Congressional Testimony

S. HRG. 115–242 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CONGRESS HEARING BEFORETHE COMMITTEE ON BANKING, HOUSING, ANDURBANAFFAIRS UNITED STATES SENATE ONE HUNDRED FIFTEENTH CONGRESS SECOND SESSION ON EXAMINING THE FEDERAL RESERVE’S SEMIANNUAL REPORT TO CONGRESS ON MONETARY POLICY AND THE STATE OF THE ECONOMY MARCH 1, 2018 Printed for the use of the Committee on Banking, Housing, and Urban Affairs ( Available at: http://www.govinfo.gov/ U.S. GOVERNMENT PUBLISHING OFFICE 30–197 PDF WASHINGTON : 2019 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 S:\DOCS\30197.TXT SHERYL COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS MIKE CRAPO, Idaho, Chairman RICHARD C. SHELBY, Alabama SHERROD BROWN, Ohio BOB CORKER, Tennessee JACK REED, Rhode Island PATRICK J. TOOMEY, Pennsylvania ROBERT MENENDEZ, New Jersey DEAN HELLER, Nevada JON TESTER, Montana TIM SCOTT, South Carolina MARK R. WARNER, Virginia BEN SASSE, Nebraska ELIZABETH WARREN, Massachusetts TOM COTTON, Arkansas HEIDI HEITKAMP, North Dakota MIKE ROUNDS, South Dakota JOE DONNELLY, Indiana DAVID PERDUE, Georgia BRIAN SCHATZ, Hawaii THOM TILLIS, North Carolina CHRIS VAN HOLLEN, Maryland JOHN KENNEDY, Louisiana CATHERINE CORTEZ MASTO, Nevada JERRY MORAN, Kansas DOUG JONES, Alabama GREGG RICHARD, Staff Director MARK POWDEN, Democratic Staff Director ELAD ROISMAN, Chief Counsel JOE CARAPIET, Senior Counsel TRAVIS HILL, Senior Counsel ELISHA TUKU, Democratic Chief Counsel COREY FRAYER, Democratic Professional Staff Member AMANDA FISCHER, Democratic Professional Staff Member DAWN RATLIFF, Chief Clerk CAMERON RICKER, Deputy Clerk JAMES GUILIANO, Hearing Clerk SHELVIN SIMMONS, IT Director JIM CROWELL, Editor (II) VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00002 Fmt 0486 Sfmt 0486 S:\DOCS\30197.TXT SHERYL C O N T E N T S THURSDAY, MARCH 1, 2018 Page Opening statement of Chairman Crapo ................................................................. 1 Prepared statement .......................................................................................... 41 Opening statements, comments, or prepared statements of: Senator Brown .................................................................................................. 2 Prepared statement ................................................................................... 41 WITNESS Jerome H. Powell, Chairman, Board of Governors of the Federal Reserve System ................................................................................................................... 4 Prepared statement .......................................................................................... 42 Responses to written questions of: Senator Scott ............................................................................................. 45 Senator Sasse ............................................................................................ 47 Senator Schatz ........................................................................................... 49 Senator Cortez Masto ................................................................................ 51 ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD The February 2018 semiannual Monetary Policy Report ..................................... 66 American Banker article, ‘‘SIFI Hike Could Kick-Start Bank M&A,’’ sub- mitted by Senator Brown .................................................................................... 124 (III) VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 S:\DOCS\30197.TXT SHERYL VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 S:\DOCS\30197.TXT SHERYL THE SEMIANNUAL MONETARY POLICY REPORT TO THE CONGRESS THURSDAY, MARCH 1, 2018 U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. The Committee met at 10:01 a.m. in room SD–538, Dirksen Sen- ate Office Building, Hon. Mike Crapo, Chairman of the Committee, presiding. OPENING STATEMENT OF CHAIRMAN MIKE CRAPO Chairman CRAPO. The hearing will now come to order. Welcome, Chairman Powell, for your first appearance before this Committee as Chairman of the Federal Reserve Board of Gov- ernors. Congratulations on your confirmation. Today’s hearing is an important opportunity to examine the cur- rent state of monetary and regulatory policy. Over the past few years, the Humphrey-Hawkins hearing has often served as an opportunity for Members of this Committee to review the new regulations imposed in the wake of the financial crisis. While I did not always agree with former Chairman Bernanke and former Chair Yellen, I appreciated their willingness to engage with the Committee and to discuss possible improvements to the regulatory regime. These discussions were helpful in building common ground for our banking bill, Senate bill 2155, particularly for provisions like the threshold for enhanced standards under Section 165 of Dodd- Frank. This bipartisan bill now has 13 Republican and 13 Democratic and Independent co-sponsors. The bill was the result of a thought- ful, deliberative process over several years that included hearings, briefings, meetings, and written submissions from hundreds of commentators and stakeholders. The primary purpose of the bill is to make targeted changes to simplify and improve the regulatory regime for community banks, credit unions, mid-size banks, and regional banks to promote eco- nomic growth. Economic growth has been a key priority for this Committee and this Administration and for this Congress. The U.S. economy has failed to grow by more than 3 percent an- nually for more than a decade, by far the longest stretch since GDP has been officially calculated. But now there are widespread expec- tations that growth is finally picking up. (1) VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 2 According to the January FOMC meeting minutes, the Federal Reserve increased its expectations for real GDP growth going for- ward after fourth quarter growth exceeded expectations. The Fed cited the recently enacted tax reform legislation as among the reasons economic growth is expected to rise. In addition to tax reform, President Trump’s recently released Budget and Economic Report both emphasize that regulatory re- form is a key component of rising productivity, wages, and eco- nomic growth. By right-sizing regulation, the Committee’s economic growth bill will improve access to capital for consumers and small businesses that help drive our economy. Now that many are predicting a pickup in growth, a number of commentators have expressed sudden concerns about the economy overheating. While the Federal Reserve should remain vigilant in monitoring inflation risks, we must also continue to pursue common-sense, pro-growth policies that will lead to increased innovation, produc- tivity, and wages. With respect to monetary policy, I am encouraged that the Fed- eral Reserve is continuing on its gradual path to monetary policy normalization. The Fed has begun to reduce its balance sheet by steadily de- creasing the amount of principal it reinvests as assets as its port- folio matures. I look forward to hearing more about the Fed’s monetary policy outlook as part of Chairman Powell’s testimony today. I also look forward to hearing about the Federal Reserve’s ongo- ing efforts to review, improve, and tailor existing regulations. I know that you are working with Vice Chairman for Supervision Randy Quarles on all those issues, Mr. Chairman. Vice Chairman Quarles has done an excellent job so far, and I urge Congress to confirm him for his full term on the Board as soon as possible. With that, Senator Brown. STATEMENT OF SENATOR SHERROD BROWN Senator BROWN. Thank you, Mr. Chairman. And welcome to your first one of these, Mr. Chair. Nice to see you. Welcome back to the Committee. You are leading the Federal Re- serve at a crucial time in our Nation’s history as the Fed normal- izes interest rates and shrinks the balance sheet. The country is in its ninth year of economic recovery, though, as we know, 2017 marked the worst year for job creation since 2010. And the recovery has not reached everyone. Wage growth has been slow and labor force participation has barely improved since 2014. Nine years of job growth have still not done much to narrow in- come inequality or address employment disparities. Nationwide, the unemployment rate for African American work- ers is double that for whites workers—equal to the gap at the start of the civil rights movement. Looking more broadly, labor force par- ticipation is down for all minorities. Statistics show that large pockets of people are waiting to share in the benefits from the recovery. Instead of addressing their VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 3 problems, Republicans are working hard to make sure that Wall Street banks rake in even bigger profits. Despite the fact that we are 9 years removed from the recession, the Administration has embarked on a substantial fiscal stimulus, permanently slashing the corporate tax rate, and providing the largest benefits to the wealthiest Americans. Over time, 81 percent of the benefits of that tax cut goes to the wealthiest 1 percent. Of course, Wall Street, which is making record profits, will do well. Instead of fighting for workers and making sure labor market op- portunities are shared among those who have been struggling, Re- publicans push for tax cuts for corporations and the wealthy. Those tax cuts are not free. As you know, Mr. Chairman, they will add over $1 trillion dollars to the deficit. The once and future deficit hawks on the other side of the aisle were more like marsh- mallow Peeps when confronted with tax cuts for the wealthy. The ink was barely dry when we began to hear calls for spending cuts that will hurt families across the country. Eighty-one percent of the benefits going to the wealthiest 1 percent, then, alas, there is a budget deficit we have to address. Let us look at ‘‘entitlement reform’’ that everyone should understand means cuts to Medicare, Medicaid, and Social Security. It is the same playbook we have seen for years. The claim was that it would all be worth it because workers would benefit. I am happy for any Ohioan who gets a bonus or a raise, but we have seen how banks and corporations have responded to the tax cuts, and the numbers are staggering. In January, Wells Fargo— they have been in front of this Committee a number of times, and we have spent lots of time talking about their illegal behavior. Wells Fargo in January announced a $22 billion stock buyback— 288 times what it will spend on pay raises for workers. A lot of dis- cussion, a lot of news coverage on the benefits to workers on the bonuses or the pay raises, but 288 times that number went to stock buybacks for executives. Companies this year will start disclosing CEO-to-worker pay ra- tios, as required under the Wall Street Reform Act. Honeywell an- nounced an $8 billion stock buyback in December and just disclosed that its CEO is getting a 61-percent pay raise and makes 333 times the average worker’s pay. It is pretty simple: For each pay raise or bonus for workers, com- panies are spending 100, 150, 200 times as much on stock buybacks and executive compensation. And it gets worse. While the biggest banks lavish pay raises and stock giveaways on their executives, they continue to violate the law and abuse their customers. The Federal Reserve recently imposed an unprece- dented—if belated—penalty on Wells Fargo following several scan- dals, including the opening of millions of fake accounts and improp- erly charging borrowers—even after that scandal was disclosed, charging borrowers for auto insurance they did not need. The Fed told Wells Fargo it cannot grow until it has dem- onstrated that it has improved board oversight and risk manage- ment. It sounds like the Fed has come to the conclusion many of VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 4 us on this Committee reached a year and half ago: Wells Fargo, simply put, is ‘‘too big to manage.’’ I will be closely watching to make sure the new team at the Fed does not lift these penalties, as the Consumer Bureau did, without the bank making real changes. It is not just Wells Fargo. Last week, Citigroup announced it ille- gally overcharged 2 million credit card accounts for over 5 years; it will refund $335 million to consumers. Though Wall Street cannot seem to go a month without a new scandal, the Senate is set to take up a bill that would roll back crit- ical financial stability protections and limit watchdogs’ ability to police the largest banks. We can expect the banks to spend any savings from less over- sight the way they spent their tax cuts: more dividends, share buybacks, and mergers. Many of us in this body are concerned about this deregulation bill that I mentioned a moment ago, especially when it comes to foreign banks, those banks that are huge, but their assets in this country are under $250 billion. They are both troubled and trou- bling banks in their international operations, yet Secretary Mnuchin sat at that table and said he plans to deregulate some of these banks, like Deutsche Bank and Santander. And we know the fines that they have paid and the problems that they have caused internationally. Chair Powell, Wall Street may be focused on whether there are three or four rate hikes this year. I think your focus needs to be on ensuring the Fed does not once again permit the buildup of risk in the market and hubris at the Fed. The Great Moderation turned out to be not so great. We forget that lesson at our peril. The Fed needs to take the side of consumers, making sure the financial system stays strong and regulations are enforced. I look forward to your testimony. Chairman CRAPO. Thank you very much. Chairman Powell, once again we appreciate you being here. We look forward to your opening statement, and you may proceed. STATEMENT OF JEROME H. POWELL, CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Mr. POWELL. Thank you very much, Chairman Crapo, Ranking Member Brown, Members of the Committee. I am pleased to present the Federal Reserve’s semiannual Monetary Policy Report to Congress today. On the occasion of my first appearance before this Committee as Chairman of the Federal Reserve, I want to express my apprecia- tion for my predecessor, Janet Yellen, and her important contribu- tions. During her term as Chair, the economy continued to strengthen, and Federal Reserve policymakers began to normalize both the level of interest rates and the size of the balance sheet. Together, Chair Yellen and I have worked to ensure a smooth lead- ership transition and provide for continuity in monetary policy. I also want to express my appreciation for my colleagues on the Federal Open Market Committee. And, finally, I want to affirm my continued support for the objectives assigned to us by the Congress—maximum employment and price stability—and for VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 5 transparency about the Federal Reserve’s policies and programs. Transparency is the foundation of our accountability, and I am committed to clearly explaining what we are doing and why we are doing it. Today I will briefly discuss the current economic situation and outlook before turning to monetary policy. The U.S. economy grew at a solid pace over the second half of 2017 and into this year. Monthly job gains averaged 179,000 from July through December, and payrolls rose an additional 200,000 in January. This pace of job growth was sufficient to push the unem- ployment rate down to 4.1 percent, about three-quarters of a per- centage point lower than a year earlier and the lowest level since December of 2000. In addition, the labor force participation rate re- mained roughly unchanged, on net, as it has for the past several years, and that is a sign of job market strength, given that retiring baby boomers are putting downward pressure on the participation rate. Strong job gains in recent years have led to widespread reduc- tions in unemployment across the income spectrum and for all major demographic groups. For example, the unemployment rate for adults without a high school education has fallen from about 15 percent in 2009 to 51⁄ 2 percent in January of this year, while the jobless rate for those with a college degree has moved down from 5 percent to 2 percent over the same period. In addition, unemploy- ment rates for African Americans and Hispanics are now at or below rates seen before the recession, although they are still sig- nificantly above the rate for whites. Wages have continued to grow moderately, with a modest acceleration in some measures, although the extent of the pickup likely has been held back in part by the weak pace of productivity growth in recent years. Turning from the labor market to production, inflation-adjusted GDP rose at an annual rate of 2.8 percent in the second half of 2017, nearly a full percentage point faster than its pace in the first half of the year. Economic growth in the second half was led by solid gains in consumer spending, supported by rising household incomes and wealth and upbeat sentiment. In addition, growth in business investment stepped up sharply last year, which should support higher productivity growth in time. The housing market has continued to improve slowly. Economic activity abroad has also been solid in recent quarters, and the associated strengthening in the demand for U.S. exports has provided considerable support to our manufacturing industry. Against this backdrop of solid growth and a strong labor market, inflation has been low and stable. In fact, inflation has continued to run below the 2 percent rate that the FOMC judges to be most consistent over the longer run with our congressional mandate. Overall consumer prices, as measured by the price index for per- sonal consumption expenditures, or ‘‘PCE,’’ as we call it, increased 1.7 percent in the 12 months ending in December, about the same as 2016. The core PCE price index, which excludes the prices of en- ergy and food items and is a better indicator of future inflation, rose 1.5 percent over the same period, somewhat less than in the previous year. And we continue to view that some of the shortfall in inflation last year was likely reflecting transitory influences that we do not expect will repeat. And consistent with this view, the VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 6 monthly readings were a little bit higher at the end of the year than in earlier months. After easing substantially in 2017, financial conditions in the United States have reversed a bit of that easing, and at this point we do not see these developments as weighing heavily on the out- look for economic activity, the labor markets, and inflation. Indeed, the economic outlook remains strong. The robust job market should continue to support growth in household incomes and consumer spending, solid economic growth among our trading partners should lead to further gains in U.S. exports, and upbeat business sentiment and strong sales will likely continue to boost business in- vestment. Moreover, fiscal policy has become more stimulative. In this environment, we anticipate that inflation on a 12-month basis will move up this year and stabilize around the FOMC’s 2 percent objective over the medium term. Wages should increase at a faster pace as well. The Committee views the near-term risks to the eco- nomic outlook as roughly balanced but will continue to monitor in- flation developments closely. I will turn now to monetary policy. The Congress has assigned us the goals of promoting maximum employment and stable prices. Over the second half of 2017, the FOMC continued to gradually re- duce monetary policy accommodation. Specifically, we raised the target range for the Federal funds rate by a quarter percentage point at our December meeting, bringing that target rate to a range of 11⁄ 4 percent to 11⁄ 2 percent. In addition, in October we ini- tiated a balance sheet normalization program to gradually reduce our securities holdings. That program has been proceeding smooth- ly. These interest rate and balance sheet actions reflect the Committee’s view that gradually reducing monetary policy accom- modation will sustain a strong labor market while fostering a re- turn of inflation to 2 percent. In gauging the appropriate path for monetary policy over the next few years, the FOMC will continue to try to strike a balance between avoiding an overheated economy and bringing PCE price inflation to 2 percent on a sustained basis. While many factors shape the economic outlook, some of the headwinds the U.S. econ- omy faced in previous years have turned into tailwinds. In par- ticular, fiscal policy has become more stimulative and foreign de- mand for U.S. exports is on a firmer trajectory. Despite the recent volatility, financial conditions remain accommodative. At the same time, inflation remains below our 2 percent longer-run objective. In the FOMC’s view, further gradual increases in the Federal funds rate will best promote attainment of both of our objectives. As al- ways, the path of monetary policy will depend on the economic out- look as informed by incoming data. In evaluating the stance of monetary policy, the FOMC routinely consults monetary policy rules that connect prescriptions for the policy rate with variables associated with our mandated objectives. Personally, I find these prescriptions helpful. Careful judgments are required about the measurement of the variables used, as well as about the implications of the many issues these rules do not take into account. And I would note that this Monetary Policy Re- port provides further discussion of monetary policy rules and their VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 7 role in our policy process, extending the analysis we introduced in July. Thank you again. I look forward to our discussion. Chairman CRAPO. Thank you, Mr. Chairman. I am going to focus my questions on Senate bill 2155, which I referenced in my introductory remarks, but first, Mr. Chairman, you are familiar with that legislation, correct? Mr. POWELL. Yes, I am. Chairman CRAPO. In past hearings former Chair Yellen, former Federal Reserve Governor Tarullo, and former Comptroller of the Currency, among others, have all expressed support for changing the $50 billion threshold for enhanced prudential standards. Build- ing on that feedback, Senate bill 2155 raises the threshold from $50 billion to $250 billion and requires the Fed to tailor regulations to a bank’s business model and risk profile. I would like to ask you some questions about this bill if it does become law, and there are five or six of them, so I would like to have you respond as briefly as you can, but fully answer the ques- tions. Is it accurate that the Federal Reserve would still be required to conduct a supervisory stress test for any bank with total assets be- tween $100 billion and $250 billion to ensure that it has enough capital to weather economic downturns? Mr. POWELL. Yes, it is. Chairman CRAPO. And is it accurate that the Federal Reserve would still have sufficient authority to apply prudential standard to a bank with between $100 billion and $250 billion in total assets if the Fed determined that was appropriate? Mr. POWELL. Yes, that is true. Chairman CRAPO. Is it accurate that this provision does not weaken oversight of the largest globally systemic banks? Mr. POWELL. That is correct. Chairman CRAPO. Is it accurate that the Federal Reserve applies enhanced standards to international banks based on their global total consolidated assets, meaning this provision would not exempt banks such as Deutsche Bank and Santander from Section 165 of Dodd-Frank? Mr. POWELL. That is correct. Chairman CRAPO. Is it accurate that this provision does not in any way restrict the Fed’s supervisory, regulatory, and enforcement authorities to ensure the safety and soundness of financial institu- tions? Mr. POWELL. Yes. Chairman CRAPO. And, finally, is it accurate that nothing in this provision would restrict the Fed’s ability to ensure that large finan- cial institutions are well capitalized? Mr. POWELL. Yes. Chairman CRAPO. Thank you. And to go on a little bit, as you know, the Dodd-Frank Act included a provision known as the Volcker rule, which placed restrictions on banks that trade for their own profit, otherwise known as ‘‘proprietary trading,’’ and on cer- tain relationships with certain private funds. As you also know, fi- nancial companies have incurred significant costs attempting to comply with the rule. Do you support addressing this confusion by VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 8 exempting community banks with less than $10 billion in total as- sets and who are engaged in a small amount of trading activity? Mr. POWELL. I think that is a sensible thing to do, yes. Chairman CRAPO. All right. Thank you. And some have ex- pressed concerns that this exemption would allow a community bank to purchase a hedge fund. Is it accurate that the Federal Re- serve could use its existing authority to address any safety and soundness concerns arising from such an action? Mr. POWELL. We would still apply all of our safety and soundness supervisory activities to that bank, and we would be looking for things like that and find them. Chairman CRAPO. All right. Thank you. Finally—and I am shift- ing gears away from the legislation right now—I also mentioned in my opening statement that Randy Quarles has been confirmed as Vice Chairman for Supervision of the Federal Reserve but has not been confirmed for his full term as a Governor yet. I believe it is very critical that we do that confirmation and confirm Governor Quarles for his full term. Do you agree? And if you do, why is it critical for the Senate to confirm Vice Chairman Quarles as soon as possible? Mr. POWELL. Thank you for raising this, Mr. Chairman. I abso- lutely agree. It is very important that Vice Chair Quarles get his full term. At this point he is working on an expired underlying Governor term, but he has a 4-year Chair term, and I think to have him fully installed, it is very important that he have this under- lying Governor term. Chairman CRAPO. All right. Thank you. I appreciate your empha- sis on that, and hopefully that will help to encourage the full Sen- ate to move more expeditiously on that nomination. Senator Brown. Senator BROWN. Thank you. I appreciate my friend and colleague Chairman Crapo’s skillful, narrow, and leading questions about his legislation. I think it is important to point out that the question particularly about foreign banks, Deutsche Bank and Santander and those banks that have been both troubled and troubling, will be mostly deregulated under this bill because they are under 250. That is not really my question. I want to get to questions. But I also want to point out, in spite of this Chair of the Federal Re- serve’s general satisfaction with this bill, there have been serious, serious, serious questions raised against it, raised about it by former Fed Chair Volcker, by former Fed Governor and Deputy Treasury Secretary Sarah Bloom Raskin, but Bush appointee former FDIC Chair Sheila Bair, by former Counselor to the Treas- ury Secretary Antonio Weiss, and by the former Deputy Governor of the Bank of England Paul Tucker. And I think it is important to note that it is not all candy and roses here. Let me talk about a couple other things. The unemployment rate has been steady at 4 percent, 4.1 percent; wage growth, as you know, Mr. Chair, has been slow to improve. At your confirmation hearing in November, you mentioned that labor force participation for prime-age workers was also lagging. I would like to see im- provement across the board, as I know you would. Two questions related to that. Do you think it is possible to achieve further improvement in wages and employment among VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 9 workers that have been left behind without causing higher infla- tion? And will you commit to looking at all the data and consid- ering the workers who have struggled the most so as to avoid raising rates preemptively and cutting off the chances for broader economic gains? Mr. POWELL. Thank you, Senator. As you mentioned, there are a couple places where it looks like there may be additional slack in the labor force, and the biggest of those is that participation by prime-age workers is a full percentage point below where it was be- fore the crisis. We do not see any strong evidence yet of a decisive move up in wages. We see wages by a couple of measures trending up a little bit, but most of them continuing to grow at about 21⁄ 2 percent. So nothing in that suggests to me that wage inflation is at a point of acceleration, and so I would expect that some contin- ued strengthening in the labor market can take place without caus- ing inflation. We will, of course, be monitoring that, and I think the risks are much more two-sided than they were 2 or 3 years ago when there was a great deal of slack in the labor market. Senator BROWN. I appreciate, as I told you in person, your inter- est and commitment to both mandates of inflation and employ- ment. One Fed nominee that is still in abeyance, may or may not have the votes on the floor, does not take that position. Your posi- tion there is crucial, as Chair Yellen understood, as Chairman Bernanke understood. Second question: Morgan Stanley and other Wall Street analysts have said that only 13 percent of the reduced taxes under the tax bill being paid by companies will go to workers’ pay; 18 percent will go to mergers. If that ratio holds up for banks—18 percent will go to mergers, 13 percent for worker pay. If that ratio holds up for banks, whether it is the tax bill or the Chairman’s bill he talked about, shouldn’t we expect even more bank consolidation? Mr. POWELL. First, I would say we do not really know yet how that will shake out, but taking your hypothetical, would it add to more consolidation among the banks? You know, bank consolida- tion has been going on for 30-plus years. It has got a lot to do with smaller banks and economic activity moving out of the rural areas into the city and interstate banking and things like that. I am not sure this would tend to change the trend. Senator BROWN. I appreciate what you just said because I cer- tainly heard the deregulators in this body, those that suffer this collective amnesia about what happened a decade ago, always blaming bank consolidation on Dodd-Frank when, as you point out, it has been going on for years. Mr. Chairman, here is an American Banker article from Novem- ber that discusses your bill. The title is ‘‘SIFI hike could kick-start bank M&A,’’ and I ask to enter that in the record. Chairman CRAPO. Without objection. Senator BROWN. Thank you. Senator BROWN. Last question. Most of the Wall Street—the big Wall Street bank offenders have—most of the Wall Street banks have been repeat offenders since the crisis. The Fed and other reg- ulators have fined them. You were part of this, $243 billion in com- bined penalties, money laundering, market manipulation, deceiving customers, you name it. The Chairman’s bank deregulation bill VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 10 would mandate that the Fed further tailor rules for the largest banks. Meanwhile, Vice Chair Quarles is talking about the Fed’s plans to make living wills less frequent, to reduce leverage rules to weaken the Volcker rule. Why should big banks that have consistently failed to follow the rules benefit from statutory or regulatory rollbacks? Mr. POWELL. I would just say that our focus is very much on the smaller and medium-size banks. We want the post-crisis regulatory initiatives like higher capital, higher liquidity, stress testing, reso- lution, we want those to apply in their strongest form to the largest institutions. We want to make sure we are doing that efficiently. And there are some changes we can make in that regard, but most of what we are doing really applies to banks—— Senator BROWN. Well, I hear you, but I sat with Senator Crapo and a number of others that are in this room on the Finance Com- mittee, and I heard Republican after Republican say the tax cut was all about the middle class, yet 81 percent of the benefits went to the wealthiest 1 percent. I heard you and I hear the push for this S. 2155 being all about the community banks, but we know much of it is driven by what happens for the larger banks, the weaker stress tests, the periodic stress tests, what we are doing, instead of annual, what we are doing for the foreign banks. So I hear your talk about your interest primarily is the smaller banks, but I guess the question still stands. Why should anything in this bill—why should we do anything for the largest banks? As this bill does, why should we do anything for banks that have consistently failed to follow the rules? Why should they benefit from statutory and regulatory rules rollback? Mr. POWELL. As I see the parts of the bill that I am familiar with, they really apply to banks 250 and under. And when you say ‘‘largest banks,’’ I think you are talking about either the eight SIFIs—by the way, one of which is below $250 billion in assets, so we are very capable of reaching below 250 to apply enhanced pru- dential standards when it is appropriate. But it is really those in- stitutions that I would call the large and complex institutions, and the focus there, again, is on sustaining the four pillars that I men- tioned of post-crisis regulation and maybe looking at making them more efficient. They do not need to be—they should not be more burdensome than they need to be, but—— Senator BROWN. I agree with that. Mr. POWELL.