Mr. Chairman. Chair Powell,
thank you for being here.
You mentioned in your opening statements you committed to
regular and frequent contact. I can attest to the fact that you
have regularly contacted my office, and any time we have had a
request for a conversation you have been very prompt, so I
appreciate you for your responsiveness.
I want to talk a little bit about the current extraordinary
inflationary pressures and the tools that the Fed has to deal
with it. Of course, you could have a benchmark rating increase.
We know what that would have is a consequence for raising the
price of lending and ultimately affecting the cost of buying a
car or buying a house or just making ends meet.
Your other option is to reduce the balance sheet,
particularly from some of the COVID areas bond-buying programs.
I believe that it was Governor Waller who just last month said
that because of the alarming rate of inflation the Fed should
begin shrinking the asset portfolio without delay, and I think
this week the Fed president from Atlanta, Mr. Bostic, said he
thinks the Fed should aggressively draw down the balance sheet
by at least $100 billion a month. I know you went up from $15
billion to $30 billion, but that is a 3.5 time increase over
the current run rate.
So to what extent do you think, and give me an idea of
discussions that you are having at the Fed, to have a faster
taper in lieu of a rate increase?
Mr. Powell. We have not made any decisions. We had our
first discussion of these issues about runoff, and as you
mentioned there are a number of different pieces to talk about.
We had that at the December meeting. I expect we will talk
about it again at the January meeting.
And again, just no decisions, but as we reflected in our
minutes, we looked at what the Fed did last time, and I was
there, as we, you know, ended QE, and then later started to
have the balance sheet shrink. And we looked at that experience
and thought that is quite informative, but the economy is in a
completely different place than it was when we ended asset
purchases the last time. So the period of time between stopping
purchases and beginning runoff will be shorter, and also the
balance sheet is much bigger and so the runoff can be faster.
So I would say sooner and faster. That much is clear.
Beyond that, we are not at the point of making decisions at
this point. We will have another discussion, and I think we
will be in a position to provide guidance at coming meetings.
And, you know, we are mindful that the balance sheet is $9
trillion. It is far above where it needs to be.
Senator Tillis. At the current draw-down rate that is about
a 24-year trajectory to retire the balance sheet. Is that
right?
Mr. Powell. That would depend on the speed you assume.
Senator Tillis. What sort of indicators are you looking at
that would actually drive you to a faster taper, particularly
based on some of the comments that folks at the Fed----
Mr. Powell. You know, we are looking at the whole range of
things. This balance sheet is much shorter in duration than the
one that we had at the end of the global financial crisis. That
can play into it.
We tend to do a lot of analysis. We tend to take two,
three, four meetings to work these things through. I find that
the best ideas sometimes take a while to surface. They did the
last time on this issue. So it will be part of the things that
we are discussing and doing this year.
Senator Tillis. OK. Thank you for that. I should have also
mentioned that I look forward to supporting your nomination.
Mr. Powell. Thank you.
Senator Tillis. I want to turn to bank mergers. You know,
Senate Bill 2155 gave us the opportunity to do some regulatory
tailoring for some of the smaller banks, and I think it was
largely successful. I appreciate the bipartisan effort to do
it.
But bank mergers are one of the most highly regulated
transactions that you could go through. It involves the Federal
regulators, including the Fed, the Department of Justice, and a
lot of opportunities for outside interest groups and others to
voice their opinions.
But I am getting the sense that moving forward there may be
a trend toward making it more difficult for some of the super-
regionals and other banks to move through the merger process. I
tracked one recently that involved a North Carolina banking
institution and it seemed to take a bit longer than I thought
it would have.
So can you give me an assurance that there is not sort of
increasing bias on the part of the Federal regulators to make
it more difficult for some of these super-regional and smaller
banks to actually get through a merger and acquisition process,
or am I missing--is this a trend that I should be concerned
with, or do you believe that the financial regulators are still
in a position to allow that ecosystem to continue to evolve,
which I personally believe is very important for the viability
of the U.S. banking system?
Mr. Powell. So we are still applying the same. The law has
not changed, and our practices have not changed. We are still
working our way through, you know, the applications that we
have in front of us.
Senator Tillis. OK. And I will submit a question for the
record on the status of the Fed payment system. Thank you.
Thank you, Mr. Chair.
Chairman Brown. Thank you.
Senator Warren, from Massachusetts, is recognized.
Senator Warren. Thank you, Mr. Chairman.
So since President Biden took office we have added more
than 6.4 million jobs, the most jobs that have ever been added
to the economy in U.S. history. But over the past few months,
families have faced higher prices at the grocery store, at the
gas pump.
Addressing inflation is one of the Federal Reserve's most
important jobs, and if we are going to solve this problem then
we need to understand why it is happening. So if we can let's
start with Econ 101.
Chair Powell, in markets with lots of competitors, are
companies' profit margins generally likely to stay low? That
is, in competitive markets are profit margins likely to stay
steady, modestly above the cost of labor, or materials and
capital?
Mr. Powell. I mean, microeconomics would tell you that all
of the things equal, you will compete down to your marginal
cost.
Senator Warren. Good. And in markets with greater
concentration and not much competition, are corporations
generally able to raise prices and increase profit margins, all
else being equal?
Mr. Powell. So actually the connection between
concentration and market power is not as clean as we might
think it might be. In some of the industries that have
concentrated, there actually has been, you know, sort of lower
cost increases. It has resulted in lower costs to consumers,
and I am thinking there of retail and things like that, so it
is not as direct.
Senator Warren. Well, but let me ask it the other way then,
because we are still kind of doing Econ 101 here. If you are a
corporation that has eaten up most of the competition and
cornered the market, is it easier for you to raise prices on
your customers, and maximize your profits, because you do not
have to worry about losing your business. In other words, you
have lost the discipline that the market imposes.
Mr. Powell. In principle, if you do not have competition
and you are a monopolist, yes, you can raise your prices.
Senator Warren. OK. And over the past year we know that
prices have risen because of supply chain problems, unexpected
shifts in the demand for goods, and even higher labor costs.
But if corporations were simply passing along these costs, in
highly competitive markets, would the companies' profit margins
have changed much?
Mr. Powell. You know, so many things affect that
calculation. In principle you could be right, but----
Senator Warren. Well it is very much not what we are seeing
right now. Today nearly two out of three of the biggest
publicly traded corporations in the country are reporting
fatter profit margins than they reported before the pandemic,
which does not sound like they are just passing along costs.
So let me ask you, does that increase in profit margins,
combined with greater market concentration industry after
industry suggest to you that some corporations may be passing
along increased costs and, at the same time, charging more on
top of that to fatten their profit margins?
Mr. Powell. That could be right. It could also just be,
though, that demand is incredibly strong and that, you know,
they are raising prices because they can.
Senator Warren. Well, that is the point. They are raising
prices because they can, and they are not being competed down.
You know, market concentration has allowed giant
corporations to hide behind claims of increased costs to fatten
their profit margins, so the consumer pays more, both because
the corporations face higher costs and because, as you put it,
because the corporation can increase prices.
The reason I raise this is that higher prices have many
causes, and we cannot overlook the role that concentrated
corporate power has played in creating the conditions for price
gouging.
Now before my time expires I want to ask you about one
other important topic, and that is about climate change. Mr.
Chair, when you came before the Banking and Housing Committee
last July you said that the transition to a lower carbon
economy could, quote, ``lead to a sudden repricing of assets or
entire industries and that we need to be in a position to deal
with all of that.'' Why is it important for the Fed to assess
risks related to climate change in order to fulfill its
mandate?
Mr. Powell. So our role on climate change is a limited one
but it is an important one, and it is to assure that the
banking institutions that we regulate understand their risks
and can manage them, and it is also to look after financial
stability. And with financial stability the issue really is,
can something from climate change rise to the level that would
threaten the stability of the entire financial system? So that
sounds more in the nature of what you were reading, something
in the nature of transition risk, where some unexpected, you
know, Government policy change happen, which could potentially
create disruption.
Senator Warren. Well the world is running out of time to
deal with the climate crisis, and the Fed has an important role
to play here, and I hope the Fed will step up.
Last thing, Chair Powell, I sent you another letter asking
for more information about the Fed's ethics scandal, and I
asked for a response by next Monday. Can I receive your
assurance that I will get that response by next Monday?
Mr. Powell. I will have to look into the status of that.
You will get either a response or we will update you on where
we are.
Senator Warren. OK. I would like to have a response. OK.
Very important. Thank you.
Chairman Brown. Thank you.
Senator Kennedy, of Louisiana, is recognized.
Senator Kennedy. Mr. Chairman, congratulations. I think it
is fair to say that you are, and once you are confirmed, will
continue to be one of the most powerful people in the world.
So I want to begin today, I have some questions, but first
I have a plea. Above all else, above everything else on your
plate, I ask that you please preserve the independence of the
Federal Reserve. The last thing that America needs right now is
to have the Federal Reserve politicized. It is the last thing
the world needs right now, and believe me, the whole world is
watching, including our enemies.
Now I get it. Our politics is polarized. I hope you will
remain blissfully ignorant of that. And I get it. I am not
telling you not to listen to elected officials, public
officials. I get it. I mean, I can only speak for the Senate.
We have some very smart people in the Senate. They have strong
opinions and strong personalities. We have got a few Senators
that, to paraphrase Dave Barry, think they ought to make a
Hamilton-style musical about their lives. I get all that.
But you have got to remain independent. Political fads come
and go, but the dollar does not. I hope not. The dollar
underpins the entire world economy. Politicize it at your own
risk.
Let me shift gears to a question. Professor Keynes, about
who I know you know more than I do, but Professor Keynes has
seen a resurgence in the last few decades in his number of
followers. And, of course, we both know Professor Keynes said
one way to get out of a recession is to have the Government
spend money it does not have, to deficient spend, to stimulate
the economy.
But Professor Keynes said something else that the media
does not usually quote. He also said when you get out of the
recession, pay the damn money back. Did he not? Did he not say
that?
Mr. Powell. Yeah. I was going to add that. What he said was
it is OK to do deficit spending but you should be doing
surplus, you know, in good times, to sort of keep it----
Senator Kennedy. Yeah. Now behind me is a charge of our
public debt, going all the way back to, I think, 1990. You do
not have to be Euclid to see that the direction is up, and it
has been up under Republican administrations, and it has been
up under Democratic administrations. It has been up under
Democratic and Republican Senates and Houses. It is up.
So here is my question to you. How much is too much? At
what point, in your judgment, are we going to hit the point
where you have to say, ``No, that is it. We cannot do anymore.
It is hurting the world. It is hurting our country.''
Mr. Powell. So we do not know when that is, and as the
world's reserve currency, demand for our paper is very strong.
If you had shown that and then asked somebody, 15 years ago, to
predict what interest rates would be, they would not be
predicting that the 10-year would be at 1.75.
Senator Kennedy. No.
Mr. Powell. Right? So there has been a lot of demand.
Senator Kennedy. But they would have predicted that the
debt was going to go up.
Mr. Powell. They would have looked at that picture and
said, ``Well, you must be experiencing difficulty borrowing,''
but we are not at all.
So, no, we are on an unsustainable path. Debt is not at an
unsustainable level, but the path is unsustainable, meaning it
is growing faster than the economy, meaningfully faster than
the economy. We have to address that over time. We will address
it over time. And the better way to do it is soon, and to do it
in good times. Start when the economy is strong and the taxes
are rolling in. You know, since we do not do fiscal policy, but
I will say that the sustainability of the debt is something we
need to get back to and focus on again.
Senator Kennedy. Good luck, Mr. Chairman.
Mr. Powell. Thank you, sir.
Chairman Brown. Senator Van Hollen, of Maryland, is
recognized.
Senator Van Hollen. Thank you, Mr. Chairman. Welcome.
Mr. Chairman, we all recognize we have got continuing
economic challenges, but I think it is important to look at
some critical areas where we are much better off today than the
Fed predicted we would be at this time, just a little while
ago. We have seen a record increase of 6.4 million jobs in our
economy in 2021, and back in December of 2020, when the
unemployment rate was 6.7 percent, the Federal Board of
Governors projected that the unemployment rate in December of
the year we just came out of would be 5 percent. Is that not
correct?
Mr. Powell. I cannot do it from memory but I am sure you
are right.
Senator Van Hollen. Well, as I reviewed your predictions
that was what it was, and, in fact, we did much better than
that. The unemployment rate for December, the month that we
just left, was 3.9 percent, and the unemployment rate for that
fourth quarter of last year was 4.2 percent, a year ahead of
what the Fed had predicted. Is that right?
Mr. Powell. Yes.
Senator Van Hollen. And what happened in between was a lot
of us here in the Senate and the House and folks around the
country looked at those projections and said, ``That is not the
kind of course we want to be on,'' and we passed the American
Rescue Plan which helped stabilize the economy and helped
result in those much-improved employment numbers. Isn't that
right?
Mr. Powell. Yes.
Senator Van Hollen. Now let me just talk about inflation. I
think all of us recognize that Americans are experiencing price
increases in many areas. The Federal Reserve has predicted--
well, the Cleveland Fed projected a 2.6 percent inflation rate
for this year, which matches the Federal Reserve Board's
projections. If you look at consumer expectations, not
surprisingly they are running higher than that, because of
where we have been in the last couple of months.
But can you explain why you are confident at the Federal
Reserve that we can hit that 2.6 percent target while
continuing to push for full employment?
Mr. Powell. So that is the median of expectations of
individual expectations. We do not have a committee or official
Fed forecast. And it is conditioned on a number of assumptions,
and the most important assumption here is that we do get
significant relief on the supply side, that the global supply
chains loosen up and we get, you know, more semiconductors so
that we can start manufacturing cars again. That is going to be
a big part of getting inflation back down.
Part of it will also be our moving from a very highly
accommodative policy to a somewhat less accommodative policy,
but still accommodative, but a lot of it will come on the
supply side.
Senator Van Hollen. And on the supply chain issue, I mean
there have been recent reports of progress in a number of
supply chain bottlenecks. Can you just speak to your perception
of where that stands?
Mr. Powell. Yes. You always see a few snowflakes, but it
does not amount to a storm yet. If you look at the Port of Los
Angeles, the Port of Long Beach, record numbers of ships still
at anchor. We did see--and this is maybe what you saw--that
inventories are moving up and delivery times have shortened,
and that is a good thing.
But on the other hand, you know, Omicron can really,
particularly if China sticks to a no-code policy, Omicron can
really disturb the supply chains again, although it could be
briefer this time.
So I think the picture--we would not want to say--I would
not want to say that it is decisively improving yet, but we are
watching it carefully.
Senator Van Hollen. I got it. I was pleased to hear
President Biden say, when he renominated you for this position,
that you saw the economic risks of climate change as a, quote,
``top priority.'' Is that an accurate statement?
Mr. Powell. Yes.
Senator Van Hollen. And if confirmed, how do you plan to
prioritize addressing the financial risks of climate change in
your next term?
Mr. Powell. So we have a role to play. It is a narrow one
but an important one, and that is it relates to our existing
mandates. We do not have a new mandate on climate change. It is
really the simple mandate, the central mandate of supervising
and regulating financial institutions to make sure that they
are aware of and able to manage all of their risks, and we are
doing that, particularly focusing on the largest financial
institutions, who, by the way, are spending a lot of time
themselves on these issues.
And second, looking at financial stability issues. You
know, we have responsibility for the stability of the financial
system, and over time climate risk can play into that as well.
Senator Van Hollen. Well thank you, Mr. Chairman. I am
pleased to see that you do agree that it is a top priority.
Thank you.
Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Van Hollen.
Senator Hagerty, from Tennessee, is recognized.
Senator Hagerty. Thank you, Mr. Chairman, Ranking Member
Toomey. I appreciate you holding this hearing. I want to
congratulate Chairman Powell on being renominated to be the
Chair of the Fed. Thank you for your testimony and your
presence here today, Chairman.
First I have just a quick housekeeping question for you. I
think I know the answer to this, but as a matter of fact, have
you ever embellished your resume, your record, your publication
history?
Mr. Powell. I do not think so.
Senator Hagerty. I did not think so. Thank you for
clarifying that for us.
I would like to turn to the topic of quantitative easing
for just a minute, Chairman Powell. When Chairman Bernanke
first introduced quantitative easing back in 2009, he assured
lawmakers at that point that it would be both temporary and
rare. Essentially it was introduced as an emergency measure. Do
you agree that quantitative easing should be both temporary and
rare?
Mr. Powell. I agree we should not use it unless we need to,
but I will say it is going to depend, on some extent, on where
interest rates. We have been in a very low interest rate
environment, even during good times, all over the world, and
when that is the case we do not have a lot of ammunition to
support the economy.
So I can imagine a regular garden variety downturn, which
we have not had in a long time, in which we did not need to
resort to quantitative easing to asset purchases and we then
would not. But in a world where you have only got a couple
hundred basis points to cut you may need to do that, because
what that gives you is the ability to move longer-run rates
down, not just at the short end.
Senator Hagerty. I understand but I just remain concerned
because here we are, 12 years later, from its first
introduction. The Fed's balance sheet is nearly $9 trillion. We
are continuing to grow, albeit at a slower pace, so it remains
a real concern.
You said earlier to Senator Shelby that you think the Fed
could begin the process with normalizing its balance sheet
later this year. Can you provide us with a little bit more
clarity on this process, how soon you think this would begin,
and whether you would consider actively selling securities
rather than just letting them gradually run off the balance
sheet?
Mr. Powell. So we had our first discussion of this set of
issues at the December FOMC meeting. We will talk about it
again at the January meeting in a couple of weeks. We have not
made any decisions. This time is going to bear some similarity
to what we did last time but it is going to be different too,
and that is already clear in that we will have the ability to
move sooner and to move a little faster than we did last time.
So more clarity is coming soon on that, but I do not want to
get ahead of the Committee.
In terms of selling assets, we have not made any decisions
on that. We did not do that last time. We never ruled it out
either. So it is just something we will be looking at. The
balance sheet is a whole lot bigger this time, and also the
duration is shorter, and the economy is much stronger, so it is
a very different situation.
Senator Hagerty. So I would like to come to the question of
governance if I might. While you have been nominated to remain
Chairman of the Fed, the Biden administration's three proposed
appointees would, together with the nominee for Vice Chairman,
who we will hear from this Thursday, constitute a majority of
the Federal Reserve board.
Looking recently at the five-member board at the FDIC and
what happened there, there, at the FDIC, a five-member board
overturned 88 years of tradition and independence with Biden
political appointees led by CFPB Director Rohit Chopra, forcing
out the FDIC Chairman before her 5-year term was up, strictly
for partisan reasons.
This incident causes me to worry that an activist bloc at
the Federal Reserve board could sideline you. They could exert
their authority while excluding the full FOMC membership.
So my question for you, Mr. Chairman, is the Fed vulnerable
to similar unfortunate, politically motivated hijacking of an
organization, like we just witnessed at the FDIC, and what
could this Committee do to prevent it?
