Congressional Testimony

S. HRG. 118–205 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CONGRESS HEARING BEFORETHE COMMITTEE ON BANKING, HOUSING, ANDURBANAFFAIRS UNITED STATES SENATE ONE HUNDRED EIGHTEENTH CONGRESS FIRST SESSION ON OVERSIGHT ON THE MONETARY POLICY REPORT TO CONGRESS PURSU- ANTTOTHEFULLEMPLOYMENTANDBALANCEDGROWTHACTOF1978 MARCH 7, 2023 Printed for the use of the Committee on Banking, Housing, and Urban Affairs ( Available at: https://www.govinfo.gov/ U.S. GOVERNMENT PUBLISHING OFFICE 54–497 PDF WASHINGTON : 2024 COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS SHERROD BROWN, Ohio, Chair JACK REED, Rhode Island TIM SCOTT, South Carolina ROBERT MENENDEZ, New Jersey MIKE CRAPO, Idaho JON TESTER, Montana MIKE ROUNDS, South Dakota MARK R. WARNER, Virginia THOM TILLIS, North Carolina ELIZABETH WARREN, Massachusetts JOHN KENNEDY, Louisiana CHRIS VAN HOLLEN, Maryland BILL HAGERTY, Tennessee CATHERINE CORTEZ MASTO, Nevada CYNTHIA LUMMIS, Wyoming TINA SMITH, Minnesota J.D. VANCE, Ohio KYRSTEN SINEMA, Arizona KATIE BOYD BRITT, Alabama RAPHAEL G. WARNOCK, Georgia KEVIN CRAMER, North Dakota JOHN FETTERMAN, Pennsylvania STEVE DAINES, Montana LAURA SWANSON, Staff Director LILA NIEVES-LEE, Republican Staff Director ELISHA TUKU, Chief Counsel AMBER BECK, Republican Chief Counsel CAMERON RICKER, Chief Clerk SHELVIN SIMMONS, IT Director PAT LALLY, Assistant Clerk (II) C O N T E N T S TUESDAY, MARCH 7, 2023 Page Opening statement of Chair Brown ....................................................................... 1 Prepared statement ................................................................................... 44 Opening statements, comments, or prepared statements of: Senator Scott ..................................................................................................... 3 Prepared statement ................................................................................... 45 WITNESS Jerome H. Powell, Chair, Board of Governors of the Federal Reserve System .. 5 Prepared statement .......................................................................................... 46 Responses to written questions of: Chair Brown .............................................................................................. 49 Senator Menendez ..................................................................................... 51 Senator Sinema ......................................................................................... 52 Senator Fetterman .................................................................................... 52 Senator Crapo ............................................................................................ 54 Senator Tillis ............................................................................................. 56 Senator Kennedy ....................................................................................... 57 Senator Hagerty ........................................................................................ 63 ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD Monetary Policy Report to the Congress dated March 3, 2023 ............................ 64 Letter from Electronic Payment Coalition ............................................................. 130 Statement submitted by Accountable.US .............................................................. 132 (III) THE SEMIANNUAL MONETARY POLICY REPORT TO THE CONGRESS TUESDAY, MARCH 7, 2023 U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. The Committee met at 10 a.m., in room 216, Hart Senate Office Building, Hon. Sherrod Brown, Chair of the Committee, presiding. OPENING STATEMENT OF CHAIR SHERROD BROWN Chair BROWN. This hearing will come to order. Welcome, Chair Powell. Thank you for doing your duty and seeming to enjoy it when you come to our Committee. Thank you. Seeming to enjoy it. Today we examine the Fed’s actions to combat inflation, whether these actions are actually working, including how those actions af- fect American jobs and their paychecks. Prices are still too high across many parts of the economy. We know who feels it the most when the cost of rent and groceries go up. It is not the economic pundits and politicians who lecture us about discipline and sta- bility. It is not the corporate executives who pretend they are mak- ing tough choices about prices while reporting record profit in- creases, quarter after quarter, and doing more and more stock buybacks. It is the people working hourly jobs to make ends meet. It is sen- iors on fixed income and Social Security. It is everyone who gets their income from a paycheck each month, not an investment port- folio. It is those same Americans who stand to lose the most if the Fed’s action to curb inflation go too far. No matter what goes wrong in our economy—a global pandemic, a war in Eastern Europe, weather disasters—profits somehow always manage to go up. Workers are left paying the price. As you have noted, Chair Powell, the Fed’s tools are only one ele- ment in our fight against inflation. It is a complex problem. Inter- est rates are a single, we know, blunt tool. Raising interest rates cannot rebuild our supply chain and fix demand imbalances from the pandemic. Raising interest rates will not end Russia’s brutal invasion of Ukraine. Raising interest rates will not prevent avian flu from devastating one-third of our egg supply or weather disas- ters from destroying key crops. And raising interest rates certainly will not stop big corporations from exploiting all of these crises to jack up prices far beyond the increase in their costs. Last year, corporate profits hit a record high. Corporate PR chiefs assured us that these companies just have to raise prices. Their costs are going up. The workers just want to be paid too (1) 2 much. They have no other choice, they tell us. Yet when you look at their profits and the executive salaries and their stock buyback plans, it sure does not look like corporations have exhausted every available alternative. It is so brazen. Even global bankers called on the Fed to identify this profit- eering as one of the biggest drivers of inflation. Paul Donovan, Chief Economist of Global Wealth Management at UBS wrote, ‘‘The Fed should make clear that raising profit margins are spurring in- flation. Companies have passed higher costs on to consumers, but they have also taken advantage of circumstances to expand profit margins. The broadening of inflation beyond commodity prices is more profit margin expansion than wage cost pressures.’’ Think about that. From a chief economist at UBS. I will say it again. These companies have ‘‘taken advantage of circumstances to expand profit margins. The broadening of inflation beyond com- modity prices is more profit margin expansion than wage cost pres- sures,’’ unquote. Understandably, the Fed cannot force corporations to change their ways or rewrite the Wall Street business model on its own. But the Fed can talk about it. High interest rates, falling wages, increasing unemployment are all hallmarks of failed policies that end up helping Wall Street, the largest corporations in the country, the wealthiest people in the country. Because, let us be clear what we are talking about when people use the economic speak that can cloud this conversation. Cooling the economy means laying off workers. Lowering demand means workers get fewer raises. Of course there are times when the Fed must act. We cannot allow inflation to become entrenched. We have seen encouraging trends, that is that that is not hap- pening. And there are other ways we can bring prices down. In- stead of lowering demand, again making people poor, laying people off, denying worker raises, we can speed up and strengthen our supply chains. We can bring critical manufacturing back to the U.S. We can rebuild our infrastructure. It is what we are doing with the CHIPS Act, with the Inflation Reduction Act, with the Bi- partisan Infrastructure Bill. For the first time in decades, we are finally recognizing the damage that I and many of my colleagues warned that corporate offshoring would do to our economy. Look at East Palestine, Ohio, a community that Senator Vance and I visited a number of times recently. America learned about this small town last month, when a Norfolk Southern train de- railed and spewed hazardous material into this community. East Palestine is more than just a disaster headline. Columbiana Coun- ty was once the center of American ceramics manufacturing, at one time producing 80 percent of ceramics of dishware in this country— one county produced 80 percent of it. When I was there last week I was talking to the sheriff at the 1820 Candle Company. He was talking about how the last one closed just a few years back. Like so many industries these jobs moved overseas, and we know why. The same reason Norfolk Southern cuts costs at the expense of safety, eliminating one-third of its workforce in the last 10 years. Then you are surprised with these derailments? It is the same rea- 3 son corporations now keep prices high, even as supply chains sta- bilize. It is the Wall Street business model. Chair Powell knows that. I know that. My Republican colleagues and Democratic colleagues know that. It is the Wall Street business model. Quarter after quarter, corporations are expected to cut costs at any cost. They skimp on safety. They move production overseas to countries where they can pay workers less because of trade deals that they lobbied for. And Wall Street demands they post profit increases, even in the middle of a global pandemic. That is the problem with our economy. And not only will higher interest rates not solve it, if they are overdone they will make it worse. We cannot risk undermining one of the successes of our current economy. For the first time in decades, workers are finally starting to get a little power in this economy. Unemployment is at a historic low, 3.4 percent. That is not just a number. That means Americans have more opportunities, more options, even in places that have not seen a lot in recent years. It means people have the power to demand raises and retirement security and paid sick days and some control over their schedules. It means more Americans have the dignity—have the dignity—that comes with a good job that pro- vides for your family. We must here ensure that all Americans have the opportunity for that dignity of work. It is a critical time. The consequences of missteps could be se- vere. Mr. Chairman, two more things that affect your job. It is not just monetary policy that threatens American pocketbooks. Some of my colleagues have threatened the Nation’s full faith and credit by holding the debt ceiling hostage for partisan politics. Instead of paying our bills on time they are essentially threatening all Ameri- cans. The Fifth Circuit’s Consumer Financial Protection Bureau ruling could also cause unimaginable instability and chaos for families, for consumers, but also, as the Chair knows, for our financial system. No doubt about it. The Fifth Circuit is Wall Street’s favorite court- house. It recently ruled the CFPB’s independent funding is uncon- stitutional. If the Supreme Court upholds the Fifth Circuit’s ruling, it will not only devastate CFPB. It will threaten the independent funding of many other Federal agencies, including the Federal Re- serve. I look forward to hearing at today’s hearing how the Fed will bal- ance its dual mandate and continue to promote an economy where everyone who wants a good job can find one, an economy that works for everyone. Senator Scott. OPENING STATEMENT OF SENATOR TIM SCOTT Senator SCOTT. Good morning, Chairman Powell. Sitting here looking at my prepared remarks, thinking about . . . there is an opening coming where Vice Chairman Brainard is moving on. I think it is really important for us to make sure that all the information that we need in order to make a good decision on the next nom that we have in a timely fashion. So I would really implore the Chair to make sure that happens, that every question, 4 every questionnaire that is asked from the person, we get, that every Member of this Committee has their questions answered in a timely fashion, and that the staff has their answers in a timely fashion. Listening to Chairman Brown I thought, fascinating, truly fas- cinating. I concluded that while I know Chairman Brown pretty well, I am sure he is sincere in his rant. But let me just say this. Spending and printing trillions of dol- lars, caving to the radical left in this country, seeing policies pos- ited and then implemented that led to the worst inflation in 40 years, seeing our inflation at 9.1 percent, seeing American families struggle because of the weight of the Government on their shoul- ders, seeing the devastation from South Carolina to Ohio is unbe- lievable, that the progressives in this country, who caused a 9.1 percent inflation, would then turn, somewhere besides in the mir- ror, to see the absolute devastation caused by their out-of-control spending is remarkable. Remarkable. To stop the out-of-control inflation caused by the out-of-control spending, the Fed steps in to cool the economy. Well, the definition of cooling the economy is necessary because we have seen the most radical approach to a problem that was in our rear-view mirror being used as a Trojan Horse to bring in a level of socialism and spending that our Nation has not seen in my lifetime. The facts are very simple, when you get to 9.1 percent inflation in this Nation, as a kid who grew up in a single-parent household, mired in poverty, a 40 percent today, 100 percent just a year ago, increase in the gas prices devastates single mothers around this country. For seniors on fixed income, whose savings are being de- pleted, with an average cost just last month of a $433 increase be- cause of inflation. For my friends on the other side of the aisle to look anyplace besides a mirror, I find stunning. The truth is that when your food prices go up over 20 percent, when your electricity is up over 20 percent, you have to ask your- self, where in the world are they? They cannot be in this universe. It must be an alternate universe where, in fact, it is OK for us to see prices go through the roof and our economy not stumble but fall into a ditch. Why are we in the ditch? Because progressives used the pandemic as a way to usher in a form of spending that takes the money out of the pockets of everyday Americans and puts it in the coffers of the Government. There is a better way. The better way is to trust the American people. And when you do so, we do not have to have the Fed come in and raise interest rates so high to quell the challenges in our economy so that today versus 18 months ago the price of the same house, for your mortgage payment, is twice as high. Why? Because of the runaway spending of our friends on the other side of the aisle. I am sure I do not have time for my opening comments, but I will say, without any question, as I look around the country and I ask myself, how devastating is it that today it costs $433 more than it did a year ago, the answer is it is a crisis. When the aver- age family in our country, just a couple of years ago, did not have $400 in their savings for an emergency, to have prices go up by this amount is devastating. 5 To have a conversation about rents around the country, looking at the inflationary effect and the absolute devastation of a snarling supply chain, that we have not seen in my lifetime, run by my friends and the progressives, unbelievable. But to get to you, Chairman Powell, one of the comments that you have made that I think is really important, in one of the speeches you gave in January—and I apologize for my rant; I just wanted to make sure my rant was consistent with my friend here— it is essential, you said, that ‘‘we stick to our statutory goals and authorities and that we resist the temptation to broaden our scope to address other important social issues of the day. Taking on new goals, however worthy, without a clear statutory mandate would undermine the case of our independence.’’ You further noted that, and I quote, ‘‘Without explicit congres- sional legislation it would be inappropriate for us to use our mone- tary policy or supervisory tools to promote a greener economy or to achieve other climate-based goals. We are not and will not be a cli- mate policymaker.’’ Do you still stand by those comments? Mr. POWELL. I do. Senator SCOTT. Finally—we are not in the questioning now. I know. I get it. Chair BROWN. You now have 4 minutes and 12 seconds. Senator SCOTT. Yes. I knew the Chairman would dock that from my time, and I appreciate you doing so—— Chair BROWN. With a sense of humor. Senator SCOTT. ——with a great humor. Great humor. Finally, several of my Republican colleagues and I sent a letter to you discussing Vice Chair of Supervision, Michael Barr’s plan to conduct a holistic review of capital standards. I look forward to dis- cussing those capital standards during my Q&A, and I will thank you for a recent conversation that we had that helped illuminate some of the necessary challenges that we face as a Nation, and your answers to it. Thank you, Mr. Chairman. Chair BROWN. Thank you. Speaking of illuminating, thank you, Senator Scott. Today we will hear from Chair of the Federal Reserve, Jerome Powell, on monetary policy and the State of our economy. And I do not expect Chair Powell to weigh in on the mini-debate we just had, but I think we all know that the debt increase was much larg- er under President Trump and a Republican Senate than it has been since. Chair Powell, thank you for your service and your testimony today. STATEMENT OF JEROME H. POWELL, CHAIR, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Mr. POWELL. Chairman Brown, Ranking Member Scott, and other Members of the Committee, I appreciate the opportunity to present the Federal Reserve’s semiannual Monetary Policy Report. My colleagues and I are acutely aware that high inflation is causing significant hardship, and we are strongly committed to re- turning inflation to our 2 percent goal. Over the past year, we have 6 taken forceful actions to tighten the stance of monetary policy. We have covered a lot of ground, and the full effects of our tightening so far are yet to be felt. Even so, we have more work to do. Our policy actions are guided by our dual mandate to promote max- imum employment and stable prices. Without price stability, the economy does not work for anyone. In particular, without price sta- bility, we will not achieve a sustained period of labor market condi- tions that benefit all. I will review the current economic situation before turning to monetary policy. The data from January on employment, consumer spending, manufacturing production, and inflation have partly reversed the softening trends that we had seen in the data just a month ago. Some of this reversal likely reflects the unseasonably warm weath- er in January in much of the country. Still, the breadth of the re- versal along with revisions to the previous quarter suggests that inflationary pressures are running higher than expected at the time of our previous FOMC meeting. From a broader perspective, inflation has moderated somewhat since the middle of last year but remains well above the FOMC’s longer-run objective of 2 percent. The 12-month change in total PCE inflation has slowed from its peak of 7 percent in June to 5.4 percent in January as energy prices have declined and supply chain bottlenecks have eased. Over the past 12 months, core PCE inflation, which excludes the volatile food and energy prices, was 4.7 percent. As supply chain bottlenecks have eased and tighter policy has restrained demand, inflation in the core goods sector has fallen. And while housing services inflation remains too high, the flattening out in rents evi- dent in recently signed leases points to a deceleration in this com- ponent of inflation over the year ahead. That said, there is little sign of disinflation thus far in the cat- egory of core services excluding housing, which accounts for more than half of core consumer expenditures. To restore price stability, we will need to see lower inflation in this sector, and there will very likely be some softening in labor market conditions. Although nominal wage gains have slowed somewhat in recent months, they remain above what is consistent with 2 percent infla- tion and current trends in productivity. Strong wage growth is good for workers but only if it is not eroded by inflation. Turning to growth, the U.S. economy slowed significantly last year, with real gross domestic product rising at a below-trend pace of 0.9 percent. Although consumer spending appears to be expand- ing at a solid pace this quarter, other recent indicators point to subdued growth of spending and production. Activity in the hous- ing sector continues to weaken, largely reflecting higher mortgage rates. Higher interest rates and slower output growth also appear to be weighing on business fixed investment. Despite the slowdown in growth, the labor market remains ex- tremely tight. The unemployment rate was 3.4 percent in January, its lowest level since 1969. Job gains remained very strong in Janu- ary, while the supply of labor has continued to lag. As of the end of December, there were 1.9 job openings for each unemployed indi- 7 vidual, close to the all-time peak recorded last March, while unem- ployment insurance claims have remained near historical lows. Turning to monetary policy, with inflation well above our longer- run goal of 2 percent and with the labor market remaining ex- tremely tight, the FOMC has continued to tighten the stance of monetary policy, raising interest rates by 41⁄ 2 percentage points over the past year. We continue to anticipate that ongoing in- creases in the target range for the Federal funds rate will be appro- priate in order to attain a stance of monetary policy that is suffi- ciently restrictive to return inflation to 2 percent over time. In addition, we are continuing the process of significantly reduc- ing the size of our balance sheet. We are seeing the effects of our policy actions on demand in the interest-sensitive sectors of the economy. It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation. In light of the cu- mulative tightening of monetary policy and the lags with which monetary policy affects economic activity and inflation, the Com- mittee slowed the pace of interest rate increases over its past two meetings. We will continue to make our decisions meeting by meet- ing, taking into account the totality of incoming data and their im- plications for the outlook for economic activity and inflation. Although inflation has been moderating in recent months, the process of getting inflation back down to 2 percent has a long way to go and is likely to be bumpy. As I mentioned, the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than pre- viously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes. Restoring price stability will likely require that we maintain a restrictive stance of monetary policy for some time. Our overarching focus is using our tools to bring inflation back down to our 2 percent goal and to keep longer-term inflation expec- tations well anchored. Restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the longer run. The historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done. To conclude, we understand that our actions affect communities, families, and businesses across the country. Everything we do is in service to our public mission. At the Federal Reserve will do every- thing we can to achieve our maximum-employment and price-sta- bility goals. Thank you. I look forward to your questions. Chair BROWN. Thank you, Mr. Chair. There are 23 of us on this Committee. Almost everyone will be here today. I ask each of us to stay as close to the 5-minute mark as we can because we have votes at 11:30. So thank you all for your cooperation. Chair Powell, thank you. Job growth is strong as unemployment remains historically low. You might not know that from the open- ing statements. Many drivers of inflation are corporate greed, ris- ing inequality, supply chain disruptions, Russia’s bestiality, if you will, in Ukraine, will not get better because of interest rate in- 8 creases. Every indication is that this post-pandemic economy is dif- ferent. Should we be worried, Mr. Chair, that the Fed is treating this economic period as it has in the past instead of reacting dif- ferently? Mr. POWELL. Thank you, Mr. Chairman. So we have been aware since the very beginning, and have discussed this publicly on many occasions, that there are some differences this time. We, in par- ticular, have not seen the kind of supply side collapse that we saw at the very beginning of the inflation outbreak. Also, the outbreak of a war which had significant effects on commodity prices a year ago. So all that is different. There are also, though, some similarities. There is a mismatch between supply and demand. You can see that in the goods sector still, you saw it in housing prices going up over 40 percent since before the pandemic, and you see it in the labor market where we have 1.9 job openings for every unemployed person. So we are well aware that this particular situation involves a mix of forces, not all of which our tools can affect. But there is a job here for us to do in better aligning demand with supply. Chair BROWN. Understanding you have limited tools to address inflation, and our conversations in the past show my concern about continued rate increases that may not actually address the root cause of inflation—they hurt workers, and many of us content we cannot follow the same old playbook. Next question. Last year three banking regulators issued pro- posed updates on the Community Reinvestment Act to account for changes in our banking system. My question is does the Fed re- main committed to work with FDIC and OCC to finalize a CRA rule, and when will that rule likely be finalized? Mr. POWELL. Yes, we do remain committed, and I believe we are in broad agreement with the other two agencies on the revisions to the rule, so now we are in the process of writing all that down. That will take some time. And then after that, of course, it will come to the Board of Governors for a vote, and that will involve briefings and discussions. I cannot give you an exact but—— Chair BROWN. But as quickly as possible. Mr. POWELL. Yes, but it will be some months. Chair BROWN. Thank you. Banks weathered the shock of the COVID–19 shutdowns mostly because of the fiscal response pro- vided by Congress. We now see a spike in loan delinquencies and increase in overall risk. Banks are again plowing billions, billions— as many other corporate leaders always defended by people on that side of the aisle—into stock buybacks, which makes me concerned if there is a downturn in the economy banks could end up with too little capital. That is why I am worried about any potential rollbacks of safeguards or regulations. Can you assure me that the Fed will keep capital requirements strong and exercise more long-term, forward-thinking than cor- porate CEOs that seem to be focused on the short term? Mr. POWELL. I can assure you as to the first part, that we will keep capital requirements strong. 