——we are looking to strengthen and hold onto those. Senator BROWN. Well, I hope in your conversations with the Chair of Supervision, Mr. Quarles, that you will insist that this is about the banks under 250 and insist on that, that it is not about the banks over 250, as some on this podium have suggested. Thank you. Chairman CRAPO. Thank you. Senator Shelby. And I do remind our colleagues that we need to stick to the 5-minute rule. Senator SHELBY. That is prospective, isn’t it, Mr. Chairman? [Laughter.] Senator SHELBY. Chairman Powell, you referred to price stability just a few minutes ago as one of the mandates for the Fed in your VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 11 job. Let us talk a little about price stability and unemployment being real low. Prices, you mentioned earlier that inflation is, I as- sume, under control, whatever that is. You have got your eyes and you have got your hands on it, so to speak. But a lot of people be- lieve that you will continue to raise interest rates at incremental levels in the future. Is that because of your concern about the spec- ter of inflation, that being full employment, so to speak, you know, mostly, pressure on wages? Or where is it coming from, in other words? Or is it all of it? Mr. POWELL. Senator, where we are now is we have got unem- ployment, as you know, at 4.1 percent, which is sort of at or near or even below most estimates of the natural rate of unemployment. But we have inflation that is still a little bit below, so by con- tinuing to gradually raise interest rates over time, we are trying to balance those two things and, you know, achieve inflation mov- ing up to target, but also make sure that the economy does not overheat. Now, there is not a lot of evidence that—there is no evidence that the economy is currently overheating, but that is really the path that we have been on, and my expectation is that that will continue to be the appropriate path as long as the economy per- forms this way. Senator SHELBY. Well, I think that is a substantive path, too. I agree with you. Do you believe that there is going to be a push for higher wages? You know, you see a little of it now. The economy is good. People seem to be doing well. The tax cuts come in, which is probably going to help. We see that it is going to help at least confidence and everything in the economy. What do you see there? Mr. POWELL. It is interesting. Unemployment has declined from 10 percent at the worst part of the crisis—and, actually, well after the crisis—down to 4.1 percent now, and wages have only really gradually started to track up. The increases are now up at about 21⁄ 2 percent if you blend the various measures we look at, and we look at a bunch of them. And I will be honest. I would have thought that you would see more wage increases by this point, and I do expect that we will see more wage increases. We have got an economy with strong momentum. We have got strong job creation as a result of it. We have got low unemployment. And I do think you will begin to see wages coming up, but we have been feeling that way, and that is kind of what we are waiting to see. I hope we see it soon, expect to see it. Senator SHELBY. How important to the economy and to the mon- etary policy is price stability? Mr. POWELL. Price stability is one of our two mandates, at the very heart of what we do. Senator SHELBY. It is key, isn’t it? One of the keys. Mr. POWELL. Absolutely at the very heart of what we do. Senator SHELBY. OK. I would like to switch over to your other job, and that is, dealing with regulatory issues. Cost-benefit anal- ysis unit, it is my understanding that the Fed has announced recently its intention to create what they call a ‘‘Policy Effective- ness and Assessment Unit’’ to conduct cost-benefit analysis on reg- ulations. If that is so, I applaud that effort. A lot of us on this VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 12 Committee have pushed that for years, believing that there should be an analysis, a real cost-benefit analysis to every regulation. What is the status of this group’s development, Mr. Chairman? And what do you hope will come out of this? Mr. POWELL. As you know, Senator, we always try to implement regulations in the way that is least burdensome and also faithful to the intent of Congress. In this particular case, we are trying to raise our game here by having a specific group of, you know, quan- titatively oriented people who are focusing just on that. We have lately published cost-benefit analysis on specific regulations like the SIFI surcharge, the long-term debt, and things like that. So, you know, we are trying to raise our game here. By the way, whenever we go out for comment on a reg, we also ask for the public’s view on costs and benefits. So it is really impor- tant to us, and as I said, as you pointed out, we are trying to raise our game. Senator SHELBY. A lot of it, though, is letting the public know what all of this is about and what the costs will be to them as well as to the economy, is it not? Mr. POWELL. It is, and that is our obligation, is to be transparent about those things. Senator SHELBY. Thank you. Thank you, Mr. Chairman. Chairman CRAPO. Thank you. Senator Tester. Senator TESTER. Yes, thank you, Mr. Chairman and Ranking Member Brown. I appreciate you having this hearing. And wel- come, Governor Powell. It is great to have you here. There has been a perception being floated by some that the larg- est foreign banking organizations, such as Barclays, UBS—Deut- sche Bank has been talked about today already—will be released from enhanced prudential standards under the economic package brought forward called S. 2155. I fundamentally disagree with that. I think those views are a myth, and certainly not the text that is in S. 2155. But I am a dirt farmer, OK? I just kind of read things as they are and do not read a lot of extra stuff into it. You are the man on the Fed, and so I need to know your opinion. Does S. 2155 require the Federal Reserve to weaken any of the Dodd-Frank en- hanced prudential standards for the FBO such as Deutsche Bank, UBS, or Barclays? Mr. POWELL. It does not, according to my reading of the text. Senator TESTER. Can you elaborate, briefly if possible, on how those standards are applied to the largest FBOs? Mr. POWELL. Well, currently what the bill does is it moves up to 250 for these institutions, but it looks at their global consolidated capital. We now have intermediate holding company requirements for these companies, and none of those would be affected by this. And what that means is that they are required to keep capital and liquidity here in the United States that is commensurate with their activities. They are also subject to living wills and things like that. So, it is a range of enhanced prudential standards. The inter- mediate holding company thing is an extra one that we gave them. Senator TESTER. OK. Thank you. VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 13 I am also frustrated that some are jumping to conclusions about how or what might happen regarding international holding com- pany requirements. So just to clarify, from your perspective, the creation of the IHS was not included in Dodd-Frank, correct? Mr. POWELL. That is right. That was something that we added on independent of Dodd-Frank. Senator TESTER. And the legislative language in S. 2155, the bill that we have been talking about this morning a lot, does not re- quire any change to the IHC, correct? Mr. POWELL. It does not. Senator TESTER. OK. Thank you for clearing that up. Now, I asked you this question during your confirmation right around the time that S. 2155 was released, and it has been nearly 3 month, and that bill has made its way through this Committee and has overwhelming bipartisan support and hopefully will see the floor next week. What I asked you at that juncture was: Do you believe S. 2155 puts our financial system at risk? At that moment in time you said no. So now you have had a little more time to get your feet on the ground. Do you continue to believe that? Mr. POWELL. I do. Senator TESTER. OK. Last—go ahead, go ahead. Mr. POWELL. I can elaborate if you want. Senator TESTER. Sure. Have at it. Mr. POWELL. OK. The essence, probably the most significant piece of it is that you raise the threshold for enhanced prudential standards to 250, but you give us the ability to look below 250. We will publish a framework that addresses—and we will put it out for comment—that addresses how we will think about that. We have not been shy about reaching below 250. One of the eight SIFIs, in fact, is below $250 billion in assets. So I think it gives us the tools that we need to continue to protect financial stability. Senator TESTER. Thank you. Last, I think it is important that folks remember that the Federal Reserve and Chairman Powell have a number of tools in their toolbox when it comes to regulating our financial institutions well beyond that we even created in Dodd-Frank. I think it is important to remember that things like advanced approaches, CCAR, and Basel were not created by Dodd- Frank, and if I am not mistaken, advanced approaches and CCAR were put in place during a Republican administration. So I guess my question for you, Chairman Powell, is this: Can you remind folks what your safety and soundness authority means to the Federal Reserve and what authority it gives to you? Mr. POWELL. Except in places where Congress has addressed particular areas, we have broad safety and soundness authority to do capital requirements of various kinds, liquidity requirements and things like that, and look after the safety and soundness of all depository institutions. Senator TESTER. Thank you. I just want to close by saying that I do not for a second think that Dodd-Frank was the only reason we are seeing consolidation in banking. I think technology plays a big role in that, and population shifting plays a big role in that. On this Committee I can deal with Dodd-Frank. Thank you, Mr. Chairman. Chairman CRAPO. Thank you. VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 14 Senator Corker. Senator CORKER. Thank you. Welcome, Mr. Chairman. It is good to have you here, and congratulations on your confirmation. You have talked about the accommodative fiscal policy that is in place right now, and just out of curiosity—I know people predict you all are going to raise rates four times this year. You are defi- nitely going to raise rates some. How much of the tax bill that was put in place, how much of that is affecting your desire or your like- lihood of raising rates over this year? Mr. POWELL. I would not single it out, Senator. I would say—— Senator CORKER. No, no. I am not trying to single it out. But just out of curiosity, it is, in fact, something that is going to be stimula- tive, so how much of a factor is it in looking at raising rates? Mr. POWELL. Fiscal policy is one of many, many factors. As you know, we are looking at stable prices and maximum employment. That is what we are looking at. And everything that happens in the economy and financial conditions and fiscal policy affects that. We cannot really isolate one thing, you know, like fiscal policy. But I think, you know, I would expect that fiscal policy this year is going to add meaningfully to demand, and that is going to put up- ward pressure on inflation and downward pressure on unemploy- ment. It is hard to quantify, but it would not be the main factor. The economy is strong, and it is even stronger now. Senator CORKER. So then as it relates to growth, you said it was going to increase demand. How much of a factor is it in your growth projections, the passage of the tax legislation? Mr. POWELL. As I mentioned, I think it will add meaningfully to growth for at least the next couple of years. The real question is: How much will it add to—and the amount of that is subject to very different estimates by different approaches, but I guess the bigger question is: How much will it add to longer-run growth? There are a couple channels through which that might happen. Higher in- vestment should lead to higher productivity, which would raise po- tential growth. Lower tax rates on individuals should increase labor supply. These are highly, highly uncertain, but we hope the effects are meaningful there as well. Senator CORKER. You know, we have been through a decade now, I guess, since the crisis, and many of us were here during that time. It was a pretty heady time trying to resolve those issues. And yet we went through periods of time when we were worried about deflation. Obviously, we had really accommodative monetary policy during that time. And here we are again at 4.1 percent unemploy- ment, down from 10, as you mentioned, the economy is strong, and yet still, let us face it, 2 percent inflation—I know you all are com- bating anything getting out of control. Elaborate on the factors that in this day and age—in this economy in this world situation, what is it that is keeping inflation at such a low rate? Mr. POWELL. It is a global phenomenon, and we do not perfectly understand it, but I would say since the crisis, a big factor that has been weighing down inflation has been just the weakness in the economy. You have had a lot of slack, and the economy has not been tight, and so it makes sense that that would press downward on inflation. We also had, you know, the strong dollar and lower oil prices in 2014 and 2015. That pushed down. So more lately, we VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 15 would have expected inflation to come up by a few more tenths than it has, and we see identifiable idiosyncratic factors. There are other stories, though. There is the Amazon effect story. There is global slack, the idea that slack around the world is affecting, you know, the tightness of the U.S. labor market. It is really hard to tie those down from an empirical standpoint, but that may be hav- ing some sort of an effect on inflation as well. It is a global phe- nomenon, though, so it is not just tied to domestic factors. Senator CORKER. I know that my friends on the other side tend to focus a lot on the tax bill, and there is hope that growth is going to overcome any kind of deficits there. It may or may not occur. But we are, in fact, getting ready to spend $2 trillion more that we do not have by passing the bill we just passed. We have got an om- nibus coming up. Over the next 10 years, it is a minimum of $2 trillion in additional spending, almost twice what the President re- quested, and we have $21 trillion in debt today. How much does the deficit picture for our country come into play relative to the Federal Reserve? And how concerning is it to you that we continue just to party like there is no time ending here in Congress? Mr. POWELL. We are not on a sustainable fiscal path. We need to get on one. This is a good time to be doing that when the econ- omy is strong. But that is a longer-run problem. It is not really— it is not a problem for today’s monetary policy or economy. It be- comes a problem gradually over time as we spend more and more of our expenditures on serving—on interest rate, on debt service, and we have less and less to do the things that we really need to do and as we pass along bills to future generations. But the unsustainability of our fiscal path is not something that has too much of an effect in the near term on our policies. Senator CORKER. Thank you. Mr. Chairman, thank you. Chairman CRAPO. Senator Menendez. Senator MENENDEZ. Thank you, Mr. Chairman. Welcome, Chair- man Powell. Good to see you. I want to follow up on some questions that my colleagues Sen- ators Brown and Shelby asked you about. Inflation is continuing to run below the Fed’s 2 percent target, which has prompted a major- ity of the regional Federal Reserve Bank Presidents to urge a study of the current inflation framework. And while we have seen signifi- cant economic gains since the worst days of the recession, most hardworking families are still waiting to see their paychecks rise. Real median wages increased by only 14 percent from 1979 to 2017, and any recent acceleration in wages is accruing to high-paid executives and managers with production and nonsupervisory workers simply not seeing those gains. The Fed is projecting a minimum of three interest rate increases in 2018, and after your testimony on Tuesday, the markets are now anticipating as many as four hikes. Do you agree that the achievement of full employment should be associated with strong and broad-based wage growth for average workers, not just increases for executives and managerial pay? Mr. POWELL. I do, Senator. VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 16 Senator MENENDEZ. And if so, doesn’t that argue for consider- ation of a monetary policy path that would allow wages to continue to grow prior to the Fed’s pumping the brakes? Mr. POWELL. I agree that it does, and I believe that is, in fact, the path we are on. These are gradual rate increases, and we do expect wages to move up. Senator MENENDEZ. What would the cost to the economy of over- shooting inflation in the 2 to 3 percent range versus the cost to the economy of choking off growth if the Fed continues to tighten with- out a clear indication that inflation is going to exceed its target be? Mr. POWELL. The risk, one of the risk we are trying to avoid, I think as I mentioned earlier, the risks are more balanced than they used to be. For many years, it was clear there was a lot of slack in the economy, and, you know, I for one supported accommodative policy. At this point we have 4.1 percent unemployment, and the thing we do not want to avoid—that we do not want to have hap- pen is to get behind the curve, have inflation move up, and have to raise rates too quickly, cause a recession. And recessions, they hit the most vulnerable groups, you know, the hardest, and so that is where unemployment goes up the fastest and that kind of thing. So to prolong the recovery, the Committee’s view is that we should continue on this gradual path of rate increases which balances lower inflation and low wages against the need to make sure that we do not run too far past the natural rate of unemployment. Senator MENENDEZ. Well, I hope you will continue to look at wage growth as part of your calibrations. Let me ask you this: During the confirmation hearing—and I was pleased to vote for you—I asked you about the economic risks of adding an additional $1.5 trillion to the deficit, and I just heard your responses to my colleague from Tennessee that we are not on a sustainable path, we need to get one. Obviously, we were not on a sustainable path before we added $1.5 trillion to the debt in the tax cuts that were generated. And you then said in response, and I quote, ‘‘I think we need to be concerned with fiscal sustainability over the long term.’’ And in the same hearing, you agreed with Senator Van Hollen when he asked you—you said adding $1.5 tril- lion to the deficit would make a bad situation worse. Now, your predecessor previously testified before this Committee when she said, ‘‘I am personally concerned about the U.S. debt sit- uation. Taking what is already a significant problem and making it worse is a concern to me.’’ Do you agree with former Chairman Yellen that there is reason to be concerned about mounting deficits and growing national debt? Mr. POWELL. I do, and I will follow what my predecessors have done and not get too much into the details of fiscal policy, but I will say a couple things. One is that, as I mentioned, we need to get on a sustainable fis- cal path in the longer run. We know that we are not in the longer run. The second thing is when we do fiscal policy, when you do fiscal policy, I think it is important to keep in mind measures that would increase the productive capacity of the United States of the econ- omy, things that would increase productivity, that foster invest- ment in people, in education and training, in R&D, and in plant VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 17 and equipment as well. Those kinds of policies can help the whole economy grow faster on a sustainable basis. Senator MENENDEZ. I agree with you. I would suggest that stock buybacks do not quite do that. Let me ask you a last question. In January, the New York Fed- eral Reserve Bank president said that tax legislation is likely to generate frictional costs that will mitigate its effects on growth, namely disparate impacts regionally. In particular, president Dud- ley was pointing out the gutting of the State and local income and property tax deduction, which would raise the cost of ownership and adversely affect prices and construction activity in States like New Jersey. Do you agree with president Dudley’s analysis that States like New Jersey will see regional economic disparities as a result of the tax bill? Mr. POWELL. Senator, I hope you will allow me to say that I would rather not get into the particular details of any particular fiscal bill as Chairman, and I think that is—I am happy to talk about things at a high level, but getting into commenting on par- ticular sections in a fiscal bill which is not our responsibility for me is probably not a good idea. Senator MENENDEZ. Your president of the New York Reserve made that observation, so I would hope that we would look at the consequences to regional growth as part of your overall growth path. The region that I am from generates nearly 20 to 25 percent of GDP for the entire Nation. If we are going to have policies that ultimately affect the ability to be that engine for part of economic growth of the country, we should be considering that as well. Thank you, Mr. Chairman. Chairman CRAPO. Senator Cotton. Senator COTTON. Thank you, Mr. Chairman. And, Mr. Powell, welcome in your first appearance as Chairman, first of many. I am sure you have them all circled on your calendar and look forward to them with eagerness, as a child does to Christmas, right? Mr. POWELL. Indeed. Senator COTTON. I want to talk about the labor market, in par- ticular wage growth for America’s workers. An article in the Har- vard Business Review last October discussed wage trends since the 1970s and found that wage gains have mostly accrued to top earn- ers while wages have declined or been stagnant for the bottom half of the income distribution. The bottom half of the income distribu- tion is comprised of many Americans who do not have a 4-year de- gree, many who do not even have a high school diploma. Research from the Economic Policy Institute shows that American workers without a high school education have seen their wages decline by 17 percent since 1979 adjusted for inflation, and for workers with a high school education but no college, wages have declined by 2 percent. The chart to my left displays this, shows what I am talking about. You can see the massive wage growth for those with a col- lege degree or an advanced degree and wage declines in real terms for those with a high school degree or less. One of my top priorities is to ensure that hardworking Arkansans can share in the VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 18 economic prosperity that we see in our country in ways that they have not over the course of my lifetime. Mr. Chairman, you write—or I should say the entire Board writes on page 2 and 3 of the Monetary Policy Report, ‘‘Although there is no way to know with precision, the labor market appears to be near or a little beyond full employment at present.’’ What is your personal assessment of this matter? Is the economy at full em- ployment today? Mr. POWELL. As we say in our statement of longer-run goals and policy strategy, we look at a number of—there is no place you can directly observe. We look at a range of indicators, and I would say most of those indicators say that we are either at or beyond full employment. There are a couple that suggest maybe we are not. I would point to wages and I would point to labor force participation by prime-age males. This is a long answer. It is hard to give a real- ly clear answer, but we do not actually know precisely where full employment is. Put it all in the blender, it seems to me we are very close to full employment. I would add that is not the case in every region. Senator COTTON. To pick up on your point about labor force par- ticipation, while our unemployment rate is a bit of good news at 4.1 percent and jobless claims seem to be continuing to trend down- ward, it is somewhat surprising, given those economic conditions, that over the last year labor force participation continued to decline from 62.9 percent in January of 2017 to 62.7 percent in January of 2018. Even if you account for demographic change, for the aging of the baby-boom generation, many estimates say that 2 million workers are still missing from our economy. I also would note that job growth continues to outpace population growth, which suggests that there is still slack in the labor market. And a lot of the slack appears to be in part on the lower end of the economic scale of those workers who have a high school degree or less than that. Would you agree with that assessment? Mr. POWELL. Generally, yes. Labor force participation has been essentially flat since the back half of 2013, so a little more than 4 years, and the downward trend might be 25 basis points a year. So I look at us as having made up probably the slack that emerged—probably fully made up the slack that emerged as part of the crisis. Senator COTTON. And the wage growth we have seen over the last year, while good, I would suggest is still not good enough, espe- cially as long as we have those missing workers. So I would hate to see—putting aside all the other reasons why you might see rate increases in the coming months ahead, rate increases because of continued increases in wages, especially for working-class Ameri- cans. And the labor market, like any other market, is a market that is driven by supply and demand, correct? Mr. POWELL. Yes. Senator COTTON. So if the supply of labor exceeds the demand of labor, then you would see downward pressure on wages. That is one reason why I and some other Senators, like Senator Perdue, have been so focused on our immigration system. You know, if you could magically convert a million high school graduates in this VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 19 country to a million Stanford graduates that could go to work in our high-tech industry, then presumably that would be good for the wages of working-class Americans. Well, that is essentially what we do every single year in reverse as we bring in a million un- skilled and low-skilled workers that are competing against the very people who have not shared in prosperity and, for that matter, competing against the previous generation of immigrants. I do not think that is good for American citizens. I do not think that is good for our economy, and I will continue to work hard to make sure that those workers share in the prosperity that all Americans in the upper-income brackets, college educated and more, have shared in the past. Thank you. Chairman CRAPO. Senator Schatz. Senator SCHATZ. Thank you. Chairman, thank you for being here, and thank you for being willing to serve. I want to talk about student loan debt. There is currently $1.4 trillion in outstanding student loan debt, the highest category of consumer debt behind mortgages. It is also the most delinquent, with 11 percent of borrowers seriously delinquent or in default. The Fed estimates that this number is likely closer to 22 percent once you take into account the number of borrowers who are in forbear- ance. In contrast, at the height of the financial crisis, mortgage delin- quency was just under 5 percent, and currently that rate is around 1 percent. According to the Federal Reserve’s data, high levels of student debt have contributed to lower rates of home ownership and new business starts. So, in your view, does the high level of student debt create a drag on the economy? Mr. POWELL. On student loan debt, I think it is important that people be able to borrow to make what may be the most important investment of their lives, which is in their education. So, overall, I think borrowing to invest in yourself is something we should fos- ter, subject to a couple of important caveats. First, it is very important that people understand the nature of the borrowing and the risk that they are taking and the possible payoffs and that sort of thing so that they make informed deci- sions. The second thing is I think alone among all kinds of debt, we do not allow student loan debt to be discharged in bankruptcy. Senator SCHATZ. Right. Mr. POWELL. I would be at a loss to explain why that should be the case. So it is something—and this is fiscal policy. This is some- thing for you, not something for the Fed. But we do see and Fed research shows and other research shows you do start to see longer-term negative effects on people who cannot pay off their stu- dent loans. It hurts their credit rating. It impacts the entire path of their economic life. Senator SCHATZ. So that is the public policy argument for us to do something about student loan debt and the way we structure higher education financing. My question for you is: Do you see this as a macroeconomic risk? VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 20 Mr. POWELL. It will over time. It is not something you can pick up in the data right now, but as this goes on and as student loan continues to grow and becomes larger and larger, then it absolutely could hold back growth. Senator SCHATZ. OK. Thank you. And I want to thank you for your willingness to have an open mind on the question of the eco- nomic impacts of climate change. I appreciated your answers in the questions for the record, and so I am glad you are willing to talk about it. Your position is that the Fed is only concerned with, and I will quote, ‘‘short- and medium-term developments that may change materially over quarters in a relatively small number of years rather than decades associated with the pace of climate change.’’ Now, there are experts within the Government that would strongly disagree that the problem of climate change is measured in decades. They would say we are seeing the economic impacts now. NOAA reported 16 separate billion-dollar climate events in 2017. Combined, these events cost the United States economy $300 billion, 1.5 percent of GDP. Two-thousand seventeen was a record- breaking year, but according to NOAA’s science, it will get worse. The number and cost of these events has more than doubled over the last decade, and it has increased eightfold in the last 30 years. So I understand that your aperture is short- and medium-term. That is sort of a premise of how you operate. What I am not accept- ing as a premise of how you operate is the assumption that climate change belongs in the long-term category because I think you are— you are analysts. You believe in data. And what I would like for you to do is challenge that assumption that climate only belongs in the long-term category, because the Federal Government sci- entists are starting to indicate that that is not the case. So the question is: Are you willing to relook at that basic as- sumption that climate is just outside of your window, to sit down with our office and with Federal Government researchers to at least examine the question of whether or not as you do your plan- ning, it continues to belong in this long-term category which is out- side of your aperture? Mr. POWELL. Senator, as we discussed in your office, I guess last fall, you know, climate change is something that is entrusted to other agencies. We have particular responsibilities and particular tools: interest rate supervision, looking out for the financial system. It is just not clear that it is really in our ambit as opposed to in the ambit of other parts of the Government. But we are obviously always going to be willing to discuss it with you, but I do not know exactly how it would fit into what we do with our tools. Senator SCHATZ. I guess the question—I mean, I understand what you are saying, but I am trying to figure out why a 1.5 per- cent hit to GDP last year and the agency that knows about such things is telling us to expect more and more of it, why that wouldn’t be in your ambit? That is the first time I have ever used that word. [Laughter.] Mr. POWELL. Well, our ambit involves, you know, moving interest rates up and down and supervising financial institutions, so I do not know—I am not sure how it would enter into that. VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 21 Senator SCHATZ. OK. I look forward to continuing the discussion. Thank you. Mr. POWELL. As do I. Thanks. Chairman CRAPO. Senator Perdue. Senator PERDUE. Thank you, Mr. Chairman. I am Googling ‘‘ambit’’ over here in the meantime. Sorry. [Laughter.] Senator PERDUE. Chairman, thank you for being here again. I have a question. You mentioned in your opening comments that foreign demand for U.S. exports is up, and I happen to believe that if we are going to be north of 3 percent GDP growth, we have got to grow our exports. And I think you have made those comments publicly as well. But the low interest rate environment over the last decade has shown a proliferation of new lending, really a binge of new debt issuance in the Third World, or developing world, let me say that. And just this year—and a lot of that is short term, so this year alone, there is some almost $2 trillion of that developing world debt coming due this year, and about 15 percent of that is denominated in U.S. dollars. Do you see that as we normalize rates here in the United States, with the U.S. dynamics that we are talking about between inflation and unemployment, that the impact that that could have on the de- veloping world could in effect have some systemic risk on not only the global economy but on our own recovery? Mr. POWELL. Senator, what we can do is we can be transparent, we can be predictable, and the markets can, therefore, understand what we are doing and be ready for it. And I think if we do that, we use our tools to achieve stable prices and maximum employ- ment here in the United States, and financial stability, and so what we try to do for the world financial markets is be really clear about what we are doing, predictable, transparent. As I look at the state of the emerging market countries and their financial markets and financial regulation, they are in a much bet- ter place than they were 10, 15 years ago, even 5 years ago. There is not as much dollar-denominated debt, foreign currency-denomi- nated debt. They have better institutions—not everywhere, but it is a much better picture than it was 20 years ago, let us say. Senator PERDUE. So following up on that, you talked earlier about reducing the size of your balance sheet, and that has been an ongoing effort even before you took office, as I understand it. So the question is: The four big central bank—China, Japan, United States, and the European Union—all have similar sized balance sheets, somewhere between $4 and $5 trillion. As you normalize or as you begin to consider taking our balance sheet down to a more normal level, what actions do you monitor of these other central banks? Or is it totally independent when you make those decisions? Mr. POWELL. Well, we monitor all financial conditions and eco- nomic conditions in what we do. The normalization plan that we adopted through the summer and then put into place in the fall has been accepted very well by the markets. There is no obvious reaction at all. It is a gradual decline. We have said we are not in- terested in deviating from that unless, you know, unusual cir- cumstances arise. And I think that should be the path, and I think VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 22 we get to a more normal balance sheet size within about 4 years, give or take a year, let us say. The other large central banks that are talking about normalizing their balance sheets, they are behind that schedule. Our economy recovered sooner. We are raising rates sooner. So, you know, there is going to be some—it is not going to be a synchronized thing. It is going to be something that is happening more seriatim. But we will be watching that very carefully. We are very mindful of the issue that you raise. Senator PERDUE. Good. Thank you. One last question. It is a technical question, but it has to do with the leverage capital ratio that requires banks to hold capital against all assets, regardless of the risk of those individual assets, an operation that has created kind of a risk-blind rule. And I understand the overall rationale be- hind creating this risk-blind rule. But the question I have is ulti- mately I have a hard time understanding why assets like Treasury securities and funds on deposit in the Federal Reserve are also in that calculation. Can you defend that and answer the question if you are reviewing that practice? Mr. POWELL. Sure. My view is that the binding capital require- ment should be the risk-based capital requirement, and that would take into account Treasurys and reserves and how risky they are. The issue is that over time banks have figured out ways to game risk-based capital, so we want a hard backstop, and that hard backstop should be high and hard. It should be the leverage ratio. We do not want the leverage ratio to be the binding constraint most of the time because that, frankly, encourages people to take more risk. If you are bound by the leverage ratio, it is really saying you could probably use some riskier assets. So we like leverage— particularly risk-based capital has been vastly improved since the crisis. So that is how we think about it. Senator PERDUE. So how would you view right now, in the few seconds we have got left, just very quickly, what is your view of the general health of the entire banking industry in the United States, the capital formation arm of our economic effort in a free enterprise system? What is your assessment of the health of that industry today? Mr. POWELL. I think our banking system is quite healthy. I think we have high capital, high liquidity. We have banks that are much more aware of and capable of managing the risks that they face. They are much more ready to face failure if they do because they have living wills, and I think we are seeing profitability. We are seeing returns on capital. And I think it is a good time in our sys- tem. Senator PERDUE. Thank you, sir. Thank you, Mr. Chairman. Senator BROWN. [Presiding.] Senator Cortez Masto. Senator CORTEZ MASTO. Thank you, Ranking Member and Chair for this Committee. And welcome, Chairman Powell. It is good to see you again. I want to follow up on the conversation that you had with one of my colleagues, Senator Shelby, on the Policy Effectiveness and Asset Unit that you have created. Can you speak to how many VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 23 people will work in the unit and how the importance of data will inform the decisions you make? Mr. POWELL. I think it is five or six people now. I do not know how big it will be, but it is going to be something in that range, maybe a little bigger. But the idea is that we will have, you know, a strong quantitative approach that is tightly focused on cost-ben- efit analysis. I would stress we already do cost-benefit analysis in everything we do, but we hear outside that there is interest in doing more of that, and we are actively pursuing it. Senator CORTEZ MASTO. And the reason why you are doing this is so that it can inform your enforcement and policy decisions, cor- rect? Mr. POWELL. Well, yes. And the calibration of our regulations, you know, we want to be able to implement regulations in the least burdensome way we can, consistent with, you know, safety and soundness. Senator CORTEZ MASTO. And the data is key for your ability to do so, correct? Mr. POWELL. Very much so. Senator CORTEZ MASTO. And so I am glad to hear you speak about the importance of data collection. I always support that, and that is critical to the work of the Federal Reserve. As I am sure you are aware, the legislation that we have been talking about that is pending in the Senate, it would exempt 85 percent of depository institutions from full reporting of loan data under the Home Mort- gage Disclosure Act. Can you speak to how this might impact the ability of the Federal Reserve to properly conduct its obligations under the Community Reinvestment Act and whether the loss of this data might hinder CRA supervisory exams? Mr. POWELL. I will be glad to. As I understand it, the CFPB writes the HMDA rules and regulations, and we use that data in what we do, in supervising the banks we supervise, which is a smaller group. In addition to that, we—sorry. I lost my train of thought. What Dodd-Frank did was that it took the base of historical data collection and it significantly increased that. So my understanding is that what is being looked at in a bill is to create a broader ex- emption just from the Dodd-Frank additions. And so, you know, I think we traditionally get almost everything we need from the his- torical data, and I think we can continue to work on that basis. Senator CORTEZ MASTO. Right, and that is my concern. The more data, the better. I mean, you are creating a data unit because data is key to your decisionmaking, and my understanding is that the data that is used in the CRA supervisory exams seems to exclude relevant data points. Loans under $1 million are designated small business loans, even if they were not loans administered to small businesses. There is no analysis made whatsoever of whether lend- ing is occurring in communities of color, despite easing accessible data via the Home Mortgage Disclosure Act. And so my question is: Has the Fed considered broadening that criteria in its CRA supervisory exams? And what factors do you think would be helpful in determining whether small businesses, communities of color, and low-income areas are truly receiving the support that the law intended? VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 24 Mr. POWELL. Are we still talking about HMDA data? Senator CORTEZ MASTO. Correct. Mr. POWELL. Again, HMDA data is really an issue for the CFPB. They were given authority under Dodd-Frank to write the HMDA regulations, and we generally defer to them in terms of what their view is on that. Senator CORTEZ MASTO. So you do not think that data is going to be informative in what you do with the Community Reinvest- ment Act and the oversight of that to ensure that that Act is being enforced under the law to protect communities of color, to make sure there is no discrimination, to make sure that the loans are being sent to small businesses, and ensure that the money gets where it needs to go? That data is not going to be helpful for you? Mr. POWELL. I do not say that it would not be helpful. What I would say is that, first of all, that is an issue that the CFPB actu- ally has the lead authority on. In addition, we will still have—my understanding is that we will still have under this bill the informa- tion that we have traditionally relied upon for just about every- thing we do under HMDA. So we may not have the additional data from some institutions, but we think we will be able to function. Senator CORTEZ MASTO. Well, let me just tell you—and my time is running out, so I do not have enough time to ask the additional questions that I want to ask you. But let me just say this: As a former Attorney General in the State of Nevada, my concern was discrimination against certain communities of color, and the reason why we increased that data criteria is to ensure there was no dis- crimination and ensure that the money was going to where it was supposed to be going under the Act and Federal authorities. And so I do not understand why we are rolling back that data and those data criteria if we need—you have said it yourself—to be better in- formed. You are creating a data unit for analytical purposes to cre- ate and collect data. It informs us in everything we do. And so my concern is just that. How can we say we do not want the data when we know it informs every decision that we are making, particularly to ensure the money is going where it is going and there is no dis- crimination? Mr. POWELL. We have been talking about data. Let me take a step back and say that any kind of discrimination by race or gender or any other unfair basis in lending is completely unacceptable, and we are committed as an institution to finding it and using all of our tools to stop it. Senator CORTEZ MASTO. Thank you. I know my time has run out. Thank you very much. Senator BROWN. Senator Kennedy. Senator KENNEDY. Thank you, Mr. Chairman. Good morning, Mr. Chairman. Mr. POWELL. Good morning. Senator KENNEDY. Do stock buybacks contribute to economic growth? Mr. POWELL. Well, if I can trace that out, when you buy back your stock, the money goes to the shareholder. They lose their stock. They could take that money, and they do with it what they will. They can spend it. They can reinvest it. It does not disappear. So there should be some effect. I have asked this question. It is VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 25 essentially impossible to really track that on a micro basis, but I would think intuitively it would go back into the economy and ei- ther be spent or reinvested. Senator KENNEDY. Well, if a company buys back its stock and the value of the stock goes up, then somebody has extra money, right? Mr. POWELL. That is right. There would be a wealth effect as well, as you point out. Senator KENNEDY. And they could invest that money? Mr. POWELL. They could. They could spend it, invest it, and you are right, there would be a wealth effect from higher stock prices, too. Senator KENNEDY. And the stock going up is better than the stock going down in terms of economic growth. Mr. POWELL. It is, although I am a little hesitant to—you know, I would want to say that it is not our job, as you know, to stop peo- ple from losing money or making money in the stock market. Senator KENNEDY. Right. In the last 60 days, the bond market has been going down a little bit. What is that telling you? Mr. POWELL. Well, I think longer-term interest rates have been going up, and, you know, there are probably many reasons behind that, and I would just offer a couple in my thinking. It is the expec- tation of higher growth. It is probably the expectation of inflation moving up a little bit closer to our target. It is probably also a real- ization that growth around the world is quite strong. So we have strong recovery in continental Europe and in Asia, and so, you know, we are not the only game in town now. If money goes to other kinds of safe assets, that will tend to mean higher rates here. But these are all generally positive signs. Senator KENNEDY. Could it be a sign of inflation? Mr. POWELL. It could be a sign of slightly higher inflation, and we seek slightly higher inflation. Inflation has been below our tar- get since I joined the Fed almost 6 years ago. Senator KENNEDY. You talked about us being at or near full em- ployment. We are not at or near the optimum labor participation rate, though, are we? Mr. POWELL. The truth is we are not far from the longer-run trend. We have models that—papers published 8 or 10 years ago, and they pretty much tell you that the labor force participation rate will be right about here. That is not really the answer to your question. Labor force participation by prime-age males, for exam- ple, has been declining for 60 years. And there may be some good reasons for that, but there are a significant number of reasons that are not good reasons for that. So we as a country—— Senator KENNEDY. What are good reasons for that? Mr. POWELL. So we may be on our longer-run trend, but the trend is not a great trend. You know, there are many prime-age males, and women, out of the labor force whose lives would be bet- ter if they were in the labor force. And, you know, these are not— we do not have the tools to really address that, but it would be—— Senator KENNEDY. In 2008, the labor force participation rate was a tad over 66 percent. Today it is a tad over 62 percent. That is not good for the economy, right? Mr. POWELL. It would be great to have labor force participation at a higher level, as most advanced economy countries do. Our VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 26 labor force participation rate is now, you know, not even at the me- dian of comparably wealthy countries. Senator KENNEDY. Right. And why is that? Mr. POWELL. It really is this trend of prime-age workers leaving the labor force. A lot of that burden has been borne, as Senator Cotton was pointing out, by people with high school educations and below, the less skilled and lower-wage jobs. And it has been going on a long, long time. It is, as I said, a 60-year decline. Senator KENNEDY. But why, in your opinion? Mr. POWELL. I think it probably has to do with, you know, the evolution of technology. It certainly has to do with the flattening out in the U.S. educational attainment. U.S. educational attain- ment went up for many, many years, and then it started flattening out in the 1970s. And right about that time, U.S. wages flattened out, and labor force participation starts to get weak. So we kind of reached a point as a country where we could not increase edu- cational attainment, and really many things started happening right about then, the stagnation of median incomes, for example. Senator KENNEDY. If we could jack the rate up to pre-2008 levels, that would be an enormous stimulus to the economy, would it not? Mr. POWELL. It would. And, of course, there is an underlying trend, too, of the aging of the population. So even though older peo- ple work more than they used to after the crisis, older people still work less than younger people. So as the population ages, that is going—that is why labor force participation goes down 25 basis points each year. Senator KENNEDY. Thank you, Mr. Chairman. Thank you, sir. Chairman CRAPO. [Presiding.] Senator Warren. Senator WARREN. Thank you, Mr. Chairman. And it is good to see you again, Chairman Powell. As you know, a few weeks ago, on Chair Yellen’s last day in charge, the Fed issued a consent order against Wells Fargo prohib- iting the bank from growing any larger until it made certain im- provements. Now, the Fed also effectively forced Wells to remove an additional four board members this year. I have pushed the Fed for real accountability on Wells Fargo and its board for repeatedly cheating its customers, and I was glad to see the Fed take action. But I want to understand how the Fed intends to enforce the con- sent order now that you are in charge. The Fed requires Wells to submit two plans for approval by early April: one on improving the effectiveness of the board and one on improving the board’s risk management practices. This is not clear from the order. Will the Fed Board of Governors vote on whether to accept these plans? Mr. POWELL. So we have delegated that approval, I believe, to the head of Supervision, but, of course, that will—— Senator WARREN. Your staff? Mr. POWELL. But that will take place—I assure you that will take place in serious consultation with the Board. Senator WARREN. Consultation, but the Board is not going to vote on this? Mr. POWELL. That is not the plan. Senator WARREN. Well, you know, I do not understand this. The Fed has issued a major unprecedented consent order against one VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 27 of the biggest banks in the world, and the Fed Board, the people who are actually appointed by the President and confirmed by the Senate, are not going to vote on whether the order is actually being followed? Mr. POWELL. Well, of course, we did vote unanimously on the measures themselves. Senator WARREN. No. Whether or not the order is actually being followed, because that is the big question here. In my view, staff is not good enough, Chairman Powell. Fed Board members are sup- posed to make the big decisions, and Fed Board members are sup- posed to be accountable for these decisions. Will you consider re- quiring a vote of the Fed Board before these plans are approved? Mr. POWELL. Yes. Senator WARREN. Good. Thank you. I appreciate it. The next steps it that an independent third party must review Wells’ implementation of these plans by the end of September. Will you commit to making that independent review public, redacting any confidential supervisory information that is necessary? I think the public deserves a chance to understand how Wells is working to fix the mistakes that it has committed. Mr. POWELL. I cannot make that commitment to you without dis- cussing it with my colleagues and with staff who are implementing this thing. Senator WARREN. Will you—— Mr. POWELL. I will look into it, yes. Senator WARREN. Will you look into it? Will you urge your col- leagues to consider making this public? Mr. POWELL. If it can be made public—— Senator WARREN. I am fine about redacting confidential super- visory information. But my view here is that the American public, given all that Wells has done, the American public has a right to see it, and all of those Wells customers who were cheated have a right to see whether or not Wells is actually following through on its promises. You can see why some people might lack a little con- fidence in that? Mr. POWELL. Right, so we will—I will look at that, and if there is a way to do it that is faithful to our obligations and our prac- tices, then—— Senator WARREN. Thank you. Good. And, last, the consent order says that the growth restriction remains in effect until Wells Fargo ‘‘adopts and implements’’ the plans that were approved by the Fed. So I want to be really clear on this. To lift the growth restriction, the Fed needs to see that the plans have been fully implemented, right? It is not enough that Wells has taken some preliminary steps toward implementing the plans. Is that right? Mr. POWELL. No. I do not think that is right. I think the thought was that once we have approved the plans and they begin to imple- ment them, we see them on track, the growth restriction could then be addressed. No guarantee there, but we would then be prepared to look at it. Senator WARREN. You know, I am actually—then tell me, how much progress along that line is enough to remove the growth re- striction? VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 28 Mr. POWELL. Well, I think, again, we will have to be happy with the plan itself. We will have to be assured that the company has made these really significant measures and suffered, you know, a significant period of growth cap. And, you know, we will not lightly lift it, but I think that is our understanding of how we are going to do it. Senator WARREN. You know, the growth restriction is your really big stick here, and I hope that you will not consider lifting it just because Wells makes some marginal progress. Wells should fix its problems before it is permitted to grow any bigger. The consent order sent a powerful message to big banks that there could be real consequences, including consequences for senior officials if they break the law. But that message will be lost if the Fed does not enforce the order strictly and show the public and the banking in- dustry that they mean business. Thank you. Thank you, Mr. Chairman. Chairman CRAPO. Senator Tillis. Senator TILLIS. Thank you, Mr. Chairman. Chairman Powell, welcome. Thank you, and our congratulations on your confirmation. Can you just explain—because I was watching a lot of the hear- ing in my office before I came up here, and you talked about global slack a couple of times. Can you explain to me what that really means? Mr. POWELL. The thought is that it has become over the last 30, 40 years during our adult lifetime possible to make just about any- thing just about anywhere. Technology has enabled that, and rising living standards and capabilities in emerging market countries has created that opportunity. And the thought is that that capacity out- side the United States is in a sense a form of slack so that if you are, for example, a worker bargaining for higher wages, you are held back by this overhang of knowing that, you know, you can lose your job in that kind of thing. The issue is that, you know, globalization, most measures of globalization sort of plateaued out at about the time of the crisis, and yet it does not—that story makes a lot of intuitive sense, but it does not actually link up very well with the path of wages over the past few years. So it is something we have looked at, and it gets written about a lot. Senator TILLIS. Actually, I think that is a very important point because there is a lot of latent productivity that could be globally deployed that, as we talk about wages and we want to do a good job of moving wages in the right direction, they reach a certain point to where we could plateau again because that capability to deliver could go outside of our jurisdiction. I think that is a very important point. On productivity, a couple of years ago I met with former Chair Greenspan, and he was talking about—the one thing that he was most concerned with at this time was the kind of static growth in capital investment, and he was saying, you know, a healthy per- centage of GDP is somewhere around 8 percent, and we were trending down in the 4 percent range. Do you view that as a key indicator that we have to increase? And what, if any, trends are you seeing that give you some sense that we are getting to a healthy percentage of capital investment as a percentage of GDP? VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 29 Mr. POWELL. We do not know how to predict productivity growth very well, but we do think it links up over time with things like investment, investment in people but also investment in plant and equipment, R&D, and that kind of thing. Unfortunately, what the financial crisis did was it generated very weak demand conditions for a long time, and that created weak in- vestment, and that itself then furthers weak demand. So it is kind of a bad, self-reinforcing cycle that we had there for a while. That is why it is so heartening to see investment, business investment, moving up last year and perhaps continuing a strong performance this year, is our expectation. It is ultimately only productivity that raises living standards, and investment is one of the keys, not just investment in plant and equipment, but certainly in the skills and aptitudes of our people as well. Senator TILLIS. Do you get a sense that what we have done with tax reform is a potential positive contributor to seeing that invest- ment move up? Mr. POWELL. I do think it is a potential positive contributor in the sense that when you lower the corporate tax rate, you lower the user cost of capital. You know, like you, I have spent a lot of time working with private sector companies, and that is one of the factors they consider. It is not the only factor. But lower user cost of capital is something that should spur more investment over time, and that should add to productivity. Hard to quantify, but I think it is there. Senator TILLIS. You and I talked about this once or twice in my office, and in my remaining time, I would like for you to talk a lit- tle bit about the job that Mr. Quarles has and post-crisis regulatory right-sizing, I would be interested in your thoughts on Basel IV and regulatory tailoring. I know people asked you—I was watching in my office. On the Committee I think some asked you about the banking regulatory reform bill that passed out of here, which pro- vides some regulatory and I think responsible regulatory relief for a portion of our banking sector. But what more can we expect to see that are within your lanes and within your authorities on right- sizing regulations? The other thing I remember with Mr. Greenspan, he said the most troubling job creation growth that he saw at that time—this was 2 or 3 years ago, post-crisis, about 300,000 jobs that had been created under the tide of regulatory reform, which in my world that is by definition a nonproductive job. So I am kind of curious to see what kind of—how are we going to get to a more tailored—I think Senator Perdue asked this question. How are we going to get to a more tailored, more reasonable regulatory burden on this industry that still manages the risks that you have to be concerned with? Mr. POWELL. I think our concern is to maintain and strengthen but make more efficient the big improvements we think we made after the crisis—that is, higher capital, higher liquidity, stress testing, and resolution planning—and those are going to apply and continue to apply to the largest, most complex institutions in the strongest form. Our effort then is to tailor that at every level as we move down and make sure—and we did a lot of tailoring along the way, but we are now going back through each level to make sure that we have got that tailoring just about right. Not VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 30 everything that we need the eight systemically important institu- tions to do needs to be done by every bank, and many of them have much simpler business models that are much more traditional banking, and different regulatory strictures should apply to those companies. So it is something we are working on. Senator TILLIS. Mr. Chairman, the only thing I would say, as somebody who worked in a firm that helped prepare CCAR and stress tests results, it still is unimaginable to me how a properly tailored environment could result in 60,000- and 100,000-page sub- missions. There has got to be a better way to do it, even at the high end of the spectrum, and I just look forward to you all continuing to look at it and manage the risk but right-size it. Chairman CRAPO. Senator Jones. Senator JONES. Thank you, Mr. Chairman. Chairman Powell, thank you for being here and welcome. I would like to go back to a couple questions. I think it is pretty obvious that folks on the Committee are concerned about wage growth in addition to unemployment. You said in your testimony that with the economy growing the way it is, you expect to see wage growth continue, but that has been on a fairly modest trend over the last few years. So you see that wage growth increasing over the next couple of years as opposed to the very modest trend that we have seen? Mr. POWELL. That is my expectation, Senator. As we have moved from 10 percent unemployment down to 4.1 percent, we have seen some gradual increase in wages, but, frankly, not what I would have seen. I think as you look back over the last 3 or 4 years, you can kind of tell the story about why that was the case. Now we are at 4.1 percent unemployment, labor force participation is higher relative to trend than it was, and I guess I would have expected to see higher wages now. And I do continue to expect them to rise as the labor market continues to tighten. Senator JONES. Well, assuming the economy continues to grow as you expect, are there factors that we need to be on the lookout for that could prevent the wage growth that you would anticipate as opposed to the very kind of—not flat but very, very modest wage growth? Are there factors that we need to be concerned about or looking about in the future? Mr. POWELL. I think ultimately sustainable wage growth is a function of productivity. Wages should equal, you know, inflation plus productivity. And so to get wages to go up sustainably over a long period of time, we need higher productivity. That is a function of investment in people, investment in plant and equipment, R&D, all those things that drive us to be more productive. That is really the only way to have sustainable wage growth. Senator JONES. OK. Well, that kind of leads me to another area, and I do not want to misrepresent your testimony of the other day, so if I characterize something wrong, just please tell me. It will not be the first time I have been told I am wrong about things. But I think you said on Tuesday to some extent that limiting immigra- tion could limit our productivity growth in the coming years. Chair- man Yellen, your predecessor, also told this Committee in the past that