Mr. Powell. First, and you will know that I do not have any
comment at all on the recent events at the FDIC. So at the Fed,
monetary policy is conducted by the Federal Open Market
Committee, which includes the 12 reserve bank presidents, and
in total there are as many as 12 voters. So we will always have
a balance of Governors and reserve bank presidents.
Regulatory policy is really the business of the Board of
Governors, and there are as many as seven Governors, and a
majority is four. We do have a history at the Fed of working
collaboratively and coming together and getting consensus on
issues, and that certainly is my intention, that is my nature,
and I will work hard to make sure that things stay that way.
Senator Hagerty. And as a Member of this Committee I will
work hard to support you, to maintain that posture as well.
Thank you, Mr. Chairman.
Mr. Powell. Thank you.
Chairman Brown. Thank you, Senator Hagerty.
Senator Cortez Masto, from Nevada, is recognized from her
office.
Senator Cortez Masto. Thank you, Mr. Chairman. Chairman
Powell, good to see you again. Thank you always for taking the
time to answer my calls, meet with me, answer my questions. I
so appreciate it.
Let me start with a question that Senator Tester talked to
you about, because I think it is important we recognize and put
this in perspective again. He asked you about comments about
what the economy was like prepandemic, during the pandemic, and
then after, and you actually said something I think was
important, that we are still in a pandemic. And even still in
the middle of this pandemic you said earlier in your opening
remarks that the economy is expanding at its fastest pace in
many years and the labor market is strong.
Now in many conversations you have always prioritized job
growth and higher wages, especially for those who tend to earn
lower salaries, and you have consistently said that the best
thing any one of us can do to increase employment, raise wages,
improve our supply chains, and reduce inflation is to get
vaccinated, to wear masks, and follow the medical guidance to
prevent the spread of COVID-19. Do you still believe that
reducing COVID-19 infections will have the greatest impact on
inflation, supply chains, employment participation, and wages?
Mr. Powell. I do, and if you imagine a world in which we no
longer have to deal with a pandemic, I think that is the answer
to your question. We would quickly see the supply side problems
alleviate. We would probably see significantly more labor
supply. So these issues are still related to the pandemic. It
is proving more difficult than we had hoped to end the
pandemic, but I certainly would think that is right.
Senator Cortez Masto. And let me just add one additional
thing. Of course we all have concerns with the rising prices of
so many goods. I see it in my home State when I go grocery
shopping or hear it from my family members and constituents in
Nevada.
One other area I want to also focus on, though, is housing.
A new study from the Federal Home Loan Bank of Atlanta reported
that the median American household would need 32 percent of its
income to cover mortgage payments on a median-priced home, the
most since November 2008, and home prices have climbed 18
percent in the past year. Now we are short at least 3 million
homes, especially affordable homes.
So, Chairman Powell, do you think increasing the supply of
housing, in essence building more homes, would also have an
effect on the inflationary prices that we are seeing right now
in the housing market?
Mr. Powell. Yes, and that is outside of what we can do but
clearly the housing market is extremely tight. It was tight
before the pandemic and it is remarkably tight now, and supply
is quite limited.
Senator Cortez Masto. Thank you. Let me jump to another
topic, which is ethics for the Board of Directors. I think we
are all disappointed that Vice Chair Clarita did not disclose
his active trading in late February 2020. You and I have had
this conversation. Can you describe the changes you have made
to improve the ethics guidelines and training at the Federal
Reserve?
Mr. Powell. Yes, I would be glad to. So we have really made
a complete change in the way we govern purchases and sales of
securities by covered people, which includes all of the
policymakers and senior staffers. No one can any longer buy
individuals stocks. In addition, if you want to sell something
that you--so people will be owning mutual funds, mainly, as I
already do. When you want to sell something, it has to be
outside of blackout, as always, but you have got to give 45
days' notice, and you make that decision. You have got to clear
that trade with that sale with a central body.
We do not really have, because of our federated nature, we
do not have a group in the center that applies these rules
consistently and clearly across the whole system. We will have
that now at the Board of Governors. So you will go and you will
say, ``I want to sell X amount of this mutual fund.'' Forty-
five days later, that trade will take place, whether things
change or not. So there will be no ability to time the market
and really no appearance of--the kind of appearance issues that
we have had.
The old system was in place for decades on end, and then
suddenly it was revealed as insufficient. And so we do take the
need to protect our credibility with the public very seriously,
and I think our new system is easily the toughest in Government
and the toughest I have seen anywhere.
Senator Cortez Masto. Thank you, Chairman Powell. Mr.
Chairman, thank you.
Chairman Brown. Senator Lummis, from Wyoming, is
recognized.
Senator Lummis. Thank you, Mr. Chairman, and
congratulations on your nomination. Please throw me a lifeline
here and help me support your nomination.
The Fed's website today says that the Federal Reserve will
ensure the provision of payment services to all depository
institutions on an equitable basis, and to do so in an
atmosphere of competitive fairness. But that is not the case at
all, Mr. Chairman. The Fed actually uses substantial discretion
in providing master accounts to depository institutions, or
denies them by delay, simply starving the master account
applicant until it dies. And that is true even though every
single Federal court that has ever looked at this issue
disagrees with the Fed's assertion of substantial discretion.
The Greater Buffalo Press and Jet Courier Services cases in
the Second and Sixth Circuits found that the Federal Reserve
services were, quote, ``available to all banks.'' The Fourth
Corner Credit Union case in the Tenth Circuit from 2017 said
the same thing.
The Federal Reserve Act says that a depository institution
is any institution eligible for deposit insurance. The FDIC
says, in General Counsel Opinion 8867, that an entity is a
depository institution if it is creating deposit liabilities
out of customer assets and is characterized by State law as a
bank.
As you know, Chairman Powell, I am terribly concerned about
the manner in which Wyoming's special purpose depository
institutions are being treated by the Federal Reserve. We have
discussed this. What is your reaction to this?
Mr. Powell. So as we discussed, there are novel charters,
and the SPDIs are one of them, and we want to be really careful
because they are hugely precedential. They are very important
from a precedential standpoint. And so we have been looking
carefully at this, and I would say there are good arguments for
viewing SPDIs as depository institutions for this purpose, and
we are looking carefully at it. I do think we will make some
progress on this, and we can talk about it more offline.
But I think you do understand that we--you know, if we
start granting these there will be a couple hundred of them
pretty quickly, and we have to think about the broader safety
and soundness implications. And, you know, it is just hugely
precedential. That is really why we have taken our time with
it. And we appreciate you bringing it my attention, and so we
can continue to talk about it.
Senator Lummis. Well as you know it has been well over a
year, well over a year, and I have been stonewalled for well
over a year. My State has been stonewalled for well over a
year.
You know, you mentioned in your testimony today that we can
begin to see that the postpandemic economy is likely to be
different in some respects. My job is to represent Wyoming's
best interests and to ensure the Fed is preparing itself for
the postpandemic economy and to promote responsible innovation,
as you mentioned in your statement.
You know, I asked your staff for an update on the SPDI
charter last week, and I have yet to receive a response. And as
we discussed in December, I believed I would receive a response
by today. So my disappointment is profound. My frustration is
profound. And for now I will just leave it at that.
But I will say thank you for your dialogue with Senator
Kennedy and Senator Hagerty today. I thought those were
encouraging dialogues, and once again, Chairman Powell, throw
me a lifeline.
I yield back.
Chairman Brown. Thank you, Senator Lummis.
Senator Smith, of Minnesota, is recognized.
Senator Smith. Thank you, Chair Brown and Ranking Member
Toomey, and welcome to the Committee again, Chair Powell. As
always it was good to talk with you yesterday, and I want to
just say, Mr. Chair, that I think that together Chair Powell
and Lael Brainard would make a great team at the Fed, and I
think you are a strong combination.
So Chair Powell, I would like to ask you about kind of
where we are with employment and how this relates to the
decisions that the Fed is making. Last week, the Bureau of
Labor Statistics released job numbers from December, as you
know well, and thanks to the American Rescue Plan, and I would
also say the hard work and grit and innovation of Americans,
the unemployment rate has dropped to just 3.9 percent, which is
really a remarkable and historic recovery from the beginning of
the pandemic. I note that in my home State of Minnesota, in
November, the unemployment rate was even lower, so this is
really an incredible accomplishment.
You and I have discussed this before, how it is useful to
unbundle, though, these aggregate numbers so that we understand
a little bit more about what is happening, understand that it
is a more complicated story. For example, Black workers,
amongst Black workers the unemployment rate remains stubbornly
high, at 7.1 percent, more than twice what it is for White
workers.
So Chair Powell, could you tell us, how should the Fed
consider factors like this as you evaluate economic strength
and whether the economy has reached full employment? The
factors that I am referring to as unbundling these aggregate
numbers so we understand more deeply where we are with the
different sectors of our economy.
Mr. Powell. Sure. So we do look at a wide range of
indicators to determine whether labor market conditions broadly
are consistent with maximum employment. It not a single number
like inflation can be, and you mentioned a couple of them.
What we saw at the end of the last very long expansion was
that unemployment rates and the gap between White unemployment
rates and other unemployment rates were at all-time lows, and
this was a very desirable feature, and really a feature of
having a tight labor market. So that is a little bit of
something that tells us whether the labor market is tight. We
are not targeting a particular number there but we are using it
to inform our thinking.
You mentioned African-American unemployment, which is at
7.1. It dropped by 2.9 percent this year. That is the same
decline as for White workers.
The other thing I will say is that there was an increase in
December of \5/10\ or \6/10\ among Black unemployment. It is a
much smaller sample size and it is pretty volatile, so we would
tend to look for a couple of months. It can bounce around more
than the overall aggregate.
Another key aspect of maximum employment, though, is
participation. So we also want to think that participation is
at a structural high level, and there is not a lot of slack in
that pocket. And we saw that at the end of the last cycle. We
saw participation holding up in the face of demographic
decline. And so that is another thing that we look at
carefully.
Senator Smith. Thank you. I agree with that, and I think
that we are, in Minnesota, as we are all over the country,
experiencing a shortage of workers, and I am glad to see that
what we are seeing, in fact, is wages increasing, especially
for people who are in lower-wage jobs, and that for the first
time in a long time workers, I think, have increased bargaining
power, which is of benefit to them. So these are complicated
issues and I think it is important that we kind of look beneath
some of these aggregate numbers.
But I want to touch on another issue before I wrap up here.
You and I have talked about my grandmother, Avis Mason, who was
born in 1898, and who became the president of a small community
bank at Etna Green, Indiana. Her father, who started the bank,
was blessed with three daughters, which is how she became
president.
Like so many banks around the country, and over the years,
her bank was ultimately sold to a larger bank and became part
of the story of increased consolidation in the financial
sector, and this pattern has repeated itself for decades in
Minnesota and all across the country.
Over the last 30 years, the number of banks in this country
has been more than cut in half, and we have seen, I think, the
harm that industry consolidation can do broadly, especially in
small towns in rural places. I note the comments and the
questions of my colleague, Senator Rounds, with whom I have
done a lot of work on issues of concentration in agriculture.
So Chair Powell, one of the important duties of the Fed is
to review bank mergers. Can you tell us how you think about
bank mergers today, and what do you see as the impacts of
consolidation on concentration and access to financial
services, especially in underserved areas?
Mr. Powell. So we operate under a statute which requires us
to consider a number of factors, and those include competition
and future prospects, financial and managerial resources,
convenience and needs of the communities to be served, CRA
performance, BSA/AML compliance, and financial stability. So
all of those things go into our--and there is a rich lore of
how we apply those things, and generally banks that are
applying for permission to do mergers understand that body of
work.
More broadly, though, as we have discussed, when you look
back at the United States banking industry, for 30 years and
more, almost 40 years, you have seen a very steady decline in
the number of banks. So one of the things that is driving that
is just, you know, the loss of rural population, and I have
seen many, in my earlier years at the Fed, many cases in which
you would have a county that had lost half of its population
over the last 50 years--it is very typical of rural America--
and there was one bank left and it wanted to merge with another
bank in a nearby State.
So anyway, it is a trend that is happening because of
demographic changes. Also, fixed costs are going up. Regulatory
costs are going up, and that is a fixed cost. The need to
invest in technology to serve your customers is really a fixed
cost now, and that requires a bigger bank.
Community banks are part of the fabric of America, and we
do not want anything we do to sort of exacerbate the problem of
community banks going out of business. But there are strong
secular forces that are driving this consolidation, apart from,
you know, regulation, although that can be part of it.
Senator Smith. Thank you. I believe I am out of time. Thank
you, Mr. Chair.
Chairman Brown. Thank you, Senator Smith.
Senator Cramer, from North Dakota, is recognized.
Senator Cramer. Thank you, Chairman Brown and Ranking
Member Toomey. Thank you, Chairman Powell, for stepping up
again and being willing to take the job on. Congratulations.
I am going to go back to a question somebody asked probably
an hour and a half ago, very high level but a point that one of
my colleagues made, and I do not remember which one. But he
said, in congratulating you, that President Biden clearly has
confidence in your ability to lead our economy through this
crisis. And without judging those particular words I would ask
you, flat out, do you lead our economy? Is that what your job
is, to lead the economy?
Mr. Powell. I am responsible for an agency that has
specific, narrow mandates. I would not want to characterize it
one way or the other.
Senator Cramer. I would not either, quite honestly, but I
have great respect for and confidence in our free market
economy with a very light regulatory touch.
That said, I also want to associate myself with Senator
Kennedy's strong word of encouragement to keep the Fed
independent. That is why I respect you so much, Chairman
Powell. Under the previous President you maintained
independence, and we would certainly hope and expect that you
would continue that independence under the current
Administration.
You have touched on this, but I want just a little further
clarification, because somebody, I think it was Senator
Menendez, asked you how do you balance the two mandates; of
course, price stability and maximum employment. I thought you
did a pretty good job, and I want to give you a chance to make
it even clearer, and maybe I will help with the way I form the
question.
Doesn't price stability naturally lead to a strong economy,
which naturally leads to maximum employment? In other words,
you talked, I think, in your answer that, you know, we focus on
whichever one needs the help the most at a given time. That is
my paraphrase of it. But perhaps you could just elaborate a
little bit on it.
Mr. Powell. Sure. So most of the time monetary policy works
the same way for both of them. You know, usually inflation is
low when the economy is weak, when unemployment is high, and so
you cut interest rates and that helps unemployment go down and
it helps inflation move up, back up to 2 percent. So usually
that is the case, almost all the time.
In rare occasions, though, you have a situation where the
two sort of goals are not complementary, and we have had a
little bit of that here. I am not sure we have it anymore, but
the idea being that we were far from maximum employment--that
is no longer the case--but inflation was really high.
I think the situation today is more correctly
characterized, as we are very rapidly approaching or at maximum
employment, and we are far away from our inflation tool. There
is no basis to prefer one of the two goals over the other, but
our constitutionally adopted document at the Fed, our Statement
on Longer-Run Goals and Monetary Policy Strategy, says when
this is the case we look at far something is from the goal and
how long it will take to get to the goal, and we look at the
other goal, and we use our tools. And I think the current
application of that provision would say you need to focus on
getting inflation under control because you are not going to
have maximum employment unless you have price stability.
Senator Cramer. I agree. Thank you. Well said.
In fact, with that in mind, what I worry the most about
with the Fed, and you and I have discussed this previously, is
the mission creep that I think both clouds and, frankly,
complicates that main mission of price stability. If you have
to sit around and you have to hire people that are going to
assess climate risk as an example, banks themselves are not
already considering that. Which, by the way, climate risk, in
my mind, is really regulatory risk, because climate is a global
issue. It is not a domestic issue. It is a domestic issue to
the degree it is a global issue.
But what I worry about is the natural outcome of further
regulations in the climate sphere, and that is what we are
talking about with a climate stress test, or cyberstress test,
or any other number of tests, but climate in particular. The
natural outcome is that we are going to somewhat transfer our
climate guilt to other countries who do not have our
environmental and labor standards. In other words, we do not do
anything to help the climate except to have more imports from
faraway places that are much larger polluters than us.
So I have to tell you, I am a little worried. I am quite
worried, actually, mostly worried about the mission creep at
the Fed, should we continue to add these extra things that you
have to be focused on. And I would just ask for a response to
them and then my time will wrap up.
Mr. Powell. Well, I agree with your principle which is that
we have got to stick to our knitting we want to remain
independent. I really do. And I guess I would say climate is
appropriate for us an issue to the extent it fits within our
existing mandates. And I think it does in the sense of it is
another risk, over time, that banks are going to run. But the
broader answer to climate change has to come from legislators
and the private sector.
Senator Cramer. I agree. Thank you, and I look forward to
supporting your confirmation. Thank you. Thank you, Mr.
Chairman.
Chairman Brown. Thank you.
Senator Ossoff is recognized from his office.
Senator Ossoff. Thank you, Mr. Chairman, and thank you,
Chair Powell, for joining us. Congratulations on your
renomination.
Chair Powell, are you prepared, if necessary, to act with
agility, flexibility, and speed if inflation risk to the upside
manifests in the coming months and quarters?
Mr. Powell. Yes, I am.
Senator Ossoff. And what do you assess to be the level of
risk that inflation surprises to the upside in this year?
Mr. Powell. Well, I would say it this way. My expectation
is that we will see some relief on the supply side, as the year
goes on. By that I mean global supply chains will start to
loosen up. The shortages will start to be lesser. If that does
not happen and we see inflation becoming even more persistent
and even higher, then I think the risk of it becoming
entrenched in the psychology of businesses and households and
people, I think that increases and that would indicate that we
would respond.
Senator Ossoff. Thank you, Chair Powell. You have noted
that the Fed and many mainstream economic forecasters had
difficulty anticipating the supply chain bottlenecks, the labor
shortages, the difficulty with which the global economy would
add supply in response to the return of demand and demand
stimulated by Government policy.
How can the Fed improve its modeling such that it is not
surprised by those macroeconomic dynamics in a future crisis?
Mr. Powell. So I think this is a unique situation. We do
not have ten pandemics to look back on and say, ``Oh, these are
the common features when the global economy shuts down to deal
with a global pandemic.'' It was all just new, and the problem,
strictly speaking, is not the models. It is the assumptions you
put in the models. So I would not blame the models. Really it
just is that we and other forecasters, we believed, based on
our analysis and discussions with people in industry, that the
supply side issues would be alleviated more quickly than now
appears to be the case, substantially more quickly. We believed
that we would have seen material relief on the supply side,
that we also thought, you know, by the end of last year.
We also thought that there would be a much more significant
return to the workforce than has turned out to be the case. And
while that is not what is causing current inflation, it is more
a kind of demand side issue that labor supply can be an issue
going forward for inflation, probably more than the supply side
issues, these supply chain issues that we are seeing.
So we assumed, we believed that we would see these things,
and, you know, the data have come in pretty consistently
showing that the supply side challenges are more persistent and
more substantial than we had expected.