9 Chair BROWN. I did not expect you to give me an opinion about your looking more forward than companies that look at the short- term benefits of stock buybacks. Mr. Chair, when you last testified I asked you about the risks posted by crypto assets, stablecoin, the Fed, and other regulated possibilities. How is the Fed evaluating the risks of crypto-related activities by your supervised institutions? Mr. POWELL. So this is something we have been quite active in this area, and I will say that we believe that innovation is very im- portant over time to the economy, and we do not want to stifle in- novation. We do not want regulation to stifle innovation in a way that just favors incumbents and that kind of thing. But like everyone else we are watching what has been happening in the crypto space, and what we see is quite a lot of turmoil. We see fraud. We see a lack of transparency. We see run risk. Lots and lots of things like that. And so what we have been doing is making sure that the regu- lated financial institutions that we supervise and regulate are care- ful, are taking great care in the ways that they engage with the whole crypto space, and that they give us prior notice. We have issued, along with the FDIC and the OCC, a number of issuances of notices to that effect. Chair BROWN. Thank you, and I will close with this. I have long pushed for the Fed to prioritize workers and for the leaders of the Fed reflect the diversity of our country. We have made progress but our work is not done. We have a new opening, I understand. It is not your job to appoint the new Fed member. And we have a num- ber of upcoming vacancies at the Reserve Banks. I support Senator Reed from Rhode Island, Senator Menendez from New Jersey, and to her colleagues who are pushing for more diverse voices at the Fed. Senator Scott. Senator SCOTT. Thank you, Chairman. Obviously the Chairman and I both have strong passions about challenges that we face in the country. The one thing that I do believe that we agree on is the importance of having a strong capital market as it relates to making sure that Americans have the ability to continue to grow their businesses and solve their challenges, and frankly, I hope that we get there. Building on the same comment that the Chairman had around capital standards is where I am going to go with my thoughts today. When I think back on these last few years, it is hard not to recognize the extraordinary efforts our financial institutions of all sizes, frankly, undertook to administer a program like the PPP, all while weathering a shutdown of our global economy. I welcome your thoughts, but from my viewpoint, our banking system was resilient. Our financial institutions stepped up and de- livered aid to support families and businesses every single day. That is why Vice Chair Barr’s broad comments around holistic re- view of our capital troubled me so much. We should be laser-fo- cused on our economy and addressing the needs of everyday Ameri- cans trying to forge a new future, and helping them open the door to opportunity. 10 As you and I both know, capital and its quality must be contin- ually scrutinized, but increased capital does not necessarily provide an increased benefit, and requiring banks to hold capital that is not risk-based and appropriately tailored to a bank’s size, scope, and activities, can cause more harm than good. At a time of record in- flation where everyday needs are more expensive, we should not be pursuing actions that are harmful. Rather, we should be sup- porting the engine of our economy, small businesses. While I remain greatly concerned about by the Vice Chair’s com- ments, I am hopeful that you ensure this review is appropriate, keeping the impacts on our banking system front and center. We must promote and further the growth of our economy and thereby our people. Anything less should be unacceptable. To that end, will you commit that any ongoing capital review by the Federal Reserve will follow the law and that any follow-on reg- ulatory proposals will be risk-based and tailored to an institution’s activity, size, and complexity, and not a one size fits all? Mr. POWELL. Yes. I can easily commit to that. You know, we are very strongly committed to tailoring, and I can say that anything we do will reflect the tailoring, which is a long-held principle for us and now a requirement in the law. Senator SCOTT. Yes, sir. Thank you very much. Two weeks ago I sent a letter with Chairman McHenry to Chair Gensler regarding the SEC’s climate disclosure rule, urging him to rescind his proposal and reminding him that the SEC is a market regulator, not a climate forecaster. Much like Congress designed the SEC to protect investors to maintain fair, orderly, and efficient markets and to facilitate capital formation and not to advance pro- gressive climate change policies, Congress designed the Federal Re- serve to promote price stability and maximum employment, not to play politics. To that end, I find worrying the Fed’s announcement of recent actions to consider climate-related scenarios, coupled with remarks by the Vice Chair of Supervision, as attempts to incorporate broad- er ESG policies into the financial service system. Banks are having to continue for weather-related risks in their risk management, but efforts that attempt to predict climate change far into the future fall outside the scope of their authority. Importantly, the level of speculation required in these models should highlight their arbitrary and capricious nature. At a time when our economy is suffering from historically high inflation, I ex- pect our central bank to focus its time and resources on bringing inflation down, not on policy outside of its mandate. I noted in my opening statement a recent speech that you have given about the state of the Fed and how you should resist the temptation to broaden its scope and to address social issues. Do you agree that the Federal Reserve does not have the authority or statutory direction to use its monetary policy or supervisory tools to weight into the ESG or other climate policies? Mr. POWELL. I do. I do. As you know, there is a tightly focused role that we do have, that I believe that we have, but I would agree with your statement. Senator SCOTT. Mr. Chairman, I have 20 seconds left. I am going to defer because of my earlier question in my opening statement. 11 Chair BROWN. Thank you, Senator Scott. Senator Menendez is close but not here yet. So Senator Rounds. Senator ROUNDS. Thank you, Mr. Chairman. Mr. Chairman, first of all, welcome. It is always good to have you in front of our Committee. As you know, both core and headline inflation have remained persistently elevated, and over the past 12 months real average hourly earnings fell by 1.8 percent, about 4 percent since President Biden took office. To make ends meet as prices increase, more Americans are lean- ing on credit cards. At the end of 2022, credit card debt hit a record of $930.6 billion, an 18.5 percent hike from a year earlier, and an average credit card balance rose to $5,805. Over the past year the Fed has acted aggressively to tame infla- tion and yet we are still seeing price increases. As we have dis- cussed this several time, I recognize that it has been ongoing dis- cussion, but I believe that this further proves that we have long been feeling the effects of a policy-induced inflation resulting from decisions by the Biden administration, primarily cutting off the re- sources necessary to improve an increased energy production. I continue to be concerned that if you attempt to use the tools that are available at this time for the Fed that I believe that we are going to have a challenge of not being able to address specifi- cally the challenges brought out when you have a policy that is pro- moting higher prices with regard to energy as opposed to what you are trying to do which is to bring down the total overall costs. And I just wanted to ask, I guess, and you are going to think this is something that we have heard before, but do you believe that you currently have the monetary policy tools to actually reduce in- flation? And I just put it in this perspective. In January of 2021, the CPI was 1.4 percent when the Biden administration began. In January of 2022—and this is before the Russian invasion of Ukraine—the CPI was at 7.5 percent. Today, March of 2023, CPI is 8.5 percent. Would it not be fair to assess that a lot of the inflation that we have seen here may very well be due to policy decisions by this Ad- ministration? Mr. POWELL. Senator, it is not for us to point fingers. Our job is to use our tools. You asked whether we have the tools to get this job done, and we do, over time. There are some things that we can affect, but over time we can achieve 2 percent inflation and we will. Senator ROUNDS. In other words, you have got a limited number of tools available to you, and the limited number of tools that you have are designed to impact simply the reduction in prices and so forth. And yet if there are competing interests out there that are pushing prices higher, you do not have the wherewithal to decide one tool versus another based on whether it is policy induced or whether it is a matter of a shortage in supplies from outside, or whether it is war related. Mr. POWELL. That is right. Our tools essentially work on de- mand, moderating demand, so that is what we can do. Senator ROUNDS. So if there were policies in place that actually helped to reduce inflation—and I am just going to look at energy alone, just as a good example. If policies were in place that were 12 actually allowing energy prices to come down in the United States, then you would have less of a need to use the very blunt tools that you do have right now with regard to increasing rate increases. Is that a fair statement, sir? Mr. POWELL. In a sense it is. But I would just say, on energy we—— Senator ROUNDS. I am not trying to get you to a policy discussion with what the President is doing on his energy policy. I just want to make it clear that you have to respond to what is in front of you, and it does not matter where the inflation is coming from or what is driving it up. You are simply trying to bring it back down to that 2 percent number with the only tools that you have really got. Mr. POWELL. Yes. I will say on energy, energy has tended, over time, to fluctuate up and down, and it is not mainly affected by our tools. So the things we look at are really things that are tightly linked to demand in the U.S. economy, those we can affect. Senator ROUNDS. And I think just the fact that you have been increasing interest rates and yet inflation continues to ride up would suggest, as you have just indicated, that when you have high energy prices it is tough to impact that part of it with the mone- tary policy that you have got available to you. Mr. POWELL. We focus on everything, but we also focus on core, in particular, which does not include energy prices. And what has happened is core inflation has come down but nowhere near as fast as we might have hoped, and it has a long way to go. Senator ROUNDS. Thank you. One last question. Last June, Vice Chairman of Supervision, Michael Barr, testified before this Com- mittee that he would defend the use of the aggregation method as an alternative approach to the insurance capital standards, the ICS, proposed by the IAIS. As the final compatibility criteria is set to come out later this year, can you confirm that you share Vice Chair Barr’s views on this AM? Mr. POWELL. I will confirm that, but I will have to get back to you on the status of that. Senator ROUNDS. OK. Thank you. Thank you, Mr. Chairman. Chair BROWN. Thanks, Senator Rounds. Senator Menendez, of New Jersey, is recognized. Senator MENENDEZ. Thank you, Mr. Chairman. Mr. Chairman, I want to take this moment to remind my col- leagues that there are more than 62 million Latinos that call the United States home. We are the largest minority group in the country. We account for nearly 20 percent of the United States pop- ulation. We contribute almost $3 trillion in GDP. Yet Latinos have no representation in the Federal Reserve’s lead- ership. In the 109-year history of the Federal Reserve there has never—never—been a single member of the Board of Governors or regional bank president who has the lived experience of being Latino in the United States. And in practice that means that the voices of nearly one-fifth of our country’s people are repeatedly drowned out when the Fed is making critical decision 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 com- fortable retirement, or get a loan to expand their business. 13 Right now the Biden administration has a clear opportunity to make history with its next nomination to the Board of Governors. It has identified a number of highly qualified Latino candidates who have dedicated their careers to the fields of economics, who are committed to the Fed’s dual mandate, who will preserve the independence of the central bank. The Administration has rightly nominated and advocated for a number of diverse candidates with similar qualifications, both at the Fed and elsewhere. But despite having five opportunities over the past 2 years to nominate a qualified Latino economist to serve at the Federal Reserve, this Administration has repeatedly chosen not to. Representation or lack thereof does not happen by accident. It is a choice, and I hope the Administration makes the right choice with this nomination. Mr. Chairman, would you say that it is a truism that the United States dollar is the reserve of choice in the world? Mr. POWELL. Yes, I would. Senator MENENDEZ. And that brings us enormous benefits, does it not? Mr. POWELL. Yes, it does. Senator MENENDEZ. Now 12 years ago, Republican House brought us to the brink of defaulting on the debt for the first time in the history of this country, jeopardizing our credit in the world economy. I am getting a sense of deja vu because once again Re- publicans are recklessly demanding draconian spending cuts to pro- grams that hard-working U.S. families rely on in exchange for al- lowing the Treasury Department to pay for spending that Con- gress, including most of them have already voted to authorize. If you want to talk about spending cuts it seems to me that the budg- et is the time to do that, but not to put the full faith and credit of the United States at risk. Chairman Powell, can you talk about the catastrophic damage a debt default would inflict on the economy? Mr. POWELL. So I guess I will start, if I can, by saying that these are really matters between the Executive branch and Congress. We do not seek to play a role in these policy issues. But at the end of the day there is only one solution to this prob- lem, and that is whatever else may happen will happen, but Con- gress really needs to raise the debt ceiling—that is the only way out—in a timely way that allows us to pay all of our bills when and as due. And if we fail to do so I think that the consequences are hard to estimate, but they could be extraordinarily averse, adverse, and could do longstanding harm. Senator MENENDEZ. Well, I think that is a mild statement of what would happen. I understand. I did not ask you to engage in the congressional Executive branch roles. I asked you about the ab- stract question of what happens if you have a debt default. Is not even this constant fight putting into question the possi- bility that the United States will not honor its full faith and credit have consequence within the economy? Mr. POWELL. In principal it could. I think markets and observers tend to watch this and tend to think that it will work out, and it has in the past worked out. So it needs to work out this time too. 14 Senator MENENDEZ. Seeing your testimony before the Committee, is it fair to say that you will do whatever is necessary to tame in- flation? Mr. POWELL. We serve a dual mandate and we will do everything we can to restore price stability while also serving maximum em- ployment. Senator MENENDEZ. And primarily that means additional rate in- creases, would it not? What other tool do you have? Mr. POWELL. That is where we have the balance sheet. The shrinkage of the balance sheet will continue too, but it is prin- cipally rate hikes. Senator MENENDEZ. So the question is when does that part of doing anything necessary to tame inflation come into conflict with your other mandate of maximum employment? Mr. POWELL. Not now, when we have the lowest unemployment in 54 years, and where we have a labor market that is extremely tight, extremely. But that time could come, but it really is not now, where we are very far from our price stability mandate and, in ef- fect, the economy is past most estimates of maximum employment. Senator MENENDEZ. Thank you, Mr. Chairman. Chair BROWN. Thank you, Senator Menendez. Senator Kennedy, of Louisiana, is recognized. Senator KENNEDY. Thank you, Mr. Chairman. Chairman Powell, thank you for being here. Thank you to you and your team for helping to save the economy during the pandemic meltdown. For what it is worth, I am generally supportive of the actions of the Fed right now, and I am not going to ask you today to blame any- body. When Congress spends money it stimulates the economy, does it not? Mr. POWELL. It would depend on whether that is funded by tax increases or not. So if there is a spending that it not accompanied by taxes it would have a net, at the margin, stimulative effect. Senator KENNEDY. And when Congress borrows money to spend even more, that stimulates the economy even more, does it not? Mr. POWELL. At the margin, yeah. Senator KENNEDY. OK. If Congress reduced the rate of growth in its spending and reduced the rate of growth in its debt accumula- tion, it would make your job easier in reducing inflation, would it not? Mr. POWELL. I do not think fiscal policy right now is a big factor driving inflation at this moment, but it is absolutely essential that we do slow the pace of growth, particularly for the areas of—— Senator KENNEDY. All right. Let us try to unpack this then. I am not trying to trick you. You are raising interest rates. You are rais- ing interest rates to slow the economy, are you not? Mr. POWELL. Yes, to cool the economy off. Senator KENNEDY. And one of the ways you measure your suc- cess, other than fluctuation in gross domestic product, is the unem- ployment rate, is it not? Mr. POWELL. Yes. One of the measures. Senator KENNEDY. OK. So, in effect—and I am not being crit- ical—when you are slowing the economy you are trying to put peo- ple out of work. That is your job, is it not? 15 Mr. POWELL. Not really. We are trying to restore price stability, not wages. Senator KENNEDY. No, you are trying to raise the unemployment rate—— Mr. POWELL. There are a lot of—— Senator KENNEDY. ——and I know you do not like the phrase so let me strike it. You are trying to raise the unemployment rate, are you not? Mr. POWELL. No. We are trying to realign supply and demand, which can happen through a bunch of channels. Like, for example, you know, just job openings. Job openings can—— Senator KENNEDY. All right. Let me put it another way, OK. The economists did a wonderful study. They looked at 10 disinflationary periods in America, going all the way back to the 1950s. Disinfla- tion is what you are trying to do. It is a slowing in the rate of infla- tion. Am I right? Mr. POWELL. Yes. Senator KENNEDY. In other words, prices are not going to go down. They just do not go up as fast. Deflation is when prices actu- ally go down. You are trying to achieve disinflation, are you not? Mr. POWELL. Yes, we are. Senator KENNEDY. OK. Based on history, in the 10 times that we got inflation down, disinflation, since the 1950s, in order to reduce inflation by 2 percent, unemployment have to go up 3.6 percent. Now that is history, is it not? Mr. POWELL. I do not have the numbers in front of me, but yes, the standard has been that there have been recessions and downturns when the Fed has tried to reduce inflation. Senator KENNEDY. OK. Now, right now the current inflation rate is 6.4 percent and the current unemployment rate is 3.4 percent. Now if history is right—I am not asking you to, again, blame any- body, but if history is right unless you get some help, in order to get inflation down from 6.4 percent to, let us say, 4.4 percent, the unemployment rate is going to have to rise to 7 percent, based on history. Mr. POWELL. That is what the record would say. Senator KENNEDY. OK. And to get inflation down to 2.2 percent, based on history, an immutable fact, unemployment would have to go to 10.6 percent, would it not? Mr. POWELL. I would not—— Senator KENNEDY. That is what the history shows. Mr. POWELL. Yeah, I do not think that kind of a number is at all in play here. Senator KENNEDY. I know you are reluctant to admit it, and you do not want to get in the middle of a policy dispute. But I think it is undeniable—it is undeniable that the only way we are going to get this sticky inflation down is to attack it on the monetary side, which are you doing, and on the fiscal side, which means Con- gress has got to reduce the rate of growth of spending and reduce the rate of growth of debt accumulation. Now, I get that you do not want to get in the middle of that fight, but the more we help on the fiscal side, the fewer people you are going to have to put out of work. Is that not a fact? Chair BROWN. Please answer. 