limits on immigration could limit GDP growth. And so without putting you on the spot to try to get you to wade into very specific VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 31 hot-button issues that we have got here, can you talk a little bit about why immigration may boost productivity and GDP growth? Mr. POWELL. So to go back to what I was saying, you can think of growth being a function of growth in the labor force plus produc- tivity. Those are really the only two ways the economy can grow— more hours worked and more output per hour. Now, if you look at our labor force growth, it used to be 2, 21⁄ 2 percent, you know, 25 years ago, 30 years ago. Now it is about 0.5 percent as the population ages, and some part of that 0.5 percent is immigration. So I think those of you who have the decision rights around immigration, this is a factor that you ought to con- sider. It does not directly affect productivity, but it affects potential growth through the labor force. Senator JONES. All right. And I do not know if this would be an appropriate question, but is our current immigration policy in any way contributing to the lack of wage growth, as you see it today? Mr. POWELL. You know, immigration is one of those issues that we do not really have authority over, and, you know, I can speak to it as it relates to things like potential growth, but I am loath to get into current policy and things like that. I think I will follow my predecessors in sticking to our knitting on that. Senator JONES. All right. I kind of thought that would be the an- swer, but I was going to ask anyway. Going back to wage growth, what can we do, as wage growth con- tinues, to try to decrease the disparities that women have in the labor force, that the minority population, you know, whether they be Hispanic or the African American population, have in the labor force? Mr. POWELL. Any kind of discrimination in our society, in our labor force, is, of course, unacceptable and not something that we can tolerate. Having said that, you know, we do not have the tools, broadly speaking, to address those things. The tools we do have, though, the biggest thing we can do is to take seriously our statutory mandate of maximum employment. As you can see, when we go into a recession, it is the most vulnerable populations whose unemployment rates go up the fastest and the highest, and you can see that they come down the most in the re- covery. They tend to not get down as low as people with college de- grees and things like that. But at the same time, that is really how we can contribute. Senator JONES. All right. Last, there were comments made in your testimony on the House side concerning the appropriations process and potentially having Congress appropriate your budgets for nonsupervisory type activities of the Fed, and I would like your quick opinion on that, and also how a potential Government shut- down might affect that should you have that appropriations—I have been fairly critical of the way that the budgetary process here has been taking place, and so we have had five—you know, we have had a couple of shutdowns in the last couple of weeks. How would that have affected your ability to supervise? Mr. POWELL. Legislatures all around the world, governments all around the world have seen fit to give central banks an inde- pendent source of funding, and I would say that that is a wise deci- sion. The things that we do may not always be politically popular, VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 32 and I think it is wise to give us just a little bit of degree of separa- tion. Of course, we are transparent; of course, we are accountable. And that is not just for monetary policy. Here in the United States, all three of the bank regulatory agencies have an independent source of funding. This is a decision for Congress, that Congress has made for the last 40 years. It has not stopped Congress from providing, you know, appropriate oversight of our activities and regulations. So I would just say that I do not see what problem we are solving here. Senator JONES. It seems to be working. If it is not broken, do not fix it. Thank you, Mr. Chairman. I appreciate that. Chairman CRAPO. Thank you. And before I turn to Senator Moran, I would note to our Members we have a series of three votes being started in about 5 or 6 minutes, and we have four speakers left here. If you are all very concise and stick to your 5 minutes, I think we can probably wrap this up at the tail end of the first vote and go over. So please pay attention to the clock. We will not be able to go over and come back because of the three votes. Senator Moran. Senator MORAN. I am glad I am next, Mr. Chairman. [Laughter.] Chairman CRAPO. Five minutes. Senator MORAN. Mr. Chairman, thank you very much for joining us today. You are new at your job. I would tell you that, listening to you in previous settings and today, you are reassuring, seem- ingly competent, perhaps exactly the right thing we need at the Federal Reserve in today’s economic and political world. So thank you very much for your service to the country. I hope I do not have to change my comments about you in the future, so we look for- ward to working with you. Let me go through three things. A Treasury report recently indi- cated that the current exposure method, CEM, may not appro- priately measure the economic exposure of a listed options contract, and that a risk-adjusted approach for valuing options for purpose of capital rules such as weighing the options by their delta might be in order. I think this issue need a quicker fix, and perhaps there is a long-term fix, but are you in a position to make the changes that you at least at times have said it is important to make? Mr. POWELL. Yes, we are, Senator. I think we are in the middle of a changeover from CEM to SACCR, which is the other way to do it, and we are also looking at the calibration of the enhanced leverage ratio. Both of those things should help. Senator MORAN. What kind of timeframe do you believe you are on? Mr. POWELL. I would be loath to give you an exact date. Why don’t we come back to your office on that? But this is an active thing, I think fairly soon. Senator MORAN. Very good. I would welcome the follow-through. Tomorrow I will meet with Esther George at the Kansas City Fed, and I look forward to that conversation. Part of what I will talk to her about is agriculture and particularly the rural economies of our VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 33 region. Let me highlight for you something that I think is impor- tant for you in your regulatory role to remember. Farmers and ranchers often come to me and ask about the safety net that comes from a farm bill. Farm policy is designed to help farmers and ranchers in difficult times, generally difficult economic times. We are experiencing those times now. The challenge is sig- nificant for someone trying to earn a living in agriculture. But there is a safety net that I think is often forgotten, and that is the relationship between the lender in their community, a relationship banker, a financial institution, and that family farmer. And I just want to highlight once again the importance that we do not get to the circumstance in which the examiners, the regulations prohibit bankers from making decisions about lending or access to credit by agriculture based upon some very restrained, restrictive method. Let the issue of character, relationship, history between what is often a family owned bank and a family farm continue. That is one of the most important safety nets in difficult times, the relationship between our lenders and our bankers, and where I see the threat of that diminishing or being eliminated is through the regulatory process in which a bank is written up for making a decision that they feel comfortable with but a regulator may not. Any response to that? Mr. POWELL. I will just take that very much to heart, Senator. Senator MORAN. Thank you very much. And then, finally, let me ask a question about education. If we are looking for economic growth, it seems that a highly motivated, trained, and educated workforce is a significant component of that. Do you have in your understandings of the circumstance that we face in the employment market where we should be focusing our support for education or where we should be emphasizing for stu- dents and adults—those two things are not different—for those who need an education and additional training, where we ought to be focusing our resources to meet the economy’s needs for that highly motivated, educated, and trained workforce? Mr. POWELL. You know, I am probably not the right person to get down into the details of exactly where to focus. I will just say, though, that my view is that in the long run the only way we can sort of win in the international competition is by having the best educated, most productive workforce in the world. There is really no way to hide from that requirement, and that is education. It is also training. It is not just college education. It is also, you know, apprenticeship programs and that kind of thing, which also can be very successful. Senator MORAN. Tax rates are an important component in mak- ing business decisions, but meeting workforce requirements is there as well. Is that true? Mr. POWELL. Yes. Senator MORAN. Thank you. Mr. Chairman, thank you. Chairman CRAPO. Thank you. Senator Warner. Senator WARNER. Thank you, Mr. Chairman. Let the record show your timeliness in starting meetings meant that me being 6 min- utes late really was—— VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 34 Chairman CRAPO. I noted that and felt bad for you. Senator WARNER. It was quite a challenge. But I wanted to stay because I wanted to ask the Chairman two very important ques- tions. Let me preface this by saying, you know, in my first year here, one of the most important pieces of legislation I have ever worked on was the Dodd-Frank legislation. I think Dodd-Frank, for all its challenges, has made our system remarkably stronger. But we are 8 years later, and there is a broad, bipartisan group of us who are going to debate on the floor next week legislation that would make some modifications. In this legislation, S. 2155, we have not changed the require- ments that the Fed perform annual Dodd-Frank stress tests on banks above $250 billion. I think that is terribly important to maintain. We do give the Fed, after an appropriate period to do a rulemaking, the ability to look at those banks between $100 and $250 billion—and this is very important—to continue to undergo stress tests on a periodic basis. My view is that stress testing is the most important prudential standard and that frequent stress tests are some of the best tools we have to prevent another finan- cial crisis. Can you give us your views on stress testing, including how rig- orous they should remain and how frequent they should remain, on banks between $100 and $250 billion in assets if this legislation passed? Mr. POWELL. I would be glad to. Let me just echo what you said. We do believe that supervisory stress testing is probably the most successful regulatory innovation of the post-crisis era. We are strong believers in this tool, including for institutions of $100 to $250 billion. So it would be our intent, if this bill is enacted, to con- tinue, that these institutions would continue to have meaningful, strong, regular, periodic stress tests, frequent stress tests. And, again, we see it as a very important tool for these institutions. Senator WARNER. I hope, again, folks will be listening to this. We are not touching anything on the largest institutions in terms of the annual stress test on folks above 250, and as the Chairman of the Fed has indicated, even amongst those banks between 100 and 250, we are still going to have frequent, periodic stress tests that are still going to be strong, and the legislation lays out in some de- tail some of the requirements that we would have in those stress tests. My last question is this: In terms of overall enhanced prudential standards, we do move in this legislation from $50 billion to $100 billion. But we give you then in the group of institutions between $100 and $250 billion an 18-month period to essentially tailor those standards more appropriately. And as you have indicated, we al- ready have an institution below $250 billion that still qualifies as a SIFI. So I would just like to say again for the record, for folks who are watching and who will watch the debate next week, that you will take this responsibility of this 18-month rulemaking and do a thorough examination of the banks that fall in that category, and those that are claiming that somehow all enhanced prudential regulations of banks that fall into that category are going to sud- denly magically disappear sure as heck is not the intent of this VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 35 individual in terms of that legislation and I hope is not the intent of the Fed. Mr. POWELL. What I see us doing is creating a framework—we will be looking at all the institutions that are in that area and all the risks that might arise in banks between 250 and 100, and we will create a framework for assessing where systemic risk might be, where there might be regional risks. We will look at everything. And that framework will then be in place in 18 months, and if there are institutions that are currently in that population or that over time become systemically risky or even risky to themselves, the way the legislation gives us a lot of flexibility to do that, then we will have that in place. And as you point out, we have not been shy about finding systemic risk under 250. We are perfectly happy to do that. So we will feel comfortable doing this job, I believe. Senator WARNER. Listen, I look forward to a fair and spirited de- bate next week. A lot of Members have different views. But I think it is very, very important when people go about talking about doing away with stress tests or eliminating any kind of enhanced pruden- tial regulations, that is not our intent. There may be some tailoring that goes on in this new category, but particularly for the larger institutions, status quo is going to remain. Thank you, Mr. Chairman. Chairman CRAPO. Thank you. And Senator Heitkamp is next. I will let our Senators know we are 5 minutes on our way to the vote, so we have got to really go. Senator Heitkamp. Senator HEITKAMP. Thank you. I just want to follow up a little bit on HMDA and clarify what—I was not able to attend because I had other hearings, but what I understand has been discussed has been a clarification from you that nothing in this bill that will be debated next week undermines the Fed’s ability to enforce fair lending laws. Is that correct, Mr. Chairman? Mr. POWELL. That is generally right. CFPB really writes these rules, and you should seek comment from them, if you like. Senator HEITKAMP. But you would acknowledge that our bill pre- serves the traditional HMDA data collection on race? Mr. POWELL. It does, yes. Senator HEITKAMP. So while the bill does not undermine fair lending, it does meaningfully reduce substantial costs imposed on small lenders from HMDA data collection. I think this is the moti- vation. These costs can reach into the hundreds of thousands of dollars per year. One small institution estimates that the cost of HMDA quality assurance for their bank equals approximately $400,000 per year and involves five associates. So when it comes to regulation, we have to look at the benefits and the costs. One of the things that I think I just want to impress on people is that when you do not respond to these kinds of concerns, legiti- mate concerns from small lenders, there is a resentment to the overall policy that, you know, we tend to throw the baby out with the bath water because of the level of frustration. Wouldn’t you agree that we could, in fact, reduce costs to small lenders and still maintain the protections provided by HMDA? Mr. POWELL. Yes, I do agree. VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 36 Senator HEITKAMP. So when we are looking at going forward, I think it is important that we have a very spirited debate about this, but I think it also is very important that we put it in perspec- tive and that we not exaggerate the results here or the purpose of this bill. And so, Chairman Powell, just one question, and I know you have been answering a lot of questions about the economy, writ large, but I wanted to just get your sense of economic growth as we look at—again, no big surprise I am going to ask a question about trade. I know you guys do not always like answering those questions. But it seems to me that we are now looking at a poten- tial of tariffs being imposed on aluminum and steel for which there will be retaliation. We have, in fact, retreated somewhat from the commitments on NAFTA, and we no longer have a pathway into TPP. How concerned are you about the impacts of this trade policy of this Administration on our opportunity for economic growth long term? Mr. POWELL. I will not comment directly on the Administration’s policies, but I will say about trade that I think the record is clear that over long periods of time for many, many countries, trade is a net positive. It spreads productivity. It forces our companies to compete. It gives businesses and people the ability to buy and sell things in the world market. So, overall, the studies all show and theory would suggest that it is a good thing. But the benefits do not fall equally. There can be communities, there can be individuals who are negatively affected by trade, and we have seen a fair amount of that. I think it is more of that than probably was expected. And I think it is important that we address that as well so that you can sustain public support for trade. I think, you know, as Chairman Bernanke said, the tariff ap- proach is not the best approach there. The best approach is to deal directly with the people who are affected rather than falling back on tariffs, but, again, these are not measures that are consigned to us. They are really for you and for the Administration. Senator HEITKAMP. But I think that these are measures that are going to have an effect on the kind of economic analysis that you do that is going to lead to monetary policy. I do not think there is any doubt that trade will have a dramatic impact on economic growth, and I am very, very concerned about making sure that our trade policy is consistent with economic growth and also very con- cerned about the speed at which systems today can react to trade policy as opposed to maybe 20 or 30 years ago when it was kind of, you know, plodding along. It was OK if the WTO took 10 years. Today I do not think that is true, and I do not think it is true that it is OK that it takes 10 years to get back into TPP. I think things will move a lot quicker, and they are going to have—it is going to have a dramatic effect on our ability to be competitive in this coun- try and to encourage investment and growth. Thank you, Mr. Chairman. Chairman CRAPO. Thank you. Senator Reed. Senator REED. Well, thank you very much, Mr. Chairman. And thank you, Mr. Chairman, for being here today. VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 37 One of the things that we have noticed over the last many years is the decline in workforce participation of prime-age men. In fact, the Kansas City Fed has done a lot of good analytical work on this. One reason is automation. Those are particularly the types of jobs, it seems, that are easily replaced by some type of technology—ma- chines and computers, et cetera. As we go forward, I would assume that that trend will continue, and it raises the question of how does the Fed plan to forecast these effects of automation with your man- date for full employment? We could find ourselves technically at full employment but with millions of Americans who are out of luck and out of jobs and technically not in the workforce. How are you going to deal with that? Mr. POWELL. The long history of this, as I am sure you know, is technology comes in and it can displace people, but ultimately if so- ciety—if the people in society have the skills and aptitudes to ben- efit from technology, then the advent of technology lifts all boats. So for 200 years really, since the Industrial Revolution, we have faced this problem, and over longer periods of time, it has always been the case that technology lifts all boats in a way. Now, I do not think there is any law of nature that says that that has to continue, and the reason—the part of it that we control is skills and aptitude of our labor force. To the extent people have the skills and aptitudes to benefit from technology, to operate tech- nology, then they will benefit from it. And to the extent they do not, it is people with the high school degree and less who have real- ly experienced the worst of this. You know, that is where wages are low, that is where labor force participation is low, all those things. So it is a really easy thing to say and a really hard thing to do, but it comes down to education. Senator REED. Do you think we are doing enough in terms of education, in terms of Federal, State, local investment? We just saw West Virginia shut down for 2 days because their teachers felt they were not being compensated well enough, and we have a situ- ation I think in Oklahoma where they are only going to school 4 days a week because of budget problems. So I agree with you, edu- cation is a key. We just do not seem to get that message. Mr. POWELL. There is nothing in the productivity data or any other economic data that suggests we are handling this problem well. All around the world, others are catching up and passing. Senator REED. And exceeding us. Mr. POWELL. Yes. Senator REED. Yes. One other point, and this is sort of a pas- sionate issue with me, and that is the Military Lending Act. The Federal Reserve has the responsibility among many agencies to en- force it. The Department of Defense promulgated regulations in 2015 which I think are tougher. It essentially says you cannot charge someone in uniform over 36 percent interest. That seems to me a pretty fair rule. And having just come back from Somalia and being with Special Forces people and their families back home, I think this has to be enforced aggressively. Can you tell me what you are doing to make sure that your responsibilities under this rule are vigorous and proactive and relentless? Mr. POWELL. Well, we share your view about the importance and value of enforcing this, I assure you, and this is one where—as I VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 38 think we have discussed, this is a very important regulation, and it will get aggressive enforcement from us. Senator REED. And you will get the message out to your regu- lated entities that this is really at the top of your list? Mr. POWELL. Yes, we will. Senator REED. Thank you, sir. Chairman CRAPO. Thank you. Senator Van Hollen. Senator VAN HOLLEN. Thank you, Mr. Chairman. And welcome, Mr. Chairman. Good to have you here in the Banking Committee in your official capacity. I know there has been some discussion about stock buybacks. Stock buybacks are primarily a way for corporations to increase the share price. Isn’t that right? Mr. POWELL. Yes. I mean, it works in that way, yes. It is a way for companies to distribute cash to shareholders as well. Senator VAN HOLLEN. Exactly. So I do think it is worth pointing out that since the tax bill was passed, which was in large part ad- vertised as a way to dramatically increase wages of workers—in fact, the predictions were $4,000-a-year pay increases. We have seen the overwhelming amount of the money that has gone to cor- porations used for stock buybacks, in fact, $200 billion of stock buybacks just in the first 2 months of this year alone, including a $20 billion stock buyback from Wells Fargo, a major financial insti- tution that we have had a lot of discussion about in this Com- mittee, primarily because of a violation of consumer protection issues. I do think it is also worth pointing out that over 35 percent of the stock owned is actually owned by foreigners and foreign enti- ties, which is why the Prime Minister of Norway, when she visited a short time ago, thanked President Trump for the tax bill because it dramatically boosted the stock value of the Norwegian Govern- ment and its holdings. But it means money not going into the econ- omy, generally speaking, direct investment by those corporations. I wanted to ask you about the issue of cybersecurity and the im- pact of cyber attacks on our overall economy. We have seen big banks that have been victims of cyber attacks like JPMorgan. I be- lieve the Fed in the past has been the victim of some cyber intru- sions. And the Council for Economic Advisers just put out a report indicating that malicious cyber activity cost the economy between $57 billion and $109 billion in 2016—a big number—and the Chair- man of the Committee has spent a lot of time focusing on this issue, and we had a hearing specifically on the Equifax breach. This evening, I am going to be teaming up with our Maryland State Attorney General, Brian Frosh, to have a forum on consumer protection. Seven hundred people have already signed up for this, and we expect many of them to have been victims of the Equifax breach. My understanding is there has been reporting, first of all, just this morning, that Equifax found an additional 2.4 million people impacted by the breach, and there was also a February 4th report saying that U.S. consumer protection official puts Equifax probe on ice, and the article says that the CFPB, under the leadership of Mr. Mulvaney, has ‘‘rebuffed bank regulators at the Federal VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 39 Reserve, the FDIC, and the OCC when they offered to help with onsite exams of credit bureaus in connection with the Equifax in- vestigation.’’ Can you confirm whether or not the Consumer Financial Protec- tion Bureau has rebuffed offers by the Fed to help them get to the bottom of the Equifax—— Mr. POWELL. No, I cannot. I had not heard that. Senator VAN HOLLEN. If you could get back to us—I mean, this is a publicly reported document. Would you be willing to get back to us and let us know, confirm or say one way or another? Mr. POWELL. Sure. Senator VAN HOLLEN. I appreciate that very much. In terms of the impact on banks, you have the direct impact— banks are also impacted when those that have less cyber protec- tions—you know, Target, for example—are hacked, and as a result of that, the banks have to pay the credit card cost directly to con- sumers. And then they have got to go recoup that money from other entities. And so one of the things I have been focused on and the Committee has talked about is to try to get the SEC to increase its oversight with respect to cyber attacks and especially their re- sponsibilities to disclose to the public in a timely manner. And I would just ask you if you could work with us and the other regu- lators in trying to come up with disclosure requirements that pro- vide the public with adequate notice of these cyber breaches so they can protect themselves from the cost, not just the public but banks and others as well. I would appreciate that if you could do that. Mr. POWELL. We would be glad to. Senator VAN HOLLEN. Thank you. Mr. POWELL. Thanks. Chairman CRAPO. Thank you. And, Chairman Powell, Senator Brown has said—— Senator BROWN. I will be very brief, respecting your time and our getting to the vote. I heard you say a number of times in response to questions that there will be no relaxing of the rules for foreign banks, and I want to just—I just do not agree with that. A Treas- ury report last year, the Administration made it clear it wanted to lower standards. Secretary Mnuchin testified, sitting where you are right now, in January that he believed the bill would accomplish the goal. Paul Volcker has said it does. Sarah Bloom Raskin said that there will be less regulation of the foreign banks. Antonio Weiss said the same. I had an amendment during the markup on that issue, and it was defeated. Foreign banks lobbied against that amendment. The bill’s supporters rejected it. I have three very related questions. I will ask the three consecu- tively, and you can either answer them now or get them in writing to me, if you would. Promises she will push back against foreign bank lobbyists and Secretary Mnuchin to ensure that no foreign bank with more than $50 billion in U.S. assets will benefit from any deregulation. I would like that promise from you that you will push back against foreign bank lobbyists and Secretary Mnuchin. VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 40 I would like to know what you plan to do when a foreign bank sues the Fed for not treating it equally to a U.S.