Senator Ossoff. Thank you, Chair Powell. I want to discuss
with you the institutional integrity, public confidence in
institutions, ethics among those who hold high office and have
privileged access to information. I am an advocate for banning
stock trading by Members of Congress who make policy, who have
access to information and economic forecasting, and banning
stock trading by their spouses, and I will be introducing
legislation this week intending to make that the law, with
penalties for Members of Congress who violate those new rules.
We had, this week, the resignation of another senior Fed
official related to controversy about their stock trading. How
widespread is the practice of stock trading, management of
one's own portfolio at senior levels in the Fed? Do you agree
that it undermines public confidence in the institution? Will
you work with this Committee to advance legislation? I know the
Chairman has proposed some, to end that practice, and will you
comply with any lawful requests or commands for records or
information by this or other congressional committees to
examine those trades and their propriety?
Mr. Powell. Well to the latter, of course we will do that.
So I would just point out we have, immediately upon the
emergence of these facts, we began to devise a brand-new system
of governing investment by principles and senior staff
associated with the FOMC. That process is very far along. It is
nearing completion. We have already announced the contours of
it, and it effectively ends any ability to actively trade on
the part of any senior Fed official, either FOMC member or
senior staff.
You cannot purchase any equities. If you bring equities to
the Fed, ownership of equities to the Fed, of course they
cannot be in banks or anything like that, but you can sell
them. But if you want to sell or buy anything you have to give
45 days' notice, and it is nondiscretionary. Once you say you
are going to do that then those securities will be bought or
sold in 45 days. So there is no ability to time the market.
In addition, we are going to have a group at the Board of
Governors here in Washington that is preclearing trades, all
trades, and is in a position to apply the rules consistently
across the system. And I really think this is the strongest
system I have seen in place certainly for a Government agency,
and I think it rises to the current situation. I completely
agree that the public's faith that we are working to their
benefit is absolutely critical.
Senator Ossoff. Thank you, Chair Powell. And will you
provide the outlines of that proposal to this Committee as soon
as possible?
Mr. Powell. We have already announced it, and we are very
much at the point of being ready to adopt it. But of course we
would be delighted to share that.
Senator Ossoff. I am looking forward to seeing the details.
It is vital that the public understand that those in positions
of power are not trading based upon access to information that
the general public does not have.
Thank you, Chair Powell, for your testimony today. I yield
back, Mr. Chairman.
Chairman Brown. Senator Daines, from Montana, is
recognized.
Senator Daines. Mr. Chairman, thank you. I want to start by
expressing my continued concerns my colleagues have had with
inflation we are seeing in the economy. The last time you were
here before the Committee real wages were down. Well, they are
still down as we sit here today, 1.9 percent over the course of
2021, to be more precise, and I believe it is a direct result
of this inflation that we are seeing.
CPI inflation grew by 6.8 percent, year over year, in
November. Tomorrow morning we are going to get the CPI rating
for December. I think we all know it is not going to be good
news for hard-working Montanans, hard-working Americans who are
seeing their wages eaten away, month after month, by inflation.
Economists are projecting that CPI inflation will rise
about 0.5 percent on a month-to-month basis in December, which
will leave CPI inflation up at 7.1 percent in 2021. This would
be the biggest annual increase in 40 years, and is well above
the Federal Reserve's 2 percent target.
This, of course, is not that surprising, to many of us who
were here in this very room who warned this would happen when
our Democrat colleagues passed this very reckless $1.9 trillion
spending package in March of this year, when the economic
recovery was already well underway, and we pointed out there
was nearly $1 trillion of unspent funds coming into calendar
year 2021. The Democrats, on a purely partisan basis, pushed
another $1.9 trillion of reckless spending in March.
Frankly, we should be thankful at this moment that most
recent, multitrillion-dollar reckless tax and spending spree
package did not pass last year, as that would only worsen the
problems we are seeing today.
I trust the Federal Reserve is on the case to address this
inflation. I want to make sure that we here in Congress do not
do anything to make your job more difficult than it already is.
Moving away from inflation, I would like to briefly address
the Federal Reserve's dual mandate. Chairman Powell, I think it
is safe to say the Federal Reserve has its hands full already
trying to achieve its statutorily mandated goals of promoting
maximum employment and stable prices. However, many have called
for expanding the Fed's role to wade into politically charged
issues for the first time. The Federal Reserve has a long
history of political independence, and I worry that
independence could easily be undermined.
Chairman Powell, will you commit to strictly following the
Fed's dual mandate and not expanding it in ways that are not
clearly supported by the law?
Mr. Powell. Yes.
Senator Daines. I know Senator Crapo mentioned this earlier
so I will just add brief additional remarks on the Fed's report
on the costs and benefits of a central bank digital currency.
It is a topic that we want to start discussing here, so it
would be helpful to have the Federal Reserve's insights. And I
very much appreciate that you are working to get this report
out in the next few weeks.
My question, Mr. Chairman, is, the FSOC recently designated
climate change as an emerging threat to financial stability.
Can you describe a sequence of climate-related events that
would cause a financial crisis?
Mr. Powell. So it is a good question. There are two
different kinds of risk, right. There is physical risk and then
there is transition risk. So physical risk tends to be, you
know, these risks in the form of extreme weather and that kind
of thing, and they kind of accumulate over time gradually. And
to have a financial stability disruption, something that
actually threatens the financial system, it does not result
from that kind of a process. So it does not seem likely in the
near term that it would come from physical risk.
So that means the real risk would be transition risk, and
what that means is some surprising event would have to take
place that destabilized the whole financial system and maybe
caused a very large financial institution to fail in a
disorderly way.
How would that happen? It conceivably could happen through
Government policy, or it could come through an event, some kind
of a public event that really, not unlike the pandemic only
related to climate in some way.
So those are the kinds of things. These are not things that
we think about will happen every day, but, you know, it is more
a question of over time what can happen from climate.
Senator Daines. So just a follow-up to that. This morning I
was with Chairman Manchin of Energy and Natural Resources
Committee, which I serve on. We had a hearing on hydropower.
And there is a movement afoot in this country to breach
hydropower dams, to breach dams. We have already seen blackouts
in the U.S. and other countries because of forced closures of
reliable baseload energy, whether it was the nuclear plants
that have been shut down, coal plants that have been shut down.
They are talking about breaching dams.
Do you think that rolling blackouts due to a lack of a
stable baseload power poses a more tangible and real near-term
threat to the stability of the financial system?
Mr. Powell. I would have to think about that. I will say
that to have a successful--if you are someone who wants to see
a transition away from carbon-based energy, you know, we are
going to need a lot of energy to facilitate that transition,
and I think that means we need to be honest about having to
rely on more traditional kinds of power.
Senator Daines. Yeah. But what is mind-boggling to me--and
this will be my last comment, Mr. Chairman, and I will finish--
but what is mind-boggling means we have sources of energy that
do not emit carbon, like nuclear, like hydropower, and yet we
see these ideological movements that are seeking to shut down
nuclear plants, shut down hydropower, in some cases, which I
think pose a significant risk to the stability of the grid as
well as to our financial system.
Mr. Chairman, thank you.
Chairman Brown. Thank you, Senator Daines.
Senator Toomey is recognized for one last round of
questioning, and I will finish up. Thank you.
Senator Toomey. Thank you, Mr. Chairman. I want to start by
just underscoring a point that Senator Daines just made, which
I think is extremely important, and I do not think we made it
until he made that point, which is that every month that goes
by in which inflation, in the form of consumer prices, is
growing faster than wages are gaining is a month in which
workers are falling behind. There has been some comment about
wage gains. I think we would all like to see wage gains. But
wage gains that are more than wiped out by price increases do
not leave a family better off.
And so it is not a contradiction. It is not somehow
contrary to the interest of a working family to get price
stability. In fact, it is necessary for the well-being of the
working families of Pennsylvania and America that we bring
about price stability.
Mr. Chairman, two quick questions for you, one regarding a
central bank digital currency. Some have advocated, as you
know, that a central bank digital dollar be used and developed
in such a fashion that individual Americans have retail
accounts with the Fed and the Fed becomes the retail banker for
America. It seems to me that there is absolutely nothing in the
history, the experience, the expertise, the capabilities of the
Fed that lend the Fed to being a retail bank. Is that a fair
observation?
Mr. Powell. I would say it is, yes.
Senator Toomey. Thank you. Second, I know we are going to
get our report soon, and I am very much looking forward to
this, as you and I have discussed. But I wonder if you could
respond to this. If Congress were to authorize, and the Fed
were to pursue a central bank digital dollar, is there anything
about that that ought to preclude well-regulated, privately
issued stablecoins from coexisting with a central bank digital
dollar?
Mr. Powell. No. Not at all.
Senator Toomey. All right. Thank you very much. Thank you,
Mr. Chairman.
Chairman Brown. Thank you, Senator Toomey.
Chair Powell, you have responded three times, I believe, to
this issue, but I wanted to try to get a little more
specificity from Senator Cortez Masto, Senator Ossoff, and
Senator Warren. The recent revelations about the Vice Chair's
financial transactions before the Fed announced its
extraordinary support of the economy in 2020 are pretty
troubling, as you and I have talked and you have responded to
here.
After the initial fallout from Fed officials making stock
trades you announced stricter trading rules at the Fed. That
was, I believe, in October. Those rules have still not been
written, to my knowledge. We have not seen them, if they have
been written, so they certainly obviously have not been
implemented.
When will these rules--when will we see them and when will
they be put in place?
Mr. Powell. Imminently. We have tried to take care and
write them correctly. They are complex. We have to hire people,
we have got to build systems, and we have got to write rules.
So we have been hard at work at that since October. We are
ready to move ahead with that, and I would think it is in the
very near future.
Chairman Brown. OK. We are watching. Several of my
colleagues, Senator Warnock and Senator Ossoff, mentioned it.
His bill and our bill complement and do some of the same
things, the importance of banning conflicting trading at the
Fed. We should move also with our colleagues too, so that is a
next step in this.
I want to, before closing, address one issue that came up
today. You have said banks were well capitalized during the
pandemic. They had one of their most profitable years ever. But
the largest banks still are spending it on stock buybacks and
bigger dividends while still demanding relief for policy
measures because of the volume of the deposits they are taking
in. Government help can be necessary but they do not need
Government help now.
They should scale back. They could and should and can scale
back their stock buybacks. Banks could use that capital to
increase lending to small businesses, mom-and-pop
manufacturers.
We have seen manufacturing wages, which used to be the
highest wages in our economy, particularly for sort of
moderate-income people, we have seen that slide back, in part
because mom-and-pop manufacturers critical to the supply chain
are not always getting the access to capital they should. We
should use that capital to increase lending, to invest in
communities instead of enriching their executives while pushing
to weaken resiliency of our banking system.
The Fed needs to strengthen, not weaken, capital
requirements. It is the job of our banking system to support
the real economy, not executive stock portfolios. That is what
this comes down to. Everything the Fed does needs to support
the economy so that it works for all Americans--workers, small
businesses, their communities.
That is the Fed. You must lead, if confirmed. I plan to
support your confirmation. I am counting on this, as most of in
the Senate are.
So, Chair Powell, thank you for being here today. Thank you
for providing testimony.
Senators who wish to submit questions for the hearing
record, those questions are due at the close of business on
Friday, the 14th of January. To the nominees, we would like to
have your responses by Wednesday, January 19th.
Thank you again for your testimony today. The Committee on
Banking, Housing, and Urban Affairs is adjourned. Thank you.
[Whereupon, at 12:27 p.m., the hearing was adjourned.]
[Prepared statements, biographical sketch of nominee, and
responses to written questions supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN SHERROD BROWN
Yearning for a return to normalcy, American voters elected Joe
Biden President of the United States.
The American people were exhausted by divisive rhetoric at
neighborhood functions, church gatherings, and family dinners.
They wanted someone who would bring this country together based on
our shared values, like the dignity of work. They wanted an economy
that works for everyone--not just wealthy elites.
That is what we are delivering.
Think of where our country was a year ago.
Domestic terrorists breached this building a year and a week ago,
assaulting our democracy.
Four million more people were out of a job, and the hope of
vaccines, for everyone, was just that--a hope.
Today, we have made so much progress.
We have a president committed to democracy--willing to stand in
this breach, as he put it last week.
Vaccines and booster shots have dramatically lowered the risk for
most people, and allowed Americans to go back to work and our children
to go back to school, safely.
We added 6.4 million jobs last year--6.4 million jobs--the most
since 1939.
The nomination we consider today represents another step in
President Biden's effort to rebuild our economy. And the president is
putting results over partisanship, renominating a Federal Reserve chair
of the other political party.
Jerome Powell has served as Chair of the Federal Reserve since
2018. He joined the Fed in 2012. Before that, he served the country in
a number of different roles, including as Under Secretary for Finance
at the Treasury Department during the George H.W. Bush administration.
As Chair, together with President Biden, he has helped us deliver
historic economic progress.
We passed the American Rescue Plan, which got shots in arms and
money in pockets. The unemployment rate dropped to 3.9 percent, down
from 6.7 percent at the end of the last Administration. In December
alone, we added 807,000 jobs--more than doubling economists'
expectations.
The economy has regained 84 percent of the jobs we lost since the
pandemic hit 2 years ago. And for some of my colleagues who only like
to measure the strength of the economy by the stock market--it was up
27 percent at the end of 2021 and hit 70 record highs last year.
We passed an historic jobs bill, the bipartisan infrastructure
package--a goal that has for decades eluded presidents of both parties.
Chair Powell--along with Vice Chair nominee Lael Brainard, whom we
will hear from later this week--led the Federal Reserve's unprecedented
actions to stabilize our economy in the face of a global pandemic.
Chair Powell, to his credit, recognized the importance of full
employment--and what that means for all workers, particularly those at
the margins of our economy. He held firm against attempts to politicize
the Fed, and prevented an economic downturn from becoming far worse.
He understands that the best way to bounce back from this crisis is
to get the coronavirus under control with vaccines.
Today, we are at a critical moment. For the first time in decades,
workers are finally--finally--starting to get a little bit more
bargaining power. Wages are growing faster than we've seen in over a
decade.
Americans are leaving jobs that didn't work for them and their
families, and finding better ones--often with higher paychecks.
Corporations call this a, quote, ``labor shortage.'' To me it looks
like the free labor market at work at its best.
Of course we still have many challenges.
We have seen severe supply chain disruptions caused by the
pandemic. And because for decades corporations put short-term profits
over long-term resilience--enabled by bad trade deals and bad tax
policy that they lobbied for--those fragile supply chains stretch all
over the globe, and aren't easily fixed. These disruptions--along with
corporate opportunism--are raising the cost of many consumer goods.
That's adding to all the costs that have been growing more
unaffordable for decades, from childcare to prescription drugs to
housing.
And while paychecks are starting to go up, wages are still far from
keeping up with corporate profits. We have only just begun the work of
empowering American workers, and reorienting our economy from Wall
Street to Main Street.
Yet some are already suggesting the Fed pull back on its support of
the broader economy, and make it harder for people to get jobs.
Economists' lingo tends to mask what we're really talking about
when it comes to the Fed's work, so let's be clear--President Biden put
it pretty well last week:
Taking the example of the price of cars, he said we have two
options: we can increase the supply of cars by making more of them, or
we can reduce demand for cars by making Americans poorer.
That's the choice we face. When people talk about ``cooling off''
the economy, what they really mean is making it harder for people to
find jobs and stopping paychecks from growing.
And we know how this goes--the ``cooling off'' never seems to
extend to corporate profits or executives' pay.
The Fed must not allow only Wall Street to recover, while working
Americans are left behind. We've seen that story unfold too many times
before.
Today, banks are quietly celebrating one of their most profitable
years ever, with huge bonuses and payouts.
The Fed must do more to stop consolidation in the banking industry
from hurting consumers and small businesses. It must encourage more
lending to Main Street, and crack down on stock buybacks and risky bets
at the biggest banks.
And the Fed needs to take seriously the systemic risks that
threaten our economic progress--like cryptocurrencies and stablecoins
and climate change.
Chair Powell has shown he understands--in his words--``profound
challenges for the global economy and.financial system,'' and if
confirmed, we expect him to take what he has promised will be ``bold
steps'' to tackle these risks.
Chair Powell and Vice Chair nominee Brainard have also begun
important work with the FDIC and the OCC to update the Community
Reinvestment Act regulations. Completing that update is essential, to
increase banks' service to, and investment in, all the communities that
have been left on their own for too long.
We also expect reform inside the Federal Reserve System.
That means increasing diversity at the Fed, so that the people
making decisions for our economy actually reflect the workers who power
it.
As Chair Powell has said, ``If entrenched inequities prevent some
Americans from participating fully in our labor markets, not only will
they be held back from opportunities, but our economy overall will not
realize its potential.''
Many of us have appreciated his words. This year, we expect action.
In all of this work, the American people must be able to trust that
the Federal Reserve works for them, and that officials aren't abusing
their positions for personal gain.
Recent revelations about the Fed's ethics scandal have confirmed a
lot of people's worst suspicions about Government officials. As Chair
of the Fed, Mr. Powell has a responsibility to restore that trust.
The Federal Reserve plays a central role in how we want our economy
to work. We can't have a Fed that returns to business as usual--because
that didn't work for most Americans.
Chair Powell, President Biden renominated you to grow the economy
for all Americans, not just those at the top. And to protect that
growth from threats to our financial system, like risky Wall Street
schemes, cryptobubbles, and increasing climate disasters.
We expect you to meet these challenges, and I believe you have
shown the leadership to do so. We will be watching closely.
______
PREPARED STATEMENT OF SENATOR PATRICK J. TOOMEY
Thank you, Mr. Chairman.
Chairman Powell, congratulations on your renomination. As I've
said, I intend to vote in favor of extending your chairmanship. Let me
briefly explain why.
There's broad bipartisan backing for Chairman Powell's renomination
because he has a record of acting thoughtfully and constructively,
especially in difficult circumstances.
First, he implemented a number of modest, sensible reforms that
reduced regulatory burdens, including on small banks, and helped spur
economic growth. Second, when the pandemic hit nearly 2 years ago--and
Governments worldwide began to shut down their economies--credit
markets seized and the economy teetered on the brink of collapse. But
with Congress' help, Chairman Powell acted swiftly and appropriately to
stabilize the financial markets and the economy.
And to his critics who claim that the regulatory reforms he
spearheaded would hasten the collapse of the banking system, we now
know that's empirically false. After the pandemic caused the economy to
nearly collapse, our country emerged with the most well-capitalized
banks in history. It was, and still is, abundantly clear that those
regulatory reforms did not come at the expense of financial stability.
Of course, none of the Fed's pandemic actions came without a cost.
This negative-real interest rate environment continues to distort
markets, risk asset bubbles, and punish savers. And the Fed has
dramatically expanded its balance sheet with trillions in Government
bonds, effectively monetizing a lot of debt, facilitating profligate
Government spending.