16 Mr. POWELL. It could work out that way. Senator KENNEDY. Sir? Mr. POWELL. It could work out that way. Senator KENNEDY. Yes, sir. Thank you. Chair BROWN. Thank you, Senator Kennedy. Senator Reed, of Rhode Island, is recognized. Senator REED. Thank you very much, Mr. Chairman. Thank you, Chairman Powell, for being here today. We saw, in the wake of COVID, the globalized supply chain dis- rupted significantly, and we are in the process, in some respects, of rebuilding the supply chain with the emphasis on sourcing in the United States. To what extent did that disruptive supply chain con- tribute to inflation, and to what extent will the new, if you envision it, the new supply chain that is located in the United States and other friendly countries, affect inflation? Mr. POWELL. So the initial outbreak of inflation as all about spending on goods where people could not spend on services. So goods spending went way up and the global supply chain—many, many goods are imported—the global supply chain just collapsed, and that was the source of the original inflation. It has now spread over the last 2 years to housing and also to the rest of the service sector. So to your question, we are seeing goods inflation has been com- ing down for some time now. It is still too high but it is coming down. Housing services, in the pipeline you see the new leases that are being signed, and what that tells you is that in the next 6 to 12 months we will see that come down. But this big service sector that is everything else, which is finan- cial services, medical services, travel and leisure, all of those things, that is the source of the inflation we have now, which had not much to do with the supply chains. That is where the challenge is now. Senator REED. And is there anything you can do that would tar- get that service area without affecting the other areas? Mr. POWELL. There is not really. You know, our monetary policy tools are famously powerful but blunt. Senator REED. A different topic, and that is, as you are probably aware, the Fifth Circuit delivered a ruling in the Community Fi- nancial Services Association vs. CFPB, that the CFPB’s funding mechanism is unconstitutional. Just like the Board of Governors, the CFPB is a bureau of the Federal Reserve. Both the Board of Governors and the CFPB rely on the same source of funds and draw on those funds in virtually identical ways. If the Board of Governors funding starts to be found unconstitu- tional, what would the implications be for the country and mone- tary policy? Mr. POWELL. Well, it would be very significant, but I have to say we have significant responsibilities but I would be reluctant to comment on a case that is before the Supreme Court. Senator REED. But it is certainly something that you have people examine for possible ramifications. Mr. POWELL. Yes, and the central banks tend to be self-funding because of the way they work, and that is a key factor of our inde- pendence. 17 Senator REED. We have gone back and forth on the impact of rate hikes on workers, and you have indicated previously that wages have not been spiraling upwards necessarily, and that infla- tion expectations are currently stable. But the impact on increased interest rates are usually felt more by low- to moderate-income peo- ple. Is there any way you can work yourself out of that dilemma? Mr. POWELL. So where we are right now, of course, is very low unemployment. Wages have been moderating, and they have been doing so without softening in the labor market, without rising un- employment, really, and that is a good thing. So we really do not know. The current situation is a combination of more typical supply and demand issues but also just things that we have not seen before, like the war in Ukraine, like the supply chains that you mentioned. So we have many usual factors, and I do not think anybody knows with confidence how this is going to play out. Senator REED. Thank you very much, Mr. Chairman. Chair BROWN. Thanks, Senator Reed. Senator Britt, from Alabama, is recognized. Senator BRITT. Thank you, Mr. Chairman. Chairman Powell, it is great to have you here today. Over the past 2 years we have seen the highest inflation of my lifetime, driving up costs for American families across the board. According to the U.S. Department of Labor, the annual inflation rate in 2021 was 7 percent, and in 2022 it was 6.5 percent. According to the U.S. Department of Agriculture, the cost of food went up 10 percent in 2022, and the real effect of that is moms and dads across this Nation that are working to put food on the table for their kids, for their babies, had a harder time doing that. This has devastated hard-working Americans, causing a kitchen table crisis in every corner of our country, as the price of food, energy, and housing have all skyrocketed. In response, the Federal Reserve has raised the Federal Reserve fund rate more than 4 percentage points. Being far from transient, inflation has remained persistent, high, and well above the Fed’s long-run goal of remaining under 2 percent. In the coming year, what factors and indictors are you paying at- tention to as you and the Federal Open Market Committee decide on whether to increase rates? Mr. POWELL. So I would say a couple of things to that. First, we are going to be looking at inflation in the three sectors that I men- tioned: the goods sector, the housing sector, and then the broader service sector. And we need the inflation that is already underway in the goods sector to continue, and that is really important. In the housing sector we just need the time to pass so that that reported inflation comes down, and it is effectively in the pipeline as long as new leases are being signed at relatively small increases. So we will be watching very, very carefully, though, at the larger service sector, which is 56 percent of consumer spending and more than that of what is currently inflation. So that is one thing. We will be watching that very carefully. Also, we raised rates very quickly last year, and we know that monetary policy, tightening policy has delayed effects, so it takes 18 a while for the full effects to be seen in economic activity inflation. So we are watching carefully to see those effects come into play, and we are aware that we have not seen the full effects yet and we are taking that into account as we think about rate hikes. Senator BRITT. So when you are looking at this, obviously not to get into a policy discussion, but if there were an increase of energy production in this country do you feel like that would help drive down inflation? Mr. POWELL. Well, I think over time more energy would mean lower energy prices. But we are very focused on what we call core inflation, because that is what is driven by, you know, really by de- mand. And our tools are really aimed at demand. Senator BRITT. Right. Understood. But I feel like the cost of en- ergy is not just what you pay at the pump, that it ends up affecting every good across this great Nation. Additionally, I would like to ask you about labor participation. So when you look at the unemployment rate, and we have heard my colleagues discuss people having to be displaced in order for us to maybe get to the inflation rate that we would like as a Nation, I would like to focus on the labor participation rate. Right now it is 62.4 percent. If there were an increase and people coming back into the workforce, would that be a positive factor with regard to driv- ing us down to the 2 percent rate that you would want to achieve? Mr. POWELL. I think that it would. I mean, remember, those peo- ple coming into jobs, that would be great because the economy clearly wants more people than are currently working. Of course, those people would then spend more, so it would not be a zero-sum game. But it would be great for the country and great for them if they were to come into the labor force. Senator BRITT. I believe that increasing and capital requirements on financial institutions would have a chilling effect on the econ- omy and the availability of financial services. Last week I joined many of my colleagues in sending you a letter that expressed con- cerns that if the Federal Reserve decides to conduct a, quote, ‘‘ho- listic review of capital standards,’’ as we heard Senator Scott talk about earlier. So is the Federal Reserve concerned that the impact to the econ- omy of increasing capital requirements on financial institutions at a time when inflation remains persistently high would cause an issue? Mr. POWELL. I think it is always a balance. We know that higher capital makes banks safer and sounder. We also know that you will, at the margin, provide less credit the more capital you have to have. But I think it is never exactly clear that you are at a per- fect equilibrium, and it is fair question, I think, to look at that. Senator BRITT. And I know, out of respect for the Chairman and trying to stay in my time, I will just end by saying I heard what you said. Obviously, as you have said, the Federal Reserve is not and will not be a climate policymaker. I just want to thank you for your public statement on that. I agree with you that there is a dif- ference between policymakers and financial regulators, and I cer- tainly look forward to working with you in the future. Chair BROWN. Thank you, Senator Britt. Senator Warner, from Virginia, is recognized. 19 Senator WARNER. Thank you, Mr. Chairman, and Chairman Powell, it is good to see you again. Let me start by saying, depend- ing on who is asking questions, we are either pounding you for how quickly we are going to drive that inflation back to 2 percent or pounding you on making sure that we do not push the economy into a recession and drive up unemployment. I have got to tell you, and these are maybe not the cheap seats, but I actually think you have done a pretty good job in terms of both ratcheting up rates and then starting to tail off a little bit. I think we all were concerned by the January numbers that popped up a little bit more. I wish, Mr. Chairman, we were actually having this hearing 2 weeks from now because we are going to have a lot more data later in this week and next week. But we have still got ways to go and the January numbers were concerning, but I do think your tailored approach, we can all second guess but I think it has been the right approach. And I want to commend you on that. I want to get two questions in. One, one of the areas that I am very worried about is commercial debt. I mean, we have got a Bloomberg story here showing we are going to hit a $6 trillion wall this year on refinancing. Where I am particularly concerned is the issue around commercial real estate. As we recover from COVID, a lot of things are getting back to normal, but clearly the trans- formation of where people work is going through a fundamental transition, and I hope people do return more to the office, but lots of folks prefer working elsewhere. That is going to fundamentally change the real estate market on the commercial side, and I do believe we are going to hit poten- tially a cliff here of a totally unexpected problem in terms of com- mercial real estate. How are you looking at that issue, and recog- nizing there are lots of bumps coming out of COVID, this one seems to be more unique in nature, and how are you thinking about that issue? Mr. POWELL. So the first one, on commercial debt, business debt generally, it has kind of been moving sideways as a percent of GDP, so you do not see a big spike going on or anything like that. However, of course there are pockets of concern, and particularly you pointed to the refinancing spike that has to happen. I have seen those come and go before. Generally markets can absorb them, maybe at a much higher rate this time. But it is something we are well aware of and watching carefully. In terms of CRE, I would agree with you. The occupancy of office space in many major cities is just remarkably low, and you wonder how that can be. Now over time some of that is going to be made into condominiums and things like that, since we do not seem to have quite enough housing in some places. But the question is what is the financial stability risk? It is not great. The largest institutions do not tend to have a lot of direct exposure to that. Some smaller banks actually do, medium- and small-sized banks do. We carefully monitor it. We agree that that is an area that requires a lot of monitoring, and I would say we are on the case. Senator WARNER. Well, that morphed me into my last question, something we have talked about, and a lot of my colleagues have 20 talked about the large institutions. I mean, I do think even some of the biggest critics of Dodd-Frank I think would acknowledge that our banking system is a heck of a lot stronger and it was able to withstand COVID in a very healthy way. But what we have also seen evolve is a vast amount of financial institutions move beyond the regulatory perimeter. You know, the fact that we now have way over half of the mortgage origination coming from nonfinancing in- stitutions, because a lot of the large entities, hedge funds, other funds, that may be doing some of this commercial debt or some of them CRE debt. I would like you to talk generally, in the last 40 seconds or so, of how you think about this regulatory perimeter. I am a big be- liever and I know some of my colleagues are that we ought to look less at charter and look at same regulation maybe as a guiding principle. I know Senator Warren has been working on some work, and I have been working on some work around crypto around that area. But there is a vast amount of activity that is taking place outside the regulatory perimeter. How should we be thinking about that and how do we make sure that does not create the kind of crisis sneak-up that happened in 2008 on the nonregulated side of the house? Mr. POWELL. I think you articulated the principle very well. It is same activity, same regulation, and that covers crypto and all kinds of other activities. People are going to assume when they deal with something that looks like a money market fund that it has the same regulation as a money market fund, or a bank de- posit, and so stablecoins need some attention in that respect. I just think that is the basic principle. And you are right. So much of intermediation has moved away from the regulated banks, really for a long period of time, and we have got to keep an eye on that. Senator WARNER. Thank you. It is something I hope we can keep looking at. Chair BROWN. Thank you, Senator Warner. Senator Hagerty, of Tennessee. Senator HAGERTY. Thank you, Chairman Brown, and thank you very much, Ranking Member Scott, for holding this hearing. Chair- man, it is great to see you again here. I appreciate your presence, and I appreciate the opportunity to talk with you about an item that I am particularly concerned about, and that is the holistic review that Senator Britt just brought up, that Vice Chair Barr is conducting right now. It is gen- erating a sense that higher capital requirements are on the horizon for us, and as I think about that in the context of what we have weathered, you think about the situation in 2020 was an acute, real-life stress test, if you will. And I think that our financial sys- tem navigated that admirably. In the past, Chairman Powell, you have told this Committee that our financial system has proven resilient, through 2020, and that the capital levels at that point in time—and I would note that those capital levels are multidecade highs—are in aggregate ade- quate. And I just wanted to follow up on those prior statements and see if you still feel that way. 21 Mr. POWELL. So I guess I would say it to you this way. In our system we have a Vice Chair for Supervision who has statutory re- sponsibilities, and when a new Vice Chair for Supervision comes in generally they are going to want to take a fresh look, and that is what Vice Chair Quarles did, and Dan Tarullo kind of had the job on an informal basis, and that is what he did. So it is only natural that someone would come in and take a fresh look, and I think that is part of the process. The role of that person is to make recommendations on regula- tions and supervision to the full board. The role of the board is to consider those when made. And to me this just comes under that heading. Senator HAGERTY. Well, as the review is underway—and I appre- ciate that context—one aspect of it seems to us an apparent will- ingness to undo the tailoring requirements that were enacted as part of S. 2155. And I understand that nothing has been finalized regarding the regulations. It is a concerning prospect if that is the case. The Fed’s general counsel just yesterday alluded to undoing 2155 by, quote, ‘‘pushing down the Basel requirements on banks that were intentionally given relief in that bill.’’ So I want to be per- fectly clear that the banking regulators themselves cannot just sim- ply ignore or selectively enforce the laws. And again I realize that the details of this study have not been finalized or made public, but if the proposal put forth by Vice Chair Barr is either unduly aggressive or appears to contradict the spirit of S. 2155, will you vote for it? Mr. POWELL. I would have to—I cannot answer that in the ab- stract, of course. But I would say we are, as an institution, very strongly committed to tailoring, and anything we do is going to re- flect tailoring of institutions according to their risk. I mean, that is a principle that we will stick with. Senator HAGERTY. I think it is quite important again, given the legislative intent here and the concerns that we maintain that. In the face of what general counsel said just yesterday I appreciate your perspective in terms of keeping that in place. I would like to, with my next question, Chairman Powell, with a starting question by underscoring the importance of the inde- pendence of the Fed’s monetary policy. Right now the economic pic- ture is about as uncertain as I can remember. We have had large companies in the private sector who are in the midst of planning layoffs and forecasting serious economic weakness in the quarters to come, yet, on the other hand, the current economic data seems to be robust, inflation shows some signs of softening in the past several releases. So I just hope, Chairman Powell, that you could briefly tell us how you synthesize these seemingly contradictory data. Mr. POWELL. So just quickly, at the end of last year we saw a couple of very promising, modest inflationary readings in Novem- ber and December, but earlier this year some of that improvement was revised away. In addition, we got a very strong reading on in- flation in January, also a very strong jobs reading, also very strong retail sales. And so as I pointed out in my testimony we are looking 22 at a reversal, really, of what we thought we were seeing, to some extent, a partial reversal. It is still the case that we are seeing progress on inflation. Goods inflation has come down significantly. There is improvement in housing inflation in the pipeline. There is not a lot of improvement yet to be seen in the largest sector, which is non-housing services. So core inflation is running at 4.7 percent on a 12-month basis. I think nothing about the data suggests to me that we have tight- ened too much. Indeed, it suggests that we still have work to do. Senator HAGERTY. In that context and thinking about where the tightening goes and where and when it might happen, where do you see the terminal Fed funds rate landing in this cycle? Mr. POWELL. We last wrote down our assessments, individual as- sessments of that in December, and I think the median range was—basically people were clustered between 5 and 5.5. We are going to write those down again. We do it four times a year. We will do around the March meeting, which is on the 21st and 22nd of March. And as I indicated in my testimony, I think that the data we have seen so far—and we still have other data to see. We still have significant data to see before the meeting—suggests that the ultimate rate that we write down may well be higher than what we wrote down in December. Senator HAGERTY. Got it. Thank you, Mr. Chairman. Chair BROWN. Senator Warren, of Massachusetts. Senator WARREN. Thank you, Mr. Chairman. So the Fed has raised interest rates eight times over the last year in what has been the most extreme rate hike cycle in 40 years. The Fed’s goal is to slow inflation, and your tool, raising in- terest rates, is designed to slow the economy and throw people out of work. So far you have not tipped the economy into recession but you have not brought inflation entirely under control either. And maybe the reason for that is that other things are also keeping prices high, things you cannot fix with high interest rates, things like price gouging and supply chain kinks and war in Ukraine. But you are determined to continue to raise interest rates, so I want to take a look at where you are headed. In December, the Fed released its projections on the state of the economy under your monetary policy plan. According to the Fed’s own report, if you con- tinue raising interest rates as you plan, unemployment will be 4.6 percent by the end of the year, more than a full point higher than it is today. Chairman Powell, if you hit your projections do you know how many people who are currently working, going about their lives, will lose their jobs? Mr. POWELL. I do not have that number in front of me. I will say it is not an intended consequence. Senator WARREN. Well, but it is, and it is in your report, and that would be about 2 million people who would lose their jobs, people who are working right now making their mortgages. So Chairman Powell, if you could speak directly to the 2 million hardworking people who have decent jobs today, who you are plan- ning to get fired over the next year, what would you say to them? How would you explain your view that they need to lose their jobs? 23 Mr. POWELL. I would explain to people more broadly that infla- tion is extremely high and it is hurting the working people of this country badly, all of them, not just 2 million of them but all of them are suffering under high inflation, and we are taking the only measures we have to bring inflation down. Senator WARREN. And putting 2 million people out of work is just part of the cost, and they just have to bear it? Mr. POWELL. Will working people be better off if we just walk away from our jobs and inflations remains 5, 6 percent? Senator WARREN. Let me ask you about what happens if you do this. Since the end of World War II, there have been 12 times in which the unemployment rate has increased by 1 percentage point within 1 year, exactly what you are aiming to do right now. How many of those times did the U.S. economy avoid falling into a re- cession? Mr. POWELL. You know, it not as black and white—very infre- quent. Senator WARREN. I am just looking at the numbers. Mr. POWELL. Yeah, no, no. Senator WARREN. It actually is pretty black and white. Mr. POWELL. Alan Blinder has written a book on this. Senator WARREN. There have been 12 times that we have seen a 1-point increase in the unemployment rate in a year. That is ex- actly what your Fed report has put out as the projection and the plan, based on how you are going to keep raising these interest rates. How many times did the economy fail to fall into a recession after doing that, out of 12 times? Mr. POWELL. I think the number is zero. Senator WARREN. I think the number is zero. That is exactly right. So then the question becomes, we have got 2 million people out of work. Can you stop it at 2 million people? History suggests that the Fed has a terrible track record of containing modest increases in the unemployment rate. Once the economy starts shedding jobs it is kind of like a runaway train. It is really hard to stop. In fact, in 11 out of the 12 times that the unemployment rate increased by a full percentage point within 1 year unemployment went on to rise another full percentage point on top of that. If that is what hap- pens this time we would be looking at at least 3.5 million people who would lose their jobs. So Chairman Powell, if you reach your goal and 2 million people get laid off by the end of this year, and then just like in 11 out of 12 times that unemployment has risen by a point in a single year, it keeps on rising and then we have got 2.5 million people out of work, we have got 3 million people who get laid off, we have got 3.5 million people who get laid off. What is your plan? Mr. POWELL. Well, right now the unemployment rate is 3.4 per- cent, which is the lowest in 54 years, and we actually do not think that we need to see a sharp or enormous increase in unemployment to get inflation under control. Senator WARREN. I am looking at your projections. Do you call laying off 2 million people this year not a sharp increase in unem- ployment? Mr. POWELL. I would say 4.5 percent—— 24 Senator WARREN. Explain that to the 2 million families who are going to be out of work. Mr. POWELL. Again, we are not targeting any of that. But I would say even 4.5 percent unemployment is well better than most of the time for the last 75 years. Senator WARREN. In other words you do not have a plan to stop a runaway train if it occurs. You know, Chair Powell, you are gambling with people’s lives, and there is a pile of data showing the price gouging and supply chain kinks and the war in Ukraine are driving up prices. You cling to the idea that there is only one solution—lay off millions of workers. We need a Fed that will fight for families, and if you are not going to lead that charge we need someone at the Fed who will. Chair BROWN. Senator Vance, of Ohio. Senator VANCE. Thank you, Mr. Chairman. Chairman Powell, thanks so much for being here. I have a question that is slightly far afield, but how often do you get to talk to the Federal Reserve Chairman, so I might as well ask it. To give some context here, my family comes from Appalachia. Particularly, my grandparents grew up in southeastern Kentucky, coal country, and moved to southern Ohio