-based bank that falls in that 50 to 250 category. And I guess my final question: Wouldn’t it better to amend this bill to avoid litigation and make sure it does not benefit large for- eign banks? So if you want to respond now, or you can respond in writing. Mr. POWELL. Why don’t we take those under advisement and give you a clear response in writing quickly. Senator BROWN. Fair enough. OK. Thank you, Mr. Chairman. Chairman CRAPO. All right. Thank you. And that does conclude the questioning. Again, I want to thank you, Chairman Powell, for being here and for the service you are giving to our country. For Senators who wish to submit questions for the record, those questions are due on Thursday, March 8th, and I encourage you, Chairman Powell, if you receive additional questions, to respond to them promptly. I also apologize that because of the pressure we have on the vote I am going to have to conclude this hearing and then run to the floor, so I will not be able to visit with you privately or more per- sonally after your testimony, but we will have plenty of opportuni- ties to do so. With that, the hearing is adjourned. Mr. POWELL. Thank you, Mr. Chairman. [Whereupon, at 12:06 p.m., the hearing was adjourned.] [Prepared statements, responses to written questions, and addi- tional material supplied for the record follow:] VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 S:\DOCS\30197.TXT SHERYL 41 PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO Welcome, Chairman Powell, for your first appearance before this Committee as Chairman of the Federal Reserve Board of Governors, and congratulations on your confirmation. Today’s hearing is an important opportunity to examine the current state of mon- etary and regulatory policy. Over the past few years, the Humphrey-Hawkins hearing has often served as an opportunity for Members of this Committee to review the new regulations imposed in the wake of the financial crisis. While I did not always agree with former Chairman Bernanke and former Chair Yellen, I appreciated their willingness to engage with the Committee and discuss possible improvements to the regulatory regime. These discussions were helpful in building common ground for our banking bill, S. 2155, particularly for provisions like the threshold for enhanced standards under Section 165 of Dodd-Frank. This bipartisan bill now has 13 Republican and 13 Democratic and Independent co-sponsors. The bill was the result of a thoughtful, deliberative process over several years that included hearings, briefings, meetings and written submissions from hundreds of commentators and stakeholders. The primary purpose of the bill is to make targeted changes to simplify and im- prove the regulatory regime for community banks, credit unions, midsize banks and regional banks to promote economic growth. Economic growth has been a key priority for this Committee and this Administra- tion this Congress. The U.S. economy has failed to grow by more than 3 percent annually for more than a decade, by far the longest stretch since GDP has been officially calculated. But now, there are widespread expectations that growth is finally picking up. According to the January FOMC meeting minutes, the Federal Reserve increased its expectations for real GDP growth going forward, after 4th quarter growth ex- ceeded expectations. The Fed cited the recently enacted tax reform legislation as among the reasons economic growth is expected to rise. In addition to tax reform, President Trump’s recently released Budget and Eco- nomic Report both emphasize that regulatory reform is a key component of rising productivity, wages and economic growth. By right-sizing regulation, the Committee’s economic growth bill will improve ac- cess to capital for consumers and small businesses that help drive our economy. Now that many are predicting a pickup in growth, a number of commentators have expressed sudden concerns about the economy overheating. While the Federal Reserve should remain vigilant in monitoring inflation risks, we also must continue to pursue commonsense, pro-growth policies that will lead to increased innovation, productivity, and wages. With respect to monetary policy, I am encouraged that the Federal Reserve is con- tinuing on its gradual path to monetary policy normalization. The Fed has begun to reduce its balance sheet by steadily decreasing the amount of principal it reinvests as assets in its portfolio mature. I look forward to hearing more about the Fed’s monetary policy outlook as part of Chairman Powell’s testimony today. I also look forward to hearing about the Federal Reserve’s ongoing efforts to re- view, improve and tailor existing regulations. I know that you are working with Vice Chairman for Supervision Randy Quarles on those issues. Vice Chairman Quarles has done an excellent job so far, and I urge Congress to confirm him for his full term on the Board as soon as possible. PREPARED STATEMENT OF SENATOR SHERROD BROWN Chairman Crapo, thank you for holding this hearing. Chair Powell, welcome back to the Committee, and for the first time in your new role. You are leading the Federal Reserve at a crucial time, as the Fed normalizes interest rates and shrinks its balance sheet. The country is in its ninth year of economic recovery, though 2017 marked the worst year for job creation since 2010. And the recovery has not reached everyone. Wage growth has been slow and labor force participation has barely improved since 2014. Nine years of job growth have still not done much to narrow income inequality or address employment disparities. VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00045 Fmt 6621 Sfmt 6621 S:\DOCS\30197.TXT SHERYL 42 Nationwide, the unemployment rate for black workers is double that for whites- equal to the gap at the start of the civil rights movement. Looking more broadly, labor force participation is down for all minorities. Statistics show that large pockets of people are waiting to share in the benefits from the recovery. Instead of addressing their problems, Republicans are working hard to help Wall Street banks that are raking in profits. Despite the fact that we are 9 years removed from the recession, this Administra- tion has embarked on a substantial fiscal stimulus, permanently slashing the cor- porate tax rate and providing the largest benefits to the wealthiest Americans. Of course, Wall Street, which is making record profits, will do well. Instead of fighting for workers and making sure labor market opportunities are shared among those who have been struggling, Republicans would rather push for tax cuts for corporations and the wealthy. Those tax cuts are not free-they will add over a trillion dollars to the deficit. The once and future deficit hawks on the other side of the aisle were more like marsh- mallow Peeps when confronted with tax cuts for the wealthy. The ink was barely dry when we began to hear calls for spending cuts that will hurt families across the country-the so-called ‘‘entitlement reform’’ that everyone should understand means cuts to Medicare, Medicaid, and Social Security. The claim was that it would all be worth it, because workers would benefit. I’m happy for any Ohioan who gets a raise, but we have seen how banks and cor- porations have responded to the tax cuts, and the numbers are staggering. In Janu- ary, Wells Fargo announced a $22.5 billion stock buyback-288 times what it will spend on pay raises for its workers. This year, companies will start disclosing CEO-to-worker pay ratios, as required under the Wall Street Reform Act. Honeywell, which announced an $8 billion stock buyback in December, just disclosed that its CEO is getting a 61 percent pay raise and makes 333 times the average worker’s pay. It’s pretty simple—for each pay raise or bonus for workers, companies are often spending a hundred or two hundred times as much on stock buybacks and executive compensation. It gets worse. While the biggest banks lavish pay raises and stock giveaways on their execu- tives, they continue to violate the law and abuse their customers. The Fed recently imposed an unprecedented-if belated-penalty on Wells Fargo following several scan- dals, including the opening of millions of fake accounts and improperly charging bor- rowers for auto insurance they didn’t need. The Fed told Wells Fargo it can’t grow until it demonstrates that it has improved board oversight and risk management. It sounds like the Fed has come to the con- clusion many of us on this Committee reached a year and half ago-Wells Fargo is ‘‘too big to manage’’. I’ll be closely watching to make sure the new team at the Fed doesn’t lift these penalties, without the bank making real changes. And, it’s not just Wells Fargo. Last week, Citigroup announced it illegally over- charged nearly two million credit card accounts for over 5 years, and that it will refund $335 million to customers. Though Wall Street can’t seem to go a month without a new scandal, the Senate is set to take up a bill that would roll back critical financial stability protections and limit watchdogs’ ability to police the largest banks. We can expect the banks to spend any savings from less oversight the same way they spent their tax cuts-more dividends, share buybacks, and mergers. Chair Powell, Wall Street may be focused on whether there are three or four rate hikes this year, but I think your focus needs to be on ensuring the Fed doesn’t once again permit the buildup of risk in the market and hubris at the Fed. The Great Moderation turned out to be not so great, and we forget that lesson at our peril. The Fed needs to take the side of consumers-making sure the financial system stays strong and regulations are enforced. Chair Powell, I look forward to your testi- mony. Thank you, Mr. Chairman. PREPARED STATEMENT OF JEROME H. POWELL CHAIRMAN, BOARDOFGOVERNORSOFTHEFEDERALRESERVESYSTEM MARCH1, 2018 Chairman Crapo, Ranking Member Brown, and Members of the Committee, I am pleased to present the Federal Reserve’s semiannual Monetary Policy Report to the Congress. VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00046 Fmt 6621 Sfmt 6621 S:\DOCS\30197.TXT SHERYL 43 On the occasion of my first appearance before this Committee as Chairman of the Federal Reserve, I want to express my appreciation for my predecessor, Chair Janet Yellen, and her important contributions. During her term as Chair, the economy continued to strengthen and Federal Reserve policymakers began to normalize both the level of interest rates and the size of the balance sheet. Together, Chair Yellen and I have worked to ensure a smooth leadership transition and provide for con- tinuity in monetary policy. I also want to express my appreciation for my colleagues on the Federal Open Market Committee (FOMC). Finally, I want to affirm my con- tinued support for the objectives assigned to us by the Congress—maximum employ- ment and price stability—and for transparency about the Federal Reserve’s policies and programs. Transparency is the foundation for our accountability, and I am com- mitted to clearly explaining what we are doing and why we are doing it. Today I will briefly discuss the current economic situation and outlook before turning to monetary policy. Current Economic Situation and Outlook The U.S. economy grew at a solid pace over the second half of 2017 and into this year. Monthly job gains averaged 179,000 from July through December, and payrolls rose an additional 200,000 in January. This pace of job growth was sufficient to push the unemployment rate down to 4.1 percent, about 3⁄4 percentage point lower than a year earlier and the lowest level since December 2000. In addition, the labor force participation rate remained roughly unchanged, on net, as it has for the past several years—that is a sign of job market strength, given that retiring baby boomers are putting downward pressure on the participation rate. Strong job gains in recent years have led to widespread reductions in unemployment across the in- come spectrum and for all major demographic groups. For example, the unemploy- ment rate for adults without a high school education has fallen from about 15 per- cent in 2009 to 51⁄2 percent in January of this year, while the jobless rate for those with a college degree has moved down from 5 percent to 2 percent over the same period. In addition, unemployment rates for African Americans and Hispanics are now at or below rates seen before the recession, although they are still significantly above the rate for whites. Wages have continued to grow moderately, with a modest acceleration in some measures, although the extent of the pickup likely has been damped in part by the weak pace of productivity growth in recent years. Turning from the labor market to production, inflation-adjusted gross domestic product rose at an annual rate of about 3 percent in the second half of 2017, 1 per- centage point faster than its pace in the first half of the year. Economic growth in the second half was led by solid gains in consumer spending, supported by rising household incomes and wealth, and upbeat sentiment. In addition, growth in busi- ness investment stepped up sharply last year, which should support higher produc- tivity growth in time. The housing market has continued to improve slowly. Eco- nomic activity abroad also has been solid in recent quarters, and the associated strengthening in the demand for U.S. exports has provided considerable support to our manufacturing industry. Against this backdrop of solid growth and a strong labor market, inflation has been low and stable. In fact, inflation has continued to run below the 2 percent rate that the FOMC judges to be most consistent over the longer run with our congres- sional mandate. Overall consumer prices, as measured by the price index for per- sonal consumption expenditures (PCE), increased 1.7 percent in the 12 months end- ing in December, about the same as in 2016. The core PCE price index, which ex- cludes the prices of energy and food items and is a better indicator of future infla- tion, rose 1.5 percent over the same period, somewhat less than in the previous year. We continue to view some of the shortfall in inflation last year as likely re- flecting transitory influences that we do not expect will repeat; consistent with this view, the monthly readings were a little higher toward the end of the year than in earlier months. After easing substantially during 2017, financial conditions in the United States have reversed some of that easing. At this point, we do not see these developments as weighing heavily on the outlook for economic activity, the labor market, and in- flation. Indeed, the economic outlook remains strong. The robust job market should continue to support growth in household incomes and consumer spending, solid eco- nomic growth among our trading partners should lead to further gains in U.S. ex- ports, and upbeat business sentiment and strong sales growth will likely continue to boost business investment. Moreover, fiscal policy is becoming more stimulative. In this environment, we anticipate that inflation on a 12-month basis will move up this year and stabilize around the FOMC’s 2 percent objective over the medium term. Wages should increase at a faster pace as well. The Committee views the VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00047 Fmt 6621 Sfmt 6621 S:\DOCS\30197.TXT SHERYL 44 near-term risks to the economic outlook as roughly balanced but will continue to monitor inflation developments closely. Monetary Policy I will now turn to monetary policy. The Congress has assigned us the goals of pro- moting maximum employment and stable prices. Over the second half of 2017, the FOMC continued to gradually reduce monetary policy accommodation. Specifically, we raised the target range for the Federal funds rate by 1⁄4 percentage point at our December meeting, bringing the target to a range of 11⁄4to 11⁄2percent. In addition, in October we initiated a balance sheet normalization program to gradually reduce the Federal Reserve’s securities holdings. That program has been proceeding smoothly. These interest rate and balance sheet actions reflect the Committee’s view that gradually reducing monetary policy accommodation will sustain a strong labor market while fostering a return of inflation to 2 percent. In gauging the appropriate path for monetary policy over the next few years, the FOMC will continue to strike a balance between avoiding an overheated economy and bringing PCE price inflation to 2 percent on a sustained basis. While many fac- tors shape the economic outlook, some of the headwinds the U.S. economy faced in previous years have turned into tailwinds: In particular, fiscal policy has become more stimulative and foreign demand for U.S. exports is on a firmer trajectory. De- spite the recent volatility, financial conditions remain accommodative. At the same time, inflation remains below our 2 percent longer-run objective. In the FOMC’s view, further gradual increases in the Federal funds rate will best promote attain- ment of both of our objectives. As always, the path of monetary policy will depend on the economic outlook as informed by incoming data. In evaluating the stance of monetary policy, the FOMC routinely consults mone- tary policy rules that connect prescriptions for the policy rate with variables associ- ated with our mandated objectives. Personally, I find these rule prescriptions help- ful. Careful judgments are required about the measurement of the variables used, as well as about the implications of the many issues these rules do not take into account. I would like to note that this Monetary Policy Report provides further dis- cussion of monetary policy rules and their role in the Federal Reserve’s policy proc- ess, extending the analysis we introduced in July. Thank you. I would be pleased to take your questions. VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00048 Fmt 6621 Sfmt 6621 S:\DOCS\30197.TXT SHERYL RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT FROM JEROME H. POWELL Q.1. Unemployment is at 4.1 percent. Wages are up 2.9 percent compared to a year ago—that’s the biggest hike since June 2009. The economy’s growing at a healthy rate—3.2 percent during Q3 and 2.6 percent in Q4. Tax reform is going to boost that number back above 3 percent. Despite all the positive indicators, the mar- ket had several down days last month. Most of them were around your swearing in. If look back at the recent past, the Federal Re- serve and your predecessors have cited stock market volatility as a reason to not raise interest rates. The Fed backed down so many times that this became learned behavior: stock market volatility means no hike in interest rates. Congress says to seek maximum employment and stable prices . . . no more and no less. Please an- swer the following with specificity: Q.1.a. Is a rising stock market a pillar of monetary policy? A.1.a. My colleagues on the Federal Open Market Committee (FOMC) and I set monetary policy with the sole purpose of achiev- ing and sustaining our statutory objectives of maximum employ- ment and price stability. Because monetary policy affects the econ- omy and inflation with a lag, we need to be forward looking in setting policy. That is why, each time the FOMC meets, we assess the implications of incoming information, including information about financial conditions broadly defined, for the economic out- look. Our current assessment, based on all available information, is that further gradual increases in our target for the Federal funds rate will prove most appropriate for achieving and sustaining the objectives the Congress has assigned to the FOMC. We do not have a target for asset prices and we recognize that asset price fluctua- tions do not necessarily alter the economic outlook. Moreover, fi- nancial conditions are only one of many factors that can affect the outlook for the economy. Q.1.b. Has recent stock market volatility deterred you from your plan to raise rates later this year? A.1.b. After carefully considering all available information nec- essary to assess where the economy stood relative to the goals of maximum employment and price stability, and how it was likely to evolve, the FOMC concluded, on March 21, that it would be appro- priate to raise the target range for the Federal funds rate by a fur- ther 25 basis points. Moreover, FOMC participants generally saw the economic outlook as somewhat stronger than was the case in December, and continued to judge that further gradual increases in the Federal funds rate are likely to be warranted if the economy continues to evolve as expected. Indeed most participants antici- pated that, in light of the stronger outlook, the Federal funds rate might rise slightly more, in coming years, than they had (45) VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00049 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL 46 anticipated in December. Please bear in mind that we do not have a fixed plan for the path of the Federal funds rate. We will be watching how the economy evolves in the months and years ahead relative to our maximum employment and price stability objectives. If the outlook changes, we will adjust monetary policy appro- priately. Q.2. I sold insurance for over 20 years, and I’ve said it many times: our State-based system of insurance regulation is the best in the world. The President’s Executive order on financial regulation and other Administration reports favor a deferential approach by the Fed to working with primary financial regulators. When it comes to the business of insurance that means State-based insurance reg- ulators. Please answer the following with specificity: How will you and the Federal Reserve integrate State-based in- surance regulators into your work? A.2. The State-based system of insurance regulation provides an invaluable service in protecting policyholders. The Federal Re- serve’s principal supervisory objectives for all of the insurance hold- ing companies that we oversee include protecting the safety and soundness of the consolidated firms and protecting any subsidiary depository institution, which encompasses protecting the depositors and taxpayer-backed deposit insurance fund. The Federal Reserve also undertakes supervision, through reporting, examination, and other engagement, of entities in an insurance enterprise that are not subject to financial regulation in order to protect against extant or emerging threats to the consolidated enterprise’s safety and soundness. The Federal Reserve’s consolidated supervision thus is com- plementary to, and supplements, existing entity-level supervision by the primary functional regulators, with a perspective that con- siders the risks across the entire firm. We conduct our consolidated supervision of all insurance firms in coordination with State de- partments of insurance (DOIs), who continue their established oversight of the insurance subsidiaries. In order to maximize effi- ciencies and eliminate supervisory duplication or ‘‘layering,’’ we rely upon the work and supervisory findings of the State DOIs to the greatest extent possible. We intend to continue to do so. Fed- eral Reserve supervisors regularly meet, share supervisory infor- mation, and collaborate with State DOIs. We remain open to input from supervised firms, State DOIs, and other interested parties on how we can further tailor and better coordinate our supervision while achieving our supervisory objectives. Moreover, in the ongoing development of a Federal Reserve cap- ital standard for savings and loan holding companies significantly engaged in insurance activities (described as the Building Block Approach (BBA) in the Federal Reserve’s advance notice of pro- posed rulemaking of June 2016), Federal Reserve staff have engaged, and continues to engage, with State regulators and the National Association of Insurance Commissioners in their develop- ment of the group capital calculation, a capital assessment that is structurally similar to the BBA. This ongoing dialogue aims to achieve harmonious frameworks to the greatest extent possible and VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00050 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL 47 minimize burden upon insurance firms supervised by both the States and Federal Reserve. RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE FROM JEROME H. POWELL Q.1. As you know, the Administration has invoked Section 201 of the Trade Act of 1974 to impose significant tariffs on solar panels and washing machines. Q.1.a. As Federal Reserve Chairman, your job is to stay abreast on the state of our economy. These tariffs will almost certainly impact our economy, I believe for the worse. What economic indicators are you consulting to evaluate the economic impact of these tariffs? Q.1.b. What has been the international response to these tariffs and the initial economic impact of these tariffs? A.1.a.–b.The Federal Reserve is entrusted to achieve its congres- sionally mandated objectives of price stability and maximum sus- tainable employment. Matters of trade policy are the responsibility of Congress and the Administration. Although the implemented trade actions do have consequences for specific industries, these trade actions are targeted enough that they are likely to have small effects on aggregate price stability and national employment. Federal Reserve staff closely monitor data on U.S. trade flows as well as domestic price developments, both of which could be affected by tariff rate increases. The international response has been consistent with World Trade Organization (WTO) rules. Canada, China, the European Union, Japan, South Korea, and Taiwan have been holding consultations with the United States under the World Trade Organization rules to protest the measures. China has claimed the right to suspend tariff concessions immediately equal to the amount of trade af- fected, and did so the week of April 2. The affected countries will likely proceed with the filing of WTO cases against the United States. Q.2. The Administration has announced that it will impose 25 per- cent tariffs on steel and 10 percent tariffs on aluminum under Sec- tion 232 of the Trade Expansion Act of 1962. Q.2.a. Can you identify any historical examples where tariffs have helped the United States economy or otherwise fixed the problem it was intended to address? Q.2.b. Based on the record of the Bush administration’s 2002–2003 steel tariffs and other historical examples, how would you expect this 25 percent tariff on steel and aluminum to impact the U.S. economy? Q.2.c. Would this answer change if countries responded with eco- nomic retaliation against the United States, such as through tar- iffs? For example, I hear constantly from Nebraskan agriculture and manufacturing stakeholders of their concern that other coun- tries will respond to the potential trade barriers by retaliating against agriculture. Q.2.d. Historically, what industries would be most impacted by this economic retaliation? For example, would agriculture be impacted? VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00051 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL 48 Q.2.e. In 12 months, what economic data would you consult to evaluate the net economic impact of these tariffs in the United States? A.2.a.–e. International trade, facilitated by low barriers to trade, is likely beneficial to the U.S. economy on net. History has shown that countries that are open to trade often are more productive and grow faster than countries that are relatively closed to trade. The challenge is that the gains from trade are not guaranteed to be dis- tributed as to make everyone better off. It is important to realize that openness to trade can cause dislocation and impose costs on some industries and workers. In part because of these costs, effort should be taken to ensure that trade occurs on a level playing field. Higher tariffs on products such as steel and aluminum would tend to reduce imports of these products, and shift demand toward U.S.-produced steel and aluminum. Although U.S. producers may benefit from increased domestic demand, other U.S. firms likely would have to pay more for these products when used as an inter- mediate input, increasing their production costs. Currently, most of the major exporters of steel and aluminum to the United States are subject to exemptions from the tariffs, including Canada, the Euro- pean Union, and Mexico. As such, the effects may be muted. The granted exemptions are more extensive than in past epi- sodes. For example, during the 2002 safeguard tariffs on steel, the European Union, a significant supplier of steel to the United States, was not excluded. Even so, the effects on employment and inflation from the 2002 measures were fairly muted. If countries retaliate by increasing their tariffs on U.S. goods, this will likely hurt exporting industries in the United States by reducing their competitiveness and demand for their products. Re- taliation is typically equivalent in size to the affected sales to the United States. China’s announcement of retaliatory tariffs on products such as fruit and pork on April 1 were in direct response to the steel and aluminum tariffs, and the total amount subject to tariffs was picked to match the total amount of Chinese exports of these prod- ucts (about $3 billion). China also has threatened to retaliate against a larger list of products, depending on what measures the United States Government takes in response to its investigation under section 301 of the Trade Act of 1974 into China’s policies re- lated to technology transfer, intellectual property, and innovation. In calibrating retaliation, foreign countries often target indus- tries in which the United States has a comparative advantage, such as agriculture. In part, this reflects that the United States tends to export more from sectors in which it is relatively produc- tive. In addition, agriculture can make an appealing target for re- taliation as agricultural products tend to be relatively homogenous, allowing the retaliating country to shift purchases away from the United States toward alternative producers with less disruption to local consumers. The Federal Reserve looks at a wide range of data to assess the state of the economy. Data which might be used to evaluate the ef- fects of the tariffs would include import and export data, as well as the prices of imports and exports. In addition, domestic employ- ment and overall retail prices might be informative. VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00052 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL 49 RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCHATZ FROM JEROME H. POWELL Q.1. I would like to follow up on our ongoing conversation on the economic impacts of climate change. I understand that the Federal Reserve’s mandate and tools are entirely focused on monetary pol- icy. However, the Federal Reserve’s implementation of monetary policy is informed by its assessment of the U.S. economy, including future economic trends and risks. According to your answer to a question I posed during your confirmation, your position is that the Federal Reserve is only concerned with ‘‘short- and medium-term developments that may change materially over quarters and a rel- ative small number of years, rather than the decades associated with the pace of climate change.’’ Q.1.a. How did you arrive at the determination that there are no short- or medium-term impacts of climate change? Q.1.b. Have you or your staff considered or reviewed data from our Government’s scientific agencies about the rate of climate change? Q.1.c. In 2017, NOAA reported 16 separate billion-dollar climate events. Combined, these events cost the U.S. economy over $300 billion—roughly 1.5 percent of U.S. GDP. Do you think that severe weather events that cost the equivalent of 1.5 percent of GDP qual- ify as short- and medium-term developments that the Federal Re- serve should be concerned about? Q.1.d. Will you commit to having a staff-level conversation about these data sources to consider whether they should be a resource the Federal Reserve uses when assessing the national economic outlook and future economic risks? A.1.a.–d. Each and every severe weather event reported by the Na- tional Oceanographic and Atmospheric Administration (NOAA) is consequential for the individuals and communities that are directly affected. The most severe of these events can seriously damage the lives and livelihoods of many individuals and families, devastate local economies, and even temporarily affect national economic sta- tistics such as GDP and employment. In that sense, severe weather events do have important short-term effects on economic condi- tions. And in assessing current economic conditions, such as our published statistics on industrial production, we take into account information on the severity of weather events. For example, we re- lied on information from the Federal Emergency Management Agency and the Department of Energy to gauge the disruptions to oil and gas extraction, petroleum refining, and petrochemical and plastic resin production caused by last fall’s hurricanes. Likewise, we frequently use daily measures of temperatures and snowfall at weather stations throughout the country from the NOAA to assess the short-run economic impact associated with unusually large snowfall events. However, severe weather events are difficult to predict very far in advance. Moreover, the historical regularity has been that these type of events have not materially affected the business cycle tra- jectory of the national economy, both because the disruptions to production have tended to be relatively short-lived and because such events tend to affect specific geographic areas rather than the United States as a whole. In contrast, monetary policy has VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00053 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL 50 broad-based effects on the U.S. economy and tends to influence macroeconomic conditions with a lag. As a result, monetary policy is not well suited to address the economic disruptions associated with severe weather events. That said, the most severe of these events have imposed a significant drain on public resources. If such events become much more frequent or more severe, the fiscal cost would likely mount, and that would be an important issue for the Congress to consider. My staff is available to discuss these issues further if you would find that helpful. Q.2. There is currently $1.4 trillion in outstanding student loan debt, the highest category of consumer debt behind mortgages. It is also the most delinquent, with 11 percent of borrowers seriously delinquent or in default. The Federal Reserve Board of New York estimates this number is likely twice that rate, once borrowers who are in forbearance are taken into account. At the hearing, you agreed that student loan debt could create a drag on the economy as student loan debt continues to grow. Q.2.a. What indicators should we track to determine when student loan debt is starting to have a real impact on the economy? Q.2.b. What are the ways in which student loan debt could hold back the economy and how much of an effect do you think it could have? A.2.a.