For the past 18 months, I cautioned that the Fed was fighting the
last war--a mystery pathogen that led Governments to collectively shut
down the global economy--when a new enemy is here: Inflation.
I'm relieved the Fed has acknowledged inflation is running well
above and longer than its initial projections. In response, the Fed has
accelerated the termination of its bond buying program. And FOMC
participants appear to be accelerating the process to normalize
interest rates.
But I remain concerned with the Fed's actions going forward. First,
I worry that this has become the new normal for the Fed's monetary
policy. We're more than a year into record economic expansion, with
unemployment at near all-time lows, and yet the Fed is still buying
Government and agency securities.
Having continued QE throughout the recovery was a mistake. It has
contributed to asset bubbles, distorted markets, and a suboptimal
allocation of capital, credit, and resources, ultimately leading to
lower economic growth.
Second, I worry that the Fed's new monetary policy framework has
caused it to be behind the curve, as we are seeing with inflation
running at a 39-year high. Under this framework, the Fed intentionally
tolerates above target inflation for an indeterminate amount of time.
Under the old approach, the Fed may have acted last April when we first
passed 4 percent inflation.
Beyond monetary policy, I'm deeply concerned to see the Fed,
especially at the regional banks, wade into politically charged areas
like global warming and so-called racial justice. Regional banks have
hosted symposia on these issues that consistently embrace and advance a
liberal political agenda.
And the Fed itself joined the Network of Central Banks and
Supervisors for Greening the Financial System. The network's stated aim
is to use financial regulation to ``mobilize mainstream finance to
support the transition toward a sustainable economy.'' In other words,
to direct credit away from the fossil fuel sector.
The troubling politicization of the Fed puts its independence and
effectiveness at risk. The Fed has been granted operational
independence to protect monetary policy from short-sighted political
interests. And in turn, the Fed has operated largely apolitically to
great effect.
There's a kind of bargain here: the Fed is given independence on
the assumption it will only engage in areas in which it has a mandate.
That makes sense.
But if the Fed is going to stray from its mandate and become a
political actor, advocating a certain set of social policies, then
there's no way it's going to maintain its independence from the
political branches of Government that are actually responsible for
those topics.
The Fed does not have a mandate to advance politically charged
causes that are irrelevant to its mandate, like addressing global
warming or advancing so-called racial justice. And to make matters
worse, when I've sought to understand these developments, I've been met
with unacceptable noncompliance.
Let me be clear--if this politicization continues unchecked--it
will not end well for the Fed or for independently driven monetary
policy. As the Fed's leader, I hope you take this seriously and rein it
in to protect the Fed's legitimacy and independence.
I've observed that the Fed has had the good sense to adjust its
behavior as the facts and circumstances regarding inflation have come
in differently than they expected. Unfortunately, we've seen no such
humility or recognition of reality from the Biden administration, or
our Democrat colleagues.
They appear set on making the inflationary problem worse with more
reckless spending that gooses demand and regulatory and protectionist
policies that limit supply, that in combination ultimately push prices
for basic goods higher. The crisis we face now is inflation complicated
by policymakers who unwisely behave as if it's still March 2020.
The Fed cannot correct for policy failures like school closures,
Government-induced business shutdowns, or misguided expansions of the
welfare State--nor should it try.
Chairman Powell, the role of the Fed Chairman is crucial for our
shared economic prosperity. I was encouraged to see your renomination,
and I hope that you will do everything in your power to ensure that the
Fed operates within its limited mandate to effectively support the
American economy.
______
PREPARED STATEMENT OF JEROME H. POWELL
To Be Chairman of the Board of Governors of the Federal Reserve System
January 11, 2022
Chairman Brown, Ranking Member Toomey, and other Members of the
Committee, thank you for the opportunity to appear before you today. I
would like to thank President Biden for nominating me to serve a second
term as Chair of the Board of Governors of the Federal Reserve System.
I would also like to thank my colleagues throughout the Federal Reserve
System for their dedication, perseverance, and tireless work on behalf
of the American people. Their commitment and expertise were essential
to the Fed's response to the COVID-19 crisis and remain vital to the
implementation of monetary policy as our economy continues to progress.
Particular thanks go to my wife, Elissa Leonard, and our three
children, Susie, Lucy, and Sam. Their love and support make possible
everything I do. My five siblings are all watching, and we are thinking
of each other and of our parents today with love and gratitude.
Four years ago, when I sat before this Committee, few could have
predicted the great challenges that would soon become ours to meet.
On the eve of the pandemic, the U.S. economy was enjoying its 11th
year of expansion, the longest on record. Unemployment was at 50-year
lows, and the economic benefits were reaching those most on the
margins. No obvious financial or economic imbalances threatened the
ongoing expansion. But this attractive picture turned virtually
overnight as the virus swept across the globe.
The initial contraction was the fastest and deepest on record, but
the pain could have been much worse. As the pandemic arrived, our
immediate challenge was to stave off a full-scale depression, which
would require swift and strong policy actions from across Government.
Congress provided by far the fastest and largest response to any
postwar economic downturn. At the Federal Reserve, we used the full
range of policy tools at our disposal. We moved quickly to restore
vital flows of credit to households, communities, and businesses and to
stabilize the financial system.
These collective policy actions, the development and availability
of vaccines, and American resilience worked in concert, first to
cushion the pandemic's economic blows and then to spark a historically
strong recovery.
Today the economy is expanding at its fastest pace in many years,
and the labor market is strong.
As always, challenges remain. Both the initial shutdown and the
subsequent reopening of the economy were without precedent. The economy
has rapidly gained strength despite the ongoing pandemic, giving rise
to persistent supply and demand imbalances and bottlenecks, and thus to
elevated inflation. We know that high inflation exacts a toll,
particularly for those less able to meet the higher costs of essentials
like food, housing, and transportation. We are strongly committed to
achieving our statutory goals of maximum employment and price
stability. We will use our tools to support the economy and a strong
labor market and to prevent higher inflation from becoming entrenched.
We can begin to see that the postpandemic economy is likely to be
different in some respects. The pursuit of our goals will need to take
these differences into account. To that end, monetary policy must take
a broad and forward-looking view, keeping pace with an ever-evolving
economy.
Over the past 4 years, my colleagues and I have continued the work
of our predecessors to ensure a strong and resilient financial system.
We increased capital and liquidity requirements for the largest banks--
and currently, capital and liquidity levels at our largest, most
systemically important banks are at multidecade highs. We worked to
improve the public's access to instant payments, intensified our focus
and supervisory efforts on evolving threats such as climate change and
cyberattacks, and expanded our analysis and monitoring of financial
stability. We will remain vigilant about new and emerging threats.
We also updated our monetary policy framework, drawing on insights
from people and communities across the country, to reflect the
challenges of conducting policy in an era of persistently low interest
rates.
Congress has assigned the Federal Reserve important goals and has
given us considerable independence in using our tools to achieve them.
In our democratic system, that independence comes with the
responsibility of transparency and clear communication, to keep the
public informed and enable effective legislative oversight. That duty
takes on even greater significance when the Fed must take extraordinary
actions in times of crisis. In order to facilitate that transparency,
and to earn your trust and that of the American people, I have made it
a priority to meet regularly and frequently with you and your elected
colleagues. I commit to continuing that practice if I am confirmed to
another term.
The Federal Reserve works for all Americans. We know our decisions
matter to every person, family, business, and community across the
country. I am committed to making those decisions with objectivity,
integrity, and impartiality, based on the best available evidence, and
in the long-standing tradition of monetary policy independence. That
pledge lies at the heart of the Fed's mission and is one we all make
when we answer the call to public service. I make it here again, with
force and without reservation.
Everything we do at the Federal Reserve is in pursuit of the goals
set for us by Congress. I am honored to have worked in service to those
ends since I joined the Fed in 2012, and as Chair for the past 4 years.
Thank you. I look forward to your questions.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN BROWN
FROM JEROME H. POWELL
Q.1. Chair Powell, you recently stated that in your career, you
``have seen the best and most successful organizations are
often the ones that have a strong and persistent commitment to
diversity and inclusion.'' Yet, according to the New York
Times, just 1 percent of all economists at the Fed are Black
and less than 10 percent of them are Hispanic. I appreciate
that in your nomination hearing, you emphasized the importance
of a diverse workforce for full employment, including at the
Fed. What steps will you take to ensure racial equity in hiring
at the Fed? Will you commit to furnishing this Committee with a
report by July 1st of this year, if confirmed, identifying the
Fed's progress in hiring more economists and staff from diverse
backgrounds?
A.1. To foster diversity, we must develop an overall culture of
inclusion at all levels, starting at the top. The Federal
Reserve Board (Board) reviews and assesses our employment
policies, procedures, and practices and works closely with
stakeholders to address any barriers that may not align with
the Board's values in fostering an inclusive working
environment. Board leaders continue to engage in strategies
that support effective recruitment and development goals. For
example, we have implemented an Ambassador outreach program in
which Board employees from diverse backgrounds representing a
variety of job families, including economics, may participate.
This program is designed to attract candidates to the Board by
providing information about the Federal Reserve and the
Ambassadors' experience working at the Board.
We offer voluntary classes in leadership development,
mentoring, and skill enhancement as part of career development
and succession planning. In addition, we will continue to
support the American Economics Association summer programs for
economics-centered internships, and to work closely with other
minority and women's professional organizations such as the
Sadie Collective to advance opportunities for minorities in the
economics profession. To promote accountability for addressing
possible bias in the recruitment and promotion process, hiring
officials will continue to attend workshops on recruiting
without bias, and we will continue to ensure that interview
panels include people with diverse backgrounds.
In addressing the challenges of increasing diversity in the
economics profession, we are collaborating with the G7 Central
Banks to identify leading practices and resources that will
enable recruitment of economists from a broader set of research
areas in order to attract more diverse candidates and better
support the diversity of perspectives, experiences, and skill
sets needed to fulfill our mission. In addition, our economics
divisions (Research and Statistics, Monetary Affairs,
International Finance, and Financial Stability) will continue
to collaborate on a variety of diversity and inclusion
initiatives to support and encourage increased representation
of women and minority groups in the economics profession. These
initiatives involve partnerships with outside organizations--
such as the American Economic Association, the Bank of England,
the European Central Bank, the National Economic Association,
and the American Society of Hispanic Economists--as well as
Federal Reserve System and internal efforts.
With regard to your question on reporting, the Board's
Office of Minority and Women Inclusion annually reports to
Congress outlining its activities, successes, and challenges.
The appendices of this report provide the Board's Employer
Information EEO-1 Report, as well as the combined data for
official staff demographics of the Board and Reserve Banks, the
demographics of Federal Reserve System boards of directors, and
the total contract payments by the Board and Reserve Banks to
minority- and women-owned businesses. As required by section
342 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, the Board will continue to provide this
information annually. Our next report will be forthcoming at
the end of March.
Q.2. What specific measures will you use to evaluate the
success of the Federal Reserve in understanding and addressing
the needs of Black, Indigenous and people of color (BIPOC)?
And, will you keep Congress apprised, as appropriate, on the
progress being made on these measures?
A.2. The Federal Reserve devotes considerable attention to
analyzing differences in income, wealth, employment, and other
economic outcomes for Black, Indigenous, and people of color,
women, and communities across regions of the country to help us
better understand the implications of such differences for the
economy's functioning. The Federal Reserve regularly reports
the outcomes of these efforts to Congress and the public
through various reports and testimonies, all of which are
posted on our website.
Some specific examples of the data collection work that we
have undertaken include:
The Distributional Financial Accounts (DFAs). The
DFAs provide quarterly estimates of wealth, assets, and
debt by race and ethnicity.
The Survey of Household Economics and
Decisionmaking. Since 2013, the Board has conducted the
Survey of Household Economics and Decisionmaking, which
measures the economic well-being of U.S. households,
including across racial and ethnic groups, and
identifies potential risks to their finances.
The Survey of Consumer Finances (SCF). The SCF is a
long-running data product of the Board. For the 2022
SCF, Board staff have worked to improve the SCF's
ability to measure wealth disparities across racial and
ethnic groups by increasing the sample size for these
groups. These improvements to the SCF will allow us--
for the first time--to estimate the wealth holdings of
Asian families separately; in addition, it will permit
us to look more closely at subsets of Black and
Hispanic families.
The Small Business Credit Survey. This survey
covers a national sample of small businesses
(businesses with fewer than 500 employees) and provides
information on firms' financing needs and access to
credit, with a focus on startups, minority-owned firms,
women-owned firms, rural firms, and self-employed and
gig workers.
Data from these surveys as well as research and analysis
based on these data are available in a number of public
formats, including a section of the Board's website that
provides easy access to the range of our data and research on
economic disparities. The Federal Reserve also regularly
presents relevant analysis in the semiannual Monetary Policy
Report that we submit to Congress, such as the analysis we
included in the February 2021 Monetary Policy Report on
disparities in labor market outcomes across demographic groups
and for workers at various places in the wage distribution.
In addition, the Federal Reserve System and the Board have
undertaken or encouraged analysis of these topics in the
following ways:
The Board and the Federal Reserve Banks of Atlanta,
Minneapolis, and St. Louis have set up research centers
that investigate the causes of economic and financial
disparities across demographic groups. For example, the
Board has become a member of the Central Bank Network
for Indigenous Inclusion, which seeks to foster ongoing
dialogue, research, and education to raise awareness of
economic and financial issues and opportunities around
Indigenous economies. The Board's participation is
supported by the Center for Indian Country Development
at the Federal Reserve Bank of Minneapolis and the
Economic Education Partnership with Indian Country at
the Federal Reserve Bank of St. Louis.
Building on previous work, the Board and Reserve
Banks partnered to convene research conferences in 2021
that focused on uneven outcomes in the labor market.
The Federal Reserve also supervises and enforces laws and
regulations designed to advance economic opportunity to people
and communities of color by promoting fair and equal access to
credit and financial services and preventing illegal
discrimination. We have rigorous processes and robust programs
to implement the laws and regulations in the following areas,
and the Federal Reserve's work in these areas is reported to
Congress in our Annual Report.
Community Reinvestment Act (CRA): Implementation of
the CRA is a crucial mechanism for addressing
persistent systemic inequity in the financial system
for low- and moderate-income (LMI) and minority
individuals and communities. CRA evaluations carefully
review and rate banks on how well they meet the
investment, credit, and banking services needs of their
local communities, which are critical to advancing
economic opportunity, including by promoting access to
home ownership, small business loans, and education.
The Board is working with the Federal Deposit Insurance
Corporation (FDIC) and the Office of the Comptroller of
the Currency (OCC) to propose revisions to regulations
that would strengthen the CRA's role in meeting the
credit needs of communities of color by encouraging
investment in minority depository institutions, women-
owned financial institutions, low-income credit unions,
community development financial institutions, and
encouraging investment in Indian Country and colonias.
Fair Lending Laws: As a supervisor of financial
institutions, we enforce both the Fair Housing Act and
the Equal Credit Opportunity Act, the Federal fair
lending laws that prohibit discrimination in lending.
Under these authorities, we have a robust supervisory
approach to make sure banks have strong programs to
ensure fairness in their lending and address any
findings of discrimination to ensure that bank policies
or practices do not close off opportunities to access
credit that advance economic opportunity. Supervisory
evaluations for CRA and fair lending are also taken
into account when evaluating proposals for mergers and
acquisitions.
Minority Depository Institutions (MDIs): The
Federal Reserve recognizes the importance of MDIs,
which have an explicit mission to serve the banking and
credit needs of minority consumers and communities and
understand the challenges inherent in providing access
to credit and other financial services in traditionally
underserved areas. In collaboration with the FDIC and
OCC, the Federal Reserve's Partnership for Progress
(PFP) program is dedicated to supporting the
preservation of MDIs to ensure these financial
institutions can thrive and support an inclusive
financial system. In 2021, the Federal Reserve expanded
the programmatic work to include Women's Depository
Institutions (WDIs) to ensure that PFP resources are
also available to WDIs. The agencies' activities are
reported annually to Congress in the Annual Report on
Promoting Minority Depository Institutions.
Further, the Federal Reserve has a long-standing commitment
to community development, establishing programs at each of the
12 Reserve Banks and the Board in 1984. This function promotes
economic growth and financial stability for LMI communities and
individuals by conducting and publishing research and convening
community development stakeholders interested in working
together to address challenges and create new investment
opportunities.
To help inform the work of community development
practitioners, researchers, lenders, and policymakers, the
Federal Reserve produces publications and convenes events to
disseminate research, data, and perspectives on issues related
to advancing economic opportunity for traditionally underserved
populations and areas.
Q.3. What is your plan for creating an inclusive working
environment for employees within your office?
A.3. I place a high value on setting a tone of inclusiveness
and openness in my office. An inclusive working environment is
critical to enable all employees to fully engage in their work
and to feel valued and respected. It is important to provide a
venue and a process for employees to have the ability to freely
and confidently share feedback on their workplace. I have
supported the implementation of an Engagement Survey. Feedback
from this process has led to enhancing career development
opportunities, creating a Board-wide mentoring program,
implementing diversity and inclusion training events, and
addressing safety to speak up.
Q.4. Where have you excelled in past positions in attracting,
hiring, and promoting people of color in positions in your
organization? Where might there be room for improvement?
A.4. As Chair, I have internally and externally stated my
strong personal belief in and support for a diverse and
inclusive environment, including specifically identifying its
importance as part of the Board's 2020-23 Strategic Plan. As
Chair, I have also led quarterly meetings with staff at many
levels from within the Board and the System to discuss and
assess our progress in advancing diversity and economic
inclusion. These meetings are a priority for me and my
colleagues on the Board.
I also speak regularly with staff about the importance of
fostering diversity and inclusion. I meet with the Board's
Director of the Office of Women and Minority Inclusion on a
quarterly basis, and I have met with the chairs and cochairs of
each of the Board's seven Employee Resource Groups \1\ on a
number of occasions. We have created staff advisory groups at
the division level to work with leadership to create action
plans focusing on staff development and division inclusion
activities. In an effort to learn from others, we have also
hosted business and nonprofit leaders who have served on
Reserve Bank boards of directors to discuss what has worked
well in developing a culture of diversity and inclusion at
their organizations.
---------------------------------------------------------------------------
\1\ The Board's employee resource groups include: Advocacy for the
Diverse Abilities, Needs, and Contributions of Employees (ADVANCE)
Employee Resource Group; African American Employees Resource Group;
Asian American Pacific Islander Employee Resource Group; Hispanic
Employee Resource Group; LGBTQA Employee Resource Group; Veterans
Employee Resource Group; and Women's Employee Resource Group.
---------------------------------------------------------------------------
As Chair, I have encouraged and strongly supported the
considerable outreach we do to diverse candidates in our
recruiting of staff. This includes participating in minority
recruitment events at Historically Black Colleges and
Universities (HBCUs), Hispanic-Serving Institutions (HSI), and
Hispanic professional conferences and career fairs. Our
outreach is particularly notable as we hire recent college
graduates as full-time research assistants, a position which
can be an important step towards a career in economics.