where I now have the honor of representing all of Ohio. You know, one of the things that you hear a lot when you study the regional history of Appalachia is it is often described as pos- sessing a resource curse. So there is a lot of coal in central Appa- lachia that enables a certain amount of consumption. Obviously consumption is good. People need food and medicine and other things. But there is also a pretty good argument that for a host of rea- sons it causes mal-investment in the region, and consequently you have lower productivity growth, lower innovation, and an economy that is much less diversified and much less dynamic. I am wondering, when I think about and read about the history of Appalachia and the resource curse I am struck by the idea that you could make a similar argument about the Reserve currency status of the United States dollar. Americans have enjoyed one of the greatest privileges of the international economy for the last nearly eight decades, a strong dollar that acts, of course, as the world’s reserve currency. You know that better than I do. Now this has obviously been great for American purchasing power. We enjoy cheaper imports. Americans, when they travel abroad, benefit from lower costs. But it does come at a cost to American producers. I think in some ways you can argue that the reserve currency status is a massive subsidy to American con- sumers but a massive tax on American producers. Now I know the strong dollar is sort of a sacred cow of the Wash- ington consensus, but when I survey the American economy and I see our mass consumption of mostly useless imports on the one hand, and our hollowed-out industrial base on the other hand, I wonder if the reserve currency status also has some downsides and not just some upsides as well. And let me just put a final point on this, and I would love to get your thoughts on that, Chairman Powell. We are, of course, now the main supporter of a massive land war in Europe between the 25 Russians and the Ukrainians. I read recently—and I am not going to comment on how perfect or precise these estimates are—but I read recently that the United States is trying to ramp up produc- tion from 14,000 artillery shells to 20,000 artillery shells—that is per month—while the Russians are firing 20,000 artillery shells in Ukraine per day. And when I look at the American economy we have a lot of financial engineers and a lot of diversity consultants. We do not have a lot of people making things, and I worry that the reserve currency status and the lack of control that we have over our currency is perhaps driving that. I would love to get your feedback on that. What are the upsides and downsides of the reserve currency? Mr. POWELL. That is a big question to try to answer. Senator VANCE. We have 2 minutes, Chairman Powell, so plenty of time. Mr. POWELL. I cannot even get started on that. So we are the world’s reserve currency, of course, and that is be- cause of our democratic institutions. It is because of our control over inflation over many, many, many years. The world trusts the rule of law in the United States, and those are the things. So once you are the reserve currency it is used all over the world in trans- actions, and it is the place where people want to be in times of stress, using dollar-denominated assets. So, of course, we benefit by being able to pay for our goods all over the world, pay for anything anywhere in the world, mostly, with dollars. That is an advantage. You know, there is some eco- nomic theory around it, that it also has burdens of various kinds, but I cannot call it all back to mind. But, you know, the other thing is it is a very stable equilibrium but it is not a perfect one—it not a permanent one, rather. So there is not any obviously candidate to replace the United States right now, where you can have free flow of capital in and out of the coun- try, where you can really trust the rule of law and democratic insti- tutions, and keeping price stability, which you can here. Senator VANCE. Do you think it gives us less control over our own currency, the fact that it has become the world’s reserve cur- rency? Mr. POWELL. Control over our currency. I am not sure—so essen- tially what we try to control is price stability, and no, it does not make it harder for us to keep inflation under control. The United States has a smaller external sector than most large economies. It is only about 15 percent. So main what affects inflation in the United States is domestic supply and demand. Senator VANCE. Do you think it makes it harder for us to fight back against currency manipulation, to control the export and im- port controls in a way that stabilizes our own manufacturing sec- tor? Mr. POWELL. Well, I mean, what is important there is really the level of the dollar. And, you know, when the dollar is stronger obvi- ously our wares are more expensive abroad, and that kind of thing. But we do not have an opinion on—matters of the level of the dol- lar are really matters for the Treasury Department and the elected Government, not for the Fed. Senator VANCE. Thank you, Chairman Powell. 26 Mr. POWELL. Thank you. Chair BROWN. Thank you, Senator Vance. Senator Van Hollen, of Maryland, is recognized. Senator VAN HOLLEN. Thank you, Mr. Chairman. Chairman Powell, thank you for being here and for your service. I know the Fed is experiencing lots of challenges these days. I have got a couple of questions that are just, I think, basic yes or nos, and then some longer questions. Would you agree that changes in the size of corporate profits can be one of the factors that affects the inflation rate? Mr. POWELL. Yes. Senator VAN HOLLEN. Recently we saw that the employment cost index, which, as you know, measures the growth of wages and ben- efit costs, grew at roughly 4 percent on an annualized basis in the fourth quarter of 2022. Is that right? Mr. POWELL. That is my recollection, yes. Senator VAN HOLLEN. So if corporate profits were to decline from the extremely high levels that we saw recently, would it be possible to sustain the 4 percent growth rate in the employment cost index for an extended period of time, even as we get inflation down to the target of 2 percent? Mr. POWELL. It depends on what you mean by extended period of time. So without a very, very large increase in productivity, which would be great but that we do not expect, you would not be able to sustain 4 percent wage inflation over the longer term. Over the shorter term, though, yes. Senator VAN HOLLEN. So over the shorter term that would not be a justification in and of itself for raising rates. Is that right, in the short term? Mr. POWELL. Well, so I think wages affect prices and prices affect wages. I think we do think that some softening in the labor market conditions will happen as we try to get inflation under control, and will need to happen. Senator VAN HOLLEN. Right, but that is more a prediction about your efforts to fight inflation. Are you saying that simply looking at the current 4 percent growth rate in the short term is an excuse for jacking up interest rates? Mr. POWELL. No. What I would say is that the all the data we look at, in the labor market, including not just that measure of wages but others, also unemployment, also participation, also job openings and quits and things like that. All of that, you put that into the picture and I think you see a labor market that is ex- tremely tight and is probably contributing to inflation. I have never said it was the main cause. Senator VAN HOLLEN. I think the larger point here, based on your response to that first question about growth and profits, is corporations have a decision as to whether or not they are going to pocket more for profit, which they can, or provide higher wages to their employees. And if you actually lowered your profit margins you could sustain a higher wage increase without violating the 2 percent inflation. Is not that right? Mr. POWELL. Yes. I mean, when I hear profit margins, what we are seeing in the economy is pretty much about shortages and sup- ply chain blockages. And when there is not enough of a product, 27 and there is a lot of demand, which you see as prices going up, as the supply chains get fixed and shortages are alleviated you will see inflation coming down, you will see margins coming down, and that will certainly help with inflation. Senator VAN HOLLEN. But profits are the margin, right? They are going up beyond what they were before. That means that even with the increase of costs because of supply chains they are making more profits, which again, they can do that. But my point is that as a contributor to inflation, as you indicated in response to the first question. Let me ask you about the tight labor market because one of the issues in a tight labor market is parents with kids, including a lot of moms who would like to go back into the market but are not able to do so because of lack of affordable childcare. The other issue is immigration, and I know that you have gotten some recent data on how some immigration figures actually have softened a little bit the tightness in the labor market. Can you just talk broadly about those two factors, affordable childcare and immigration, more legal immigration, and how they could affect labor force participation and therefore also reduce in- flation pressures? Mr. POWELL. On the first, we do not make recommendations or evaluate fiscal policy, but I will say there is research that shows that it helps keep women in the workforce when there is childcare available, which is, I think, kind of self-evident. Sorry, the second was—— Senator VAN HOLLEN. Impact of immigration. Mr. POWELL. Immigration, yes. So what I talked about with you is actually, as part of the January Bureau of Labor Statistics re- port—sorry. The Employment Report for January comes out in early February—there is a section in there about more people. The Census Department has increased its estimate of the workforce by something like 870,000, and a significant of that has been immigra- tion. And that has moved up participation by a little bit, and it may be part of why we are hearing from, in the labor market, that the really intense labor shortage pressures that we were hearing about in 2021 and 2022, may be alleviating. So that would con- tribute to that. Clearly, the economy is calling for more people, with essentially two job openings for every unemployed person, and this can be a source of those people. Senator VAN HOLLEN. Right. And that would reduce the tight- ness of the labor market and reduce pressures on inflation, right? Mr. POWELL. It may already be doing so. Senator VAN HOLLEN. Thank you. Chair BROWN. Senator Cramer, of North Dakota, is recognized. Senator CRAMER. Thank you, Mr. Chairman. Thank you, Chair- man Powell, for being here. And I cannot resist responding to a few things that my friends on the left have said. For example, in his opening statement Chairman Brown had a long list of things that raising interest rates will not do. Raising interest rates will not fill- in-the-blank. I am going to fill in the blank with a couple of things. How about raising interest rates will not stop Senate Democrats and President Biden from overtaxing, overspending, overborrowing, overregulating? 28 Chairman Brown said we should rebuild our supply chain by curbing offshoring, corporate offshoring. I agree. He talked a lot about corporate greed contributing to inflation. OK. But how about regulatory greed contributing to corporate greed? How do you ex- pect corporations to reinvest money if you overregulate their ability to invest that money right here in the United States of America? You want to onshore some things? How about energy policy? How about instead of looking to Venezuela or Iran for oil supply, or Rus- sia, or rather than looking to China for electric vehicles and chips and solar panels, how about we have a strategy that onshores those things by reducing regulations, reducing taxes, and letting those corporations reinvest their profits rather than stock buybacks or dividends? This idea that somehow the Federal Reserve is supposed to keep inflation in check while half of the Government works against it is mind-boggling. Now I know, Mr. Chairman, you do not like to comment on pol- icy. You and I have gone around and around about this. You were anxious to advise us to spend lots of money during the pandemic. I do not think a lot of people blame you for that. You would not respond to efforts by the Biden administration after we were in a robust recovery from not spending so much money. OK, I can ap- preciate the change. But now we are in this debate between the Republicans and Democrats, between particularly the House Speaker and President on how to raise the debt ceiling, and you have made some pretty strong comments about raising the debt ceiling, absent from struc- tural reforms that would actually help us get back to a reasonable growth. And so I warn you again, if you are going to make political com- ments, if you are going to advise us on policy, be consistent with it. Now, I want to get back to the greening of the Federal Reserve and these, I call them, stress tests. You can call them whatever we call them. But I am concerned that now the Federal Reserve is starting down this path. Maybe it is slightly, at first, about climate stress testing. I just want to ask you this. If we are going to go down that path, if the Federal Reserve is now going to become part of the Federal climate police force, are we going to consider the ramifications of having entire communities and economies, factories and manufac- turers, you know, whatever energy entities, large server farms, leaving them susceptible to a very unreliable, very expensive en- ergy source? Is that part of the stress test? Mr. POWELL. No. Those are considerations for elected people, not for us. We have a narrow role to play here, but it is real role, and I can talk about that if you would like. Senator CRAMER. Yeah, I would like you to, because again, if we are going to start doing stress tests for the six largest financial in- stitutions related to climate—which really is more weather than climate—then are we going to consider the effects of an unreliable energy source at several locations throughout our country? Mr. POWELL. Our only focus is on the safety and soundness of these institutions and do they understand and can they manage all 29 of the risks that they run in their business model. That is our only goal. Again, we are not looking to be climate policymakers. Climate policy is clearly going to have effects on regions, on com- panies, on individuals, on countries, disparate effects, and that is not for unelected people like us, who have a narrow mandate, but I think it does touch climate. And you are right to be concerned that we find ourselves on a slippery slope, but honestly, I think the climate scenarios are something that the banks are already doing themselves, and climate guidance is something that they are look- ing for. They want to know how we are thinking about this. But we will try really hard not to get on a slippery slope and find our- selves becoming climate policymakers. It is just not appropriate for an independent agency. Senator CRAMER. OK, and I completely agree and I hope you stick to that, and I think you ought to ask the banks to consider what kind of vulnerabilities that might expose. With regard to what Senator Warren was saying on her mono- logue, one thing about idealogues, the have the luxury of binary choices. You have a really big job and you have a single, in my mind, one and a half, maybe two missions. I think the first one handles the second ones OK. But it has got to be tough when the White House is working against you and you do not have to com- ment. Thank you. Thank you, Mr. Chairman. Chair BROWN. Senator Tester, of Montana, is recognized. Senator TESTER. Chair Powell, thank you for being here today, and thank you for serving in this critical role at this critical time. I have talked many times in this Committee, and I especially, right now, cannot overstate the importance of the Fed’s independence. I said in the previous Administration. I say it now. We cannot be playing politics with our economy, and that is a fact. From a climate standpoint I will just tell you it is entirely artifi- cial right now anyway because if you look at the hundreds of bil- lions of dollars this country puts out every year in disasters due to climate instability, we ought to be asking our question, is that sustainable, because quite frankly, it has to be done, and I do not think it is sustainable. So we have got to start looking for some so- lutions on the climate side sooner rather than later. The Reserve has a tough job, and I really appreciate how you have done it—reasonable, working together, making hard decisions for the good of the economy. We have to get this right. So the question is, how much has inflation decreased since its peak? Mr. POWELL. It depends on the measure, but meaningfully, at least a couple of percentage points. Senator TESTER. OK. And has unemployment gone down as infla- tion has gone down? Mr. POWELL. Unemployment has gone down. Yes, it has, to now a 54-year low. Senator TESTER. Yeah. So the question becomes—and I always think back to in 1998, I bought some property, and the interest on that property was 10 percent in 1998, and I thought I got a hell of a deal, by the way. I thought it was just great. 30 But the truth is interest rates have been artificially low for the last, what, 20 years probably? And the question becomes, as you look at the economy and as you try to make the determination whether the inflation is caused by demand or supply, where does all that fall in to you, your decisionmaking, moving forward? Mr. POWELL. You mean the level of interest rates? Senator TESTER. Right. Mr. POWELL. In theory there is this thing called the neutral level of interest, and we know it only by its works, and neutral is the level that neither pushes the economy up nor pulls it down. And it changes over time. This is the thing about these important vari- ables in economics. So what has happened until now is that the neutral level of in- terest went down and down and down to the point where many countries had zero interest rates and very low inflation. Now we have this series of shocks associated with the pandemic, and we have rates at 4.5 percent, our policy rate, and we have the labor market very strong, and inflation reacting somewhat, and it does raise the question of where is the neutral rate. Honestly, we do not know. I think we look at the current situation and we see that there is not a lot of evidence—it is hard to make a case that we have over-tightened it. It means we need to continue to tighten. I think we are very mindful of the lags with which our policy works. We do not think we need a significant increase in unemploy- ment, and we are certainly not aiming for one. But we do think that there will be some softening in labor market conditions to get to 2 percent inflation. Senator TESTER. When you are looking at interest rates I know we talk about energy prices here and the price of gasoline, and then if you go over and Europe is much, much higher. I am just curious. Are we comparable with interest rates here as with, say, Europe? Mr. POWELL. We are very close to where Canada is. We are a lit- tle bit higher than where Europe is. Europe has traditionally had much lower inflation. They now have very high inflation, and they are still increasing rates. But they are a bit lower in terms of rates. Senator TESTER. So if we do not get the inflation under control— and like I said, I think the steps you have taken have been reason- able and measured—if we do not get it under control, really what are the impacts of that? Mr. POWELL. Well, the social costs of failure is one way to think about it, are very, very high. So if inflation were to continue at some point that will become the psychology, and businesses will come to expect high inflation, and that will make it more self-per- petuating. That will mean an up-and-down economy. It will mean something that looks more like what we have seen in periods of high inflation. Capital allocation is difficult in a world like that. It is not a good time for the economy. What we want to do is restore price stability, firmly, back at 2 percent so that we can have the kind of strong labor market for a sustained period that we had before. Senator TESTER [presiding]. Once again, thank you for your work. Thank you for your independence. Senator Daines. Mr. POWELL. Thank you. 31 Senator DAINES [presiding]. Thank you, Senator Tester. I will be handing it off to Senator Cortez Masto when I am finished up as well. Mr. Chairman, good to have you here today. Back in Montana, the number one issue I hear, certainly across the State, is the high cost of gas, the high cost of groceries, and overall how their pay- checks are shrinking because of inflation. It is a crushing blow. It has real-life impacts. It is a top-of-mind issue for Montanans. It is also important to note the devastating impact it is going to have on our Nation’s economic future. In fact, in October of last year I sent a letter to Congressional Budget Office Director Swagel regarding the impact that high inflation and the elevated interest rates would have the cost of servicing the Federal debt. His re- sponse painted a less-than-rosy picture. But then we got CBO’s updated 10-year baseline forecast in Feb- ruary, and it confirmed the truly dire situation that we find our- selves in. Driven by interest payments on the debt, the CBO now projects that cumulative deficits during the 10-year window—and I recognize where deficits come from. It is irresponsible spending here in Washington. But the cumulative deficits during the 10-year window will exceed $20 trillion. The cumulative deficit. I am not talking the debt, because it is going to grow the total Federal debt to more than $51 trillion by 2033. Now 2033 used to sound like a long way away. We are 10 years away. Ten years go by very, very quickly. Within 5 years we are going to spend more on annual interest on the national debt than we spend on national defense. Think about that for a moment. These are coming out of the CBO. These absolutely shocking but, quite frankly, predictable projec- tions go back to a debate we vigorously had here in the Banking Committee. I remember when Lawrence Summers, of course, the former Secretary of Treasury under President Clinton, economic advisor to President Obama, he warned us. He said—and he was frankly warning my colleagues across the aisle—he said you cannot move forward if these purely partisan—at that time a $1.9 trillion spending extravaganza, we had $1 of unspent COVID money in De- cember of 2020. And that passed on a purely partisan vote. We said it is going to start to ignite the inflation fires. So I certainly hope the President’s budget, which we expect to see later this week, will propose pro-growth policies that can get us out of this mess, and I would argue almost an existential crisis if we look at what is going to come at us here over the course of the next 10 years with debt and service on that debt. Unfortunately, as the President said in his State of the Union address, the President said he is going to raise taxes. That is recipe for disaster. It is going to crush productivity, discourage invest- ment, stifle economic growth even further. I want to turn to my questions now, Chairman Powell. You are raising interest rates to combat the inflation we have seen in the economy over the past few years. Is that correct? Mr. POWELL. Yes. Senator DAINES. And although this is the domain of Treasury, a higher Fed fund rate will mean higher borrowing costs. Is that cor- rect? 32 Mr. POWELL. Yes, all else equal. Senator DAINES. So I just want to connect the dots here. Inflation was sparked, one of the big reasons was massive spending here in Washington, and now we are going to be bearing the challenges with higher debt service over the course of the next several years, where we are going to see debt service exceeding defense spending, which as we see the threats of China, threats around the world, I think it is very, very concerning. Now as a grandfather of four, soon to be five, grandchildren, these are things you think about more and more as you look forward. I want to change here and talk about American energy. When the war in Ukraine broke out many feared that Russia would cut off natural gas exports and cause energy inflation to spike. Prices did not spike as much as anticipated due, in large part, to the fact that American companies stepped up to the plate. As of late last year, the European Union now receives more liquified natural gas from the United States producers than it does from Russian producers, and that is good thing for the world to see more U.S.