–b. Student loan debt can potentially hold back the economy through several mechanisms. First, high levels of student loan debt (and the financial burden associated with repaying such debt) may hold back student loan borrowers’ savings and therefore affect deci- sions such as home purchases, investment, marriage, and starting a family. Second, high levels of student loan debt may increase debt-to-income ratios or reduce credit scores, leaving some bor- rowers with more limited access to mortgage, auto, and credit card loans. In addition, unlike other types of household debt, student loans are not dischargeable in bankruptcy, which can make these loans more burdensome in times of financial hardship. Third, if student loan debt becomes exceedingly burdensome, students may be discouraged from taking loans to go to college, thereby damp- ening human capital accumulation in the economy. One important caveat to underscore is that if student loan bor- rowers earn more over their lifetimes as a result of obtaining more education, student loans would likely help strengthen the economy, instead of holding it back. Accordingly, there are several indicators one could track to gauge the possible impact of student loan debt on the economy. Such indi- cators include auto purchases, home ownership and household for- mation rates, as well as savings and investment behavior, espe- cially among young adults with student loan debt. In addition, one could track the credit performance of student loan borrowers, not only on their student debt, but also on other types of debt. Q.3. So far, companies benefiting from the recent tax cuts have an- nounced over $200 billion in stock buybacks. In contrast, compa- nies have announced only $6 billion in worker bonuses and raises. VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00054 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL 51 Q.3.a. As far as possible investments go, do you think stock repur- chases offer the greatest potential for boosting productivity and economic growth? Q.3.b. How do they compare to investments in capital, innovation, or worker compensation in terms of the potential for increases in productivity and economic growth? Q.3.c. If companies put the vast majority of their gains from the new tax law into stock repurchases, would you expect to see an in- crease in economic growth and wages from the tax law? A.3.a.–c. Investments in new capital equipment or innovative tech- nologies are important factors for improving productivity and eco- nomic growth. Similarly, increased worker compensation can be a factor in encouraging individuals to join or remain in the labor force and to develop new skills, which can further increase produc- tivity and growth. Comparing the economic effects of these invest- ments to the eventual effects of stock buybacks is difficult because we cannot be sure where the gains from buybacks will ultimately turn up. When a company buys back its shares or pays higher divi- dends, the resources do not disappear. Rather, they are redistrib- uted to other uses in the economy. For instance, shareholders may decide to invest the windfall in another company, which may in turn make productivity-enhancing investments. Or they may decide to spend the windfall on goods and services that are produced by other companies, who may in turn hire new workers. In these ways, stock repurchases would also be likely to boost economic growth. Companies themselves are the best judges of what to do with their after-tax profits, whether it is to invest in their business, raise worker compensation, or increase returns to shareholders through dividends or share buybacks. RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM JEROME H. POWELL Q.1. The Federal Reserve has the responsibility for monetary pol- icy. The Congress has the responsibility for fiscal policy. In the past few months, Congress spent more than a trillion dollars. The majority did not spend it on investments to build our outdated bridges, roads or electrical grids. The majority did not spend it on transit to reduce gridlock and reduce pollution and improve our air quality. The trillions of dollars did not provide housing for families struggling to pay rent. Or subsidies to help parents afford the cost of child care. Nor did we invest in pre-K education. Or research and development. Instead, multi-national corporations will see their incomes go up substantially: Warren Buffet’s Berkshire Hathaway will make $29 billion more in profit. The seven largest banks will increase their income by 12 percent or more. Meanwhile, some families will see big tax increases because they can’t deduct their alimony payments or all of their property and State income taxes. Our national debt is already twice the historic average and high- er than it has been at any time in history since World War II. Today, it consumes more than 77 percent of the economy. The President’s proposed budget would increase that level to as much VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00055 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL 52 as 93 percent of our entire economy by 2028 according to the Com- mittee for a Responsible Federal Budget. If we had chosen to invest $1.5–$2.3 trillion in rebuilding our in- frastructure, investing in research and development and in our children and families, what is the Federal Reserve’s estimates of the effect on wages, productivity and economic growth? A.1. The Federal Reserve has not prepared an estimate of the eco- nomic effects of a large investment of the kind that you describe. Any such estimate would depend critically on the particular as- sumptions one made about the allocation of the investment among the purposes that you describe, as well as the efficiency with which investments could be targeted to high-rate-of-return projects. The Congressional Budget Office is well situated to provide economic analysis of this kind. Q.2. I appreciated your statements opposing discrimination in mortgage lending during your testimony. However, I remain con- cerned that if the Economic Growth, Regulatory Relief, and Con- sumer Protection Act, (S. 2155), becomes law the Federal Reserve will not have adequate information on the quality of mortgage loans made by 85 percent of the banks and credit unions in the United States. At the hearing, you told me the Federal Reserve re- lies primarily on historical Home Mortgage Disclosure Act data but that data does not include specific information on mortgage loan quality or borrower characteristics. In the run up to the Financial Crisis, the Federal Reserve and other regulators missed rampant discrimination in the mortgage market; African Americans and Latinos were more than twice as likely as a white family to receive a subprime mortgage. Even if Latinos and African Americans had higher incomes and credit scores, they still received worse loans. The Federal Reserve has oversight authority of banks with fewer than $10 billion in assets. • How will you ensure that those banks are not engaged in red- lining or other types of discrimination if you do not have infor- mation about the loan characteristics, the borrower’s credit score or other information in the expanded HMDA require- ments? A.2. With respect to fair lending, the Fair Housing Act (FHA) and Equal Credit Opportunity Act are critical to ensuring consumers are treated fairly when offered financial products and services. Dis- crimination has no place in a fair and transparent marketplace. Discriminatory practices can close off opportunities and limit con- sumers’ ability to improve their economic circumstances, including through access to home ownership and education. The Federal Reserve’s fair lending supervisory program reflects our commitment to promoting financial inclusion and ensuring that the financial institutions under our jurisdiction fully comply with applicable Federal consumer protection laws and regulations. For all State member banks, we enforce the FHA, which means we re- view all Federal Reserve-regulated institutions for potential dis- crimination in mortgages, including potential redlining, pricing, and underwriting discrimination. For State member banks of $10 billion dollars or less in assets, we also enforce the Equal Credit Opportunity Act, which means we review these State member VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00056 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL 53 banks for potential discrimination in any credit product. Together, these laws prohibit discrimination on the basis of race, color, na- tional origin, sex, religion, marital status, familial status, age, handicap/disability, receipt of public assistance, and the good faith exercise of rights under the Consumer Credit Protection Act (collec- tively, the ‘‘prohibited basis’’). We evaluate fair lending risk at every consumer compliance exam based on the risk factors set forth in the interagency fair lending examination procedures. The procedures include risk fac- tors related to potential discrimination in redlining, pricing, and underwriting. While we find that the vast majority of our institu- tions comply with the fair lending laws, we are committed to iden- tifying and remedying violations when they have occurred. Pursu- ant to the Equal Credit Opportunity Act, if we determine that a bank has engaged in a pattern or practice of discrimination, we refer the matter to the U.S. Department of Justice (DOJ). Federal Reserve referrals have resulted in DOJ public actions in critical areas, such as redlining and mortgage pricing discrimination. For example, in our redlining referrals, the Federal Reserve found that the banks treated majority-minority areas less favorably than non- minority areas, such as through Community Reinvestment Act (CRA) assessment-area delineations, branching, lending patterns, and marketing. For our mortgage-pricing discrimination referrals, the Federal Reserve found that the banks charged higher prices to African American or Hispanic borrowers than they charged to simi- larly situated non-Hispanic white borrowers and that the higher prices could not be explained by legitimate pricing criteria.1 We also work proactively to support financial institutions in their efforts to guard against fair lending risks through outreach efforts that actively promote sound compliance management practices and programs. The outreach efforts include Consumer Compliance Out- look, a widely subscribed Federal Reserve System publication fo- cused on consumer compliance issues, and its companion webinar series, Outlook Live.2 For example, in 2017, we sponsored an inter- agency webinar on fair lending supervision with almost 6,000 reg- istrants. Several of the webinars and articles described the key risk factors related to redlining and pricing discrimination, as well as information about what banks should do to mitigate those risks. With respect to potential discrimination in the pricing or under- writing mortgages, if warranted by risk factors, the Federal Re- serve will request data beyond the public Home Mortgage Disclo- sure Act (HMDA) data, including any data related to relevant pric- ing or underwriting criteria, such as applicant interest rates and credit scores. The analysis then incorporates the additional data to determine whether applicants with similar characteristics received different pricing or underwriting outcomes on a prohibited basis 1See, e.g., DOJ public fair lending settlements with Midwest BankCentre; SunTrust Mortgage Inc.; and Countrywide Financial Corporation. The public actions were based on referrals from the Federal Reserve, and can be found at: https://www.justice.gov/crt/housing-and-civil-en- forcement-section-cases-1#lending. More information about recent referrals to the DOJ can be found in the Federal Reserve’s annual report at www.federalreserve.gov/publications/2016-ar- consumer-and-community-affairs.htm#14890. 2See https://www.consumercomplianceoutlook.org/ and https://www.consumercompliance outlook.org/outlooklive/. VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00057 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL 54 (for example, on the basis of race), or whether legitimate pricing or underwriting criteria can explain the differences.3 With respect to potential redlining discrimination, the current data analysis does not rely on an evaluation of the additional data fields, but rather the number of HMDA mortgage applications and originations generated in majority-minority tracts by the bank and similar lenders. More specifically, the analysis reviews whether the bank’s record of HMDA mortgage applications and originations in majority-minority tracts4 shows statistically significant disparities when compared with the lending record of similar lenders. Thus, although additional fields from the exempted institutions could en- hance the data analysis, provisions in the recently enacted bill, S. 2155, related to HMDA data collection requirements would not im- pact the Federal Reserve’s ability to fully evaluate the risk of red- lining discrimination. Moreover, as explained further below, the data analysis is only one aspect of the redlining analysis. Q.3. Historical HMDA data does not collect information on certain racial and ethnic populations at a finer level of granularity. For in- stance, expanded HMDA requirements that would be rolled back by S. 2155 require reporting within the Asian community (Asian In- dian, Chinese, Filipino, Japanese, Korean, and Vietnamese, among others) and within the Hispanic or Latino communities (Mexican, Puerto Rican, among Cuban, among others). Q.3.a. How will you monitor and ensure that banks are not en- gaged in redlining specifically against some of these subgroups without collecting this data? Q.3.b. With historic HMDA data only, do you have the capacity to discern whether lenders are charging single female borrowers high- er interest rates or more expensive points and fees on mortgages compared to single men? A.3.a.–b. Consistent with the interagency fair lending examination procedures, the Federal Reserve’s redlining review evaluates whether the bank treated majority-minority census tracts less fa- vorably with respect to the following risk factors: • CRA assessment area, • branching strategy, • lending record for HMDA-reportable mortgage applications and originations, • marketing and outreach, and • complaints. 3A recent study of publicly available HMDA data conducted by The Center for Investigative Reporting and published by Reveal News concluded that African Americans, Latinos, and other individuals of color were more likely to be denied loans for home purchases and home remod- eling than white borrowers. See Aaron Glantz and Emmanuel Martinez, ‘‘Kept Out,’’ Reveal News, Feb. 15, 2018, available at: https://www.revealnews.org/article/for-people-of-color-banks- are-shutting-the-door-to-homeownership/. Studies such as these put much-needed focus on racial disparities and Federal Reserve staff carefully review them. However, as noted, HMDA data have limitations. These data do not include important underwriting criteria, such as credit scores and loan-to-value ratios. If concerns arise regarding a Federal Reserve-regulated institu- tion, we will request additional data beyond the publicly available HMDA data to fully evaluate whether applicants with similar characteristics received different underwriting outcomes on a prohibited basis (for example, on the basis of race), or whether legitimate underwriting criteria can explain the differences. 4Majority-minority tracts are defined as census tracts that are more than 50 percent African American and Hispanic. VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00058 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL 55 With respect to the lending record, the data analysis reviews the HMDA-reportable mortgage applications and originations gen- erated in majority-minority census tracts. The definition of major- ity-minority tract is based on the census data classifications for the race and/or ethnicity of the residents of the census tract, rather than on HMDA data classifications. Thus, although the additional data fields from the exempted institutions could enhance the data analysis, provisions in the recently enacted bill, S. 2155, related to HMDA data collection requirements would not impact the Federal Reserve’s ability to fully evaluate the risk of redlining discrimina- tion. Also consistent with the interagency fair lending examination procedures, the Federal Reserve’s pricing review evaluates the fol- lowing key risk factors: • financial incentives to charge higher prices, • loan originator discretion to determine pricing criteria and set the price, • disparities in pricing on a prohibited basis, and • complaints. The analysis of potential pricing disparities includes the review of potential disparities in the annual percentage rate, interest rate, and fees. Although not included in the public HMDA data, if war- ranted by risk factors, the Federal Reserve will request these data as well as any other data related to relevant pricing criteria, such as the interest rate and credit score. Also, the Federal Reserve analyzes the disparity on a prohibited basis, including potential discrimination for single females. The current HMDA data classifications allow for an analysis of poten- tial discrimination against single females. Thus, provisions in the recently enacted bill, S. 2155, related to HMDA data collection re- quirements would not impact the Federal Reserve’s ability to fully evaluate the risk of mortgage pricing discrimination, including for single females. Please also see the response to question 2. Q.4. In your testimony, you stated that data collected under HMDA’s original requirements was adequate for the Federal Re- serve when examining financial institutions for compliance with the Community Reinvestment Act. Wall Street Reform’s expansion of HMDA requirements included a number of critical requirements that were motivated by the financial crisis, including quality of loan, interest rate and providing the legal entity identifier (LEI) of the lender. Without the expanded requirements under Wall Street Reform, how is the Federal Reserve examining the quality of the loans being given to borrowers, particularly female borrowers and bor- rowers of color? A.4. To determine the risk of potential pricing or underwriting dis- crimination in mortgages on a prohibited basis (such as, sex, race, color, or national origin), the Federal Reserve evaluates State mem- ber banks for compliance with the FHA (and the Equal Credit Op- portunity Act for State member banks with $10 billion or less in assets). Although not included in the public HMDA data, if VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00059 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL 56 warranted by risk factors, the Federal Reserve will request any data related to relevant pricing and underwriting criteria, such as the interest rate and credit score. Thus, provisions in the recently enacted bill, S. 2155, related to HMDA data collection require- ments for certain institutions would not impact the Federal Re- serve’s ability to fully evaluate the risk of mortgage pricing or un- derwriting discrimination, including for female borrowers or bor- rowers of color. While we find that the vast majority of institutions regulated by the Federal Reserve comply with the fair lending laws, we some- times find violations of the laws and regulations. If we determine that a bank has engaged in a pattern or practice of discrimination, we refer the matter to the DOJ, pursuant to the Equal Credit Op- portunity Act. We also take evidence of discrimination into account when assigning consumer compliance ratings and CRA ratings, consistent with regulations and supervisory guidance. Please also see the response to questions 2 and 3. Q.5. Wall Street Reform also expanded on requirements when re- porting ethnicity. For example, for Asian American Pacific Islander, lenders should also provide an ethnic breakdown. Without this specific data of race and ethnicity, will the Federal Reserve be able to identify discrimination against specific ethnic groups, such as Filipino or Hmong? A.5. Reviews of potential pricing or underwriting discrimination based on the race or ethnicity of the borrower may be impacted by HMDA data classifications, but other risk factors can be used to evaluate potential discrimination, such as loan policies and proce- dures, marketing, and complaints. Please also see the response to question 2. Q.6. A 2014 analysis of OneWest Bank—which was then owned by Treasury Secretary Steve Mnuchin—found that the Bank had a ‘‘low satisfactory’’ on its last CRA evaluation; that only 15 percent of the banks’ branches were located in low- and moderate-income census tracts; and that the majority of ‘‘small business’’ loans made by OneWest were to businesses with more than $1 million in rev- enue. Q.6.a. What recourse does the Community Reinvestment Act give to the Federal Reserve and other regulators when banks have this kind of record? Q.6.b. How can banks that consistently receive low ratings for their lending to small businesses and communities of color be bet- ter incentivized to improve their record? A.6.a.–b. The CRA regulations define the ratings and recognize that a ‘‘low satisfactory’’ rating under the CRA lending test and/or service test is indicative of ‘‘adequate’’ performance in responding to the credit needs in its assessment areas(s), taking into account the number and amount of home mortgage, small business, small farm, and consumer loans, as well as an adequate geographic dis- tribution of loans in its assessment area(s). The CRA ratings are publicly available, which motivates some in- stitutions to seek to improve their rating. Regulators encourage and support banks in this aim by pointing out ways they can VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00060 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL 57 improve their CRA performance, which would meet supervisory ex- pectations and enhance how their record is viewed by the public. Further, an overall CRA rating of less than satisfactory can be an impediment to favorable action on an application or notice sub- mitted to the Federal Reserve. Q.7. I agree with you that sound data is critically important in in- forming the policy and enforcement decisions you’ll be making. However, I am very concerned that such analysis fails to capture the human and economic cost of massive financial system failure. For example, in 2009, when I was Attorney General, Nevada had 165,983 people unemployed. Also that year, in a State of 3 million people, we had 28,223 personal bankruptcies, 366,606 mortgage de- linquencies and 421,445 credit card delinquencies.5 In addition, 121,000 Nevada children’s lives and educations were disrupted by the foreclosure crisis. And, we had more than 219,000 foreclosures between 2007–2016. Q.7.a. Do you agree the Fed underestimated the human costs of the financial crisis prior to 2008? A.7.a. The recent financial crisis took a devastating toll on con- sumers, families, and businesses, as well as revealing weaknesses in our financial system. The fragilities that arose in the U.S. finan- cial system by the mid-2000s resulted in the worst U.S. recession since the Great Depression and a painfully slow economic recovery. We have worked hard in the aftermath of the crisis to make sure we have a financial system that is safer, sounder, has more capital, higher quality capital, and is less prone to crises. Financial crises are immensely costly to the well-being of households, families, indi- viduals, and businesses. It is important to make sure we do every- thing we can to reduce the odds of another devastating crisis. Q.7.b. How will your analysts accurately ensure you’ll get it right this time? A.7.b. The Federal Reserve has substantially increased its efforts to assess risks to financial stability on an ongoing basis, in conjunc- tion with other U.S. agencies (through, for example, discussions at the Financial Stability Oversight Council). These efforts may pro- vide insight into the buildup of risks and allow the appropriate reg- ulatory agencies to take steps to mitigate risks to financial sta- bility. At the same time, we are aware of the challenges facing anyone trying to predict rare events such as financial crises. In part be- cause of these challenges, the Federal Reserve has focused on in- creasing the resilience of the financial system, so that when detri- mental, unforeseen events occur, the system absorbs, rather than amplifies, them. An important part of increased resilience is a set of higher standards for key institutions. These standards are high- er for the largest, most systemic firms and include capital regula- tion, liquidity regulation, steps to enhance the resolvability of large bank-holding companies, and stress testing of large bank-holding companies. 5See Center for American Progress. ‘‘10 Years Later: The Financial Crisis State by State.’’ February 22, 2018. Available at: https://www.americanprogress.org/issues/economy/news/ 2018/02/22/447031/10-years-later-financial-crisis-state-state/. VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00061 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL 58 We have implemented these standards as a response to the in- creased awareness among economists of the risks and costs of fi- nancial crises. Research, including research by staff within the Federal Reserve System, has documented the large adverse effects of financial crises and the benefits associated with regulatory standards that raise the resilience of the financial system.6 Q.7.c. What concerns do you have that cost-benefit analysis re- quirements allow financial institutions the ability to sue regulators to avoid regulation? A.7.c. The Federal Reserve Board (Board) takes seriously the im- portance of evaluating the costs and benefits of its rulemaking ef- forts. Under the Board’s current practice, consideration of costs and benefits occurs at each stage of the rule or policymaking process. Before the Board develops a regulatory proposal, the Board often collects information directly from parties that it expects will be af- fected by the rulemaking through surveys of affected parties and meetings with interested parties and their representatives. In the rulemaking process, the Board also specifically seeks comment from the public on the costs and benefits of the proposed approach as well as on a variety of alternative approaches to the proposal. In adopting the final rule, the Board seeks to adopt a regulatory alternative that faithfully reflects the statutory provisions and the intent of Congress while minimizing regulatory burden. The Board also provides an analysis of the costs to small depository organiza- tions of our rulemaking consistent with the Regulatory Flexibility Act and computes the anticipated cost of paperwork consistent with the Paperwork Reduction Act. Increasingly, the Board has pub- lished quantitative analyses in connection with its rulemakings. Recent examples include the global systemically important banks surcharge rule, the single-counterparty credit limit rule, and the long-term debt rule. To further these efforts, the Board recently es- tablished an office and hired additional staff to focus on analyzing the costs and benefits associated with its rulemakings. The Administrative Procedure Act (APA), which the Board fol- lows, provides for judicial review of final regulations. Affected firms have the right to challenge the actions of an administrative agency under the APA, including whether the agency has engaged in rea- soned decisionmaking. Litigation, of course, imposes certain costs on the litigants including an agency and delays the rulemaking process. Q.8. I am very concerned about forcing more than 800,000 men and women—Dreamers—out of the country. It is a cruel betrayal of the promises we’ve made to them. In Nevada, we have more than 13,000 Dreamers. If our neighbors, friends, and colleagues are de- ported, some estimate that Nevada would lose more than $600 mil- lion in annual economic growth. Q.8.a. Organizations, on both sides of the spectrum, estimate that detaining and deporting DACA recipients could cost the U.S. 6For example, the following research paper discusses these issues and related research: Fire- stone, Simon, Amy Lorenc, and Ben Ranish (2017). ‘‘An Empirical Economic Assessment of the Costs and Benefits of Bank Capital in the U.S.,’’ Finance and Economics Discussion Series 2017–034. Board of Governors of the Federal Reserve System (U.S.). VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00062 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL 59 economy between $280 and $460 billion a year. The United States Chamber of Commerce called ending DACA ‘‘a nightmare for Amer- ica’s economy.’’ Q.8.b. Has the Federal Reserve published any information on how the deportation of the Dreamers will affect our Nation’s economy? Q.8.c. What do you think the economic impact of deporting 800,000 Dreamers—90 percent or about 720,000 of whom are employed— would be on labor force participation, economic growth and produc- tivity? A.8.a.–c. Over long periods of time, economic growth generally re- flects the trend rate of growth of the population, the trend in labor force participation, and the trend in productivity growth. A large deportation of individuals currently living in the United States would probably reduce the level of economic output, for the simple reason that the population—and hence the workforce—would be smaller. That being said, the Federal Reserve has not published in- formation pertaining to your questions. The manner in which eco- nomic output per capita would be affected is a more difficult ques- tion; the answer would depend on such factors as how the labor- force participation of the deported individuals compared with that of the remaining population; how the productivity of the deported individuals compared with that of the remaining population; and the question of whether problems of job matching would arise (if, for example, deported individuals were concentrated in particular industries, occupations, or geographic areas, and whether non- deposited individuals were available and willing to fill the resulting vacancies). Q.9. Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis recently wrote an op-ed in the Wall Street Journal on why immigration is the key to economic growth. The Minneapolis Fed estimates that boosting legal immigration by one million peo- ple a year would grow the economy by at least 0.5 percent a year, even under the most conservative assumptions. Do you agree with the president of the Federal Reserve of Min- neapolis that increasing legal immigration will grow our economy? A.9. Growth in the labor force is all important determinant of the longer-run growth rate of the U.S. economy. Because many legal immigrants actively participate in the workforce, challenges in the pace of immigration can affect economic growth. Having said that, however, the issue of immigration is well outside of the remit of the Federal Reserve System, and it would be more prudent for others to decide how best to address that issue. Q.10. I represent Nevada, which is within the San Francisco Fed- eral Reserve District. We are one of the most diverse districts in the Nation—with many Latino and Asian Pacific American fami- lies. We value that diversity because it leads to innovation, economic growth and stronger connections with other nations in our globally connected world. A recent report by Fed Up, Working People Still Need a Voice at the Fed: 2018 Diversity Analysis of Federal Reserve Bank Direc- tors, found that there is inadequate diversity at the Federal VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00063 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL 60 Reserve. It specifically cited the San Francisco Federal Reserve as one of system’s least diverse regional banks. The report states, ‘‘De- spite covering some of the most demographically diverse counties in the United States, 100 percent of the San Francisco Fed’s Board of Directors come from the banking and financial sector. The direc- tors are 78 percent white and 78 percent male.’’ Q.10.a. How will you work with Director Clark to improve the gen- der and racial diversity of the Board of Directors at the 12 regional Reserve Banks? And specifically the San Francisco Fed? Q.10.b. How will you work to end the outsized representation and influence of the banking and business sectors among the Regional Bank Boards of Directors? Q.10.c. Have you identified directors with nonprofit, academic, and labor backgrounds that could also serve? A.10.a.