We are also reviewing our recruiting and hiring practices
to identify and implement ways in which we can further increase
the pool of diverse qualified candidates. As a result of our
ongoing review, we have started to broaden the research
specializations within economics from which we have typically
hired economists. Recruiting from a broader set of research
areas not only may draw more diverse candidates, but also
better supports our mission by ensuring broader skill sets and
perspectives.
Under my leadership as Chair, the Board has leveraged its
award-winning internship program to offer students on-the-job
experience and learning. The program is a way to create a
diverse job candidate pool for our entry-level positions. The
Board has also implemented job board and resume database access
to expand diversity sourcing initiatives with the National
Black MBA Association and National Society of Black Engineers.
Over the last 4 years, my colleagues and I have worked to
develop the pipeline of economists from under-represented
groups. We have welcomed diverse groups of students--at the
high school, undergraduate, and graduate levels--to the Board
both in person and through online events to discuss career
opportunities, the work that we do, and diversity in the
profession. We are collaborating closely with the American
Economic Association (AEA) and with Howard University,
including committing staff resources over the next 5 years to
teach an Advanced Research Methods class to undergraduate and
masters level students at the AEA Summer Training Program,
which is being hosted by Howard University.
My colleagues and I are also supporting research on and
awareness of the factors that are holding back diversity and
inclusion in economics. For example, in November 2021, we
hosted a conference on Diversity and Inclusion in Economics,
Finance, and Central Banking, along with three other central
banks.
Prior to becoming the Chair of the Board, I was chair of
the Board's Committee on Reserve Bank Affairs, responsible for
overseeing Reserve Bank operations. With respect to the process
of selecting Reserve Bank presidents, we have focused over the
past 7 years on ensuring that Reserve Bank boards reflect the
communities that they serve, in terms of personal
characteristics, as well as professional experience and
educational background. Research has shown that diverse hiring
committees have more success in identifying and attracting
diverse talent. The directors who serve on these boards play
the lead role in appointing presidents and other senior Reserve
Bank leaders. During my tenure as the chair of the Committee on
Reserve Bank Affairs, I also worked with Reserve Bank boards of
directors and presidents to specifically align expectations for
the Reserve Bank president position and developed a set of key
dimensions for the role. In addition, I oversaw the overhaul of
the Reserve Bank president search process, leveraging best
practices I learned from my previous leadership roles and
outreach to various communities. Aligning expectations and
having robust search processes are important steps in assuring
that search committees have the opportunity to consider a
broader set of candidates who are diverse in professional,
academic, and personal background. These changes--both to
Reserve Bank boards and the appointment process--have helped
diversify the sectoral, professional, racial, and gender makeup
among the Reserve Bank presidents. More work is needed in
furthering diversity across the senior ranks of the Federal
Reserve System, and I am committed to working with the Reserve
Banks to further leverage effective practices in the senior
leadership search processes.
Q.5. Twenty years ago, Wall Street marketed over-the-counter
derivatives and subprime mortgages as ``financial innovation''
and a way to manage risks and expand opportunity. Without
regulation, these products failed and upended the financial
system. We hear the same type of marketing about cryptocurrency
today--that it's innovative, secure, and expands inclusion.
They also market stablecoins as an alternative to the American
dollar, which you mentioned in the hearing is strong and in
demand across the world. What risks do you see to working
families from cryptocurrency and stablecoins? Further, what do
you believe is the Fed's role in protecting the economy from
the risks of crypto assets?
A.5. Like any new financial technology, crypto assets may
create potential benefits, but they also pose a range of risks,
including those related to safety and soundness, anti- money
laundering, illicit finance, and--as you note--consumer
protection. It is vital that the United States maintain a
strong financial regulatory system that adheres to the
principle of same activity, same risks, same regulation for all
financial activity, including novel asset classes such as
crypto assets.
The Board continues to monitor financial services
innovation involving crypto assets, including the potential
risks to the financial system. As you know, the Board's
regulatory and supervisory authority is generally limited to
activities conducted by depository institution holding
companies, State member banks, and their nonbank affiliates.
The Federal Reserve is committed to supporting responsible
innovation in banking, but is focused on ensuring the safety
and soundness of banking institutions and the financial system
more broadly. The Federal Reserve is also committed to working
with our interagency counterparts to tackle novel risks in the
financial system, such as those raised by the growth of crypto
assets.
Stablecoins that may be used as a means of payment, like
other payment innovations, are of particular concern in light
of their rapid growth and asserted promise of stability.
Stablecoins may improve efficiencies, increase competition,
lower costs, and foster broader financial inclusion, but they
also pose risks such as run risk, payment system risk, systemic
risk, and risks related to the concentration of economic power.
The President's Working Group on Financial Markets, together
with the other Federal banking agencies, has recommended that
Congress move promptly to enact legislation that would ensure
payment stablecoins and payment stablecoin arrangements are
subject to a consistent and comprehensive Federal regulatory
framework.
More broadly, the Board is working in conjunction with the
other Federal banking agencies to better understand the risks
associated with crypto-asset-related activities, including
those related to cryptocurrencies, and to develop an
appropriate, coordinated response. As noted in the recent
interagency statement on this topic, the agencies are engaging
in policy work focused on providing greater clarity on whether
certain activities related to crypto assets conducted by
banking organizations are legally permissible and, if so, how
these activities can be conducted safely. The agencies expect
to provide further clarity on these issues throughout 2022. The
Board, also in conjunction with the other Federal banking
agencies, works closely and frequently with the Financial
Crimes Enforcement Network on matters relating to the Bank
Secrecy Act and anti- money-laundering policy and regulatory
issues, including those related to digital assets such as
cryptocurrency.
Q.6. Recently, the Fed approved mergers that created banks with
$560 billion, $450 billion, and even $1 trillion in assets.
Bank mergers often lead to closed branches, decreased financial
inclusion, less access to capital for small businesses. How do
you prioritize community needs and financial stability in
reviewing bank mergers?
A.6. The Federal Reserve is committed to promoting financial
inclusion, and to the premise that all Americans should have
access to affordable banking services regardless of where they
live. The Federal Reserve is required to review bank merger and
acquisition (M&A) proposals under the relevant statutory
factors set forth in the Bank Holding Company Act and the Bank
Merger Act and takes seriously its responsibility for doing so.
Under these statutes, the Federal Reserve is required to
consider, among other things, the managerial resources of the
organizations involved and the proposed combined organization.
As part of its evaluation of the managerial factor, the Federal
Reserve considers the involved institutions' records of
compliance with laws and regulations, including those related
to consumer protection.
The Federal Reserve is also required to consider the
effects of a bank M&A proposal on the convenience and needs of
the communities to be served by the resulting financial
institution. In evaluating the convenience and needs factor,
the Federal Reserve considers whether the involved institutions
are currently helping to meet the credit needs of their
communities, as well as the potential effects of the proposal
on these communities. This includes considering the records of
the involved institutions under the CRA, their consumer
compliance records, the results of their recent fair lending
examinations, as well as the number and locations of branches
proposed to be closed as a result of the merger and the
potential impact of closures in LMI and majority-minority
areas.
Because a bank's CRA performance is taken into account in
the Board's review of bank M&A proposals, I should also note
the Federal Reserve's ongoing work to strengthen and modernize
the CRA. In 2020, the Federal Reserve released an Advance
Notice of Proposed Rulemaking (ANPR) on the CRA regulations.
\2\ In July, the Federal banking agencies took a significant
step forward by announcing that we are working together on
strengthening CRA regulations. \3\ I believe that the Board's
ANPR will serve as a sound framework for our interagency
efforts.
---------------------------------------------------------------------------
\2\ Community Reinvestment Act, 85 FR 66410, 66412 (Oct. 19,
2020).
\3\ See https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20210720a.htm.
---------------------------------------------------------------------------
The Dodd-Frank Wall Street Reform and Consumer Protection
Act (Dodd-Frank Act) added financial stability as a statutory
factor the Board must consider when evaluating M&A proposals
under the Bank Holding Company Act and the Bank Merger Act. In
analyzing the financial stability considerations associated
with a proposed banking merger, the Board assesses the systemic
footprint of the resulting firm and the incremental effect of
the transaction on the acquirer's systemic footprint. Since the
enactment of the Dodd-Frank Act, the Board has not approved any
acquisition by a global systemically important bank (GSIB) that
resulted in a material increase in its systemic footprint or
any M&A transactions that would create a GSIB. Further, the
Board has made substantial improvements to its regulatory
framework to mitigate systemic risk since the 2008 financial
crisis, including through the adoption of stricter bank capital
and liquidity requirements, as well as other enhanced
prudential standards under the Dodd-Frank Act. Under the
Board's regulatory and supervisory framework, as banking firms
grow larger--whether organically or through M&A--they face an
increasingly stringent set of prudential requirements.
Q.7. As I mentioned in my opening statement, when the Federal
Reserve's only remedy against inflation is to raise interest
rates, it is ordinary Americans who bear the brunt, becoming
locked out of employment and losing access to affordable credit
in service of ``cooling off'' the economy. In the past, the
Federal Reserve has raised interest rates prematurely, hurting
workers in the process. How is this time around different? As
Chair, how will you work to ensure that the Federal Reserve
takes lessons from our history to inform future monetary policy
frameworks, especially given that, as you shared during your
testimony, the higher prices we are seeing are heavily impacted
by pandemic-related supply constraints?
A.7. The labor market is very strong, and I expect that it will
strengthen further, although the pandemic will continue to
prevent or discourage some from re-entering the workforce. Job
openings and quits are at record levels, and nominal wages are
rising at the fastest rate in decades. Wage gains have been
concentrated in the lowest quartile of earners and among
production and nonsupervisory workers. The labor market does
not suffer from a lack of demand, but from restrained supply
resulting from the pandemic. Many people are still unable or
unwilling to return to the workforce because of factors such as
caregiving needs or fears of illness, which has limited firms'
ability to attract workers.
More broadly, strong aggregate demand and pandemic-
constrained supply have pushed inflation well above our 2
percent objective. High inflation is most burdensome for those
living on fixed income and struggling to pay costs of basic
necessities. One of the key lessons of the past, including
those from the previous expansion, is that the biggest benefits
of a strong labor market emerge over the course of a long
expansion, particularly for families and residents of low-to-
moderate income communities. To return to the kind of economy
we saw before the pandemic could require another long,
sustained expansion, which will, in turn, require price
stability and well-anchored longer-term inflation expectations.
The Federal Open Market Committee will be discussing these
issues at our coming meetings.
Q.8. Chair Powell, the Federal Reserve has not had a full Board
of Governors since 2013. As we face a critical moment in our
economic recovery, there is much work to be done. Do you agree
that the Federal Reserve would benefit from a full Board?
A.8. As you are aware, the Federal Reserve has many functions,
and members of the Board contribute a broad range of views to,
and share responsibility for, fulfilling that work. Under the
Federal Reserve Act, the Board can take any authorized action
with the Board members that are serving. I have served with as
few as three members, and as many as seven. I have
significantly benefited from the range of views my colleagues
contribute to our deliberations.
Q.9. During your time as Chair, did you ever prevent another
member of the Board from expressing his or her views or refuse
to work with that member on an issue with which you disagreed?
Do you commit to work with every member of the Board of
Governors and attempt to find common ground?
A.9. I have served on the Board for nearly 10 years and have
occupied the position of Chair for nearly 4 years and, in my
experience, the Board is a highly collaborative environment
where governors with different views work together in good
faith to conduct the business of the Board. I welcome diverse
opinions and have never prevented other governors from
expressing their views. I have worked to continue to foster the
Board's collegial and collaborative culture, and I commit to
continue to do so if I am confirmed for a second term as Chair.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
FROM JEROME H. POWELL
Q.1. Economists often describe quantitative easing (QE) as
working through a ``term premium effect.'' QE pushes down long-
term yields by reducing the supply of Treasury debt and
mortgage bonds.
To the best of your understanding, how much do the Fed's
portfolio holdings reduce the current 10-year Treasury yield?
If uncertain, provide a plausible range.
What models or analyses inform your estimate of the Fed
portfolio's TPE?
A.1. The financial and economic effects of quantitative easing
have been a topic of economic research for decades. \1\
Following the Global Financial Crisis in 2008, the literature
on the financial and economic effects of quantitative easing
expanded greatly. Various authors have identified a range of
possible channels through which quantitative easing may affect
financial conditions and the overall economy, including a
portfolio balance channel, duration channel, and signaling
channel, among others. \2\ These various channels of influence
work through both the term premium embedded in longer-term
Treasury yields and the expected future path of short-term
interest rates. Vayanos and Vila (2021) \3\ is one study that
has provided a theoretical basis for understanding the effects
of quantitative easing. The term structure model of Li and Wei
(2013) \4\ has been an important framework underlying many of
the Federal Reserve's empirical estimates of the effects of
quantitative easing on the term structure of interest rates.
Numerous authors have studied the effects of quantitative
easing in foreign economies. While the estimates vary
considerably, most papers find evidence that quantitative
easing can have important effects on the level of longer-term
yields and other asset prices. These changes in financial
conditions, in turn, can have meaningful macroeconomic effects.
\5\
---------------------------------------------------------------------------
\1\ One of the earliest papers focusing on the effects of changes
in the supply of Treasury securities in the hands of the public on the
level of longer-term Treasury yields is Modigliani, Franco, and Richard
Sutch (1967), ``Debt Management and the Term Structure of Interest
Rates: An Empirical Analysis of Recent Experience'', Journal of
Political Economy, 74, August, pp. 569-589.
\2\ See, for example, Krishnamurthy, Arvind, and Annette Vissing-
Jorgensen (2011), ``The Effects of Quantitative Easing on Interest
Rates: Channels and Implications for Policy'', Brookings Papers on
Economic Activity, 42, Fall, pp. 215-265; D'Amico, Stephania, William
English, David Lopez-Salido, and Edward Nelson (2012), ``The Federal
Reserve's Large-Scale Asset Purchase Programmes: Rationale and
Effects'', Economic Journal, 122, November, pp. 415-446; Bauer, Michael
D., and Glenn D. Rudebusch (2014), ``The Signaling Channel for Federal
Reserve Bond Purchases'', International Journal of Central Banking,
September, pp. 233-289, and Bhattarai, Saroj, and Christopher Neely
(2016), ``A Survey of the Empirical Literature on U.S. Unconventional
Monetary Policy'', Federal Reserve Bank of St. Louis Working Paper,
October. In addition, monetarist literature's account of how asset
purchases can lower bond yields and stimulate the economy when the
short-term interest rate is at its lower bound is quite similar to what
we have laid out in describing our asset purchases. For example, see
Edward Nelson (2013), ``Friedman's Monetary Economics in Practice'',
Journal of International Money and Finance, vol. 38, no. 1, pp. 59-83.
\3\ Vayanos, Dmitri, and Jean-Luc Vila (2021), ``A Preferred-
Habitat Model of the Term Structure of Interest Rates'', Econometrica,
89, January, pp. 77-112.
\4\ Li, Canlin, and Min Wei (2013), ``Term Structure Modeling with
Supply Factors and the Federal Reserve's Large Scale Asset Purchase
Programs'', International Journal of Central Banking, 9, March, pp. 3-
39.
\5\ See, Engen, Eric, Thomas Laubach, and David Reifschneider
(2015), ``The Macroeconomic Effects of the Federal Reserve's
Unconventional Monetary Policies'', Finance and Economics Discussion
Series, Board of Governors of the Federal Reserve, January.
---------------------------------------------------------------------------
Calculating the effects of the increase in the Federal
Reserve's total portfolio of securities holdings on the 10-year
Treasury yield is complicated because such effects work through
the entire expected future path of securities holdings. That
said, the estimates from various studies of the effects of
securities holdings, summarized in Gagnon (2016), \6\ provide a
reasonable range. According to Table 1 in this study, the
median of the estimated quantitative easing effects for the
U.S., reported across a range of papers, is about 70 basis
points for quantitative easing purchases, amounting to 10
percent of nominal GDP. Over the period from 2019 Q4 to
present, the Federal Reserve's securities holdings increased as
a share of nominal GDP from about 17 percent to about 35
percent. Using the 70-basis point figure, this 18 percentage
point increase in the Federal Reserve's securities holdings as
a share of nominal GDP since the onset of the pandemic, all
else equal, may have lowered the level of the 10-year Treasury
yield by roughly 125 basis points. Of course, the range of
uncertainty around any estimate of this type is quite large.
While this estimated effect of the increase in the Federal
Reserve's securities holdings on longer-term yields is sizable,
the effect would be expected to fade over time once asset
purchases conclude and as the size of the Federal Reserve's
balance sheet relative to nominal GDP returns to a more normal
level.
---------------------------------------------------------------------------
\6\ Gagnon, Joseph (2016), ``Quantitative Easing: An
Underappreciated Success'', Peterson Institute for International
Economics, Policy Brief, April.
Q.2. Traditional monetarist analysis suggests a different
transmission mechanism for QE: the money supply. QE increases
the amount of reserves in the banking system. A greater level
of reserves earning a near-zero return drags down return on
equity, incenting banks to increase lending. Lending boosts
bank deposits, and therefore the money supply. In turn, all
else equal, the greater money supply increases aggregate
demand--and in the long run, prices.
Do you believe this mechanism is important for explaining
the transmission of monetary policy? Please explain your view
and share any relevant research.
Or if you do not yet have an informed view, will you commit
to studying it further and briefing me and my staff?
A.2. The traditional textbook account of deposit creation--
according to which increases in the quantity of reserves in the
banking system give rise to a multiplied expansion of the money
supply via the commercial banking system increasing its loans
and investments--can be of value in understanding the behavior
of commercial banks' reserve balances and their deposit
liabilities in past historical episodes. In recent decades,
however, this theory has been of much more limited value in
understanding the process of money creation, as the
relationship between bank reserves and bank deposits has
weakened considerably in the United States.
With regard to the relationship between the money supply,
aggregate demand, and prices, the M2 monetary aggregate once
had a reasonably stable connection with total spending in the
economy, and it was widely argued that M2 growth provided a
useful signal about the future course of the inflation rate.
For the past 30 years, however, financial innovation, related
changes in regulation, and the lower level of nominal interest
rates have substantially altered the link between M2 and
economic activity. M2 has not been a reliable indicator of
spending, inflation, the stance of monetary policy, or the
degree of policy accommodation. Correspondingly, about a decade
ago, M2 was dropped from the Conference Board's standard set of
U.S. leading economic indicators.
Q.3. FOMC participants have re-evaluated their views on the
appropriate path of policy in light of recent inflation. In the
December 2021 Summary of Economic Projections, the median FOMC
participant projected three rate hikes in 2022, up from one
rate hike. All participants see inflation slowing. However,
three rate hikes would only raise overnight rates to between
0.75 percent and 1.00 percent. In real terms, interest rates
would still be sharply negative. While these projections are
not a committee forecast, these numbers suggest that
participants generally believe that inflation will fall despite
real interest rates remaining in negative territory.