-produced energy. Chairman Powell, do you believe that European and American inflation would have been manageable if not for American energy producers? Mr. POWELL. I certainly think that our particular area of natural gas assets have helped Europe make the transition. Senator DAINES. Any sense of how much worse the global energy picture would be if you would imagine a world where we are not producing and shipping energy to other countries? Mr. POWELL. It would be hard to estimate. Senator DAINES. Probably worse? Mr. POWELL. Yeah, I mean, I think it has been—Europe has managed better than expected, and a part of that story is just U.S. energy exports. Also the winter was not as bad, and the Germans made some good decisions. Senator DAINES. Yeah. We made some prayers. They said we need to pray for a warm winter for Europe and I think they got one, which was somewhat helpful. I am out of time here. I am going to send this back over to Sen- ator Cortez Masto. Senator CORTEZ MASTO [presiding]. Thank you. Chairman Powell, it is great to see you. Thank you so much. I know it has been a long morning. I always appreciate you coming to talk with us here on the Committee. I want to first align myself with the remarks from Chairman Menendez supporting a Latino nominee to the open seat on the Federal Reserve. It has been more than 100 years, and a Latino has never served on the Federal Reserve board, and I know there are many strong Latino economists and economic experts who would capably serve. So I want to put that out there. Chairman Powell, I also sit on Senate Finance. Right across the way we are talking about affordable housing. And I think for pur- poses of so many of us across the country, including in Nevada, when we talk about affordable housing it is also about workforce housing. It is about making sure families that are working so hard have an opportunity to keep a roof over their head. Right now in 33 Nevada, if you are making minimum wage, you have to work 75 hours a week just to be able to afford housing. And so I want to talk to you about this. I was distressed to see in the report that activity in the housing sector has contracted as a result of the elevated mortgage rates, and you have been talking about that. I often hear from Nevadans who say, ‘‘I do not know if I am ever going to own a home,’’ and many feel resigned to being stuck in a cycle of renting. So Chairman, how do the Federal Reserve economists and lead- ers think about the balance between keeping interest rates low to spur that affordable home building and home buying while ad- dressing inflation? Mr. POWELL. We have a dual mandate from Congress, as you well know, which is maximum employment and price stability, and that is really what we take into account. And, of course, interest- sensitive spending is the thing that gets the most support when we cut rates and the thing that is most affected when we raise rates, and that means housing to a significant extent. That is not a choice that we make. That is just the way it works. And we only have, really, one tool, which is monetary policy. So, you know, we do not really try to use our tools to effect broader housing policy but really just to achieve our statutory goals. Senator CORTEZ MASTO. It happens to just unfortunately be an effect as you try to achieve your statutory goal. Is that correct? Mr. POWELL. Yes. Senator CORTEZ MASTO. And I want to have the opportunity to address Senator Warren’s conversation with you earlier about the tools that you have and the impact it has on causing, potentially, more people to be unemployed, and this obviously has an impact on their ability to afford homes as well. Can you address that? Mr. POWELL. I would be glad to. I want to be clear that we do not seek, and we do not believe we need to have a very significant downturn in the labor market. And it is not just hope. I think if you look at the situation in the labor market you have got all these job openings and, in principle, you could reduce the job openings without seeing a really significant increase in unemployment. Also, you are starting from such a strong labor market, it seems as though you are a long way away from anything that looks like a recession just looking at the labor market by itself. So honestly, we do not know that we need, that there will need to be a really significant downturn. Other business cycles had quite different back stories than this one, and we are going to have to find out whether that matters or not. But I do think, and I have said all along, and my colleagues and I have too, that we believe that we can—there is path to re- storing 2 percent inflation with less significant effects on the labor market than have typically been seen in downturns. Senator CORTEZ MASTO. And for purposes of the general public, the people, the Nevadans that I know that are struggling—we have talked about this, and thank you for always being willing to talk with me—we have one of the highest unemployment rates in the country. Our service sector was hit so hard. We are still at over 5 34 percent just in southern Nevada. We have high gas prices. We have grocery prices. We have housing prices that are high. So one of the things that you have commented on, and you just did again, but I know it was in your opening remarks, and it is quoted right here, and let me just say, you say, ‘‘Our overarching focus is using our tools to bring inflation back down to our 2 per- cent goal and to keep longer-term inflation expectations well an- chored.’’ For the general public, for those working families and people, why 2 percent? Why is getting it to 2 percent so important? Mr. POWELL. So that has become the globally agreed. Essentially all central banks target 2 percent inflation in one form or another. Senator CORTEZ MASTO. How does that help my Nevada families? How does that help people in Nevada? Mr. POWELL. I will tell you how it does. I guess it is not obvious how that is. But 2 percent inflation, to have people believe that in- flation is going to go back to 2 percent really anchors inflation there because the evidence and the modern belief is that people’s expectations about inflation actually have an effect on inflation. If you expect inflation to go up 5 percent, then it will, you know, if everyone kind of expects that, because that is what businesses and households will be expecting, and it will kind of happen because they expect it. So having a 2 percent inflation goal, which we had for many years, de facto we had it, then we formally adopted it in 2012, but for years before that we were effectively targeting 2 percent infla- tion, and what that meant was that one of the reasons why infla- tion was low and predictable is having a real target and sticking to it, not changing it at convenient moments. So we think it is really important that we do stick to a 2 percent inflation target and not consider changing it. We are not going to do that. People will be better off if the whole question of high infla- tion is just not part of their lives. That is kind of the definition of price stability, is that people live their lives without having to think about inflation all the time. Senator CORTEZ MASTO. Thank you. I notice my time is up. Thank you so much. Senator Lummis. Senator LUMMIS [presiding]. Thank you very much, Madam Chairman, and welcome, Chairman Powell. When you are setting these rates and making these decisions and seeking that 2 percent magic number, are you considering the cost of borrowing for the United States, knowing that Congress has overborrowed and that we have overspent and that the national debt is at now at least 97 percent of GDP, and we are going to face challenges, of our own making. This is not about what the Fed has done. This is about what the Congress has done that you have to factor into your decisions. Do you think about the costs of bor- rowing for the United States itself? Mr. POWELL. No, we do not, and we are not going to. In other words, that would be fiscal dominance. If we were constrained in our monetary policy by the budgetary situation of the United States—and we are not; we are clearly not—the path we are on is 35 not sustainable but the level of debt that we have is sustainable. Put it that way. So we do not think about interest costs when we make monetary policy. We think about maximum employment and price stability. Senator LUMMIS. It is your opinion that the level of debt we have is sustainable? Mr. POWELL. Yes. I mean, clearly we have the largest economy in the world. We can service this debt. That is not the problem. The problem is that we are on a path where the debt is growing substantially faster than the economy, and that is kind of, by defi- nition, in the long run, unsustainable. And the way countries have fixed that is with longer-term programs that have bipartisan sup- port and that address the actual problem in the budget. That is really the formula. Senator LUMMIS. Thank you. I am going to switch to stablecoins. You are a member of the President’s Working Group on Financial Markets. The working group called for bank-like regulation of stablecoins in late 2021. Then, on January 3rd of this year, in a joint staff statement, the Federal banking agencies stated that even after the bank’s capital, BSA/AML, and risk management, a bank issuing a stablecoin on a, quote, ‘‘open public or decentralized network is highly likely to be inconsistent with safe and sound banking practices.’’ I am going to say that again. Even after a bank’s capital, BSA/ AML, and risk management, a bank issuing a stablecoin on an open public or decentralized network is highly likely to be incon- sistent with safe and sound banking practices. So I am a little confused about where we are headed on stablecoins. Does the January 3rd statement mean that the Fed has decided that stablecoins on a permission-less distributed ledger have no place in banks? Mr. POWELL. So I think that there are real concerns about per- mission-less public blockchains, and the reason is that they have been so susceptible to fraud, to money laundering, and all of those things. So I think what you heard from the Federal banking agen- cies, in one of their reports, was that they would tend to look at those as not consistent with safety and soundness. Senator LUMMIS. And what about properly regulated stablecoins? Do you think they could have a place in our banking system? Mr. POWELL. I certainly think that in a world of appropriate reg- ulation, where the stablecoin activity gets the same regulation as comparable products in different places, then there certainly could be a place for stablecoins in our financial services sector. Senator LUMMIS. Thank you. The European Union, U.K., Aus- tralia, Switzerland, Singapore, and others have all moved over the last few years to create a legislative framework for digital assets. The European Union, in particular, is attempting to be a standard- setter again, like it was with its data protection rule. Is the United States in danger of being a rule taker, not a rule- maker, when it comes to digital assets? Mr. POWELL. I do think it would be important for us to have a workable legal framework around digital activities. I think that is important, and something Congress, in principle, needs to do be- cause we cannot really do that. 36 Senator LUMMIS. Yeah. Thank you. Senator Gillibrand and I agree with you. One area we have already seen is in the Basel Committee on Bank Supervision. They proposed prudential treatment for crypto assets framework, setting forth banks’ capital standards for digital assets. The Basel Committee’s framework does not impose a capital charge for digital asset custody, whereas the SEC’s Staff Account- ing Bulletin No. 121 imposes a prohibitive capital charge through the back door and places consumers at risk in bankruptcy. Similarly, the Basel Committee framework allows banks to issue or hold digital assets on their balance sheet if the requisite capital is set aside. So back to January 3, 2023. The Fed and other bank regulators have said that it is forbidden for a U.S. bank to conduct these ac- tivities no matter the capital. So my question is, what does the rest of the world know about digital asset regulation that we do not, that the Fed does not? Mr. POWELL. So as we discussed, this is an SEC staff accounting bulletin, and it is not something that the Fed issued, and I would be loath to comment directly on it. Senator LUMMIS. The issue is, and what concerns me, is that the Fed and other Federal banking agencies are not following inter- national norms on digital asset regulation. That is just my com- ment. Thank you, Chairman Powell, for being here. I now recognize Senator Smith. Senator SMITH [presiding]. Well, thank you, and Chairman Pow- ell, it looks as if Senator Britt and I are the last people standing at this Committee hearing. Thank you for passing on the gavel to Senator Lummis. And I want to thank you for your service and for our recent conversation. And before I get into my questions I would just like to note there has been a good back-and-forth amongst our Committee around some of the big economic challenges and opportunities that we face in this country, and I would just like to note that the programs and the spending that the Ranking Member and some of our colleagues have blamed for inflation provided critical relief that kept working families and small businesses afloat during a global pandemic. And in fact, many of these policies were passed on a bipartisan basis and signed into law by both Republican and Democratic Presidents. And I also just want to add that the laws that the Democrats passed to lower prescription drug costs and health care costs and to lower energy costs for Americans are helping to lower basic costs for families, all of which, by the way, was fully paid for. So I return, Mr. Chair, to what you have said to me privately and to all of us publicly, which is what we ought to be looking for is striving for bipartisan solutions to find a path forward, and, in fact, Senator Lummis and I were just talking about this yesterday when it came to housing policy. So I just want to put that out there. When you and I spoke yesterday briefly we talked about the Community Reinvestment Act, and I know that I appreciated the Chair raising this point earlier in the hearing. But I want to just return to that briefly. I am very glad to see, it has been about a 37 year since the Fed and the OCC and the FDIC issued their pro- posed rule to modernize implementation of the Community Rein- vestment Act. I do not think that the proposal was perfect by any means, but it does make really important improvements to how, through the CRA, financial services organizations can serve and meet the needs of communities that are full of assets but lack the resources to make it happen like wealthy communities can. So I think, Chairman Powell, you indicated that you expect this new CRA rule to be finalized in the coming months. Is that what you indicated? Mr. POWELL. Yes. That is right. Senator SMITH. And can you just tell us, with the departure of Dr. Brainard, who will be spearheading the CRA efforts? Mr. POWELL. I have asked Vice Chair Barr to be responsible for moving the project forward. Of course, it has to the whole board and everyone gets a vote on that. But he will be pushing it for- ward. Senator SMITH. That is great. Thank you. And I was glad to see that disaster preparedness and climate re- siliency were added to the definition of community development ac- tivities that would be eligible for the CRA credit, and this is impor- tant, of course, because low- and moderate-income folks and the communities that they live in often face some of the worst impacts of climate change and extreme weather events. This is not social engineering. This is dealing with the actual costs and challenges that people experience because of climate change. So, Chairman Powell, can you talk to us a little bit about how you see that change and how it fits with the CRA’s overarching ob- jectives? Mr. POWELL. I think it fits for the reasons that you said. Hon- estly, I am a week or so away from getting a briefing on where the proposal lies, so I am reluctant to touch on it. Again, I would rath- er wait until after I am fully briefed on where that agreement came out, after the FOMC meeting. Senator SMITH. Thank you. That is fine. I look forward to con- tinuing this conversation with you—— Mr. POWELL. As will I. Senator SMITH. ——and with Mr. Barr, and I just appreciate this. My view of this is that climate change and the economy are inextricably linked and the reality is that climate-related action or inaction has a direct financial impact on people and our economy. And was wondering if you would just be willing to update us briefly on some of the next steps that the Fed is going to be looking at as you evaluate the resilience of financial institutions with respect to climate risk. There is this pilot project that just was started in January, I think it was, of this year, and I am curious to know how you see next steps there. Mr. POWELL. So we are doing really two things. One is we are doing a climate stress scenario, which the banks are already doing, the large banks, the six that we are working with. And that is real- ly just to begin the process of understanding the risk that are asso- ciated with this over the longer term. Again, they are already doing it and it is something—there is a lot of learning going on, around the world actually. 38 The other thing we are doing is providing guidance. The banks want clear guidance. They actually want one set of rules globally, the big banks that do business around the world. They are hoping that they are not in a world where there are just different regu- latory regimes everywhere they go. So we are kind of working on that as well. Senator SMITH. Great. Thank you very much, Mr. Chair. Mr. POWELL. Thank you. Chair BROWN [presiding]. Thank you, Senator Smith. Senator Tillis, of North Carolina, is recognized. Senator TILLIS. Thank you, Mr. Chairman. Chair Powell, thank you for being here. In your opening statement—I was here for that—I think you touched on some of the interest rate-sensitive components of GDP and non-interest rate-sensitive components of GDP. I think you said that we do have a concern in the latter group—inflation expec- tations, labor market tightening, et cetera. Can you tell me a little bit about how you are looking at the in- terest rate-sensitive and non-interest rate-sensitive readings and whether the Fed—what sort of Fed actions can take place to avoid a zero landing? Mr. POWELL. Sure. So the housing sector, of course, interest-sen- sitive spending is the thing that is very directly affected by our policies, almost right away, and the poster child for that is housing. And so you have seen mortgage rates now go back up over 6 per- cent. You have seen housing starts come down. The activity in housing has declined as people are reluctant to get out of the low- rate mortgages they have had before. So housing activity is slowing down. On the other hand, housing prices went up in the aggregate more than 40 percent since the beginning of the pandemic, so we may be seeing some price correction on that too. So that is coming along. And housing inflation, which is a big part of the CPI, a little bit smaller part of the PCU, the inflation measures we follow, that we rely on, that will be coming down because of the slowdown in the housing market. I guess I would say the service sector is probably less interest- sensitive than that, and that is restaurants, it is travel services, travel and leisure, it is health care, it is financial services, health care services, all those services, and that is a big, big part of our economy. This sector is 56 percent of consumer spending on non- energy and food. So it is very important, and it is about having a little bit softer demand and about having some softening in labor market condi- tions, we think. Our tools will work on that, but we do expect that that will take time. Senator TILLIS. Thank you. I know the Chairman, in his opening comments, mentioned, I believe—I do not want to misquote him— that we have too little capital in the banking sector. It may be true of a couple of banking institutions, but how do you feel about the current capital that our broader banking sector, irrespective of where they are in size, what concerns, if any, do you have about the capital that we see out there already? 39 Mr. POWELL. So I supported all of the capital raising that we did. I joined the Fed in 2012, when we were in the middle of imple- menting all those Dodd-Frank increases, and I supported all of them, after careful thought and discussion with my colleagues. I think the new Vice Chair is doing what new Vice Chairs do, which is to take a fresh look and ask the question, even though I think we all agree capital is strong. Certainly the Vice Chair does. The question is, is it at the right level, and I think that is what happens with a new Vice Chair for Supervision. We do not have any proposal yet but at some point we will. Senator TILLIS. Yeah. I am going to be meeting with the Vice Chair and we will drill down on that topic. But I was over in Fi- nance Committee so I was not here, but I do now that several members—well, first off we know that Vice Chair Barr is looking at a holistic review of capital requirements. I think that is a good idea. But I have to ask a question. Does the Fed consider the bipar- tisan-passed Senate bill 2155, which is currently the law of the land, superior to any of the Basel requirements or any holistic re- view process. It is the law of the land. How does that weigh in to how these reviews go? Mr. POWELL. So 2155 was—I think you are talking about tai- loring. Senator TILLIS. Yeah. Mr. POWELL. Dodd-Frank actually called for tailoring and what 2155 did was it changed ‘‘may tailor’’ to ‘‘shall tailor,’’ and it also changed the thresholds. But tailoring is an absolutely bedrock as- pect of our bank regulatory system, and anything that we do is going to reflect what we think is appropriate tailoring between the different sizes and risks of the financial institutions that we super- vise and regulate. Senator TILLIS. What we were trying to accomplish as a part of that—I do not expect you to respond. I know that we are coming to the end of the hearing—is that a holistic review of a financial services institution is going to reveal the fact that many of these financial institutions are very different based on the activities that they are most involved in. And those sorts of holistic reviews may actually result in increasing capital requirements for two banks that look like peers but not for another because of the inherent risk associated with their business focus. Does that make sense? Mr. POWELL. To your earlier point, though, the law, the Dodd- Frank language, as amended, actually requires that we take those things into consideration. Senator TILLIS. And I hope that we will. Mr. POWELL. We will. Senator TILLIS. Thank you. Chair BROWN. Thank you, Senator Tillis. Senator Warnock is recognized, from Georgia. Senator WARNOCK. Thank you so very much, Mr. Chairman. Before I begin my questions, I know that this Committee will soon consider a new nominee to serve on the Federal Reserve Board of Governors, and while it has not historically been the case it seems to me that the board should reflect the diversity of our Nation, that those things are connected, policy and representation, 40 are connected. And I hope that we will see, sitting before this Com- mittee, a nominee that pushes us closer toward our ideals of e pluribus unum out, out of many, one, and I support Senator Menendez and others who have called for a diverse nominee, spe- cifically. The fact that we have never had a Latino person serve on the Federal Reserve board I think is a huge oversight, and I hope we can move quickly in that directly. That said, my State of Georgia is in a housing crisis, like much of the country. The Federal Reserve Bank of Atlanta has des- ignated owning a home in Atlanta as unaffordable to the average home buyer. But this is not just a city problem. Harris County, Georgia, with a population of less than 35,000, sitting on the bor- der of Alabama, is also raised as unaffordable. In the midst of this housing crisis, the Federal Reserve continues to raise interest rates. This makes mortgages a lot more expensive for families, especially young families looking to buy a house. Ac- cording to the National Association of Realtors, the share of first- time home buyers is at an all-time low, while the average age of a purchaser is at an all-time high. Chairman Powell, you have said that there has been, quote, ‘‘an imbalance in the housing market,’’ but if you are a Georgia family, parents in their mid 30s, young children, and all you want is to be able to afford your first home and place and build equity to 1 day pass that equity on to your kids, how are the Fed’s actions helping that family afford a