–c. Diversity is a critical aspect of all successful organiza- tions, and I am committed to fostering diversity and inclusion throughout the Federal Reserve System. In my experience, we make better decisions when we have a wide range of backgrounds and voices around the table. I assure you that diversity is a high priority objective for the Federal Reserve. The Federal Reserve Board (Board) focuses particular attention on increasing gender, racial, and sector diversity among directors because we believe that the System’s boards function most effec- tively when they are constituted in a manner that encourages a va- riety of perspectives and viewpoints. Monetary policymaking also benefits from having directors who effectively represent the com- munities they serve because we rely on directors to provide mean- ingful grassroots economic intelligence. Because all directors serve in this role, we believe it is important to consider the characteris- tics of both Reserve Bank and Branch boards. Each year, the Board carefully reviews the demographic charac- teristics of Reserve Bank and Branch boards. This information is shared with Reserve Bank leadership, including the current Chair and Deputy Chair of each board, and areas for improvement are highlighted. The Board thoroughly vets all candidates for Class C and Board- appointed Branch director vacancies, taking into consideration fac- tors such as professional experience, leadership skills, and commu- nity engagement. The Board also evaluates a candidate’s ability to contribute meaningful insights into economic conditions of signifi- cance to the District and the Nation as a whole. As part of this process, the Board focuses considerable attention on whether a can- didate is likely to provide the perspective of historically underrep- resented groups, such as consumer/community and labor organiza- tions, minorities, and women. Although there is room for improvement, the System has made significant progress in recent years in recruiting highly qualified women and minorities for director positions. For example, in 2018, approximately 56 percent of all System directors are diverse in terms of gender and/or race (with a racially diverse woman counted only one time), which represents a 16 percentage point increase in the share of directors since 2014. With respect to the San Francisco District, 21 of 37 directors, or approximately 57 percent of all VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00064 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL 61 Reserve Bank and Branch directors, are diverse. On the Reserve Bank’s head-office board, 4 of 9 directors, or approximately 44 per- cent of Reserve Bank directors, are diverse. We also have numer- ous directors who represent consumer/community and labor organi- zations serving on boards throughout the System. In addition, we gain invaluable insight and perspective from directors who are af- filiated with other types of organizations, including major health care providers, universities and colleges, and regional chambers of commerce, among others. Q.11. Chair Yellen was the first chair in Federal Reserve history to share data with this Committee about racial economic dispari- ties during her semi-annual testimony. When she presented that data, she touted significant progress, and indeed, black unemploy- ment fell from 11.8 percent at the beginning of her term to the cur- rent historically low figure of 6.8 percent. Q.11.a. What do you attribute this trend to? Q.11.b. Do you think the attention that Chair Yellen paid to this issue and the policies of the Federal Reserve deserve some credit for the progress that has been made? A.11.a.–b. The improvement in the black unemployment rate in re- cent years reflects the general strengthening in labor-market condi- tions during that time period; and the credit for the general strengthening, in turn, goes to the millions of individuals who go to work day in and day out and work hard, and to those who run businesses, take risks, and generate creative new ideas and new products. Chair Yellen deserves great credit for shining light on the impor- tant differences in economic well-being across different segments of the population; I intend to continue that practice. As a Nation, we have a long way to go before we will have achieved the objective of full economic inclusion of all segments of the population. Q.12. At that same testimony where Janet Yellen presented infor- mation about racial economic disparities, she said, quote ‘‘it is trou- bling that unemployment rates for these minority groups remain higher than for the Nation overall, and that the annual income of the median African American household is still well below the me- dian income of other U.S. households.’’ Though African American unemployment is lower today, Chair Yellen’s point remains true. Q.12.a. Do you think the recent progress is sufficient? Q.12.b. What more can be done to ensure that unemployment among African Americans is equal to white unemployment? Q.12.c. And, how do you plan to respond to reports that African Americans with a college degree have lower employment and wealth than whites with the less education? African American women and Latinos are graduating from college in record numbers but are still having a harder time finding a job. A.12.a.–c. I do not think that recent progress has been sufficient. As I noted earlier, we have a long way to go before we will have achieved the objective of full economic inclusion of all segments of the population. The steps that will be necessary to attain full economic inclusion span virtually the entire spectrum of economic VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00065 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL 62 policy areas. These are important issues for Congress’ consider- ation. Q.13. For years, many of my colleagues have suggested that the Fed is unfairly hurting savers through low interest rates. On the subject of seniors, savers, and depositors, I want to ask about a proposal by a nominee to the Board of Governors, Marvin Goodfriend. For decades, Mr. Goodfriend promoted the Fed to incentivize spending by placing a tax on currency. He does admit that ‘‘the regressivity of the tax’’ is a concern. If Mr. Goodfriend’s proposal were to be implemented, can you es- timate what the impact would be on savers and low-income deposi- tors? A.13. Nominations to serve on the Board of Governors are made by the President and require consent of the Senate. It is up to the President and Senate to evaluate the views and qualifications of potential members of the Board. I do not want to comment on a specific nominee. The Federal Reserve has not considered and is not planning to consider a tax on U.S. currency. Our Nation’s currency plays an important role as a means of payment and store of value worldwide and taking any action that could diminish its role in the domestic or global economy would need to be very carefully thought through after a thorough review and analysis of relevant data. Q.14. Chair Powell, at your nomination hearing, you told me that you supported strong consumer protections. Since that time, the Consumer Financial Protection Bureau has endured new leader- ship that is hostile to its mission. Q.14.a. If the Bureau continues to drop lawsuits against predatory online loan companies, like Golden Valley Lending or drop inves- tigations against companies like World Acceptance Corporation, one of the biggest payday lenders, will the Federal Reserve’s con- sumer protection staff pick up the slack and protect people from fraud and abuse? Q.14.b. If the Consumer Financial Protection Bureau’s leadership refuses to ask for adequate funding, will you let us know if preda- tory and deceptive practices start going unaddressed by a weaker Consumer Financial Protection Bureau? Q.14.c. Has the Federal Reserve weighed in on the impact from the Consumer Bureau’s decision to weaken fair lending enforcement, suspend the civil penalties fund and stop investigating the hack of 145 million people’s information held by Equifax? Q.14.d. What have you shared with the leadership of the Bureau? A.14.a.–d. While the Board plays a consultative role in CFPB rulemakings and coordinates in the examinations as appropriate, we do not have any oversight of the CFPB organizational or struc- tural design, which is defined in statute, nor of CFPB enforcement priorities. By statute, the organizational structure and prioritization of the CFPB’s fair lending work is up to the CFPB’s director to decide. For our part, the Federal Reserve continues to carry out our su- pervisory and enforcement responsibilities for the financial institu- tions and for the laws and regulations under our authority. VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00066 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL 63 We remain committed to ensuring that the financial institutions under our jurisdiction fully comply with all applicable Federal con- sumer protection laws and regulations. For example, in the last few years, the Federal Reserve has addressed unfair and deceptive practices through public enforcement actions that have collectively benefited hundreds of thousands of consumers and provided mil- lions of dollars in restitution. In addition, our examiners evaluate fair lending risk at every consumer compliance exam. Pursuant to the Equal Credit Opportunity Act, if we determine that a bank has engaged in a pattern or practice of discrimination, we refer the matter to the DOJ. Federal Reserve referrals have resulted in DOJ public actions in critical areas, such as redlining and mortgage- pricing discrimination. With respect to the Equifax data breach, the Federal Reserve’s authority is limited. The Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (agencies) have authority to examine and regulate bank service companies under the Bank Service Company Act (BSCA).1 Addi- tionally, the BSCA provides the agencies with limited authority to regulate and examine the activities of other films that provide cer- tain services to the institutions we supervise.2 The three largest credit reporting agencies in the United States (Equifax, Experian, and TransUnion) are not owned by insured depository institutions and are thus not bank service companies. Accordingly, any author- ity the agencies have under the BSCA with respect to the activities of these companies would arise under the BSCA in so far as in- sured depository institutions (or their subsidiaries or affiliates) are outsourcing services authorized under the BSCA. To date, none of the agencies has concluded that the credit reports that credit re- porting agencies sell to the institutions we supervise are services within the scope of the BHCA. However, the Federal Reserve expects financial institutions to follow vendor management guidance issued by the Board and the Federal Financial Institutions Examination Council, which includes conducting an assessment of the relationships with third parties and their handling and protection of sensitive personal information of individuals. As such, the Federal Reserve holds the institutions we supervise accountable for conducting appropriate due diligence and risk management with respect to their relationships with third-parties, including credit reporting agencies. Our examiners regularly assess banking organizations’ programs for due diligence, contract management, ongoing monitoring, and overall risk man- agement of third-party and vendor relationships as part of Federal Reserve examinations. In addition, the Board, along with the other banking agencies and the Federal Trade Commission have jointly issued rules under the Fair Credit Reporting Act that require fi- nancial institutions to maintain identity theft prevention programs. 1See 12 U.S.C. § 1867(a). A ‘‘bank service company’’ is defined as a company that is organized to provide services authorized under the BSCA and that is owned exclusively by one or more insured depository institutions. 12 U.S.C. § 1861(b)(2). 2Whenever an insured depository institution, or any subsidiary or affiliate of such insured de- pository institution, causes to be performed for itself services authorized under the BSCA, such performance is subject to regulation and examination to the same extent as if such services were being performed by the insured depository institution itself on its own premises. 12 U.S.C. § 1867(c). VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00067 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL 64 These programs must include policies and procedures for detecting, preventing, and mitigating identity theft, and we examine the banks we supervise for compliance with these rules. Finally, under the Gramm-Leach-Bliley Act, the Board and other banking agen- cies have issued guidelines to institutions containing standards for safeguarding their customers’ data. Q.15. In recent years, Federal Reserve policymakers have warned that we should raise interest rates to counter asset bubbles desta- bilizing the financial system. Board of Governor nominee Marvin Goodfriend has suggested replacing liquidity coverage ratios and a host of other regulations with tighter monetary policy. Q.15.a. Do you believe that the blunt tool of monetary policy can be a substitute for sound financial protections? What is your read- ing of the historical evidence surrounding the relationship between monetary policy and asset bubbles? A.15.a. As stated above, it is up to the President and Senate to evaluate the views and qualifications of potential members of the Board. I do not want to comment on a specific nominee. Strong regulatory and supervisory standards are critical for fi- nancial stability. In the years leading up to 2007–2008, excessive leverage and maturity transformation left the U.S. and global econ- omy vulnerable to a deterioration in the U.S. housing market and an increase in investor concerns regarding the solvency and liquid- ity of large, interconnected financial institutions. Reforms since that time, enacted by Congress and implemented by the appro- priate agencies, have raised loss-absorbing capacity within the fi- nancial sector and reduced the susceptibility of the financial sys- tem to destabilizing runs. Monetary policy, already tasked with the goals of price stability and full employment, should not be consid- ered a substitute for strong financial and supervisory standards. Moreover, asset-price swings owe to many factors, and monetary policy has not generally been a prime factor in historical episodes involving large movements in asset prices. Q.15.b. Besides monetary policy, what other tools are available to temper asset bubbles? A.15.b. It is difficult to identify whether an asset price has reached an unsustainably high (or low) level. For this reason, it is impor- tant to monitor asset price developments and to consider whether, for example, unusually rapid increases in asset prices are leading to vulnerabilities in the U.S. economy that could jeopardize finan- cial stability, price stability, or full employment. If a rapid increase in nonfinancial borrowing, leverage in the financial sector, or matu- rity transformation accompanied a rapid rise in asset prices, tools aimed directly at mitigating such vulnerabilities could be appro- priate. For example, the Countercyclical Capital Buffer is a regu- latory tool that requires the largest, most systemic bank-holding companies to build additional loss absorbing capacity when the Board identifies a need for such additional resilience. However, the difficulties associated with the detection of vulnerabilities as they emerge highlight the need for strong regulatory and supervisory standards at all times. The capital and liquidity regulations and supervisory policies adopted by the VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00068 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL 65 Federal Reserve, including stress testing, represent such an ap- proach to maintaining resilience at a level that limit excessive risk. Q.15.c. Isn’t it true that countries with tighter monetary policy than the United States also experienced housing bubbles in the early 2000s? A.15.c. The housing boom during the early 2000s was global in na- ture, with house prices rising across most advanced economies. Al- though the availability of mortgage financing at favorable rates co- incided with strong housing markets in some countries, there were particularly rapid house price gains in several economies whose key monetary policy rates never declined below 31⁄ 2 percent, in- cluding Australia, New Zealand, Norway, and the United Kingdom. Each of those economies experienced house price declines, to vary- ing degrees of severity, during the global financial crisis that fol- lowed. Subsequent studies, including at the International Monetary Fund, have found that the stance of monetary policy is not gen- erally a good leading indicator of future house price bubbles and busts. Q.15.d. Can you speak to the scale of interest rate increases that would be needed to rein in an asset bubble? A.15.d. As noted in the second answer to question 15, it is difficult to detect whether an asset price has reached an unsustainable level. A corollary of this challenge is that it is hard to determine what factors are driving unsustainable asset-price movements. The condition of markets is one of many factors that could influence the underlying economy, but efforts to influence asset prices in a man- ner that is not consistent with the Federal Reserve’s employment and price-stability objectives could compromise the achievement of those objectives. VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00069 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL 66 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00070 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.10079103 For use alll :00 a.m., fST N!bruary 23, 2018 Poucv MoNETARY REPORT February 23, 2018 Board of Governors of the Federal Reserve System 67 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00071 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.20079103 T lETIER OF RANSMITIAL BOARD OF GoVERNORS OF TilE FEDERAL RE.SERI'E SYSTEM Washington, D.C., February 23. 2018 T11E I'REsiDE~>1' OF TilE Sr:NATE TilE Si'EAKt.l\ OFT ilE HOUSE OF REPRESE~1'Alli'ES Tile lloard or Gol'crnors is pleased to submit its Monetary Policy Report pursuant to section2 B or the Federdl Rescfl'e Act. Sincerely, ~H. P~ Jerome H.l'owell, Chairman 68 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00072 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.30079103 5 STATEMENT ON LONGER-RUN GOALS AND MONETARY POLICY TRATEGY Adopted efiecbve january 24. 2012: as amended efiecUve january 30, 2018 The Federal Open ~1arket Committee {FOMC) is firmlyc ommitted to fulfilling its statutory mandate from the Congress of promoting maximume mployment. stable prices, and moderate loog-tenn interest rates. The Committee seeks to e.wlain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decisionmaking by households and businesses, reduces economic aod financial uncertainty, increases tbe etTecti~·eness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society. Inflation. employment, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Moreove~ monetary policy actions tend to influence economic activity and prices with a lag. Titerefore. the COnunittee's policy decisions reflect its longer-run goals, its medium term outlook, and its assessments of the balance of risks. including risks to the financial S}~tem that could impede tbe attainment of the COmmittee's goals. Tile in Hat ion rate over tbe longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. Tile Committee reaffirms its judgment that inflation at the rate of 2 pereent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Rescn>e's statutory mandate. Tile Committee would he concerned if inflation were running persistemly above or below this objective. Communicating this symmetric inflation goal clearly to the public helps keep longer-termi nflation expectations firmly anchored, thereby footer ing price stability and moderate long-tenn interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances. The maximuml evel of employment is largely determined by nonmonetary f.1ctors that aflectthe structure and dynamics of the labor market. These factors may change over time and may not he directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rath e~ the Committee's policy decisions must he infonned by assessments of the maximum level of employment. recognizing that such assessments are necessarily uncertain and subject to revision. Tile COmmittee considers a wide range of indicators in making these assessments. lnfom1ation about Committee participants' estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC's Summary of Economic Projections. For example, in the most recent projections, the median of FOMC participants' estimates of the longer-run normal rate of unemployment was 4.6 peroent. In setting monetary policy, the Committee seeks to mitigate deviatious of inflation from its longer-run goal and deviations of employment fromt he COmmittee's assessments of its ma.~imum level. These objectives are generally complementary. Howe~~r. under ciroumstanocs in which the COmmittee judges that the objectives are not complementary, it follows a balanced approach in promoting them. taking into account the magnitude of the deviations and the potentiallyd ifferent time hori1.0ns over whiche mployment and inflationa re projected to return to levels judged consistent with its mandate. Tile COmmittee intends to reaffinn these principles and to make adjustments as appropriate at its annual organiZ.1tional meeting each January. 69 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00073 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.40079103 CONTENTS Summary .................................................. 1 E0011omic and Financial Developments . . . . . . . . . . . . . . . . ....... 1 Monetary Policy ..........................•......•.............•......•.... 2 SpeciaiTopics ............................................................. 2 Part 1: Recent Economic and Financial Developments ................ 5 Domestic DevelopmeniS.. .. .. .................... 5 Financial Developments. . . . . . . . . . . . . .........•.............•.......... 21 International DevelopmeniS ................................................. 27 Pari 2: Monetary Policy ....................................... 31 Part 3: Summary of Economic Projections ......................... 39 The Outlook for Economic Activity. .. .. .. . .. .. .. . .. .. • . . .. .. .... 40 The Outlook for Inflation ................................................... 45 Appropriale Monetary Policy . . . • .. . • . . • .. . • • . • • . . • • . • .. . . • . • • . . .. . • . . . . . 45 Uncertainty and Risks.... .. .. . .. .. .. . .. .. . ........................... 45 Abbreviations .............................................. 55 List of Boxes How Tight Is the labor Market? ................................................ 8 Low Inflation in the Advanced Economies .. .. .. 14 DevelopmeniS Related to Financial Stability. . . . . 24 Monetary Policy Rules and Their Role in the Federal Reserve's Policy Process ..•.•....•.• 35 Forecast Unceminty ....................................................... 54 Non: This repor1 reflects infonnalion Ih at was l"'blidy available as of noon ESTo n February 22, 2018. Unless Olhenvi5e sUied, lhe time 5enes in lhe figures extend through, for d~ly data, februal'( 21, 2018; for monthly dat>, Janua'Y 2018; and, for quar1erly dala, 2017:Q4.1n barch<>ns. EXcepc as nOied,lhechange for a gi>-en period is measured to i~ final quarter from lhe final quarter of lhe preceding period. Fcwr-'tllra\5andllJI'IOitlhauhtS&PSOOincleundtlle0ow)l)oeS8al'ltlndttart~oiS&POOw!Cnesl~llCardl.:riiUffiliatl"lwd ~J\~be!nl~b!l".!tyll't!BoiJd_Cq:r,liglt010l3S&P0owiC~CeStndic6LlC,adivo!iCIIdS&PCiobi!,anc!brils~AIInglft~ ~E<IOilll>u""'"""""""'·-""""""''"'".!lole"illponorepool>l>'.edw<""'""''"'P"""'"''ofS&PimJonesltd•"'llC.Fol""" i<'~lotr:'latJOnonal'l)'cfS&POow,IOI'ltslncktsUC\11'11ktlpl~'li$11n..,,$fldji.<'OJO S&Pf)iUt!gj\if:rtd~~<l~lAxlf\Fir.at~ttal StrvloKL1C,ardDlw~l1iltt;51!r!dn5emar'c"o/O,:r.<t~lr:idM&rtHQIIir>i\LlC.Nfl.lhtrS&POow~l'llictsltC,IJc,wjor6lOO!mi..>k­ Hol4~llC,~alfalial~ll()(lheilthlldpart)'II~ITO.teitl)'~~(tiOf'Wri'IINin!)l,e:tpreUOfl~,as101hebl!tyolflf'JII'I6etiO ""'"'"'"""""""'""d"'OI""""'"""Ii>a!llp.opc<t"O"""""(Ind-W!m-I""""HC,!m-T<Odtml~t<oid'31 tlC,tte:raftil!ate.norlwlhtldp:;-ry~~a!l~;qlt:ob"rykra~er«m,onissiOI"'Syorlr~iensofarrtlrdecrsthfdatalnduded~n. 70 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00074 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.50079103 SuMMARY Economic activity increased at a solid pace objective of 2 percent. l11e price index for over the second half of2017, aod the labor personal consumptione xpenditures increased market continued to strengthen. Measured 1.7 percent over the 12 months ending in on a 12·month basis, inOation has remained December2017, about the same as in 2016. below the Federal Open Market Commiuee's The 12·month measureofinOation that (FOMC) longer·run objective of2 percent. excludes food and energy items (sa<alled l11e FOMC rnised the target range for the core inftation), which historically has been federal funds rate twice in the fu'St half of a better indicator of where overnll inflation 2017, resulting in a range of I to IY . pen:ent will be in the future than the headline figure, by the end of its June meeting. With the was 1.5 pen:ent in December-0.4 percentage federal funds rate rising toward more normal point lower than it had been one year cadier. levels, at its September meeting. the FOMC However, monthly readings on core ioDation decided to initiate a program of grndually were somewhat higher during tbe last few and predictably reducing the size of its months of2017than earlier in the year. balance sheet. At its meeting in December, Measures of longer·run inflation expectations the Committee judged that current and have, on balance, been generally stable, prospective economic conditions called for although some measures remain low by a further increase in the target range for the historical standards. federnl funds rate. to IY . to I~ percent. Economic gromh. Real gross domestic product Economic and Finandal (GDP) is reported to ha1oe increased at an Developments annual rate of nearly 3 percent in the second half of 2017 after rising slightly more than '111e labor rnarket. The labor market has 2 percent in tbe first half. Consumer spending continued to strengthen since the middle of expanded at a solid rate in the second half, last year. Payroll employment has posted solid supported by job gains, rising household gains. a'~rnging 182,000 per momb in the wealth. and favorable consumer sentiment. seven months starting in July 2017, about the Business investment groMb was robust, and same as the average pace in the first half of indicators of business sentiment have been 2017. Although net job creation last year was strong. 11le housing market has continued slightly slower than in 2016, it has remained to improve slowly. Foreign activity remained considerably faster than wbat is needed, solid and the dollar depreciated further in the on average, to absorb new entrants into the second half. but net exports subtracted from labor force. The unemployment rate declined real U.S. GDP gro111h as imports of consumer from 4.3 percent in June to 4.1 pen:ent in and capital goods surged late in the year. January-somewhat below the median of FOMC participants' estimates of its longer· financial conditions. Financial conditions run normal level. Other measures of labor for businesses and households have utilization also suggest that the labor market eased on balance since the middle of has tightened since last summer. Nonetheless, 2017 amid an impro1~ng global groMh wage growth bas been modernte.likely held outlook. Notwithstanding financial market down in part by the 11uk pace of productivity developments in recent 11~eks. broad measures gr0111b in recent years. of equity prices are higher, and spreads of yields on corporate bonds over those of IoDation. Consumer price inOation bas comparable-maturity Treasury securities have remained below the FOMC's longer·run narrowed. Mosttypesof consumer loans 71 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00075 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.60079103 remained widely available. though credit The FOMC expects that, with further gradual was still difficult to access in credit card and adjustments in the stance of monetary policy, mortgage markets for borrowers wiU1Iow economic activity will expand at a moderate credit scores or harder-to-document incomes. pace and labor market conditions will remain Longer-term nominal TreJSucy yields and strong. lnftation on a 12-month basis is mortgage rates have moved up on net. The expected to move up this year and to stabilize dollar depreciated, on average, against the around the Committee's 2 pertent objoctive currencies of our trading partners. In foreign over the next few years. The federal funds [nancial markets, equity prices generally rate is likely to remain, for some time, below increased in the second half of2017, and most levels that are expected to prevail in the longer of those indexes remain higher, on net. despite run. Consistent 11~th this outlook, in the most recent dectines Most longer-term yields rose recent Snmmacy of Economic Projoctions noticeably. (SEP), which was compiled at the time of the lA"CCmber FOMC meeting. the median of Financial stability. Vulnerabilities in the U.S. participants' assessments for the appropriate financial system are judged to be moderate on level of the federal funds rate through the end balance. Valuation pressures continue to be of2019 rem.1ins below the median projoction elevated across a range of asset classes even for its longer-run level. (The December SEP is alter taking into account the current level presented in Part 3o f this report.) However, of Treasury yields and thee xpectation that as the Committee has continued to emphasize, the reduction in corporate tax rates should the act11al path of the federal funds rate will generate an increase in after-tax earnings. depend on the economic outlook as informed Leverage in the nonfinancial business sector by incomingd ata. In particula~ with inflation has remained high, and net issuance of risl'Y ba1ing persistently run below the 2 pe.rcent debt has climbed in recent months. Inc ontrast, longer-run objective, the Committee will le~uage in the household sector has remained carefully monitor actual and expected ioDation at a relatively low level, and bousehold debt developments relative to its symmetric in recent years has expanded only about in inflationg oal. line 11ith nominal income. Moreover, U.S. banks are well capitalized and have significant Balance sheet policy. In the second half of liquidity buffers. 2017, the Committee initiated the balance sheet normalization program that is described Monetary Policy in the Addendum to the Policy Normalization Principles and Plans the Committee issued in Interest ratepoUcy. The FOMCcontinued June.' Specifically, since Octobe~ the Federal to gradually increase the target range for the Reserve has been gradually reducing its federal funds rate. After having raised it twice holdings of Treasucy and agency securities in the first half of 2017, the Conunittee raised by decreasing the reinvestment of principal the target range for tbe federal funds rate payments it recei1·~s from these socurities again in December, bringing it to the current range of I Y. to I~ percent. The decision Special Topics to increase the target range for the federal funds rate reflected the solid performance of How tight is the labor market? Although the economy. Even with this rate increase. there is no way to know with precision. the the stance of monetary policy remains accommodative, thereby supporting strong I. TbeiWl<adden<lwnis8\'ililableontbeBoonl's labor nl1rket conditions and a sustained return wtb;ite a1 h11ps:l/www f <deralresel'\~.g<ll'imonetai)'JlOI icy/ to 2 percent inflation. files/FOMCJ'olieyNormalilation.~t70013.p<ll'. 