How can the Fed curtail inflation while real interest rates
remain negative?
Does this imply that the neutral interest rate is now
negative, and so a less negative rate can be contractionary?
A.3. The elevated levels of inflation we have experienced
reflect a mismatch between demand and supply. Some of the
sectors of the economy that have experienced very strong
demand, especially those involving goods, have hit supply
constraints. We expect inflation to start coming down this year
as a result of both an increase in supply and a moderation in
demand. That said, we do not think that the current imbalance
between demand and supply will be fully resolved this year.
Elevated inflation is currently the foremost threat to the
achievement of maximum employment.
Monetary policy cannot address supply constraints, but it
can affect demand. This is a reason why, as you noted, the
median Federal Open Market Committee (FOMC) participant in
December saw three rate hikes in 2022 as appropriate. But, if
the economy evolves broadly as anticipated, rate hikes this
year would be only part of our actions to curtail inflation.
For instance, the median FOMC participant in December saw
additional rate hikes as appropriate for next year (2023) and
beyond, taking the real Federal funds rate out of negative
territory. In this context, it is important to note that demand
and inflation pressures respond not just to the current level
of the Federal funds rate but also to its expected path.
Indeed, longer-term interest rates, which encompass the
expected trajectory of the Federal funds rate, are most
relevant for economic activity.
In addition to our communications regarding the expected
future path of the Federal funds rate, we have already made
strides toward ending our net asset purchases, which we expect
will end in early March. We have also started discussions about
reducing the size of our securities holdings, and will continue
those discussions at coming FOMC meetings.
As you noted, in the December 2021 Summary of Economic
Projections, the median FOMC participant projected three rate
hikes in 2022. This median view is based on a set of
expectations for how the economy will evolve, including an
expectation that inflation will move down substantially over
the course of the year. We will act as needed to curtail above-
target inflation if the data do not support that view.
Q.4. In the past, you have testified about the role of fiscal
policy in supporting monetary policy when it is constrained by
the zero lower bound. In your view, fiscal policy can support
aggregate demand when the Fed's primary tool (the overnight
interest rate) is constrained. We have now seen the troubling
result of that support: tremendous inflation. And rather than
fix our long-term budget issues, my Democrat colleagues want to
continue deficit spending. Others have proposed radical changes
to the Fed's framework for monetary policy, such as allowing
for negative nominal interest rates, or purchasing corporate
bonds and equities. None of these radical proposals address the
root issue: the neutral interest rate has fallen close to zero.
Do you agree that the potential growth rate is closely
connected to the neutral rate?
A.4. Yes. The growth rate of potential output is one of the key
factors that determines an economy's neutral rate. However,
many other factors can affect the neutral rate, including the
growth rates of population and the labor force, the expected
length of people's retirements, the share of near-retirement
age workers relative to retirees, the distribution of income,
the capital intensity of the production process, and the price
of investment goods. These factors affect the supply and demand
for savings, and therefore interest rates, and many of them
factors also affect potential growth.
Q.5. All else equal, for each percentage point increase in the
potential growth rate, how much would the neutral rate
increase? If uncertain, provide a plausible range.
A.5. As I noted in my answer to 4(a), it is quite difficult to
estimate the relationship between potential real GDP growth and
the neutral interest rate, as there are many interacting
factors at play. But on the basis of the current State of
economic research, it is plausible that for each percentage
point increase in the potential real U.S. GDP growth rate, the
longer-run value of the neutral real interest rate would
increase by 0.4 to 1 percentage point. \7\
---------------------------------------------------------------------------
\7\ On the 0.4 percent estimate, see Borio, Claudio, Piti
Disyatat, Mikael Juselius, and Phurichai Rungcharoenkitkul (2017),
``Why So Low for So Long? A Long-Term View of Real Interest Rates'',
BIS Working Paper No. 685, December, Table 8. On the 1 percentage point
estimate, see the discussion on pp. S62-S63 of Holston, Kathryn, Thomas
Laubach, and John C. Williams (2017), ``Measuring the Natural Rate of
Interest: International Trends and Determinants'', Journal of
International Economics, 108, Supplement 1, May, pp. S59-S75.
Q.6. In your view, what is the current neutral rate? If the
neutral rate were to rise, at what level would the zero lower
---------------------------------------------------------------------------
bound no longer be a salient concern for monetary policy?
A.6. Some perspective on how individual FOMC participants
assess the value of the longer-run neutral rate is provided by
December SEP. The median participant's longer-run projected
value of the Federal funds rate was 2.5 percent. All
participants in December projected a longer-run inflation rate
equal to our 2 percent objective, implying a median longer-run
neutral real interest rate of 0.5 percent. \8\ Pricing in
markets for inflation-protected Treasury securities likewise
suggests that the longer-term value of the real interest rate
is low. We expect that the lower bound on nominal interest
rates will be a salient concern in the setting of monetary
policy for the foreseeable future.
---------------------------------------------------------------------------
\8\ See, https://www.federalreserve.gov/monetarypolicy/files/
fomcprojtabl20211215.pdf.
Q.7. What models or analysis informs your estimate of the
neutral rate, as well as the relationship between the neutral
---------------------------------------------------------------------------
rate and the potential growth rate?
A.7. Although the neutral rate of interest is an important
conceptual tool, it is also an unobserved variable that changes
over the business cycle and over longer time frames. Numerical
estimates of the rate will depend on the economic model and
estimation procedure used. Members of the Board and the FOMC
look at estimates of the neutral rate of interest based on a
variety of models. Although such estimates can provide useful
inputs into policymakers' projections and deliberations, all
estimates are associated with considerable uncertainty.
Policymakers also take into account information from other
sources, such as their observations of the economy and their
discussions with market participants and observers.
In deciding on monetary policy, FOMC participants likely
have different views about the importance they attach to
estimates of the neutral rate and in the weights they give to
the various estimates. In addition, the pandemic and its
economic effects have considerably complicated the
interpretation of estimates of the neutral rate, particularly
in the case of estimates of shorter-term and medium-term
concepts of the rate. The FOMC as a whole has not adopted an
official model of the neutral rate or a preferred estimate of
that rate, and I do not assume that we know with confidence the
level of the neutral rate at any point in time.
Q.8. At a Financial Stability Oversight Council (FSOC) meeting
in 2021, Treasury Secretary Yellen expressed potential systemic
concerns resulting from ``liquidity risks'' associated with
open-end mutual funds and money market funds. It is concerning
that this will be used to justify an overreaching regulatory
regime for both products.
Do you believe that money market funds should be eliminated
as an investment vehicle?
A.8. Properly structured, money market funds can play an
important role in the financial system. However, amid recent
financial stresses, we have seen that the incentive of
investors in prime funds and tax-exempt funds is to rush to
redeem, especially if they anticipate that others are or will
soon be doing so. This incentive contributed to destabilizing
redemption waves in 2008 and 2020, both of which placed extreme
stress on the broader financial system, threatening its ability
to function and support business activity and employment, and
that ultimately required Government intervention backed by
taxpayers. The Securities and Exchange Commission (SEC) has
primary jurisdiction over money market funds and has recognized
these risks. I defer to the SEC, as the primary regulator, to
pursue the appropriate reforms.
Q.9. Do you support retaining the viability of open-end mutual
funds as an investment vehicle?
A.9. As with money market funds, properly structured, open-end
funds can play an important role in the financial system. Open-
end mutual funds, particularly funds that hold fixed-income
assets like bonds or loans, experienced unprecedented investor
outflows during March 2020, and their large asset liquidations
contributed to the distress in markets ranging from those for
U.S. Treasury securities to those for municipal and corporate
bonds that ultimately required Government intervention backed
by taxpayers. The Federal Reserve, as a member of the Financial
Stability Oversight Council (FSOC) and in the context of the
Interagency Working Group for Treasury Market Surveillance
(IAWG), continues to work with the SEC and other relevant
agencies to better understand the events of March 2020. I would
defer to the SEC as the primary regulator of open-end mutual
funds, regarding the regulation of those types of investments.
Q.10. If confirmed, will you respect the SEC's jurisdiction to
regulate money market funds?
A.10. Yes.
Q.11. Do you believe that the in-kind redemption mechanism for
exchange-traded funds (ETFs) presents different liquidity
concerns than cash redemptions from traditional mutual funds?
If you believe there is a difference, please explain how that
affects your views on how to regulate ETFs.
A.11. Exchange Traded Funds (ETFs) have different liquidity
risks than open-end funds or money market funds, and my
understanding is this does affect how the SEC approaches their
regulation. Authorized Participants (APs), usually large
financial institutions that are regulated by the Federal
Reserve, typically create or redeem shares in ETFs, mainly in
exchange for securities, rather than cash. As a result, the
incentive to redeem early is usually not present in ETFs.
However, it is important that APs understand and manage the
risks of ETF transactions and that investors, shareholders, and
others understand the role of APs.
Q.12. On July 12, 2016, former Federal Reserve Governor Daniel
Tarullo described the term ``shadow banking'' as evoking a
``sense of something hidden, furtive even'' in a speech.
Do you believe this term should apply to open-end mutual
funds registered with the SEC?
A.12. As I noted in my response to Question 5, properly
structured, open-end funds can play an important role in the
financial system.
Q.13. In 2018, the House of Representatives voted 406-4 in
favor of the JOBS and Investor Confidence Act. Section 1501 of
that legislation would have replaced the Dodd-Frank Act's
stress test requirement applicable to SEC- and CFTC-regulated
entities with an authorization to adopt rules requiring
periodic analyses of financial condition, including available
liquidity, of such entities under adverse economic conditions.
Do you support this modification that the JOBS and Investor
Confidence Act would have made?
A.13. As you know, the Board's regulatory and supervisory
authority is generally limited to activities conducted by
depository institution holding companies, State member banks,
and their nonbank affiliates. As required by the Dodd-Frank
Wall Street Reform and Consumer Protection Act, certain large
firms that we supervise are subject to company-run stress
testing requirements. I would defer to Congress, and to the
expertise of the relevant Federal financial regulatory
agencies, on the appropriate scope of company-run stress
testing requirements for financial companies not supervised by
the Board.
Q.14. I am concerned about the FSOC's designations of
Systemically Important Financial Institutions (SIFIs). A SIFI
designation is troubling in part because it creates moral
hazard: it formalizes an institution's ``too big to fail''
status and creates the expectation that the taxpayers will bail
out a SIFI that falls into financial distress. Also troubling
is FSOC's history of exercising its SIFI designation powers.
Under the Obama administration, FSOC made overreaching SIFI
designations of nonbanks in a nontransparent manner and without
providing a clear path for de-designation. In 2019, FSOC issued
a policy that made several improvements to the non-bank
designation process. These included emphasizing that
designation is a last resort, requiring cost-benefit analysis
and an assessment not only of the impact of a risk but also the
likelihood that it will be realized, as well as creating both
predesignation and postdesignation ``off-ramps'' to help firms
and regulators avoid or reverse SIFI designation by mitigating
systemic risks.
Will you commit that, if confirmed, you will support
ensuring that FSOC:
Continues to treat SIFI designation as a last resort;
Maintains a transparent process for SIFI designation;
Conducts robust cost-benefit analysis for all designations;
and
Provides institutions with the opportunity to avoid
designation and, if designated, a path to reverse such
designation?
A.14. I agree that Systemically Important Financial Institution
designation should be reserved for circumstances where the
systemic risks posed by the entity cannot be appropriately
addressed by relevant agencies under their existing
authorities; that designation should be done transparently;
that designation should be informed by the best possible
analysis of the potential benefits and costs; and that
designation should not be a one-way street.
Q.15. Under what conditions, if any, would you support the FSOC
or the Financial Stability Board (FSB) designating mutual
funds, ETFs, and money market funds as nonbank SIFIs?
In considering the systemic risks posed by mutual funds,
ETFs, money market funds and other asset managers, I generally
support the activities-based approach taken by the FSOC, SEC,
and others. This approach prioritizes understanding and
responding to the systemic risks of the activities undertaken
by asset managers, such as maturity and liquidity
transformation, rather than focusing on the entities
themselves. Under this approach, the relevant agencies design
regulations to limit the systemic risk of activities undertaken
by all covered entities, rather than designating individual
entities.
The Financial Stability Board (FSB) does not have a process
for designating asset managers as systemically important. And
of course, FSB decisions are not binding on U.S. supervisors
and regulators, who follow U.S. law in determining the
appropriate supervisory and regulatory treatment of U.S.
institutions.
A.15. Asset managers provide investment advice to clients. They
do not bear the risk of investments made by their clients
because asset managers do not own those assets.
Should asset managers be designated by the FSOC or the FSB
as nonbank SIFIs? If so, under what conditions?
As I noted in my response to the previous question, I
generally support an activities-based approach to understanding
and responding to the systemic risks posed by asset management.
Under this approach, individual asset managers are not subject
to designation; rather, the appropriate agencies consider
systemic risk when designing regulations for classes of
institutions.
Q.16. Over the past few years, there have been several
disruptions in the U.S. Treasury market (both cash and
futures), which is generally considered to be the deepest and
most liquid market in the world.
Some Treasury market observers have expressed concerns
about regulatory fragmentation, with responsibilities divided
between five or more agencies. Others have called for specific
regulatory reforms, including (1) mandatory central clearing,
(2) amendments to bank capital rules, and (3) additional data
collection.
Do you believe that the current regulatory framework for
oversight of the Treasury market is adequate? If not, what
changes do you believe should be made?
A.16. Given the importance of Treasury markets, it is incumbent
upon the U.S. official sector to ensure that the structure of
these markets can meet current and future needs. The Federal
Reserve is an active participant in the IAWG, and within that
context Federal Reserve staff are intensively analyzing a range
of potential reforms and whether they could help to improve
Treasury market functioning in an effective manner. Many of
these reforms, if they are pursued, would most naturally fall
under the remit of other agencies, such as the SEC or Treasury,
and we expect that those agencies would take the lead in such
circumstances.
While central clearing can have many benefits in terms of
decreasing market risks, it also has the potential to impose
certain costs on some market participants and to further
concentrate risk in certain intermediaries. Any efforts to
further encourage or mandate central clearing in the market for
Treasury securities would require careful analysis in
partnership with our agency colleagues. We continue to examine
the potential benefits and costs of expanded central clearing,
which may differ across the various segments of the Treasury
market.
The Federal Reserve is continuing to examine changes to our
regulatory capital framework as we consider ways to improve
Treasury market functioning. The Board has long preferred that
leverage requirements be a backstop to risk-based capital
requirements. When leverage requirements instead are a firm's
most stringent capital requirement, it lowers incentives for
the firm to hold low-risk assets, such as Treasuries. As noted
in your question, responsibility for oversight of Treasury
markets is divided across a number of agencies. While banks
face a different regulatory environment than some other
participants in Treasury markets, we believe that it is
important to work with IAWG agencies in considering the
regulatory environment for nonbanks as well and to seek to
promote a consistent framework where possible.
As you know, the Board has approved a final rule that will
require depository institutions meeting certain thresholds for
activity to report their Treasury and Agency debt and mortgage-
backed securities transactions through the Financial Industry
Regulatory Authority's TRACE reporting system. This new
requirement is scheduled to go into effect as of September 1,
2022, in order to ensure that the covered banks have adequate
time to prepare for the new reporting requirements. The Federal
Reserve has previously worked closely with the Office of
Financial Research on its collection of centrally cleared
Treasury repo market data, and we are supportive of collecting
similar data for the non-centrally cleared segment of this
market.
Q.17. On September 25, 2020, the FSOC released a statement on
its activities-based review of the secondary mortgage market.
FSOC's statement affirmed the overall quantity and quality of
the regulatory capital required by the Federal Housing Finance
Agency's (FHFA) June 30, 2020, proposed rule to establish a new
regulatory capital framework for Fannie Mae and Freddie Mac
(each, a GSE). \9\ Specifically, FSOC stated that ``risk-based
capital requirements and leverage ratio requirements that are
materially less than those contemplated by the proposed rule
would likely not adequately mitigate the potential stability
risk posed by the Enterprises.'' \10\ FSOC also concluded ``it
is possible that additional capital could be required for the
Enterprises to remain viable concerns in the event of a
severely adverse stress.'' (emphasis added). \11\ FSOC also
committed to ``continue to monitor . . . FHFA's implementation
of the regulatory framework to ensure potential risks to
financial stability are adequately addressed.'' On December 17,
2020, FHFA finalized a regulatory capital framework for the
GSEs that included leverage ratio requirements that were
identical to those in the proposed rule. \12\
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\9\ 85 FR 39,274.
\10\ https://home.treasury.gov/system/files/261/Financial-
Stability-Oversight-Councils-Statement-on-Secondary-Mortgage-Market-
Activities.pdf
\11\ Id.
\12\ 85 FR 82,150.
---------------------------------------------------------------------------
FHFA has since proposed reducing the regulatory capital
required by both the risk-based capital requirements and the
leverage capital requirements of FHFA's final rule. \13\
---------------------------------------------------------------------------
\13\ 86 FR 53,230.
---------------------------------------------------------------------------
In light of FSOC's commitment to monitor FHFA's
implementation of the GSEs' regulatory framework, which
includes the regulatory capital framework, did FHFA solicit
input from the Board of Governors of the Federal Reserve System
(the Fed) before proposing to reduce the aforementioned capital
requirements? If yes, please provide a copy of those comments.
Did the FHFA ask the Fed whether the proposed amendments to
the GSEs' regulatory capital framework would adequately address
potential risks to financial stability? If yes, please provide
a copy of the Fed's response on this question.
Has the Fed otherwise reviewed the proposed amendments to
the GSEs' regulatory capital framework?
A.17. Board staff actively monitors potential developments in
the financial markets, including proposed rules from other
regulatory bodies that may have an impact on financial
stability. As such, staff continues to assess the Federal
Housing Finance Agency's (FHFA) proposed rulemaking. While
Board staff and FHFA staff frequently interact on matters of
mutual interest, FHFA did not seek the Board's input on the
proposed amendment to its capital rule. Thus, there are no
comments or responses to provide.
Q.18. FHFA's proposed amendments include a proposed reduction
in the prescribed leverage buffer amount (PLBA). \14\ If
finalized as proposed, the amendments would reduce each GSE's
PLBA by two-thirds (from 1.5 percent of adjusted total assets
to approximately 0.5 percent) and its PLBA-adjusted leverage
capital requirements by one-quarter (from 4.0 percent of
adjusted total assets to approximately 3.0 percent).
---------------------------------------------------------------------------
\14\ 86 FR 53,230.
A.18. As a participant in FSOC's secondary market review, would
FHFA's proposed amendments, if finalized, result in ``leverage
ratio requirements that are materially less than those
contemplated by [June 30, 2020] proposed rule''?