home? Mr. POWELL. Our mandate is to use our tools to foster maximum employment and price stability, and we are using those tools really now to restore price stability at a time of the highest inflation in 40 years. I think that the same people who are having high mort- gage costs, if they have a floating rate mortgage, are also experi- encing high costs for all the basic necessities of life. And one of our most fundamental rules at the central bank is to keep price sta- bility. So we have to prioritize that in what we do. Senator WARNOCK. I understand the tools and the mandate, but my concern is that we could have a cure that is worse than the dis- ease. It does not do families any good if we stabilize housing prices while mortgage rates continue to skyrocket. It does not matter to me why a house is unaffordable. Maybe the house is unaffordable. Maybe the mortgage is unaffordable. Unaffordable is unaffordable. How does the Federal Reserve consider the total price of home ownership, including cost of mortgages, in executing that mandate to keep prices stable? Mr. POWELL. Housing inflation is a very important component of various inflation indexes, and the way that his calculated is the economists look at rents, and then for people who own a home they impute a rent, depending on the value of the home. So it actually does factor in. And I would say measures of new leases that are being signed, and new housing prices, show significant declines in inflation, not in price but in inflation. And that will play through so that overall inflation over the course of the next 6 months or year will decline. Senator WARNOCK. If we are seeing mortgage rates go up, yes or no, does this discourage folks who may have a low-interest mort- 41 gage rate from putting their home on the market and then possibly paying double the cost on a mortgage for their new house? Mr. POWELL. It certainly could. People who are in a fixed rate, low-rate mortgage, I would assume many of them are not moving. Senator WARNOCK. Does raising the Federal interest rate change the cost of borrowing for a company hoping to develop new hous- ing? Mr. POWELL. Yes. Senator WARNOCK. Does it make it more expensive for suppliers to finance expanding production to meet supply needs? Mr. POWELL. It does. Senator WARNOCK. Does it give businesses less wiggle room to offer higher wages and attract qualified workers? Mr. POWELL. Indeed. Senator WARNOCK. So all of these actions have to be taken into account. Federal Reserve does not control housing supply but its action do have a massive effect on housing supply. And some of these housing effects, it seems to me, will be felt for many years, well beyond when interest rate hikes have slowed or rates have even gone down. And I know you have got a difficult job and a tough situation, but I just hope that the Fed will think more about its actions and how they affect housing supply even as it attempts to control hous- ing demand. Thank you. Chair BROWN. Thank you, Senator Warnock. The last questioner, I believe, is Senator Sinema, who is remote, from Arizona. Senator SINEMA. Thank you, Mr. Chairman, and Chairman Pow- ell, thank you for being here today. In raising interest rates last month by 25 basis points the FOMC cited Russia’s war against Ukraine as a key contributor to elevated global uncertainty. The war has serious implications for global en- ergy and agricultural markets, and as you know, energy inflation, in particular, can appear in the form of higher prices of other goods and services. This feels like a substantial driver of inflation overall, and in my mind you cannot understand the global economy fully without as- sessing the range of possible outcomes in Ukraine. As we have also seen, the war created new supply chain problems overnight and has caused abrupt price swings in select committees. How is the FOMC assessing the economic impact of the war and the range of potential outcomes in order to inform how it sets mon- etary policy? Mr. POWELL. I guess there are two things to say. One is that the principal way that the way has affected our economy is really through commodity prices, grain and particularly energy prices. That is the main thing, and those have both flattened out. Energy prices globally have settled down, they are at a higher level, and food prices as well, to some extent. The second thing I would say is that it represents a significant risk. So the war in Ukraine, the outcome is uncertain. Develop- ments there are uncertain. And you have to think of it as a source of potential risk to the global economy and to our economy. 42 We look at alternative scenarios and things like that. We do not really do it from a geopolitical standpoint but we do, of course, model scenarios where commodity prices are higher and things that would look like what could happen from Ukraine. Senator SINEMA. Thank you. At home, Arizona families are struggling to navigate this economy. Higher prices are making it more difficult to afford groceries, gas, rents, and airfare, but on the other hand, rising interest rates are crowding out investment and making it more difficult for first-time home buyers to buy a home. Inflation has also slowed housing development to a halt in Arizona, and as you know, Chairman, housing is a major economic contrib- utor in my State. It is also clear that more spending comes with tradeoffs, and it is why attacking inflation has historically been so difficult and yet it is more important than ever that we get it under control. There has been much debate about a soft landing, where we get inflation under control without triggering a recession, versus a hard landing, where inflation comes down but triggers a painful re- cession. Some economists are currently saying they see no landing right now, that growth is actually accelerating and that more ag- gressive actions will be needed to get inflation under control. If true, that would be problematic. What do you think about that assessment? Mr. POWELL. Well, as I mentioned earlier, I think if you look at the data that has been coming in since earlier this year, you have seen stronger labor market conditions, higher inflation, stronger consumer spending, and also we saw some of the low inflation readings from the fourth quarter of last year revised away. You take all of those, they may be, to some extent, related to things like seasonal adjustments or a warm January. But nonetheless, they all point in the same direction and they do suggest the possibility that we ultimately would need to raise rates higher than had been ex- pected. Of course, we have two or three more very important data re- leases to analyze before the time of the FOMC meeting. Those are going to be very important in the assessment we have of this rel- atively recent data. We will be looking carefully at that, and all of that will go into making the decision, which we have not made, but making the decisions that we will make about what to do at the March meeting. Senator SINEMA. Thank you. On February 23rd, the Fed, the FDIC, and the OCC released another joint statement on crypto as- sets and liquidity risks posed to banking organizations. It is clear that regulators see undue risk for banks in the current environ- ment and are taking a more conservative approach. Do you believe these risks are inherent to crypto assets and how they behave, or is some of the risk the product of the current regu- latory and policy landscape for crypto assets in the U.S.? Mr. POWELL. So we are seeing, really, in the last close to a year now, we have seen just a remarkable set of events in the crypto space. Lots of companies collapsing. We have seen massive fraud. We have seen all kinds of things. I think we have to be open to the idea that somewhere in there there is technology that can be featured in productive innovation 43 that makes people’s lives better. However, in the near term we see, in crypto activity, lots of things that suggest that regulated finan- cial institutions should be quite cautious in doing things in the crypto space. And we have issued three or four releases to the banks, along with the OCC and the FDIC, the Fed has, and they essentially say you really need to be careful here. You need to be careful. It is early days with crypto. There is not the appropriate regulation. We are learning lots about the risks, and they are many of the same risks that run in other parts of the financial system, but without appropriate regulation. Chair BROWN. Thank you, Chairman Powell. Senator SINEMA. Thank you. Chair BROWN. Thank you, Senator Sinema. We conclude the hearing. The Fed must make sure that workers and families are at the center of every decision it makes to strengthen our economy. We have heard a lot today about the role that Wall Street plays in our economy too. As you have said, Mr. Chair, we know that higher capital requirements make banks safer and stronger. It allows them to make investments in their workers and their communities and our economy. That is what they should be doing instead of spending billions on buy-backs. I look forward, Chair Powell, to working with you to strengthen our economy. For Senators who wish to submit questions for the hearing record, these questions are due 1 week from today, Tuesday, March 14th. To Chair Powell, please submit your responses to questions for the record 45 days from the day you receive them. I thank my colleagues for the very, very good attendance today. Only one Member on each side was not here, one for health reasons and the other just because he is doing 12 different things. So I ap- preciate all that and thanks for your testimony and your public service, Mr. Chairman. Mr. POWELL. Thank you, Mr. Chairman. Chair BROWN. The hearing is adjourned. [Whereupon, at 12:23 p.m., the hearing was adjourned.] [Prepared statements, responses to written questions, and addi- tional material supplied for the record follow:] 44 PREPARED STATEMENT OF CHAIR SHERROD BROWN Today we examine the Fed’s actions to combat inflation and whether these actions are working—including how these actions affect Americans’ jobs and their pay- checks. Prices are still too high across many parts of the economy. And we all know who feels it the most when the costs of groceries and rent go up—it’s not the economic pundits and politicians who lecture us about discipline and stability. It’s not the corporate executives who pretend they’re making ‘‘tough choices’’ about prices while reporting record profit increases quarter after quarter and doing more and more stock buybacks. It’s the people working hourly jobs to make ends meet. It’s seniors on fixed in- comes and Social Security. It’s everyone who gets their income from a paycheck each month—not an investment portfolio. It’s also those same Americans who stand to lose the most if the Fed’s actions to curb inflation go too far. Because no matter what goes wrong in our economy—a global pandemic, a war in Eastern Europe, weather disasters—profits somehow always manage to go up. And workers are always left paying the price. As you have noted, Chair Powell, the Fed’s tools are only one element in our fight against inflation. This is a complex problem, and interest rates are a single, blunt tool. Raising interest rates can’t rebuild our supply chains and fix demand imbalances from the pandemic. Raising interest rates won’t end Russia’s brutal invasion of Ukraine. Raising interest rates won’t prevent avian flu from devastating one third of our egg supply, or weather disasters from destroying key crops. And raising interest rates certainly won’t stop big corporations from exploiting all of these crises to jack up prices far beyond the increase in their costs. Last year, corporate profits hit a record high. Corporate PR chiefs assure us that these corporations just have to raise prices. Their costs are going up, the workers just want to be paid too much, they have no other choice—they tell us. Yet when you look at their profits and their executive salaries and their stock buyback plans, it sure doesn’t look like corporations have exhausted every available alternative. This is so brazen, even global bankers called on the Fed to identify this profit- eering as one of the biggest drivers of inflation. Paul Donovan, Chief Economist of global wealth management at UBS wrote ‘‘[the] Fed should make clear that raising profit margins are spurring inflation . . . Com- panies have passed higher costs on to consumers. But they have also taken advan- tage of circumstances to expand profit margins. The broadening of inflation beyond commodity prices is more profit margin expansion than wage cost pressures.’’ Think about that—from a chief economist at UBS: ‘‘They have also taken advantage of circumstances to expand profit margins. The broadening of inflation beyond commodity prices is more profit margin expansion than wage cost pressures.’’ The Fed can’t force corporations to change their ways or rewrite the Wall Street business model on its own. But you could talk about it. High-interest rates, falling wages, and increasing unemployment are all hall- marks of failed policies that end up helping Wall Street, large corporations, and the wealthy. Because let’s be clear what we’re talking about when use the economic-speak that can cloud this conversation. ‘‘Cooling’’ the economy means laying off workers. ‘‘Lowering demand’’ means workers getting fewer raises. Of course there are times when the Fed must act. We cannot allow inflation to become entrenched. We’ve seen encouraging signs that isn’t happening. And there are other ways we can bring prices down. Instead of lowering demand—again, making people poorer, laying people off, deny- ing workers raises—we can speed up and strengthen our supply chains. We can bring critical manufacturing industries back to the U.S. We can rebuild our infra- structure. It’s what we are doing with the CHIPS Act, with the Inflation Reduction Act, with the Bipartisan Infrastructure Bill. For the first time in decades, we are finally recognizing the damage that I and many of my colleagues warned corporate offshoring would do to our economy. 45 Look at East Palestine, Ohio. America learned about this small town last month, when a Norfolk Southern train derailed and spewed hazardous material into this community. East Palestine is more than just a disaster headline. Columbiana County, once the center of American ceramics manufacturing—at one time producing 80 percent of the ceramics in the country. When I was there last week, I was talking with the sheriff at the 1820 Candle Company, and he was talking about how the last one just closed a few years back. Like so many industries, those jobs all moved overseas. And we know why. It’s the same reason Norfolk Southern cut costs at the expense of safety, eliminating a third of its workers in less than 10 years. And it’s the same reason corporations are now keeping prices high even as supply chains stabilize. It’s the Wall Street business model. Quarter after quarter, corporations are ex- pected to cut costs, at any cost: They skimp on safety. They move production overseas to countries where they can pay workers less, be- cause of trade deals they lobbied for. And Wall Street demands they post profit increases—even in the middle of a glob- al pandemic. That’s the problem with our economy. And not only will higher interest rates not solve it—if they’re overdone, they’ll make it worse. We cannot risk undermining one of the successes of our current economy. For the first time in decades, workers are finally—finally—starting to get a little power. Unemployment is at an historic low—3.4 percent. That’s not just a number. That means Americans have more opportunity and op- tions, even in places that haven’t seen a lot of that in recent years. It means people have the power to demand raises, and retirement security, and paid sick days, and control over their schedules. And it means more Americans have the dignity that comes with a good job that provides for your family. We must ensure that all Americans have the opportunity for that dignity of work. This is a critical time, and the consequences of missteps could be severe. Mr. Chairman, two more things that could affect you: It’s not just monetary policy that threatens Americans’ pocketbooks. Some of my colleagues have threatened the Nation’s full faith and credit by hold- ing the debt ceiling hostage for partisan politics. Instead of paying our bills on time, they’re threatening all Americans. The Fifth Circuit’s Consumer Financial Protection Bureau ruling could also cause unimaginable instability and chaos for consumers and our financial system. The Fifth Circuit is Wall Street’s favorite courthouse. It recently ruled the CFPB’s independent funding is unconstitutional. If the Su- preme Court upholds the Fifth Circuit’s ruling, it will devastate the CFPB and threaten the independent funding of many other Federal agencies, including the Federal Reserve. I look forward to hearing today how the Fed will balance its dual mandate, and continue to promote an economy where everyone who wants a good job can find one—an economy that works for everyone. PREPARED STATEMENT OF SENATOR TIM SCOTT Sitting here, looking at my prepared remarks . . . there is an opening coming where Vice Chair Brainard is moving on, I think it’s really important for us to make sure that all the information that we need in order to make a good decision on the next [nomination] that we have in a timely fashion. So, I would really implore the Chair to make sure that happens. That every question, every questionnaire that is asked from the person, we get. Every Member of this Committee has their questions answered in a timely fashion, and that the staff has their answers in a timely fash- ion. Listening to Chairman Brown, I thought to myself: ‘‘Fascinating, truly fas- cinating.’’ I concluded that while I know Chairman Brown pretty well, I am sure he is sincere. But let me just say this, spending and printing trillions of dollars, caving to the radical Left in this country, seeing policies posited and then implemented that led to the worst inflation in 40 years, seeing our inflation at 9.1 percent, seeing Amer- ican families struggle because of the weight of the Government on their shoulders, 46 seeing the devastation from South Carolina to Ohio—it’s unbelievable that the pro- gressives in this country who caused 9.1 percent inflation would then turn some- where besides the mirror to see the absolute devastation caused by their out-of-con- trol spending is remarkable. Remarkable. To stop the out-of-control inflation caused by the out-of-control spending, the Fed steps in to cool the economy. Well, the definition of cooling the economy is necessary because we’ve seen the most radical approach, to a problem that was in our rear- view mirror, being used to bring in a level of socialism and spending that our Na- tion has not seen in my lifetime. The facts are very simple: when you get to 9.1 percent inflation in this Nation, as a kid who grew up in a single-parent household mired in poverty, a 40 percent— today, a 100 percent just a year ago—increase in the gas prices devastates single mothers around this country. For seniors on fixed income whose savings are being depleted, with an average cost just last month of a $433 increase because of infla- tion. For my friends on the other side of the aisle to look any place besides a mirror, I find stunning. The truth is that when your food prices go up over 20 percent, when your elec- tricity is up over 20 percent, you have to ask yourself: ‘‘Where in the world are they?’’ They cannot be in this universe, it must be an alternate universe where in fact it is okay for us to prices go through the roof and our economy not stumble, but fall into a ditch. Why are we in the ditch? Because progressives used the pan- demic as a way to usher in a form of spending that takes the money out of the pock- ets of everyday Americans and puts it in the coffers of the Government. There is a better way. The better way is to trust the American people. And when you do so, you don’t have to have the Fed come in and raise interest rates so high to quell the challenges in our economy so that today versus 18 months ago, the price of the same house for your mortgage payment is twice as high. Why? Because of the runaway spending of our friends on the other side of the aisle. I’m sure I do not have time for my opening comments, what I will say without any question, as I look around the country, and I ask myself how devastating is it that today it costs $433 more dollars than it did a year ago, the answer is it is a crisis when the average family in our country didn’t have $400 in their savings for an emergency, to have prices go up by this amount is devastating. To have a con- versation about rents around the country, looking at the inflationary effect and the absolute devastation of a snarling supply chain, we haven’t seen in my lifetime, run by my friends and the progressives, unbelievable. Now to get to you, Chairman Powell. One of the comments you made that I think is really important in one of the speeches you gave in January. ‘‘It is essential,’’ you said, ‘‘that we stick to our statutory goals and authorities, and that we resist the temptation to broaden our scope to address other important social issues of the day. Taking on new goals, however worthy, without a clear statutory mandate would un- dermine the case for our independence.’’ You further noted that, and I quote, ‘‘Without explicit congressional legislation, it would be inappropriate for us to use our monetary policy or supervisory tools to promote a greener economy or to achieve other climate-based goals. We are not, and will not be, a climate policymaker.’’ Do you still stand by those comments? ‘‘CHAIRMAN POWELL: ‘I do.’’’ Finally, several of my Republican colleagues and I sent a letter to you discussing Vice Chair of Supervision Michael Barr’s plan to conduct a ‘‘holistic’’ review of cap- ital standards. I look forward to discussing those capital standards during my Q and A, and I will thank you for our recent conversation that we had that helped illu- minate some of the necessary challenges that we face as a Nation and your answers to it. Thank you. PREPARED STATEMENT OF JEROME H. POWELL CHAIR, BOARDOFGOVERNORSOFTHEFEDERALRESERVESYSTEM MARCH7, 2023 Chairman Brown, Ranking Member Scott, and other Members of the Committee, I appreciate the opportunity to present the Federal Reserve’s semiannual Monetary Policy Report. My colleagues and I are acutely aware that high inflation is causing significant hardship, and we are strongly committed to returning inflation to our 2 percent goal. Over the past year, we have taken forceful actions to tighten the stance of monetary policy. We have covered a lot of ground, and the full effects of our tight- ening so far are yet to be felt. Even so, we have more work to do. Our policy actions 47 are guided by our dual mandate to promote maximum employment and stable prices. Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of labor market condi- tions that benefit all. I will review the current economic situation before turning to monetary policy. Current Economic Situation and Outlook The data from January on employment, consumer spending, manufacturing pro- duction, and inflation have partly reversed the softening trends that we had seen in the data just a month ago. Some of this reversal likely reflects the unseasonably warm weather in January in much of the country. Still, the breadth of the reversal along with revisions to the previous quarter suggests that inflationary pressures are running higher than expected at the time of our previous Federal Open Market Committee (FOMC) meeting. From a broader perspective, inflation has moderated somewhat since the middle of last year but remains well above the FOMC’s longer-run objective of 2 percent. The 12-month change in total personal consumption expenditures (PCE) prices has slowed from its peak of 7 percent in June to 5.4 percent in January as energy prices have declined and supply chain bottlenecks have eased. Over the past 12 months, core PCE inflation, which excludes the volatile food and energy prices, was 4.7 percent. As supply chain bottlenecks have eased and tighter policy has restrained demand, inflation in the core goods sector has fallen. And while housing services inflation remains too high, the flattening out in rents evident in recently signed leases points to a deceleration in this component of inflation over the year ahead. That said, there is little sign of disinflation thus far in the category of core serv- ices excluding housing, which accounts for more than half of core consumer expendi- tures. To restore price stability, we will need to see lower inflation in this sector, and there will very likely be some softening in labor market conditions. Although nominal wage gains have slowed somewhat in recent months, they remain above what is consistent with 2 percent inflation and current trends in productivity. Strong wage growth is good for workers but only if it is not eroded by inflation. Turning to growth, the U.S. economy slowed significantly last year, with real gross domestic product rising at a below-trend pace of 0.9 percent. Although con- sumer spending appears to be expanding at a solid pace this quarter, other recent indicators point to subdued growth of spending and production. Activity in the hous- ing sector continues to weaken, largely reflecting higher mortgage rates. Higher in- terest rates and slower output growth also appear to be weighing on business fixed investment. Despite the slowdown in growth, the labor market remains extremely tight. The unemployment rate was 3.4 percent in January, its lowest level since 1969. Job gains remained very strong in January, while the supply of labor has continued to lag.1 As of the end of December, there were 1.9 job openings for each unemployed individual, close to the all-time peak recorded last March, while unemployment in- surance claims have remained near historical lows. Monetary Policy With inflation well above our longer-run goal of 2 percent and with the labor mar- ket remaining extremely tight, the FOMC has continued to tighten the stance of monetary policy, raising interest rates by 41⁄2 percentage points over the past year. We continue to anticipate that ongoing increases in the target range for the Federal funds rate will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In addition, we are continuing the process of significantly reducing the size of our balance sheet.2 We are seeing the effects of our policy actions on demand in the most interest- sensitive sectors of the economy. It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation. In light of the cumulative tightening of monetary policy and the lags with which monetary policy affects eco- nomic activity and inflation, the Committee slowed the pace of interest rate in- creases over its past two meetings. We will continue to make our decisions meeting by meeting, taking into account the totality of incoming data and their implications for the outlook for economic activity and inflation. 1A box in our latest Monetary Policy Report, ‘‘Why Has the Labor Force Recovery Been So Slow?’’ discusses the factors that have been holding back labor supply. 2A box in our latest Monetary Policy Report, ‘‘Developments in the Federal Reserve’s Balance Sheet and Money Markets’’, discusses changes in the size of the Federal Reserve’s balance sheet. 48 Although inflation has been moderating in recent months, the process of getting inflation back down to 2 percent has a long way to go and is likely to be bumpy. As I mentioned, the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tight- ening is warranted, we would be prepared to increase the pace of rate hikes. Restor- ing price stability will likely require that we maintain a restrictive stance of mone- tary policy for some time. Our overarching focus is using our tools to bring inflation back down to our 2 per- cent goal and to keep longer-term inflation expectations well anchored. Restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the longer run. The historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done. To conclude, we understand that our actions affect communities, families, and businesses across the country. Everything we do is in service to our public mission. We at the Federal Reserve will do everything we can to achieve our maximum-em- ployment and price-stability goals. Thank you. I am happy to take your questions. 49 RESPONSES TO WRITTEN QUESTIONS OF CHAIR BROWN FROM JEROME H. POWELL Q.1. Your testimony highlighted several economic risks impacting the banking system. To prepare for these risks, banks need robust capital to continue lending and serve their customers in an eco- nomic downturn. How do strong capital requirements protect the banking system, and how do they protect working Americans and small businesses? A.1. Robust capital requirements are fundamental to the strength and stability of our financial system because they help ensure that banks are able to absorb losses and continue their vital role in fi- nancial intermediation, including their ability to lend to households and businesses, through good times and bad. Q.2. During an economic downturn, what choices do banks have to maintain or even build capital and reduce risk to their balance sheets while still lending to Americans? A.2. As a general matter, banks may maintain capital during an economic downturn by preserving retained earnings—for example, by reducing expenses or dividend payments and other capital dis- tributions. They may also issue new capital instruments to inves- tors. Such measures can be taken during an economic downturn to support lending to creditworthy borrowers. Q.3. Capital frameworks tailored by the bank’s size, activity, and complexity are helpful but inadequate. Capital protects against the unexpected; there is potential for the capital framework to under- estimate losses and not account for emerging risks. A well-designed regulatory capital framework must include risk-based and risk-in- sensitive components, such as the supplementary leverage ratio. Will the Federal Reserve commit to maintaining a comprehensive capital framework ensuring a capital cushion against known and unknown risks for all banks? Will the regulatory capital requirements be tailored so that the banks presenting the greatest risk to America’s financial stability maintain proportionally more capital than community banks? A.3. Robust capital requirements are fundamental to the strength and stability of our financial system. The Federal Reserve’s frame- work includes both risk-based and leverage capital standards. The risk-based capital standards, on the one hand, assign capital re- quirements commensurate with the riskiness of a firm’s activities. The leverage standards, on the other hand, do not differentiate by the relative risk of a firm’s activities, serving as a complement to the risk-based standards to safeguard against any imprecise as- sessment of risk. Our framework also takes into account the size and complexity of financial institutions, requiring countercyclical measures, stress testing, and increased capital requirements for the largest firms and simpler, less burdensome requirements for smaller qualifying firms. All of these requirements support the re- silience of the financial system. Banks and the financial system are constantly evolving. Accord- ingly, we require financial institutions to have an established, ro- bust, and comprehensive approach for identifying, assessing, and addressing all risks stemming from their unique business activities 50 under normal and stressed conditions. Similarly, regulation and su- pervision must also evolve to be effective as our understanding of these risks deepens over time. Q.4. Consumers, investors, and all types of market participants in- creasingly choose to make free market decisions based upon envi- ronmentally and socially conscious factors. This is done for many reasons including greater efficiency and increased cost savings. However, many critics call these decisions ‘‘misguided’’ and ‘‘harm- ful to the economy.’’ Critics threaten retaliatory action against peo- ple and corporations for making their own choices in the free mar- ket. Do the data collected by and economic projections produced by the Federal Reserve indicate that a shift in preferences to con- sumer and investor decision making influenced by more environ- mentally or socially conscious considerations is likely to cause harm to or impair the economy? A.4. Changes in preferences and technologies always have the po- tential to create disruptions for some groups of consumers or firms. As a result of new technologies or changes in consumer pref- erences, some firms and industries may experience an increase in demand for their products or services, and others may experience a decrease in demand. Likewise, some consumers may see their economic situations improve, and others may experience chal- lenges. It is difficult to isolate the aggregate effects of a given change in preferences and technologies, but economists generally think that innovation and business dynamism in reaction to a changing landscape of consumer preferences or to the adoption and incorporation of new technologies makes for a stronger economy over time. Q.5. Mortgage rates have tracked closely with the Fed’s rate hikes. The average 30-year fixed mortgage rate is about 6.5 percent, more than double that 2 years ago. Rate hikes drive a housing market, pushing home ownership out of reach for younger, lower-income Americans and reducing the supply of homes for sale as existing homeowners delay moving so they can hold onto their low-cost mortgage. Meanwhile, the wealthy and investors are buying up those properties that do come on the market with all-cash offers. In the words of the National Association of Realtors’ chief econo- mist: ‘‘Only the wealthy are essentially buying homes. If this trend was to continue, that means something fundamentally is wrong with society.’’ I agree. What can Congress and the Federal Reserve do to address housing market inequality—and the wealth inequal- ity that is driven by housing inequality—while working to reduce inflation? A.5. The large increase in mortgage rates has indeed reduced home purchases by lower-income households more than those by higher- income households.1 I am mindful that this is one of the unfortu- nate costs of reducing inflation. But inflation has also had a dis- proportionately large effect on households that spend the majority of their income on necessities like food, energy, and shelter. Fur- thermore, following through on our commitment to return inflation 1See Ringo, Daniel. ‘‘Declining Affordability and Home Purchase Borrowing by Lower Income Households’’, FEDS Notes July 2022. 51 to 2 percent is essential to avoiding an entrenchment of higher in- flation expectations that could require even more aggressive policy action in the future. It is crucial that we restore price stability be- cause without it we will not achieve a sustained period of strong labor market conditions that benefit all. Pursuing our dual man- date of maximum employment and price stability is the best way for the Federal Reserve to promote widely shared prosperity. The Federal Reserve also uses our regulatory toolkit to support mortgage borrowing by lower income households. Specifically, through the Community Reinvestment Act (CRA), we (along with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency) encourage mortgage lenders to meet the credit needs of low- to moderate-income (LMI) borrowers and of borrowers living in LMI neighborhoods. In 2022, the banking agencies issued a proposal to modernize the regulations specifying how CRA is implemented. One of the goals of the proposal is to ex- pand access to credit, investment, and basic banking services in low- and moderate-income communities. RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM JEROME H. POWELL Q.1. In November, the Federal Reserve released its latest Diver- sity, Equity, and Inclusion Strategic Plan. One of the actions listed in that plan suggests that Fed will task its divisions to develop ac- tion plans with relevant and measurable results to address under- represented workforce demographics in job families like economists and senior professionals. When will those action plans be complete, and can you commit to sharing them with my office? A.1. We appreciate your interest in the Board’s Diversity, Equity, and Inclusion Strategic Plan and welcome the opportunity discuss our strategic plan and our approach for implementing it. Board staff are working with your staff to share additional information with your office. Q.2. In Section 956 of the Dodd-Frank Act Congress instructed the Federal Reserve and other regulators to jointly issue rules to rein in the incentive-based executive compensation plans that contrib- uted to the financial crisis by encouraging risky behavior. Congress set a deadline of May 2011 for this rule, but thus far no rule has been finalized. What is the status of this rule? Will you commit to placing this on your regulatory agenda as reported to the Office of Information and Regulatory Affairs? A.2. The Board is actively working with the Federal banking agen- cies, Federal Housing Finance Agency, Securities and Exchange Commission, and National Credit Union Administration to imple- ment section 956 of the Dodd-Frank Wall Street Reform and Con- sumer Protection Act. Specifically, we are preparing a proposal that would implement prohibitions against incentive compensation ar- rangements that could provide excessive compensation or lead to material financial loss and requiring disclosure related to incentive compensation arrangements. 52 RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA FROM JEROME H. POWELL Q.1. To understand the economy and how best to respond to it, it is important that we better understand wage growth. Employers in Arizona tell me it’s extremely difficult to hire workers, while work- ers in Arizona tell me that any wage gains they have accrued over the past few years have been largely wiped out by inflation. The current data are noisy and make it difficult to isolate and under- stand wage growth without capturing underlying drivers. Would the Federal Reserve consider studying and publishing a labor in- come measure? A.1. There are many high-quality measures of wages that we con- sider as monetary policymakers. For example, we look at a number of different measures of nominal wage growth, including the Em- ployment Cost Index, Average Hourly Earnings, and Compensation per Hour, all published by the Bureau of Labor Statistics (BLS). While no measure is perfect, taken as a whole, they provide a rea- sonably accurate picture of the behavior of aggregate wages. Of course, individual wage growth often differs from the average, and thus, it is often helpful to look at how wage growth differs across different groups of the population. The series mentioned above do this for different industries and occupations, and the Fed- eral Reserve Bank of Atlanta (FRB Atlanta) Wage Growth Tracker does this for different demographic groups. The BLS’s Current Pop- ulation Survey, which is the data that underlies the FRB Atlanta Wage Growth Tracker, provides highly detailed individual-level data on wages. The Longitudinal Employer Household Dynamics dataset provides detailed wage data on individuals and firms. These sources, as well as data from the payroll processing firm ADP, are used by researchers at the Federal Reserve and other re- search institutions to study the behavior of wages. We are always looking for new and timely data to improve our assessment of eco- nomic activity, including wages, and we actively engage with other statistical agencies to encourage improvement in their wage meas- ures. RESPONSES TO WRITTEN QUESTIONS OF SENATOR FETTERMAN FROM JEROME H. POWELL Q.1. Chairman Powell, as was raised in the hearing, the Federal Reserve has no tool at its disposal to stanch the loss of jobs and rise in unemployment that follows an increase in interest rates, re- sulting in a ‘‘runaway train’’ of climbing unemployment. How does the Federal Reserve model and analyze this longer-term effect of rising unemployment following an interest rate increase, and how is that data used in determining whether such an increase would be contrary to fulfilling the Federal Reserve’s dual mandate? A.1. The Federal Reserve uses a broad variety of models and other types of analysis to study the effect of interest rates (as well as broader financial conditions) on the unemployment rate, inflation, and economic output. Our models, as well as economic reasoning, suggest that the high inflation the economy is experiencing cur- rently is the result of aggregate demand exceeding aggregate sup- ply. These models and other types of analysis also suggest that 53 higher interest rates reduce growth in aggregate demand, which, in the current context, would help bring demand back into alignment with supply and bring down inflation. Soft growth in aggregate de- mand can also lead to increases in unemployment. While it is pos- sible to bring inflation down without a large increase in unemploy- ment, such an outcome will depend on a number of factors, includ- ing the absence of significant adverse shocks to inflation or eco- nomic activity. When inflation is high, as it is now, the economy does not work for anyone. High inflation imposes hardship on households and businesses, and it is especially painful to those least able to meet the higher costs of essentials like food, housing, and transportation. We saw in the latter parts of the last expansion that a sustained strong labor market together with price stability produced broad benefits to households, particularly those in low- and moderate-in- come communities. The economy can return to a period of sus- tained labor market strength, but this can only take place in an en- vironment of price stability. As a result, to fulfill our dual mandate of price stability and maximum employment, it is imperative that we bring inflation down to our 2 percent target. Q.2. Considering the recent failure of Silicon Valley Bank, as well as Signature Bank and Silvergate Bank, how could have more thor- ough oversight by the Federal Reserve, such as through the use of stress tests as required for larger banks, helped to avert the crisis? A.2. The Federal Reserve relies on a broad set of supervisory and regulatory tools to help assess the range of risks affecting large in- stitutions, including monitoring firm practices for mitigating inter- est rate and liquidity risks. Capital stress testing is one of the many supervisory tools used to monitor large banks, and we continuously look for ways to ex- pand the risk capture of the stress test. While the stress test that the Federal Reserve Board (Board) uses to set capital requirements for large banks places a significant emphasis on the types of credit- driven downturns that have occurred in severe post-war U.S. reces- sions, the Board has explored the effects of different interest rate environments in the supervisory stress test over the years. In re- cent years, the 2017 adverse scenario featured a steepening yield curve, as did the 2018 severely adverse scenario. The Board is also investigating the use of multiple scenarios to capture a wider range of risks and uncover channels for contagion. As noted in the Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank released on April 28, tailoring changes reduced the coverage and timeliness of Board stress tests for some firms. As with other findings from this report, we will be revisiting this approach as we seek to improve our supervisory and regulatory abilities. Q.3. How did the Economic Growth, Regulatory Relief and Con- sumer Protection Act of 2018 limit the Federal Reserve’s ability to conduct oversight of banks of a similar size to Silicon Valley Bank? A.3. The Economic Growth, Regulatory Relief, and Consumer Pro- tection Act of 2018 (EGRRCPA) amended section 165 of the Dodd- Frank Wall Street Reform and Consumer Protection Act by gen- erally raising the minimum asset threshold for application of pru- 54 dential standards under section 165 from $50 billion in total con- solidated assets to $250 billion in total consolidated assets. In addi- tion, under EGRRCPA, the Board must make certain findings be- fore applying any enhanced prudential standard to BHCs with total assets between $100 billion and $250 billion. Q.4. What sort of tools and regulations that could be provided via legislation would support the Federal Reserve in its efforts to more thoroughly oversee and monitor banks to prevent any future fail- ures such as those seen in recent months? A.4. The Federal Reserve is committed to maintaining and enhanc- ing its comprehensive regulatory framework for the banks it super- vises and has numerous supervisory and regulatory tools available to oversee and monitor banks. These tools are designed to enhance the resiliency of a bank and to reduce the impact on the financial system and the broader economy in the event of a firm’s failure or material weakness. Under existing law, we have the discretion and tools we need to improve supervision and regulation and are com- mitted to doing so. RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO FROM JEROME H. POWELL Q.1. In its latest baselines, the Congressional Budget Office projects that inflation will stay above the Federal Reserve’s 2 per- cent target over the next few years, peaking this year and settling just above the 2 percent target through 2027. Do you agree with these projections? Will the Federal Reserve commit to stronger action to bring inflation back to its target? A.1. The Congressional Budget Office’s inflation projection—that inflation will come down significantly and be near the Federal Open Market Committee’s (FOMC) 2 percent objective by 2025—is broadly in line with that of most private forecasters, and it is con- sistent with the FOMC’s Summary of Economic Projections. Of course, all economic forecasts are uncertain, and that is especially so given the unprecedented situation of the past few years. The Federal Reserve is strongly committed to returning inflation to our 2 percent goal and has taken forceful actions to tighten the stance of monetary policy. We continue to closely monitor incoming infor- mation in order to assess the implications for monetary policy. In determining the extent of additional policy firming that may be ap- propriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. Q.2. CBO projects this fiscal year’s deficit to total $1.4 trillion, al- most half-a-trillion larger than expected 2 years ago. Taxpayers are now double paying for partisan Government overspending—first when the dollars flew out the door and on the interest of that debt. This year’s annual deficit will become just our interest payments in a decade, more than doubling our $640 billion debt servicing payments, unless Congress acts to rein in spending and inflation. Mr. Powell, all other things being equal, would the Fed be better able to moderate interest rate increases if the Federal Government 55 reins in overspending? And would moderating reduce both the rate and principal of our long-term debt servicing cost? A.2. It is the responsibility of the Congress and the Administration to decide on appropriate fiscal policy. At the Federal Reserve, we are focused on using our monetary policy tools to restore price sta- bility and are strongly dedicated to this goal. Regarding debt sustainability, as I have said previously, the Fed- eral Government debt is on an unsustainable path insomuch as the CBO projects that Federal debt will be increasing, relative to the size of the economy, over the longer run. The details of how and when Federal debt sustainability should be achieved are for Con- gress and the Administration to decide, not the Federal Reserve. Q.3. I understand that the Real Time Payment (RTP) network, the private sector instant payment system that’s been in operation for years, can now reach about 65 percent of all U.S. deposit accounts. I also understand that the Treasury Department is not using RTP to get benefit payments to individuals quickly. This technology could have been particularly beneficial as the Government worked to distribute COVID relief payments at the height of the pandemic. Instead, I understand that Treasury is focusing its resources on en- abling the use of the Fed’s competing FedNow network, which is scheduled to go live later this year. On the day FedNow does finally launch, will it have the same reach as RTP and, if not, how long will it take to get there? A.3. The Federal Reserve’s overarching policy goal for the FedNow Service is to provide equal access to instant payments infrastruc- ture to a broad range of depository institutions across the country. We continue to work to ensure that a large percentage of deposit accounts have access to the service as soon as possible. As we have stated previously a particular objective is to ensure that the FedNow Service is available to small- and medium-sized banks and credit unions. To that end, we are working closely with a number of small- and medium-sized banks and credit unions in the FedNow pilot program to provide technical assistance as they onboard to the service and conduct testing. In addition, we are encouraging the service providers who provide access to Federal Reserve payment services for thousands of community institutions across the country to accelerate access to the FedNow Service for these institutions. In terms of timing, at the July launch of the FedNow Service a limited number of depository institutions—including large banks, community banks, and credit unions—will be