As noted in my response to Question 12, Board staff
continues to assess FHFA's proposed amendments to its capital
rule. It is important that the GSEs are subject to risk-based
capital requirements and leverage ratio requirements that are
adequate to mitigate the potential stability risk posed by the
enterprises.
Q.19. FSOC stated that ``a meaningful leverage ratio
requirement that is a credible backstop to the risk-based
requirements would address potential risks to financial
stability by ensuring that the capital requirements are
consistent with historical loss experiences during severe
stresses while mitigating model, measurement, and related risks
with a simple, transparent measure of risk.'' Taking into
account the 20 percent risk weight floor on mortgage exposures
(1.6 percent of the exposure amount), the floor on the stress
capital buffer (0.75 percent of adjusted total assets), and the
current sizing of each GSE's stability capital buffer (1.0
percent and 0.7 percent of adjusted total assets for Fannie Mae
and Freddie Mac, respectively), it appears exceedingly unlikely
that a GSE's risk-based capital requirement could ever be less
than the proposed leverage capital requirements of 3.0 percent
and 2.9 percent for Fannie Mae and Freddie Mac, respectively,
even if a substantial portion of a GSE's mortgage exposures
were subject to the risk weight floor.
As a participant in FSOC's secondary market review, and in
light of the apparently very remote prospect that the GSEs'
risk-based capital requirements could ever be less than the
proposed leverage capital requirements, would the proposed
amendments to the PLBA result in ``a meaningful leverage ratio
requirement'' and would the proposed leverage capital
requirements be ``a credible backstop to the risk-based
requirements'' within the meaning of FSOC's statement?
A.19. As noted in my response to Question 12, Board staff
continues to assess FHFA's proposed amendments to its capital
rule. It is important that the GSEs are subject to risk-based
capital requirements and leverage ratio requirements that are
adequate to mitigate the potential stability risk posed by the
enterprises.
Q.20. As part of its rationale for the proposed amendments to
the PLBA, FHFA noted that ``Basel III standards require
systemically important banks to hold a tier 1 capital leverage
ratio buffer in excess of a 3 percent leverage requirement
equal to 50 percent of a GSIB's higher loss-absorbency risk-
based requirements.'' FHFA also stated that it intended to
amend the PLBA ``in a manner similar to the U.S. banking
regulators' proposal to set the eSLR buffer to one-half of the
GSIB surcharge'' and that ``a dynamic PLBA that is tied to the
stability capital buffer would further align the [Enterprise
Regulatory Capital Framework] with Basel III standards.''
Related to this, former Fed Vice Chair for Supervision Quarles
recently said ``[w]ith respect to the enhanced supplementary
leverage ratio (eSLR) that applies to U.S. global systemically
important banks (GSIBs), the best way to address this problem
is the approach endorsed by the Basel Committee: recalibrating
the fixed 2-percent eSLR buffer requirement to equal 50 percent
of the applicable GSIB capital surcharge, with corresponding
recalibration at the bank level.'' \15\
---------------------------------------------------------------------------
\15\ Governor Randal K. Quarles, ``Between the Hither and the
Farther Shore: Thoughts on Unfinished Business'' (Dec. 2, 2021),
available at www.federalreserve.gov/newsevents/speech/
quarles20211202a.htm.
---------------------------------------------------------------------------
Importantly, a GSIB's eSLR buffer requirement is a percent
of risk-weighted assets, while a GSE's stability capital buffer
requirement is a percent of adjusted total assets. If the
intent were to align FHFA's approach to the PLBA with the Basel
Committee's approach to the eSLR buffer, would each GSE's
stability capital buffer requirement first need to be converted
to an equivalent that is expressed as a percent of risk-
weighted assets (e.g., by dividing the stability capital buffer
requirement by the average risk weight of the GSE's assets
(currently around 33 percent))?
A.20. Board staff actively monitors potential developments in
the financial markets, including proposed rules from other
regulatory bodies that may have an impact on financial
stability. As such, staff continues to assess the FHFA's
recently proposed amendments to its capital rule. I believe it
is important that the GSEs face risk-based capital requirements
and leverage ratio requirements that are adequate to mitigate
the potential stability risk posed by the enterprises. I would
be happy to have my staff reach out to your staff to discuss
the structure and calibration of the Federal Reserve's Global
Systemically Important Banks surcharge framework, as compared
to the FHFA's proposed framework.
Q.21. Most stablecoins are pegged to the U.S. dollar, and many
are used in international markets. Could stablecoins contribute
to the dollar's use internationally?
A.21. The impact of U.S. dollar-pegged stablecoins on the
international use of the dollar depends on a range of factors.
The U.S. dollar is widely used around the world because of the
size of the U.S. economy, its deep and liquid financial
markets, the strength of U.S. institutions, and the commitment
of the United States to the rule of law. For these reasons,
many stablecoins choose to peg their value to the U.S. dollar.
In general, if users outside of the United States who
previously would have held assets or conducted transactions in
another currency begin to do so with dollar-pegged stablecoins,
then this would likely increase the global use of the dollar.
However, the use of dollar-pegged stablecoins internationally
could instead represent a substitution out of other dollar-
denominated assets, including cash rather than a net increase
in global use of the dollar. The extent to which a dollar-
pegged stablecoin adds to dollar use abroad would also depend
on how the stablecoin is used (primarily as a store of value, a
medium of exchange, or both) and the dollar reserve policies of
stablecoin issuers and virtual asset service providers.
Q.22. The ability to freely transact with each other is a
fundamental component of our society, and the ability to do so
without Government oversight should be essential to the
creation of a U.S. central bank digital currency (CBDC).
How important do you think individual privacy protections
are in the design of a CBDC? What privacy measures do you think
should be included in its design?
A.22. No decisions have been made on whether to pursue a CBDC
in the United States, and the Federal Reserve does not intend
to proceed with issuance of a CBDC without clear support from
the Executive Branch and from Congress, ideally in the form of
a specific authorizing law. I strongly believe that individual
privacy is of fundamental importance in the design of any
potential CBDC.
The Board will be releasing a paper in the near future as a
first step in a public discussion between the Federal Reserve
and stakeholders about CBDCs. Soliciting feedback on the best
ways to protect individual privacy will be a key component of
that discussion.
Q.23. If the Fed receives authorization from Congress for the
creation of a CBDC, there will still be many crucial decisions
that the Fed will have to make regarding its design and
implementation. If a CBDC is not adaptable, poorly designed, or
excessively manipulated by the Government, the public will have
other options to secure their privacy and ensure low-cost
payment services.
Could well-regulated, privately issued stablecoins serve as
a check on the design and management of any American CBDC?
A.23. As noted in my response to Question 17, no decisions have
been made on whether to pursue a CBDC in the United States. As
the Federal Reserve evaluates whether a U.S. CBDC would be
appropriate, one critical question is whether a CBDC would
yield benefits more effectively than alternative methods. These
alternative methods could include improvements to the existing
U.S. payment system. Alternative methods could also include
well-designed and appropriately regulated stablecoins.
Well-regulated, privately issued stablecoins could coexist
with a CBDC. In the future, it is possible that CBDCs,
stablecoins, and other forms of money could serve different
needs or preferences. It is important for all forms of money to
be well-designed and appropriately regulated. For that reason,
the President's Working Group on Financial Markets, together
with the other Federal banking agencies, has recommended that
Congress act promptly to enact legislation that would ensure
payment stablecoins and payment stablecoin arrangements are
subject to a consistent and comprehensive Federal regulatory
framework.
Q.24. Over the past year, there has been an increasing backlog
of bank merger applications pending Fed review. In recent
months, some have come to believe that a de facto moratorium on
bank mergers and acquisitions was in place at the Fed. As this
Committee has seen in another area under its jurisdiction,
namely, the Committee on Foreign Investment in the United
States (CFIUS) process, an informal moratorium could be put in
place by regularly sending requests for additional information
to applicants and claiming that the application is not yet
complete.
Are you aware of any formal or informal effort at the Fed
to delay the resolution of bank merger applications?
Do you believe that the Fed's current merger approval
process provides clear instructions to applicants such that
they can reasonably expect to submit a complete application
without multiple rounds of revisions and additional questions?
Will you commit not to deliberately delay the bank merger
application process, and to hold your staff accountable for
doing the same?
Will you commit to consider each application on its
individual merits?
A.24. The Board continues to process each application as
expeditiously as possible and within the applicable statutory
deadlines, while ensuring that decisions are based on a
complete record. In December 2021, the Board approved three
bank merger applications, and the Reserve Banks approved 17
additional bank merger applications under delegated authority.
The Board takes seriously its responsibility to review each
bank merger and acquisition (M&A) proposal on its individual
merits under the relevant statutory factors set forth in the
Bank Holding Company Act and the Bank Merger Act. These factors
include the financial and managerial resources of the
organizations involved and of the proposed combined
organization; the convenience and needs of the communities to
be served by the resulting institution; the Community
Reinvestment Act performance of the involved depository
institutions; the effectiveness of the parties in combatting
money laundering; and the effects of the proposal on
competition and financial stability.
The Board provides clear instructions to applicants
regarding the merger approval process. For example, applicants
file applications pursuant to section 3 of the Bank Holding
Company Act using the Board's Form FR Y-3, which is accompanied
by instructions detailing the specific informational
requirements applicable to each proposal. Notwithstanding those
forms and instructions, requesting additional information, both
from applicants as well as from other regulators, is integral
to the Board's development of a complete record upon which to
evaluate each of the relevant statutory factors. Additional
information may be requested from applicants for a number of
reasons, including because the information in the initial
filing is unclear or incomplete, or because the proposal raises
legal, supervisory, or policy issues.
Q.25. Congress established a set of requirements for the Fed
review of bank merger applications under the Bank Holding
Company Act (BHCA) by establishing specific factors for
consideration. The statute does not give the agency discretion
to depart from them. \16\ Further, BHCA sets a 91-day deadline
for the Fed to approve or disapprove of the application after
the record is complete. \17\ To ensure the Fed cannot ignore
this deadline, Congress structured the law to automatically
grant any merger application the Fed fails to act on within
that timeframe. \18\ An express or de facto moratorium would
appear to directly contravene the law.
---------------------------------------------------------------------------
\16\ See, Bank Holding Company Act, 12 U.S.C. 1842(c)(1).
\17\ Id. 1842(b)(1).
\18\ Id. 1842(b)(1).
---------------------------------------------------------------------------
Will you commit to review complete bank merger applications
expeditiously, as required by law?
Will you commit not to deliberately delay the bank merger
application process, and to hold your staff accountable for
doing the same?
Will you commit to consider each application on its
individual merits?
A.25. My response is yes to all three parts of you question.
The Board carefully considers each M&A application on its
individual merits in view of the relevant statutory factors.
The Board acts, and will continue to act, on bank merger
applications as soon as it completes its review within the
statutory deadlines. As I noted in my response to Question 19,
the Board continues to process each application as
expeditiously as possible.
Q.26. Please describe with particularity the process by which
you answered these questions for the record, including
identifying who assisted you in answering these questions along
with a brief description of their assistance.
A.26. My responses reflect contributions from a large number of
colleagues across many divisions within the Federal Reserve
Board. The answers represent my views, and I submit them to you
as my own.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
FROM JEROME H. POWELL
Q.1. Both nominal and real wage growth grew slowly during much
of our recovery from the Great Recession. However, nominal wage
growth was robust in 2021, with production and nonsupervisory
workers seeing the strongest gains.
As supply chain disruptions and inflation ease, won't
monthly, nominal wage growth similar to what we saw in the
second half of 2021 lead to robust real wage growth?
A.1. Although end-of-year values have not yet been released for
a number of wage measures, the Bureau of Labor Statistics'
(BLS) measure of average hourly earnings for private industry
workers rose sharply over the second half of 2021, increasing
at an annual rate of 5.8 percent. Several other wage measures
appear on track to post gains of around 4.5 percent to 5
percent for 2021 as a whole. Some measures point to even larger
gains. These are aggregate statistics, however, and with the
Consumer Price Index (CPI) up almost 7 percent over the past
year and the Personal Consumption Expenditures (PCE) price
index up about 5.5 percent, price increases have likely
outpaced wage gains for many workers.
Recent rapid price increases are in part related to supply
and demand imbalances that have emerged as a result of the
pandemic; as these imbalances are resolved, we and many other
forecasters expect consumer price inflation to step down this
year. Were wage gains to continue at their recent pace, and
were inflation to diminish significantly, real wages would
indeed increase robustly for the average worker.
It is important to note, though, that part of the pickup in
wage growth that we have seen is itself likely attributable to
the effects of the pandemic. In particular, significant and
persistent labor shortages have emerged. Pandemic-related
factors that have contributed to these shortages include
caregiving needs and ongoing fears of the virus, both of which
have weighed on labor force participation. And these labor
shortages, in turn, have put upward pressure on wages.
As the pandemic wanes and more workers return to the labor
market, we would expect nominal wage gains to moderate. Whether
wages will decelerate more quickly than prices--or vice versa--
is difficult to predict. How these dynamics play out will
determine what happens to real wages going forward.
Ultimately, real wage gains will be influenced by
fundamental factors such as the rate of growth of labor
productivity. Again, however, the experience of the average
worker or household--which is essentially what many commonly
cited aggregate statistics measure--will not fully capture the
experience of every group of workers or households.
Q.2. Corporate profits rose to historic levels as a percent of
GDP in the 2nd and 3rd quarters of 2021. Profit margins are
also reportedly at historic highs. Will wider profit margins
better enable companies to increase wages without raising
prices and creating a wage-price spiral?
A.2. Wages are the single largest component of business costs,
but the relationship among wage growth, price inflation, and
markups or profit margins is difficult to tie down empirically.
In particular, the economywide corporate profit share, as a
share of gross domestic income, tends to fluctuate over the
course of a business cycle, though not in a regular or
predictable fashion. Moreover, measures of economywide price-
cost margins appear to have followed slow-moving trends over
the past several decades, though the ultimate driver of these
trends is not well understood.
In general, wage growth can be a source of upward pressure
on price inflation when higher wages are not matched with gains
in labor productivity, as this situation will tend to erode
firms' price-cost markups. When markups or profit margins are
already relatively high, firms can absorb some of these
increases in labor costs before passing them through to prices.
But firms might also be more likely to pass increases in labor
costs through to prices when demand for their products is high,
or if they are facing additional sources of cost pressure. In
addition, even if aggregate measures of profit margins are
relatively high, profit margins in particular sectors could be
tighter and so cost shocks in those sectors could add to
overall inflation.
A key driver of a wage-price spiral is a situation where
high inflation at a given point leads households and firms to
expect high inflation in the future, with workers then
demanding faster nominal wage gains to keep ahead of the rise
in the cost of living and firms boosting prices in response to
the faster growth in their labor costs. While we currently see
little evidence that such a dynamic is present, it is an
important risk and we are closely monitoring the data for any
signs that it is emerging.
Q.3. The Dodd-Frank Act requires the Federal Reserve to set a
maximum interchange rate that is ``reasonable and
proportional'' to the cost for a card issuer to authorize,
clear, and settle a debit transaction. In 2011, issuer costs
were around 8 cents per debit transaction and the Federal
Reserve set the maximum rate at 21 cents with 1 cent for fraud
prevention and 5 basis points for fraud losses. A Federal
Reserve survey released in 2021 found that issuer costs have
fallen to 4 cents as of 2019. In light of this survey, will the
Federal Reserve reconsider whether the maximum interchange rate
remains ``reasonable and proportional'' to issuers' costs?
A.3. Pursuant to the Federal Reserve Board's (Board)
responsibilities under section 920 of the Electronic Fund
Transfer Act (EFTA), as amended by section 1075 of the Dodd-
Frank Wall Street Reform and Consumer Protection Act, the Board
has collected data on a biennial basis from debit card issuers
subject to Regulation II's interchange fee standards (covered
issuers). The collected data include information on covered
issuers' debit card volumes and values, fraud losses, and
authorization, clearing, and settlement costs. The Board has
also released summary information to the public from those data
collections on a biennial basis with the most recent report,
covering data for 2019, released on May 7, 2021. The Board is
in the process of conducting an updated data collection,
collecting data for 2021 from covered issuers.
The Board will continue to review the parts of Regulation
II that directly address interchange fees for certain
electronic debit transactions in light of the most recent data
collected by the Board pursuant to section 920 of the EFTA and
may propose revisions in the future.
Q.4. The markets for trading Treasuries have proven susceptible
to disruptions that have undermined their stability and
integrity. Please discuss what steps you intend to take to
improve these markets in each of the following areas:
Improving timely access to market information.
Reducing risks of trade processing and settlement failures.
Reducing conflicts of interests and ensuring integrity of
trading venues.
A.4. Given the importance of Treasury markets, it is incumbent
upon the U.S. official sector to ensure that the structure of
these markets can meet current and future needs. The Federal
Reserve is an active participant in the Interagency Working
Group on Treasury Market Surveillance, and within that context
Federal Reserve staff are intensively analyzing a range of
potential reforms and whether they could help to improve
Treasury market functioning in an effective manner. Many of
these reforms, if they are pursued, would most naturally fall
under the remit of other agencies, such as the Securities and
Exchange Commission (SEC) or Department of the Treasury, and we
expect that those agencies would take the lead in such
circumstances, although we stand ready to offer our support.
With regard to the timely access to market information, the
Board has approved a final rule that will require depository
institutions meeting certain thresholds for activity to report
their Treasury and agency debt and mortgage-backed securities
transactions through the Financial Industry Regulatory
Authority's TRACE reporting system. This new requirement is
scheduled to go into effect as of September 1, 2022, in order
to ensure that the covered banks have adequate time to prepare
for the new reporting requirements.
The Federal Reserve System plays an active role in helping
to ensure sound market practices through the Federal Reserve
Bank of New York's sponsorship of the Treasury Market Practices
Group (TMPG). That group has issued a number of best-practice
recommendations that have helped to reduce the number of
settlement failures in Treasury and agency debt markets. The
TMPG has also conducted important work detailing settlement
practices in secondary Treasury markets and their potential
risks. The Federal Reserve is supportive of the SEC's
consideration of proposals to extend to Treasury-market trading
venues the operational access, disclosure, and regulatory
oversight provisions of Regulation Alternative Trading Systems
(ATS) and the system integrity provisions of Regulation Systems
Compliance and Integrity (SCI).
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR MENENDEZ FROM JEROME H. POWELL
Q.1. I've spoken to you before about the lack of diversity
among Fed Bank presidents and the need to ensure that minority
candidates are fairly considered in the search for the new
presidents of the Boston and Dallas Fed Banks.
(a) Has the Board of Governors communicated with the
regional bank directors to consider minority candidates?
(b) How was that communication made and what, if any,
response has the Board received from the regional bank
directors?
A.1. In response to parts (a) and (b) of your question, the
Board of Governors (Board), through our Committee on Reserve
Bank Affairs, is involved in ongoing communication with the
search committees at the Federal Reserve Banks of Boston and
Dallas about the recruitment process, including public
engagement strategies. We share the goal of having as broad and
diverse a candidate pool as possible for each of the searches.
The search committees have underscored the importance they
attach to a process that actively seeks to identify and include
qualified minority candidates, and their commitment to their
full consideration.
Q.2. Do you know if minority candidates have been considered
for either position? If so, how many?
A.2. At this stage in the process, the search committees are
doing broad outreach to identify candidates. The Federal
Reserve Banks of Boston and Dallas launched their president
searches in October and November 2021, respectively. These
Banks have both articulated strong commitments to conduct
nationwide searches for highly qualified candidates from a
broad, diverse slate of backgrounds from inside and outside the
Federal Reserve System. Both Banks formed diverse search
committees and hired national search firms to help identify
candidates. In addition, the directors of the Board's and the
Reserve Banks' Offices of Minority and Women Inclusion (OMWI)
have been serving as advisers to the search committees. The
Banks are also using diverse interview panels to ensure that
different points of view and opinions are part of the hiring
decision. Additional search committee efforts include outreach
to stakeholders and the public for feedback and input through
public websites and townhalls, and both Banks have invited the
public to submit potential candidates for nomination. Most
recently, on January 13, the Federal Reserve Bank of Dallas
hosted a virtual town hall that was open to the public to
discuss and answer questions about the presidential search
process. Panelists included the cochairs of the presidential
search committee, and a representative of the global search
firm Egon Zehnder that is assisting in the search for
candidates. Participants were able to submit questions during
the moderated discussion, and the recorded discussion is
available on the Bank's public website. \1\
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\1\ See, https://www.dallasfed.org/fed/presidentialsearch.
Q.3. Has the Board of Governors interviewed any minority
---------------------------------------------------------------------------
candidates for either position?
A.3. Both searches are ongoing and have not reached the point
in the process for Board interviews of candidates.
Q.4. What specific steps have you taken to ensure the regional
banks consider a diverse pool of candidates?
A.4. The appointment of a Reserve Bank president is formally an
action of eligible Class B and C directors of the Bank's board,
with the approval of the Board of Governors. The Federal
Reserve Banks of Boston and Dallas launched their president
searches in October and November 2021, respectively. These
Banks have both articulated strong commitments to conduct
nationwide searches for highly qualified candidates from a
broad, diverse slate of backgrounds from inside and outside the
Federal Reserve System.
Experience in recent years has delivered a number of clear
lessons, all of which are incorporated into the process for the
searches currently under way. Most importantly, diverse boards
and diverse search committees tend to consider and appoint
diverse leaders. Relevant research also underscores the
importance of diversity--background, experience, and
profession--on boards and search committees. Such diversity has
been achieved in recent years in the Federal Reserve System, as
the Board of Governors through its direct appointment of Class
C directors has fostered appreciable new diversity in Reserve
Bank boards, including those in Boston and Dallas.
Q.5. We know that diverse leadership helps bring about better
outcomes at every institution from corporate boardrooms to
universities to Congress, and the Fed is no different.
If confirmed for a second term, what concrete steps are you
going to take to improve minority representation, particularly
Latino representation, in leadership roles at the Fed?
A.5. I fully agree that the Federal Reserve and other
organizations make better decisions with a diverse group around
the table, and I remain committed to working with Reserve Bank
directors and presidents to further our engagement with various
communities throughout each of the twelve districts to develop
pipelines for future leadership roles at the Federal Reserve.
To foster diversity, we must develop an overall culture of
inclusion at all levels, starting at the top. As Chair, I have
internally and externally stated my strong personal belief in
and support for a diverse and inclusive environment, and I have
taken a number of steps to work towards achieving greater
diversity and inclusivity that is also part of the Board's
2020-23 Strategic Plan. I have led quarterly meetings with
staff at many levels from within the Board and the System to
discuss and assess our progress in advancing diversity and
economic inclusion. These meetings are a priority for me and my
colleagues on the Board.
I also speak regularly with staff about the importance of
fostering diversity and inclusion. I meet with the Board's
Director of the Office of Women and Minority Inclusion on a
quarterly basis, and I have met with the chairs and cochairs of
each of the Board's seven Employee Resource Groups \2\ on a
number of occasions. To see where the Board could learn from
others, we have also hosted business and nonprofit leaders who
served on Reserve Bank boards of directors to discuss what has
worked well in developing a culture of diversity and inclusion
at their organizations.
---------------------------------------------------------------------------
\2\ The Board's employee resource groups include: Advocacy for the
Diverse Abilities, Needs, and Contributions of Employees (ADVANCE)
Employee Resource Group; African American Employees Resource Group;
Asian American Pacific Islander Employee Resource Group; Hispanic
Employee Resource Group; LGBTQA Employee Resource Group; Veterans
Employee Resource Group; and Women's Employee Resource Group.
---------------------------------------------------------------------------
I have encouraged and strongly supported the considerable
outreach we do to diverse candidates in our recruiting of
staff. This includes participating in minority recruitment
events at Historically Black Colleges and Universities,
Hispanic-Serving Institutions, and Hispanic professional
conferences and career fairs. Our outreach is particularly
notable as we hire recent college graduates as full-time
research assistants, a position which can be an important step
towards a career in economics. I would note that the Board has
shown a significant increase in Hispanic hiring from 4 percent
in 2020 to 10 percent in 2021. To build on this success, we
will work to strengthen outreach and networking initiatives
with organizations such as American Society of Hispanic
Economists, Association of Latino Professionals for America,
National Hispanic Corporate Council and Prospanica.
We are also reviewing our recruiting and hiring practices
to identify and implement ways in which we can further increase
the pool of diverse qualified candidates. As a result of our
ongoing review, we have started to broaden the research
specializations within economics from which we have typically
hired economists. Recruiting from a broader set of research
areas not only may draw more diverse candidates, but also
better supports our mission by giving us broader skill sets and
perspectives.
Under my leadership as Chair, the Board has leveraged its
award-winning internship program to offer students on the job
experience and learning and to create a diverse job candidate
pool for our entry-level positions. The Board has also
implemented job board and resume database access to expand
diversity sourcing initiatives with the National Black MBA
Association and the National Society of Black Engineers.
Over the past 4 years, my colleagues and I have worked to
develop the pipeline of economists from under-represented
groups, including through outreach to students at many levels.
We have welcomed diverse groups of high school, undergraduate,
and graduate level students to the Board, both in person and
through online events, to discuss career opportunities, the
work that we do, and diversity in the profession. We are
collaborating closely with the American Economic Association
(AEA) and with Howard University, including by committing staff
resources over the next 5 years to teach an Advanced Research
Methods class to undergraduate and masters level students at
the AEA Summer Training Program, which is being hosted by
Howard University.
If confirmed, I look forward to continuing to support these
and other efforts.
Q.6. While Class C directors are getting more diverse, B
directors, who are selected by member banks to represent the
public, remain predominantly White and male. An analysis by the
Brookings Institution recommended that the Fed Banks implement
a set of best practices for selecting of directors to help
guide member banks through the process.
Would you commit to working with me to encourage and
coordinate efforts among the Federal Reserve banks to develop
and implement such guidelines and best practices?
A.6. The nomination and election of Class B directors are
prescribed in detail in the Federal Reserve Act. In particular,
these directors are elected by the banks within the District,
with a mandate to represent the public. While these directors
are not selected directly or indirectly by the Board of
Governors, we do engage on a continuous basis with Reserve
Banks and members of their boards in an effort to encourage the
recruitment of more diverse Class B directors. Indeed, we take
a similar approach with the Class A directors, who are also
elected by the banks within the District. If confirmed, I look
forward to continuing our dialogue on this important matter.
Q.7. Fed watchers have also suggested that the appointment
process for regional Fed Bank presidents be open to greater
public input.
Do you agree that that Fed would benefit from greater
public participation in the Presidential and Director selection
processes?
A.7. The Federal Reserve System serves all Americans, and the
selection process for Bank presidents and directors benefits
from input from a wide range of stakeholders. That is why the
ongoing searches for new presidents for the Federal Reserve
Banks of Boston and Dallas include broad outreach to
stakeholders and the public for feedback and input, and
opportunities for the public to submit potential candidates for
nomination. Search committees have been sharing information
about the search and soliciting questions and input from the
public through public events, such as town halls, and dedicated
websites and social media channels. We continue to leverage
advancements in technology and adopt other best practices in
creating new ways for public input.
Q.8. According to the Federal Reserve Act, Class B and C
Directors are supposed to represent the interests of the
public, and should be selected with ``due but not exclusive
consideration to the interests of agriculture, commerce,
industry, services, labor, and consumers.'' Currently, one in
ten directors are CEOs of Fortune 500 companies. 75 percent of
Fed Directors are from banking or business. Of the directors
that represent the business sector, only 24 percent come from
small businesses. A mere 5 percent of bank directors are from
labor.
If confirmed, how would you work to improve sectoral
representation in leadership roles at the Fed?
A.8. Reserve Bank boards of directors provide valuable insights
into a range of sectors, including healthcare, manufacturing,
entertainment, restaurant, retail, hotel, agriculture,
transportation, education, labor, small businesses,
construction, technology, consumer goods, and financial
services. The directors work through their own networks to
understand and represent different perspectives within their
own sectors when providing regional and sectoral inputs to the
Bank and the Board. If confirmed to a second term as Chair of
the Federal Reserve Board, I am committed to continue working
with Reserve Bank directors and presidents in further engaging
with various sectors in their regions to develop pipelines for
future leadership roles at the Federal Reserve.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
FROM JEROME H. POWELL
Q.1. As you know, we are currently witnessing the widespread
effects of ongoing supply chain disruptions that have led to
shortages of many industrial and consumer products, including
price inflation. Much of this has been attributed to the COVID-
19 pandemic. If confirmed, how will you utilize what you have
learned in your time leading the Fed during the pandemic to
promote greater pricing stability for essential consumer and
industrial goods?
A.1. The recent upturn in price inflation reflects a
combination of supply- and demand-related developments. On the
demand side, there has been a large and rapid shift in consumer
spending toward goods--particularly durable goods--as the
pandemic has made spending on many services more difficult or
less desirable. On the supply side, the availability of a range
of goods has been curtailed by production issues in the U.S.
and abroad, often because key inputs cannot be obtained or
because goods cannot be transported to U.S. markets as easily
as before. In addition, labor shortages in some sectors have
restricted the supply of goods as well as services.
We continue to believe that many of the factors pushing up
inflation are related to the pandemic and will pass with time,
although the timing and extent of the decline remains highly
uncertain. No matter how these factors evolve, the Federal Open
Market Committee is committed to using its tools to ensure that
elevated inflation does not become entrenched.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS
FROM JEROME H. POWELL
Q.1. Chairman Powell, in your testimony before this Committee
last week, you stated that ``We [The Federal Reserve] increased
capital and liquidity requirements for the largest banks--and
currently, capital and liquidity levels at our largest, most
systemically important banks are at multidecade highs.''
You have stated numerous times in congressional testimony
and correspondence that the level of capital in the banking
system is about right--a view that you held prior to the COVID-
19 pandemic and increases in capital over the past 2 years. In
September 2018, in response to a letter from me, you stated
that, ``overall capital for our largest banking organizations
is at about the right level.''
In each of your semiannual appearances before this
Committee last year, you noted the high levels of capital and
liquidity in the banking system. Governor Quarles, in his
departing remarks last month, cautioned that, `` . . .
implementing the remaining elements of Basel III could result
in a material increase in capital levels, perhaps up to 20
percent for our largest holding companies.'' and pointed out
that current high capital standards constrain the banking
system from providing credit and ultimately cost jobs and
living standards.
Do you continue to believe there is sufficient capital in
the banking system?
Given the temporary nature of the Fed's COVID interventions
and the resulting inflation of capital charges, do you
anticipate measuring capital neutrality at pre-COVID levels as
the Fed normalizes policy and works to implement Basel III
finalization?
A.1. Yes, I believe that there is sufficient capital in the
banking system, particularly for the largest firms. Robust
capital and liquidity requirements for the banking system, with
a particular focus on the largest and most complex banks, are
fundamental to financial stability. The regulatory capital
framework introduced since the financial crisis has required
financial institutions to significantly strengthen their
capital levels over the last decade. Consistent with their
systemic importance, global systemically important banks
(GSIBs) are subject to the most stringent standards, including
additional capital requirements such as the GSIB surcharge and
the enhanced supplementary leverage ratio. As a result, the
banking system was well capitalized at the onset of the COVID-
19 pandemic and financial institutions were well positioned to
deal with the challenges of the COVID-19 event. As I mentioned
during my testimony before the Committee, capital levels at our
largest and most systemically important banks are currently at
multidecade highs.
With respect to our work to implement the outstanding Basel
III capital reforms in the United States, we are working
actively with the FDIC and the OCC on that proposal.
We will of course continue to evaluate the resiliency of
large banks and monitor financial and economic conditions to
ensure our capital framework functions as intended.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR KENNEDY
FROM JEROME H. POWELL
Q.1. Chair Powell, it is my understanding that the Federal
Reserve's treatment of subordinated debt of Subchapter S and
Mutual banks under the Emergency Capital Investment Program
(ECIP) will severely limit their participation in the program
to only a fraction of the amount they are eligible to receive
under ECIP.
Out of 101 program recipients, Louisiana had 13 ECIP
recipients, 10 of which are Subchapter S banks.
If the Federal Reserve does not exclude ECIP capital from
bank debt calculations, Subchapter S and Mutual banks risk
scrutiny from their regulators.
Will the Federal Reserve commit to excluding the ECIP from
the calculation of the debt-to-equity ratio and the double
leverage ratio for Subchapter S and Mutual banks?
A.1. Since the creation of the Emergency Capital Investment
Program (ECIP), the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation, and the
Office of the Comptroller of the Currency (together, the
agencies) have been working with the U.S. Department of the
Treasury (Treasury) to facilitate ECIP investments in regulated
financial institutions. Throughout this process, the agencies
have been taking steps to ensure that regulated financial
institutions receive an appropriate capital treatment for ECIP
instruments that is consistent with safety and soundness
considerations.
Most notably, we issued an interim final rule to allow
instruments issued under ECIP to qualify as regulatory capital
under each agency's capital rule. Under the interim final rule,
preferred stock issued through ECIP is counted as additional
tier 1 capital and subordinated debt issued through ECIP is
counted as tier 2 capital. These treatments are broadly in line
with the agencies' treatment of similar types of capital
instruments under the capital rule.
I appreciate the concern that some financial institutions
are structured in a way that prevents them from issuing
preferred stock under ECIP; such financial institutions would
instead issue subordinated debt to Treasury. While taking
additional action to provide favorable treatment for ECIP
subordinated debt may increase the ability of some S-
Corporations and mutual banking organizations to participate in
ECIP, ECIP subordinated debt is an obligation that must be
repaid. As we consider these issues, we are mindful of the
balance between facilitating participation in the program and
increasing risk to the safety and soundness of the
participating financial institutions due to increased leverage.
We continue to evaluate these issues actively and carefully.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAMER
FROM JEROME H. POWELL
Q.1. Under current law, banks are required to enable all debit
cards to be processed over at least two unaffiliated networks.
For the last decade, Regulation II has applied to in-store
transactions. However, as online transactions increase, only 6
percent of online debit card transactions are being processed
over competing networks, meaning merchants are paying more or
retailers are having to swallow the cost.
A clarification of ``Reg II'' proposed by the Federal
Reserve last May said the routing choice requirement applies to
online, as well as in-store transactions, and would require
that banks allow competing networks a chance to handle debit
transactions. However, this rule has not yet been finalized.
Can you provide clarity as to when this rule will be finalized?
A.1. On May 7, 2021, the Federal Reserve Board (Board) issued
proposed revisions to Regulation II for public comment. \1\ The
proposed revisions specified that, pursuant to section 920 of
the Electronic Fund Transfer Act as amended by section 1075 of
the Dodd-Frank Wall Street Reform and Consumer Protection Act,
debit card issuers should enable, and allow merchants to choose
from, at least two unaffiliated networks for card-not-present
debit card transactions, such as online purchases. The Board
sought comment on all aspects of the proposed revisions. On
June 22, 2021, the Board extended the comment deadline from
July 12, 2021, to August 11, 2021, to allow interested persons
more time to analyze the issues and prepare their comments. \2\
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\1\ See, https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20210507a.htm.
\2\ See, https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20210622a.htm.
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The Board received nearly 2,700 comments on the proposal. A
wide variety of industry stakeholders submitted comments and
presented diverse perspectives on the proposal and other issues
related to the regulation and the debit card market. The Board
is carefully considering these comments as it evaluates final
revisions to the regulation on this matter.
Q.2. While COVID-19 has presented a number of unusual
circumstances, the world is far more aware now of the lack of
transparency of the Chinese Government, run by the CCP. Chair
Powell, how do you assess the risks posed by China to our
short, medium, and long-term economic stability and strength?
What tools are at the Fed's disposal and what is the Fed
considering when it comes to addressing China?
A.2. The economic and financial stability risks posed by China
have increased of late. To a large extent, these increased
risks are centered in its property sector. Chinese authorities
have substantial potential resources to manage these risks, in
principle, but we cannot rule out the possibility of an abrupt
and persistent slowdown in their economy. With China now the
world's second largest economy, any sharp downturn there would
have global repercussions. The U.S. economy could be adversely
affected through trade channels as well as through negative
sentiment effects on U.S. and global financial markets, though
the degree to which this would occur is uncertain.
Moreover, China also plays a large role in global supply
chains, and COVID-19 has brought to the forefront associated
fragilities. More immediately, at a time of high global demand,
short-term disruption to Chinese output from COVID restrictions
and power rationing have contributed to upward pressure on
prices around the world.
Even if very adverse outcomes for the Chinese economy were
to materialize, with spillovers to the U.S. through
macroeconomic and financial channels, they are unlikely to
materially threaten the stability of the U.S. financial sector
because our financial system has only limited direct exposures
to China. In addition, U.S. banks are well-capitalized and able
to respond to severely adverse global scenarios, as our stress
tests have repeatedly shown. That said, we continue to monitor
economic and financial risks stemming from China, to analyze
possible spillovers to the U.S., and to take these
considerations into account in our micro- and macro-prudential
financial risk assessments.
Q.3. Many banks have grown frustrated with the glacial pace of
merger approvals. My view is that regulators should approve
proposed transactions that result in a combined company with a
strong and resilient capital base and the ability to make long-
term investments in the communities and customers. There is no
need to pause merger transactions in order to do this. Can you
speak to why the extended delays are happening and when an
uptick in approvals could be expected? Are you supportive of
instituting any form of moratorium on bank mergers?
A.3. The Board carefully considers each merger and acquisition
(M&A) application on its individual merits in view of the
relevant statutory factors. The Board continues to process each
application as expeditiously as possible and within the
applicable statutory deadlines, while ensuring that decisions
are based on a complete record. In December 2021, the Board
approved three bank merger applications, and the Reserve Banks
approved 17 bank merger applications under delegated authority.