ready to send and re- ceive customer payments. We expect this number to grow in the months following the launch as more institutions complete readi- ness activities and onboard to the service. We recognize that at- taining broad reach for the FedNow Service across the thousands of depository institutions in this country will be a gradual process. We are committed to maintaining our strong level of industry en- gagement in the coming years to support these institutions, and the service providers that enable their use of our services, in transitioning to a round-the-clock operating environment. Q.4. Do you agree that instant payments would be beneficial to both those receiving benefits as well as the Federal Government? If so, will you work with Treasury toward that end? 56 A.4. The FedNow Service is intended to be a flexible, neutral plat- form that supports a broad variety of instant payments and upon which the private sector can innovate. Use cases for instant pay- ments include situations where rapid access to funds is important for recipients, such as insurance or benefit payments after an acci- dent or natural disaster and expedited payroll for gig-economy workers. Instant payments are also beneficial for helping senders manage cash flows such as last-minute bill payments or small busi- ness payments for supplies upon delivery. Because instant pay- ments are flexible and use-case agnostic, we expect that over time, various Government agencies will find it beneficial to leverage in- stant payments for a variety of needs. The U.S. Department of the Treasury’s Bureau of the Fiscal Service is a participant in the FedNow pilot program and is ac- tively testing instant payment disbursements and collections. We look forward to continued collaboration with the Treasury Depart- ment as it prepares to join the launch of the service in July. RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS FROM JEROME H. POWELL Q.1. As I noted during the Banking Committee hearing on June 22, I remain concerned that the Fed and its Reserve Banks continue a pattern of stonewalling reasonable requests for information. The latest example concerns the fairness, transparency, and consistency of Fed decisions concerning highly valuable Fed master accounts. Kansas City Fed President Esther George recently refused, once again, to provide information to Senate Banking Committee Rank- ing Member Pat Toomey (R-PA) regarding the unusual case of Re- serve Trust’s Fed master account.1 But this is far from the only example. I am likewise aware that last year, several Reserve Banks—specifically, the Boston Fed, San Francisco Fed, Minneapolis Fed, and Atlanta Fed—repeatedly re- fused to provide any documents in response to Ranking Member Toomey’s inquiry about their embrace of politically charged social causes outside the Fed’s historical mission and statutory man- date.2 This pattern of obstruction raises concerns that Reserve Banks believe they can circumvent congressional oversight. As former Obama administration official and Brookings Institution scholar Aaron Klein recently remarked, ‘‘If the Kansas City Fed is not ac- countable to Congress for regulatory decisions, then to whom are they accountable?’’3 Do you think it is appropriate for Reserve Banks to refuse to comply with requests for information and documents from Con- gress? A.1. The Federal Reserve Board (Board) is committed to public transparency. The Board understands and respects the critical im- portance of congressional oversight of our activities. We work col- 1https://www.kansascityfed.org/AboutUs/documents/8854/06-16-22-Toomey-Letter-from-Es- ther-George.pdf 2 https://www.banking.senate.gov/newsroom/minority/toomey-blasts-regional-fed-banks-for- refusing-to-comply-with-congressional-request 3https://www.americanbanker.com/news/the-broad-implications-of-pat-toomeys-standoff- with-k-c-feds-president 57 laboratively and cooperatively with Members of Congress to pro- vide information on a broad range of issues, and we expect Reserve Banks to respond appropriately to congressional requests for infor- mation as well. In March, the Reserve Banks publicly announced a systemwide effort to develop a uniform information disclosure policy to further increase transparency and accountability. I sup- port their effort on this important initiative. Q.2. What steps will you take to ensure that Reserve Banks are re- sponsive to requests for information and documents from Congress? A.2. Please see my response to Question 1. Q.3. Specifically, what steps will you take to ensure that the Kan- sas City Fed complies with congressional requests for information concerning Reserve Trust’s master account? A.3. Please see my response to Question 1. Q.4. I am also concerned about a recent Securities and Exchange Commission proposal to dramatically reinterpret the definition of a ‘‘Government securities dealer,’’ in which the Commission would re- quire many large investors to register as broker-dealers. This may have significant unintended impacts on U.S. Treasury market par- ticipation, liquidity, and resiliency. Was the Federal Reserve Board consulted in the development of this proposal? A.4. The Federal Reserve remains committed to a safe and efficient market for Treasury securities. With regard to the proposed rule of the Securities and Exchange Commission (SEC), ‘‘Further Defini- tion of ‘As a Part of a Regular Business’ in the Definition of Dealer and Government Securities Dealer’’, Federal Reserve staff has had contact with staff of the SEC regarding its proposal. As the SEC considers the comments it received on the proposal, and assesses how to move forward, our staff is ready to provide technical assist- ance as requested. Q.5. Will you commit to consider the potential market impacts of this significant proposal and to engage with the other members of the interagency working group on Treasury markets to fully assess its costs and benefits? A.5. Federal Reserve staff actively participate in the Interagency Working Group on Treasury Market Surveillance (IAWG), includ- ing in work to better understand participation in the U.S. Treasury market and ways in which to improve its resilience. A safe and effi- cient market for Treasury securities is critical to the transmission of monetary policy, and to the broader health of the global financial system. RESPONSES TO WRITTEN QUESTIONS OF SENATOR KENNEDY FROM JEROME H. POWELL Q.1. The stated purpose of the Community Reinvestment Act stat- ute is to encourage banks ‘‘to help meet the credit needs of the local communities in which they are chartered consistent with the safe and sound operation of such institutions.’’ Yet, the proposal would create new Retail Lending Assessment Areas (RLAAs) where a bank makes 100 mortgages or 250 small business loans. These 58 RLAAs could span very large geographies—often thousands of square miles. What’s more, the RLAA triggers would be immaterial relative to the lending volume of some banks. How does this aspect of the proposal not exceed the agencies’ statutory mandate to focus on local communities? A.1. An important aspect of the interagency proposal is that it sought to adapt to the expanded role of mobile and online banking by updating the approach for where banks are evaluated for their CRA performance, consistent with the statutory requirement to as- sess an institution’s record of meeting the credit needs of its entire community. While maintaining a focus on bank branches, the pro- posal asked for feedback on evaluating large bank performance in areas where they have a concentration of mortgage or small busi- ness lending outside of where they have branches. The agencies included information in the proposal on the poten- tial effects of different retail lending thresholds on large banks. The agencies asked for feedback on a number of aspects of the re- tail lending assessment area proposal, including whether a bank should be evaluated for all of its major product lines in each retail lending assessment area and whether there are alternative meth- ods that the agencies should consider for evaluating outside lend- ing that would preserve a bank’s obligation to meet the needs of its local communities. The agencies are in the process of carefully considering the com- ments received on the proposal. Q.2. According to the agencies’ own analysis of historical data, 34 percent of ‘‘large’’ banks (banks over $2B in assets) would fail their Community Reinvestment Act exam in their new Retail Lending Assessment Areas under the proposed rule. Moreover, the pro- posal’s performance benchmarks are pegged to the CRA perform- ance of other banks operating in that assessment area, thereby making it mathematically impossible that all banks would perform at the satisfactory level on their CRA exams. How does this not raise safety and soundness concerns? Shouldn’t regulatory expectations be achievable for all banks? A.2. I agree that regulatory expectations should be clear, trans- parent, and achievable for banks. The CRA proposal sought to pro- vide greater clarity, consistency, and transparency regarding how a bank’s retail lending performance translates into CRA conclu- sions and ratings. To that end, the agencies proposed numerical thresholds intended to set performance expectations for the dif- ferent Retail Lending Test conclusions. The agencies sought feed- back on whether the proposed retail lending metrics and thresholds were appropriate and were set at the appropriate levels. The agencies are in the process of carefully considering the com- ments received on the proposal. Q.3. Community Reinvestment Act modernization is likely to in- volve significant complexity, lengthy regulations, and a relatively short implementation period. This spells difficulty in implementing the regulators’ expectations and is particularly difficult for smaller banks that lack resources internally and for external consultants. In the past, the agencies have been willing to make presentations about new rules, but I am concerned about the highly scripted na- 59 ture of recent agency efforts where staff read their presentations verbatim and do not allow bankers an opportunity to ask questions or where speakers decline to answer questions. This approach is not conducive to banks’ understanding of regulatory expectations, and regulators should be concerned about that. What preparations is the Federal Reserve making to provide high-quality implementation support to bankers? Do you plan to provide useful examples, case studies, and an opportunity to ask questions and get answers? Given the proposal’s very short imple- mentation period of one year, are you prepared to roll out this as- sistance contemporaneously with the new rule? A.3. The comments submitted in response to the proposal included perspectives on the appropriate implementation period for a CRA final rule, including some views recommending a longer implemen- tation period. The agencies are in the process of carefully consid- ering these comments. On the question of whether the agencies plan to answer ques- tions and provide other materials to support implementation of any final rule, we expect that there will be broad outreach to all stake- holders to explain the final rule. This outreach would begin upon release of any final rule. Q.4. When looking at the text of the Community Reinvestment Act, Congress was clear that banks should be evaluated on the basis of where they have branch offices. Certainly, banking has changed considerably since the original passage of the CRA, but do you think that banking regulators should be able to vastly expand the evaluation area of banks with- out the approval of Congress and in contravention of the law? A.4. The statute requires the agencies to assess an institution’s record of meeting the credit needs of its entire community. As noted previously, the agencies asked for feedback on whether large banks should be assessed outside of branch-based assessment areas in areas where they have a concentration of mortgage or small business lending. My colleagues and I are committed to carefully reviewing any concerns expressed by commenters and considering ways to address these issues in any final rule while staying true to the statutory authority granted by Congress. Q.5. Chairman Powell, the three banking regulators are still in the process of updating the Community Reinvestment Act. I think we all agree that the CRA is an incredibly important tool to serve LMI communities and that the rule needs to be updated. However, I be- lieve that it should be done in a way that is in line with the CRA statute and Congressional intent. I have heard concerns that the creation of retail lending assessment areas under the proposed rule may actually be counterproductive to the goals of CRA and result in changes to bank strategy so as to not trigger new regulatory re- quirements in areas where loan volumes are immaterial to a bank’s overall business. Are you concerned by this potential outcome should the proposed rule be finalized with very few changes? A.5. As noted previously, the agencies are carefully reviewing any concerns expressed by commenters, including on potential unin- 60 tended consequences of the retail lending assessment area pro- posal. Q.6. With the departure of Fed Vice Chair Brainard, do you have an update in the timing of the release of the Community Reinvest- ment Act final rule and how long banks would have to come into compliance with the rule? A.6. As previously noted, the Board and the other agencies are still in the process of carefully considering the comments received on the proposal. As to how long banks would have to come into compliance with the rule, the agencies continue to review the comments and discuss potential alternatives to the proposal. Q.7. Given the complexity of the proposal, it seems to me like banks should have plenty of time to establish the systems needed to be in compliance. Who within the Federal Reserve is taking over the responsibility of the CRA with the recent departure of Ms. Brainard? A.7. Vice Chair for Supervision Barr is leading the CRA rule- making effort for the Board. Q.8. The Fed recently launched a pilot project for Climate Scenario Analysis (CSA) ‘‘to learn about large banking organizations’ climate risk-management practices and challenges and to enhance the abil- ity of both large banking organizations and supervisors to identify, measure, monitor, and manage climate-related financial risks.’’ The scenarios are based on those developed by the Network for Green- ing the Financial System (NGFS), of which the Federal Reserve is a member. The NGFS scenarios are based on a goal to reduce emis- sions—the net zero goal. How will the Fed and the other bank regulators ensure that, whether through these exercises or via other supervisory efforts, they are not influencing banks’ decision to lend to specific cus- tomers and the pricing of these transactions? A.8. The Federal Reserve’s mandate with respect to climate change is important but narrow, focused on our supervisory responsibilities and our role in promoting a safe and stable financial system. The Federal Reserve does not dictate banking organizations’ business decisions to lend or not lend to specific firms or sectors on any par- ticular terms. Those business decisions should be made by the banking organizations themselves. The climate scenarios used in the Federal Reserve’s pilot climate scenario analysis exercise with six of the largest banking organiza- tions are neither forecasts nor policy prescriptions and do not nec- essarily represent the most likely future outcomes. Rather, they represent a range of plausible future outcomes that can help build understanding of how certain climate-related financial risks could manifest for large banking organizations and how these risks may differ from the past. The Federal Reserve anticipates publishing in- sights gained from this pilot exercise at an aggregate level, reflect- ing what has been learned about climate-related financial risk management practices. No firm-specific information will be re- leased in connection with this pilot exercise, and the pilot exercise will not have direct capital or supervisory implications. 61 Q.9. Once finalized, the internationally developed Principles for Climate-related Financial Risk for Large Banks may alter the pro- vision of financial services to certain industries and communities in the United States. The economic effects of this will be felt by all banks, which will need to adapt to the resulting market changes and ensure that financial services to vulnerable communities and customers are preserved. How is the Federal Reserve weighing these costs when consid- ering U.S. implementation? How is the Federal Reserve ensuring that international rulemakings are transparent and that develop- ment and implementation of international standards aligns with the Administrative Procedures Act? A.9. The Federal Reserve’s mandate with respect to climate change is important but narrow, focused on our supervisory responsibilities and our role in promoting a safe and stable financial system. In light of the cross-border and cross-sectoral nature of climate-related financial risks, the Federal Reserve has been engaging with a wide range of domestic and international stakeholders, including foreign supervisors and international bodies, to better understand the po- tential impacts of climate-related financial risks on supervised in- stitutions and financial stability. The Federal Reserve approaches these engagements through the lens of our existing mandates and authorities, particularly those relating to the regulation and super- vision of financial institutions and the stability of the broader fi- nancial system. We recognize the benefit of engaging with other regulatory agencies, central banks, and international bodies on these issues while taking into account the important differences across jurisdictions and our own domestic mandates. The Federal Reserve intends to work closely with the Office of the Comptroller of the Currency (OCC) and the Federal Deposit In- surance Corporation (FDIC) to issue final principles for climate-re- lated financial risk management for large banking organizations. In December 2022, the Federal Reserve requested comment on draft principles; similar draft principles were published for com- ment by the OCC and the FDIC in December 2021 and April 2022, respectively. The Federal Reserve’s intention is for the principles to be issued as supervisory guidance, and, consistent with the Federal Reserve’s rule on guidance, the principles would neither have the force and effect of law nor impose any new requirements on super- vised institutions. As such, the principles would not be subject to the notice-and-comment requirements of the Administrative Proce- dure Act. Nevertheless, the Federal Reserve proposed the draft principles for public comment and the Federal Reserve is consid- ering all comments received in developing any final principles. Q.10. As the Federal reserve looks at ‘‘transition risk’’ how will you ensure that political or other nonprudential agendas do not become entangled in your work? As an example, transition risks under one administration may look significantly different than they did under the next Administration. How does the Fed plan to account for changes in policy which can occur in a shorter timeframe than those that you may be con- sidering? Or is transition risk analysis necessarily limited to short- 62 er timeframes because of the potential for changes in policy direc- tion? A.10. The Federal Reserve’s mandate with respect to climate change is important but narrow, focused on our supervisory respon- sibilities and our role in promoting a safe and stable financial sys- tem. The Federal Reserve is working to understand how climate- related financial risks may pose risks to individual banking organi- zations and the financial system. Scenario analysis can be a helpful risk management tool for both firms and regulators to better un- derstand the resilience of supervised institutions to a range of plausible but uncertain climate outcomes. The Federal Reserve is currently conducting a pilot climate scenario analysis exercise with six of the largest banking organizations to evaluate the potential impact of climate-related financial risks on select portfolios across multiple scenarios. This pilot exercise is intended to deepen under- standing of risk management practices and to build capacity of large banking organizations and supervisors to identify, measure, monitor, and manage climate-related financial risks. The pilot exercise includes physical and transition risk scenarios. Transition risks refer to stresses to certain institutions, sectors, or regions arising from the shifts in policy, consumer and business sentiment, or technologies associated with the changes that would be part of a transition to a lower carbon economy. The transition risk scenarios used in the pilot climate scenario analysis reflect dif- ferent combinations of economic, technological, and policy assump- tions that generate projections for economic and financial variables like GDP growth and carbon prices, but they do not represent fore- casts or policy recommendations. Instead, these scenarios serve as useful reference points to consider how economic and financial vari- ables might evolve under different sets of plausible conditions. The scenarios used in this pilot climate scenario analysis exercise are neither forecasts nor policy prescriptions and do not necessarily represent the most likely future outcomes. Rather, they represent a range of plausible future outcomes that can help build under- standing of how certain climate-related financial risks could mani- fest for large banking organizations and how these risks may differ from the past. In the transition risk module of the pilot exercise, participating institutions will estimate relevant risk parameters over a 10-year projection horizon on an annual basis. While transition risks are anticipated to manifest over a longer time horizon than is typically considered for large banking organizations’ risk management and strategic planning, transition risks could manifest sooner than an- ticipated and in a disorderly manner. Longer time horizons incor- porate a greater degree of uncertainty given embedded assump- tions about consumer or investor behavior, the pace of technological change, and policy developments. The pilot exercise’s 10-year hori- zon is intended to balance the potential longer-term nature of tran- sition risks, projection uncertainty, and desire for the pilot exercise to result in decision-useful information. 63 RESPONSES TO WRITTEN QUESTIONS OF SENATOR HAGERTY FROM JEROME H. POWELL Q.1. The biannual Monetary Policy Report notes that the Federal Reserve’s net income turned negative in September 2022 and that losses have resulted in a ‘‘deferred asset’’ of about $36 billion to date and that the SOMA portfolio was experiencing a $1.1 trillion unrealized loss as of September. 12 U.S.C. §5497(a)(1) provides that the Consumer Financial Protection Bureau (CFPB) is funded by a ‘‘transfer . . . from the combined earnings of the Federal Re- serve System.’’ Please provide the legal justification for the continued transfer of funds from the Federal Reserve to the CFPB despite the fact that the Federal Reserve has negative net income, as well as any inter- nal opinions or briefings on this issue. A.1. Congress established the funding mechanism for the Con- sumer Financial Protection Bureau (CFPB) under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Under the Dodd-Frank Act the Federal Reserve Board is not granted any discretion to determine the CFPB’s funding level. Rather, the Director of the CFPB determines the funding needed to carry out its responsibilities, up to an annual cap. The Dodd- Frank Act sets the annual cap based on a percentage of the oper- ating expenses of the entire Federal Reserve System (System). The Act also states that the funding for the CFPB comes from the com- bined earnings of the System, rather than the net earnings. It is the purview of Congress to enact any changes to this frame- work. 64 ADDITIONALMATERIALSUPPLIEDFORTHERECORD 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 LETTER FROM ELECTRONIC PAYMENT COALITION 131 132 STATEMENT SUBMITTED BY ACCOUNTABLE.US 133 134 135 136

Jerome H. Powell (2023, March 1). Congressional Testimony. Testimony, Federal Reserve. https://whenthefedspeaks.com/doc/testimony_02230302_chair_the_semiannual_monetary_policy_report

@misc{wtfs_testimony_02230302_chair_the_semiannual_monetary_policy_report,
  author = {Jerome H. Powell},
  title = {Congressional Testimony},
  year = {2023},
  month = {Mar},
  howpublished = {Testimony, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/testimony_02230302_chair_the_semiannual_monetary_policy_report},
  note = {Retrieved via When the Fed Speaks corpus}
}