72 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00076 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.70079103 MONETARY POliCY R!l'O~T: f£8RUAA\' 1018 3 labor market appears to be near or a little such as global economic slack or the beyond full employment at present. The integration of emerging economies into the unemployment rate is somewhat below most world economy-as contributing to lower estimates of its longer-run normal rate. and inflation. Polic}mtkers remain attentive the labor force participation rate is relatively to the possibility of such forces leading to dose to manye stimates of its trend. Although continued low inflation; they also are watchful employers report having more diJfJCulties regarding theo pposite risk of inHation mo>ing, finding qualified workers. hiring continues undesirably hi!!h. (Ste the box .;Low Inflation apace, and serious labor sborta!!es would likely in the Advanced Economies" in Part 1.) have brou!!ht about larger wage increases than have beene vident to date. (Ste the box "liow Monetary policy rules. Monetary policymakers Tight Is the Labor Market?'' in Part 1.) consider a wide range of information on current economic conditions and the outlook Lowg lobal inflation. Inflation has generally before decidingo n a policy stanoe they deem come in below central banks' targets in the most likely lo foster the FOMC's statutory advanced economies for several years now. mandate of maximume mployment and stable Resource slack and commodity prices- as prices. They also routinely consult monetary well as, for the United States, movements in policy rules that connect prescriptions for the the U.S. dollar-appear to explain inllation's policy interest rate with variables associated behavior fairly 11~11. But our understanding is 11~tb the dual mandate. Tbe use of such rules imperfect, and other. possibly more persistent, requires careful judgments about the choioe factors may be at work. Resource slack at and measurement of the inputs into these home and abroad mi!!ht be greater than it rules as well as the implications of the many appears to be, or inll3tion expectations could considerations these rules do not take into be lo11~r than suggested by the available account. (Ste the box ''Monetary Policy Rules indicators. Moreovtr, some observers bm-e and Their Role in the Federal Resem's Policy pointed to increased competition from online Process" in Part 2.) retailers or international developments- 73 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00077 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.80079103 PART 1 RECENT EcoNOMIC AND fiNANCIAL DMLOPME~Ts Domestic Developments during the past few years is consistent with an overall picture of improving labor market Tht labor market strengthened further conditions. In line 11ith this perspective, the during tht second hall ol 2017 and early LFPR for indhiduals aged 25 to 5-I-which is this )ear much less sensitn~ to population aging-bas 1'3)100 emp~ment has continued to post been risingsince201S. Tbeempl0)1mll solid gains. :m~raging 182.000 per roonth to-population ratio for indiViduals 16 and in the SC\'l:n roonths starting in July 2017. older- that is, the share of people who are about the same pace as in the first half of working-w;u 60. I pen:ent in January and has 2017.1 Although net job creation last year was been increasing since 2011; this gain primarily sligluly sl011tr than in 2016, it has remained reflects the decline in the unemployment rate. considerably faster than what is needed, on (The box "How Tight Is the Labor ~1arketT' :1\'erage. to absorb new entrants to the labor describes the a\'3ilable measures or labor forct and is therefore consisttnt ~ith the marktl slack in more detail.) riew that the labor nwket bas strengthened fun her (figure 1). The SUtngtb of the labor Other indic:uon are also consistent with market is also e~ident in the decline in the continuing strong labor demand. The unemployment rate to 4.1 percent in January, number of people filing inttial claims for Y. pen:cntage point below its level in June 2017 unemployment insurance has remained near and about !II percentage point below the its lowest level in decades.1 As reported in the median of Federal Open Market Committee Job Openings and Labor Tttrno,~r Survey, the (FOMC) panicipants' estimates of its longer· rate of job openings ren~'ined elevated in the run no1111.111evel (figure 2). second half of2011, while the rate or layoiTs remained ~·.In addition, the rate of quits Other md~e.uors also suggest that labor Sta)'ed hi&h. an indteation thai \I'O£Urs are able market conditions ~-e continued to tighten. to obtain a DC\\' job "hen they seek one. The labor forte participation rate (LFPR) that is, the share of adults either working or act~·ely looking for work-was 62.7 percent 3.lnirialdoimsJ•mpedinlhefallof2017asa in January. Tile LFPR is little c.hnnged, on """"''•ene<of disrupriOIU from tht hurricanes and lhen net, since early 2014 (figure 3). Ho"~vcr, the r<l•med 1oatowl"'d. average age of the population is c.ontinuing _,. to mcrease.Jn panicular, the members of the bab)·boomcohon increasingly are 111()1ing an to thear retiremrnt ~=a time when labor - -..., forct p:lltJCipation typJ:ally is~. That de>tlopment implies that a sustained period in which the demand for and supply of labor -lllO \\tre in b31ance would be associated with a downward trend in the overall participation -_1.0,0. rate-Accordingly, the Oat profile of the LFilR -100 2. Tb<hrri<WJcslbllstrad: lbe t:ait<d Slarnd•lllll 0.. KOCDcllulf of los1 ).. ., CUS<d Ab<lallll \'IIIIIXlD - 100 . i . a .. l . h .. t p - tl l 'i b lr - m ~ ln l o b e p < o l'" u tt < lb m e o p f m )O od b U p m I . o b i l l< l * l Q ht $ I I lO'.It I 11111 I !Ill t a u I a u I .., , ' »u I » "2 J 1 11 I !Ill , , pnlbol>l) ..b stllloally lll>lf«<cd. 74 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00078 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.90079103 6 PART 1: R£<lNT ECONOWICANO R~CIJII. OEVUOPMINTS 2. Measures of lll»r uodttutiUtalion - 18 - _ 1.6. - 1! - 10 1010 lOU 2014 2016 Z018 Nm: U~~C~~~Pio)l:DCI1111c 11:a1tm IOCIJ ~ u I pc::ocott&C of 1M ~~bet: f«<C. U.ol ~toea) t:~C~tploycd pbs~ W«kcn. u t paoc:lllicoft.)cbbor r~Fbdino::."'Ccdwo:icrs.Oi~wllli;aCRtr.ktofa:arPlly~worimwbo~n IIOt<"~io;ld:c~o:~~o'<J:k t-r r m ct : Q (p ( b l ! p-k c y : b 1 d 0 ~ l ' ll l :m :» . j .p o ! b l t y a c .- a c d 1 w \. .i d h t l o lk tl w !o : r ll : b b c e c l ' : S . : U It« .S . ~ ~~ . D : y . a " . C : t a t t c b r e . d a ' l l ~ t ' 0 e $ d m p ~ lu l . # .n . n b : : . M qi: » l > a y h o ~ t~ : ~l o ll t l b l c l l" u >o m r u to ' : b -.. b c, l • c f • o p : ct - c t o: t a : , d < h o w ft c b t ~ bbof IO:'tjobbtllt~11~U-6'!'1'lttr.:UI0111~plttallll:flj:ldly~wo:la:lpb10111~'tdpt.'1~cro:o.'O:ICI:C~:eucot.,l4t ~ o!tbea.bol' fot«:pbaD IUflUllyltld:lcd w<ri:m. the Cekdbari:ldiMatpciodo!b-"..s.ixts tc..'ltUio!l ttddbtd byW:<a:icoai&JNr.~of SO\:Ja; ~~Lib«~iSUr;»\UHa\"C:"AAI~·A Unemployment rates have declined across demographic groups, but unemployment remains high for some groups Unemployment rates have trended downward J Labor fon:e parti<ipolioo ntcs and employmem-to-populatioo ntio ·- across racial and ethnic groups (figure 4). The ..... decline in tbe unemployment rate for blacks or African Americans over tbe past few years bas been particularly notable. This broad pauem -6l is typical: The unemployment rates for blacks -~ and Hispanics tend to rise considerably more - 64 than the rates for wllites and Asians during re=ions, and then they decline more rapidly -_l.,l t!- during expansions. Yet even with the recent narrowing, the disparities in unemployment II- - It rates across demographic groups remain 10- substantial and largely the same as before the I II I II II I I II II I I II II I f re=ion. The unemployment rate for whites !00! 2006 2010 ~1: lOIS has averaged 3.7 pertent since the middle of Norr Thtlh:aamac::lly.lbtp::imt-etebb%1o:!:e~io::nu 2017 and the rate for Asians has been about ii•p«tqe;or~w..bticcJCtd2S»SC.ncl*ttj)!ttprti~ a!cU!hccalpiO)-..c:!-:o-popula:io:ra:.>artpcr«llllpo(lbc~ 3.3 percent. while the unemployment rates for lp S 51 ol 6 & c C :: I: d O .B 'r ln 't l l l lc(l..lboc:Slai1.'U\Uft.nuA:al)':i."1. Hispanics or Latinoo (5.0 percent) and blacks (7.3 percent) have been substantially higher. In addition, the labor forte participation rates for blacks, Hispanics, and Asians have generally been lower than those lOr whites of the same age group. As the labor market 75 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00079 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.01079103 MON!TARY POLICY R£1'01tT: f[BRIJAI!.I' 2018 7 - 11 -16 -14 -ll - IG - I ~IG lOll 201-4 lGI6 lGII Nn.lf:lcaplo)10Cfi1111C!Ilafl.IIUIOIJit;X~~~plo)'Cdua~ofOclaborfor\'C.Pc1ocr!6wliO$ce"'.zkhyifidcali!icdu~orl.cbtiUybcof cyracc.. ThcWdcdbcbdicmapc:iodo!"b;t;incarteaSioa.udc.fiDOSby~N&~IBu:ca:.o~~ Rua.-ch. St:.u.a: bullorl.&boc' Sll!istir:t ,;. lli\'C:Mf.l)~ has strengthened over the past few years, the participation rates for prime-age individuals in each of these groups have risen. Growth of labor compensation has been S. MeaswtS of einoge in hourly tomp<n.,tioo moderate ... Despite the strong labor market, thea vailable _, indicators generally suggest that the gro111h of hourly compensation has been moderate. -l Growth of compensation per hour in the business sector-a broad-based measure -l of wages, salarie~ and benefits tbat is quite -_.l, volatile-was 2Y. percent over the four quarters ending in2 017:Q4 (figure 5), well -G above the low reading in2 0t6 but about in line with the average annual increase from - I 2010 to 2015.' llle employment COI)t index I 1 f I I I I ! I I I I 2010 2012 2014 2016 lOIS which also measures both wages and the COI)t lv.r.i:B"~~:lcoiso:.a~..zr.qtanr:t~ to employers of providing benefits-was up c~M,Fo:ee~111C;!*i::dex.~itOYer:l:cll~ about214 percent in the fourth quarter of u c ! f:o q m i l o l l : h n t o; l ~ u c t d m c c ; e (o ~ : c O l x t A t ~ et ~ Fe l d' t ' W l¢~ . b O o w " ~ = t Ta y :k ~ a ' :, ~ t t c 2017 relative to its year-ago le1<el. roughly da:a a.-r tho~~o-; as • l·ruodh ~~~cot~ l«a(lll) per~ thq<. Sf4a; &:ttr.;dlAborSta:htb,ilH&~"'Cf A:J~fe6cl~ReKn't 4. The comp<nsaoion per hour measurt or ..a ges and WdAIII:::a,W~f;t(&cr"'~T~ao.U. salaries decluled ao lhe end or2016, !)06Sibly refteaoog ohe sllifting or bonuS<S or oohcr oypes of inoome inoo 2017 in anticipation of a possible cutin personal income la't rates. 76 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00080 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.11079103 8 PAAT I: Rra~'T ECONO,\IICAND FL'IANOAl DEVElDI'MENTS How Tight Ist he Labor Market? Any assessment cl labor market tightness ~ The fact thatlhe lfi'R ior prime-age men remains inherently uncertain, as it im'Oives corrparing current below its pre-recession levels might suggest that slack labor market condjtions with an estimate of conditions remains along this dimensioo,; howe\'er, the lower that would prevail under full e<npjoyment, where lhe level of the LfPR for prime-age men primarily seems latter drwnmnre cannol be dlrecdy obselved or to renect the oontinuation ol a decades-long secular rreasured and can changeovtf tirre. Many economists decline rather than a C)dical shorlfall in their lfi'R.In would describe lhe labo< ma&et as being at full addition, lhe U-6 measure of labor utilization-which employment when the unemployment rate has reached includes the lllCmployed, those nu~inally attached an •equilibrium' level, sometimes called the natural to the taboo for~. and those employed pan time who rntc d unemployment ot the longer-run nomul rate of would like full-time work-rosee•'en n""e ~e<ply unemploymenL In judging the le•-el of full empiO) men~ than the unefl'l)loyment rate during and immediately one may also oonsider additional margins of labo< after ther ecessiona nd has since recoo.~ed to near utilization-including lhe labo< fotee participation rate i~ pre-recession le-~1. Althouglt there is substantial (LFPR), the share of wo&ers employed pa~ time who ur>rerointy aboutlhe trends in each of thecon-.x>nen~ would like to be working full time, and indiliduals ol U-6, its currenlle>-el can be cautiously interpreted who are daS>ifl<d as ma~inally attached to the labor as consistent with a labor ma&et dose to full lotte-as 00fl'l>3red with trends in these measures. e<nploynrent. While the uncffiainty around the 'normal' ~ends in One can also tool< at less-direct indicatm of labor all ol these ••ariables is substantial, the labor ma&et market tightness. for eXiln'IJie, the share of S<llJII in early 2018 appealS to be near or a li111e beyond lull bosinesses with at least one job opening that they view employmenL as hard to fill is now dose to its reoord le>-els in the late The unemployment rate is n""' somewhat below 1990s(asseen in the black line in figure 8), consistent llllOI estimates of its natural rate. Specifocally, the •>ith the notion that as the labor market tightens, unemployment rate in January, at 4.1 percen• is businesses lind it increasingly diff101h to hire additional 'h percentage point below lhe median of Feder.>! Open worker~ Similarly, survey mrosu~ of households' Market Commiuee (FOMC) participants' estimates of the longer-run normal r.~teof unemploymerc, which Galbis·Rei8,Christcpl-.. Srrith, and Willtam IV. set... (2014), was rep<Jrted to hJ,~ boo> 4.6 pe<ctrrt as ollhe 'labor Force P.uticip>tion: Rec.,. Dowlq>rron• •nd Oece<nber 2017 FOMC meeting. The unemployment futt.w• P"""ec"; Brooi<i:ss Plpen on Ecmomk ~c.Viy, C ra o te n g is r e a s l s s i o o a na b l o B u u t d y, g e p t e O rc i e i n ic ta e~ g e ( C p B oi O n ) t a b J e r l r " e " n ' l lh es e t imate f E . o . su , l( l n o I u ' o P d " · ~ ' 1 l o O 9 l 7 I - f tJ > 2 E /0 7 • 7 d 5 1 , f L a h F l u l P l p 0 R t s 4 o 1 B 1 re • P w E a w l A . o b o _ r A p o O r o o l i v t < l i n i d n S e g O d s n . b e _ y d e t t i _ l 1 t > • M l C p ;> « d 8 > f ' . 0 * ; " . ' . ~ ,. ,;, ollhe natural rate; by this nlC3sure, the labo< markt1 is recuning ptblicadon The ~•rd E«tffomic Ourlool: and about as tight as it was in lhe late 1980s but less tight its updates. than in the late 1990s (tlgureA). That said, the median of FOMC participants' estimate< ol the longer-run A. Uocmpi0)1Dtt1 rate gap nonrul rnte of unenrployment and the CBO's estimate of the natural rate ol unemployment have both been revised down by about 1 percentage point OVe< the J$ few )'ears, one ind.ication of the substantial uncertainty surrounding eslimates of the 'lull ..,..,toymenr rate of unemployment.' As discussed in the main te><l, lhe lfi'R has been roughly unchanged, on oe~ "'""the past lour years, representing an i~nt C)tlical i"ll'""ement relati•·eto its declining trend. While estimates olthe trend lfi'R are ~bject to substantial unctrtainty and differ among anal)"ts, lhe currentle•-el of lhe LFPR is relati•-ely close to many estimates oil~ ~end.' I. Au~ uw;hotion dRs unctr~.aulty, dle r•~d fO.\IC p.tnietp.rms' estima<1'Sollftelong«·ntn normal"" ol No!i:'Tht~b)~:na.tStlt~Mttni:'U~ ul" 1 ' . e e f ll o iO ta )l M .. ' n It . w ty a o s h 4 w 3 o ao a d S. t O es p i e O rce . 1 , 1 ,e 1 s in s i D ng K r e h n el t e e \ r 0 2 1 0 17. C "" o ~ Q W pls d .O ed M . J t u ~O f e l\ m . ~ 't \ p t e : n C o i & : .olt t b o t! l s f t: l r t s U ! U t' t -' ! ft l iiO n C ; u l & t G o ctd l e ~ ,y ~ ~ l'4:llotal~oCE4'0!1CI::*"lltirm S o t l e u p e h n > d n i l e f , P . R ,0 a 4 n \S d C th I\ e T as " i " O 'z N C t a e j d .. . r . a , n B g< n > o o c l e e f s o ti l m llc a l t ; e s r , . l s ix ee u ~ :~of ~ f . o . r U ~ . l C. l ,U l S. ( r I a Q :.t, I I B B c rq m tt u O o ff f i.- U t:t b ll o '' t ll H S t ~ tw 6 A Q :A r I} = U n ." l l 77 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00081 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.21079103 MONETARY POliCY REPORT: ffBitUARY l0t8 9 pen:epeioos about job a~•ailability arecurrmdy at high ~>ken Iongo< for busi""""' to Ond workm in re(ent levels, as sha.vn by the blue line in figure B. rears, )<I wage growth has remained steadyor!lcwed. However, despite repo<ls that ernpioyers are now finally, while the aggregate labor market appea" having more diffiOJIIies finding qualified workers, to be modesily tight at the mo""nl not all individuals hiring has continued apace.Alihoogh payroll ha1-e benefited equally from these de;'tlopments. As employmerl gains h"" gmdually sW.ved o,..,. time dLsrossed in the m.1in texl, noci<:eable differences from about 250,000pe<month, on Mtage, in 2014 in labor market outcomes rE!l1ain presmt across to about 180,000 per month, ona\uage, in 2017, job racial and ethnic groups. More<W<<. the labor marlcel grcw1h rE!l1ains conlistent with fur1her strengthening lmpiO\"""nt in recmt rears has not been suffiCient in the labor market.' finally, the~ofwagegains to make irnpcxtanl progress in narrowing income has been 1110de.aie; while wage gains ha'e likely been Inequality. Finally, regional disparities arealsoSiriking, held down by the !luggi!h pace of productivily growth and in certain aspecls these disparities have widened in recent ~~rs. serious labor shorbges would probably in recent )~rs; for eleample, the emplof"""t· bring about larger increases than have been obse<ved to-population ratio for pri.,...ge individuals has thus far. reco.-ered less for U101e outside of -o areas than for It is possible that labor""""ges have arisen in those in metro areas (r1gure C).' cabin pockets of the e(onomy, which CO<Ad be an e a a p r p l a y r i e n n d t i i c n a t t i h o e n a c g i g b re o g tt a le te n e la c b ks o r t h rr a o i r a k r e e l . n H ot o ) w < e I r ,. e ,. a , d e i v ly en tranSfiO!~UOI\ lwlth and educauOf\ I"'""• nd ho!piolil): .and prol~ional.and busitless seMc.s. al theindustryle1.t itisdiffkultto"" rruchevidmceof S. 5eeAiisooll'<in8'tdenl10t7). 'l.OO.Mall:e\Ou""""" emerging supply cons~aints.'lnso"" industries, such as in M«roportlan ~rd t-.'on mt"Uopolilan ArNs: Signs oi trade and ~ansporbtion as well as leisure and hospitality, G""'1ng Oilparitie•: F£DS N(IO'S~v..hingtoo: 8oaJd of emplo)'ment growth has ~"'''fd marlcedly and it has COl,_,d the federal ~~ S)'ll<'ll\ S<ptenl>e< 2;), htqJS11•wwJedcnlri'!C1'1~-8"'1e(Oflr"'""'c<'f«<i.......,.bor· m;ub~t.(lutt:on~-in-metropolitan.and-non-metropoliun. l. Pa)'lllil ga•ns in thtrange ohbout90,000 ro tlO.OOO olfeJS~-of-sr~ing-disp~rilie5·20170915lltm. per mot~lh Jre eWmued to be C(lflsislffn witha c onst.l.nt u~l~rattarda dedinf in thtlabor fore~ participation rate in line with its den~i<:allydlh-en trend. 4. The aiiOl)'is behind dis stuement conodered ox broad industries-<onstruction., manufacturing. uade-.tnd C. Prime-•ge employmeoHO·popolatiooratio by mrtropolitanstatu$ B. Job :rvailobilily 111d han!4. .6 11 posirioos - 12 -10 -n - 16 .1.0 I - 1' s~"" 1l ... 10 111111 l!!t!l"l!!l!l!!!!l lO 1996199$ZOJ02002~1006200Ut10201ll81t10J421>1$ Nett Tbt llu a 12·::KI:O&& ~ 100\q l'lltllp 1...a:.-r ~btctll:iD.'llltt•(MSAs}COCIIt: ftSOO.OOOptq~le«=«t,a:d ct~~Utr!IISM<O!$dlo(100.00010S00,000f«t))t, lbbdtd.h:IID4k'llt Scm: hb ~If)' • !htp:cpal"..tl! ofbouttbal& btiJ!'\q pb&m pl'IJCidJolb'~~ as clebd~!I!Soemlatt.uoll!alcom.:­ t p ~ b l n t: k : o J -6 M 0 ! ! ll • W :t ' C " U l t b ' L ) $ ' o t ~ 'd f ~ l h lo t ' b lih t t d J . ll ~ ~ tu m = l. » '> C : '1 i : t 1 & 1 b J J n\i'a* * 'ffilU m \' J o O rh b ! z ! I i t ~ 1 p q o 0 : 1 ; . t « ;t . d o ~ t c I 1 a 0 t 0 l . l . R - n S " m o " - la ~ c ' l o c Ah r « d o l W ' . . o .. c . - .. A C m O i I1 : ), S ... t ... p .,> o .U C r O l< . <O O t . rto q m ~ « · m ~·~b)·FtdrraiR.t5C:'·tBoriR6:).Lxllhlytori:,.lllldl::t FEDS N«ts. {\\'~ 8ottl1 ol 0<1\'t:'"-«t of~ f'fdt:lllesrt\'t 6omtbeNI!.:ICaiF~of~Bractuatti=~J9$6. S)'s!m, ~ 25}. ft'W(~'t.p'f(('(IC:U./Ma.Y~olltJ Tlw sladtd bl!1 ~ ptmds ofl:actt~ rrmuo: as dtUod by ~ bbof·~«t."'O::II!'&-c~~lr.J:Ici---OD·~reu<SJp.-ol' NIIQt.IIBimrrloft."toiClCQII;'R~Dr:l~re:m!hly ~..,_'X:f·l0110925.J::t. c.kdllou 'elf 4111 to::. lbt U.S. $).Ita F«pb rv.bbd1ty, C~ ~ fiX"b.ri<IO·fll~ N!l(gl Ceaa ba:, Cc;rd ~b.'JOQ Swvt); QOlt !hlllbt fkmll d Lm f~of~Busctu.. S:UOt."tlfCI~Oivtd C~~pro.'tU{OI tbtC\un:c:tPoplk:lcnSI!r\'C)' 78 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00082 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.31079103 10 PAAT 1: R£aNT£CONOMICANOfiNAN0Al OMLDPMfNTS %percentage point faster than it!i gaina year earlier. Among measures that do not take account of benefit~ aver.~ge houdy eamings rose slightly less than 3 percent through January of this year, a gain that was somewhat faster than the average increase in the proceding few years. Similarly, the measure of wage growth computed by the Federal Reserve Bank of Atlanta that tracks median 12-month wage growtho r indil~duals reporting to the Current Population Survey sbo11~d an increase of about 3 percent in January, sinillar to its readings from the past three year.; and above the average increase in the preceding few years.' ... and likely was restrained by slow growth of labor productivity 6. Cblltlgt in b~illffi·S«tor oulput pa OOw .. These moder.~te rates of compensation gain ,_,_ tik-ely reftect the otfsetting inftuences of a tightening labor market and per.;istcotly weak productivity growth. Since 2008, labor productivity has increased only a little more than I percent per year. on average. well below the average pace from 19% through 2007a nd also below the gains in the I9 74-95 period (figure 6). Considerable debate remains about the reasons for the general slowdown in productivity growth and whether it will persist. The slowdown may be partly attributable to the sharp pullback in capital investment during the most recent recessiona nd the relatively long period or modest gro111h in investment that follo11~d, but a reduced pace of capital deepeningc an explain only a ponion of the step-down. Beyond that, some economists think that more recent technological advances, such as information technology, have been Jess revolutionary than earlier genera).p urpose technologies, such as electricity and intecnal combustion. Other.; bal'e pointed to a slowdown in the speed at which capital and labor are reallocated toward their most productive uses, which is reflected in fewer business start-ups and a reduced 5. TheAUanlll Feds measoredill'e" from olhers in that it measures tht wage grt"M'th oo)y of voorktrs ~Abo werumpeyed boll! in lhecorrentmveymornhand 12 moolhs earlier. 79 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00083 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.41079103 MOMTARY POliCY REPORT: fE8RUAAI' 2018 II pact of hiring and investment by the most innov1ltiv~ firms. Still others argue that there have been important innovations in many fields in rectnt years, from energy to medi<:ine, often underpinned by ongoing advances in information technology, which augurs well for productivity gro111b going forward. However, those economists note that such productivity gains maya ppear only slowly as new finns emerge to exploit the new technologies and as incumbent finns inv~t in new vintages of capital and restructure their businesses. Price inflation remains below 2 percent, but the monthly readings picked up toward the end of 2017 7. Ctungc in lhc: pri« indox for pcrlOilll COilSumptioo Consumer price inAation. as measured by c~pcoditwes the 12-month change in the price index for personal consumption expenditures {PCE), remained below the FOMC's longer-run r. .., objective of 2 percent during most of2017. The PCE price index increased 1.7 percent 01~rthe 12 months ending in December2017, about the same as in 2016 (figure 7). Core inftation, which typically provides a beUer indication than the headline measure of where overall inOation will be in the future. was 1.5 percent overt be 12 months ending in December 2017~.4 percentage point lower 2011 2012 1013 lOI-' 2&U 2016 1011 than it had been one year earlier. ...N..r.x..r : lbtUm-nd!htqhDt~.'t!llbcrlOl1;d:qnatth'mot~t)ut !loth measures of inflation reflected some SQ.aa:: F«l:t:'ltl'ntd!lt:IO.Ft&:l!Jtde'lf&:lko(De.llas;fot&lldlt, btcolF..."'IOll::''ltA:al)1--.;&ll Vlllb.wt Anat}rA.-'S. weak readings in the spring and summer of2017. A portion of those weak readings seemed attributable to idiosyncratic e~nts, such as a steep 1-monthd ecline in the price index for wireless telephone services. However, tile monthly readings on core inOation were somewhat higher during the last few months of2017. in contrast to the more typic.al pattern that has prevailed in recent years in wbi<:h readings around the end of the year have tended to be slightly below ~rage. Moreovec tile 12-month change in the trimmed mean PCE price index- an alternative indi<:ator of underlying inHation produced by the Federal Reserve Bank of Dallas that may be less sensitive to idiosyncrntic price movements was 1.7 percent in December2017 and bas slowed by less than core PCE price inflation 80 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00084 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.51079103 12 PAAT 1: R£aNT£CONOMICANOfiNAN0Al OMLDPMfNTS over the pas! 12 months.' (For more d.iscussion of inJlation both in !he Uniled Slates and abroad, see !he box "Low lnflalion in !he Advanced Economies.") Oil and metals prices increased notably S Brrntspotondfuturespric<s Headline inftation was a little bigher than core inftation last year, which reflecled a rise in consumer energy prices. 111e price of crude - 130 - 120 oil rose from $48 per barrel atlhe end of June -110 to a peak of about S70 per barrel early in the -tOO year and, even after recent declines, remains 911 so more !han 30 pertenl above its mid-20171evel 10 (6gure 8).111e upswing in oil prices appears 10 60 have been driven primarily bys lrenglhening lO global demand as 11~11 as OPEC's decision 10 40 further extend its November 2016 production lO - lO cuts lhrough !he end of2018. The higher oil 1 1. 20 1 14 1 I 1 lO 1 I S o l .. o l0 1 1 6 1 f 1 !l1 o 7 1 l. 2 o 01 3 I I prices fed through to modera1e increases in the cost of gasoline and beating oil. In ftation momentum was aL10 supported by non fuel import pric.es, which rose throughout 9. Nonfu<l imp<l!1 pricnlllld industrial m<tals iodexes 2017 in part because of dollar depreciation (figure 9).111at development marked a wrn from the pas! several years, during which non fuel import pric.es declined or held flat. ~- -11)1 In addition to the decline in the dollar, =:: nonfuel innport prices were driven higher by a ::=~ substantial increase in the price or industrial mltals. Despite recent volatility, mltals prices ~- - 93 remain higl1er. on net, boosted prinnarily by improved prospects for global den\1nd and $f) - Ndudllllp«tptl."'- ?6 bd!wial~l - also by governmem policies that restrained 11- - - 9-' production in China. In coo1rast, headline inftation has been Nm: 111t da:a li:c llldlxl ICIIIpOn sn:a a:t .cihly. nc ll:ll ro: held down byc onsumer food prices, which F cc dm b: lo r : a y l lml a .l n JO l, -i e l tamo;U:ly"~orl.&llyc!a:aa:dCltc:ICI.Iuot.IF increased only about Y, percent in 2017 after i:d 5 :: ( l u sh O ll : f« ~ S&:P ~ C ~ oSO ~ p I n ! . U ~ I & M .=r t' a :l . l t ~ S p lA x b o l! c ld o S : lQ ,; ! . I a H ; a 'o fo t! r ' ba1ing declined in 2016. Food prices have A:tlyli... ... 6. The uimmed me4111 index e:tcludes ·v.-haterer prires shov.td the largest increases or decreases in a g.h·eo month: for example, the sharp decline in prire< '" •iretess telephoneservicts in Mattb 2()17 •as <Xdudecl from this index. 81 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00085 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.61079103 MOMTARY POliCY REPORT: fE8RUAAI' 2018 13 been restrained bys oftness in the prices of farm commodities, which in turn has reftected robnst supply in the United States and abroad. Although the harvests for m:~ny crops in the United StJtes declined in 2017, they 11-ere larger than bad been expected earlier in the year. Survey-based measures of inflation expectations have been generally stable. .. ExpectJtions of inflation likely inHuence actual inflation bya lfecting wage-and price-setting decisions. Survey-based measures of inflation expectations at medium-and longer-term 10 M<dian ioOotioo apcdlltioos horizons have remained generally stable. In the Survey of Professional Forecasters conducted by the Federal Reserve Bank of Philadelphia. lhe median expec!ation for tbe annual rate of - M~t:~n"Y~ loromj:oJ~)~ increase in the PCE price index over the next 10 years bas been around 2 percent for the past -~ - l several years(figure 10). In the University of _, Michigan Surveys of Consumers, the median -~ SPF'~.mccs \'3lue for inflation expectations over the next icnca.IO)"tft 5 to I0 years- which had drifted downward - I starting in 2014-has held about Oat since the end of2016 at a level that is a few tenths lo11~r I I I 2 006 I I lO O ! i I ~ Ott I I 2 011 I I :O IA I 1 lO l' I 2 I 01$ I I than had prevailed through 20t4. Nm: The l.li±lta= t:::!'l"'ff 6ua ttt :IOCihly cl alelld 1h:·011&h f¢bNa:y; lbt f-ck.a~T dD ft ~. T"'..c SPf daa (or wl'll:lt'lll ... and market-based measures of 6 ~ oool00H)I (O ~~l : OJ ~ ~Q ~ J. ~ttt~da~ inflation compensation have increased in S'.l.:kCI: U;:n'CnlyofMt.iup:: S'-"\'()1: otC~ Fedml itekn't WclPhd~ia.S%\'tfot'"Prt'(~ror~C\(Sn) recent months but remain relatively low Inflatione xpectations can also be gauged by m:~rket-based measures of inflation compensation, though the inference is not straightforward because market-based measures can be importantly alfected byc hanges in premiums that provide c~mpensation for bearing inflation and liquidity risks. Measures of longer-term inflation compensation-derived either from dilferences between yields on nominal Tre.asury securities and those onc omparable Treasury Inflation-Protected Securities (TIPS) or from inflation swaps-hav~ increased since June. returning to levels seen in early 2017, but 82 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00086 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.71079103 14 PART I: R!CENHCONOMICANDIINANCIAL DMLOPM(NTS Low Inflation in the Advanced Economies "'"I!Y Inflation has been per<islenlly low in recenl years B. Inflation cxchldiog food Olld in selecl<d acroos many adiMced economies. In lhe Uniled $1ates, am1lllC<d foreigo economics bolh o'"rall inflation and core (excludng food and ene<gr prices) inflation, as rrea5<~red by die price index -· Ia< personal consumplion expcndilures, ha." run bel<>v 2 percenllor mos1 ol1he period since 2008 (ftgure A). In othe< a<honcEd econonies, rreasures of core inflation ha\'e run even lower in some cases. with core -~ -' inflalion in lhe euro area currendy al around 1 percenl - -1 . and W in h a Ja l p e a x n pl a a l i n d s o ! s h e i i s O p e z r e io ro d ( o fi l g l u o r w e B in ). f lalion! Across - ""'"" -1 !he ad•onced econonies, die main lac1ors holding """ ! inllalion down likEly include die ex..OOEd period cJ - J~ - 1 economic ~adt following lhe Greal Recession and !he falling prices oi oil and other commodilies Ir om -1 aroond mid·2014 10 early 2016. In lhe UniiEd Slales, I I I I I I I I I I I I I I I infblion also has been held d<>vn by lhe rise in !he 1ml MilO 2012 101: 201' lOIS IO<<iin exchange value of U~e dollar from mid-1014 Non: 1bt di!Afo: tbr t'WO ~rea 114'a'pX11~~!1ubatullll.t lor )1:1:1.')' lhrough 1016. The 1<>v cO<e U.S. inflation in 2017 has ~ S IS N . a T : h F t o d r a ~ l t o k r t C . ~ ~ d ~ J O I( t I l ~t i : c r t !t ro c rN de t : J : o: o ; o tJ & S h U ~ ~. 2 . 0 ,; 1 f 7 i . xlapu, b an e d en h m ar o de re r o to l a as p so u c z i z a l t e e l a w l i b th ei a l n m o id d e e n s t t i f i i n ab r l m e g c n a i u lu se d . e ' ) " 5 C !1 i : m . . .~ . . O " il " ic Y t o«i~ t A t f E bn w a o : p I te I ~ C~~-Ibti ' r II o ." t O ~ il s l't ~ l. Ccad:a,aii''D"""t:Anai)Uet. As is discussed in 1he Decembe< 2017 Summary ol Economic Projections (Pan l ollhis repor1), mosl federal Reserve policymokers \iew lhese A!Cenllow But our undootanding ollhe lon:es !hal dri•'O infblion readings as likEly 10 pro•'Oir.lnsilory and inflalion is imperfec~ and lhe lacllhal many advanced projecl U.S. inflation !his year lo mo•·e closer lo dleir economies are experiencing laN inibtion al the sarre 2 percenl objecli\~. Many pnvalelorecasle<S appear lo time suggestS lhat o1her, poosibly more Jlersisten~ share this \'iew. Ia ctors rmy be al worl As one possibility, lhe nalural rale of unempiO) men!- the rale a1 which labor markets r U n n l I l c . l e . F . U , o . r i n n d i \ l ) e 1 l d " i S t I io l ta l n " M a " l o d n . , < S e C 1 e > \I ~ r s y n si e o P t o n Y l r o e c l l y l 1 e .' 0 n l 0 p ( r I « e 0 ' a C 1 s h o 7) n d . s e , f l r o i\ l r f b l l e o ; c w o l n i a n , t l 'btion e in x f e la r l t i o oe n it - h i e s r t u ig pw h a ly r d u n n c o e r r t d a o in w , n a w n a d r d il c p o re u s l s d u r b e e o lo n w er 'l'lo!per:• lci<Gto\\'th: R"""si~ the Funrlamenlal~' S91h in m.tny economies than most economists estimate. Anoo.1l Meeting cllhe NatioNIA ssootiation b Business Ahemali•'Oiy, inOalion expcclalions could be lowe< (cooon;~ Cl.....tard, Ohio, Sq>terrber26, hupsil•ww. !han suggestEd by die available indicalors. ledera~esM•.g<>o>'ne•~-.llen20170926a.hom MO<e-lund.lmenlal changes in !he global eoonomy could also be conlributing lo die recenl stretch of A. O.ange iJ !he price iruXx for pm\1nal cons1,unpti<!a lower inOation. First, anecdol31 reports suggest !hal expc~~r!iturcs lechnological changes could be reducing pricing pcwer in many indusltiO$, holding 00..'11 inOalion as that occurs.' For exalJ1>Ie, the increased pre\'alence of - s lnle>net shopping allows consu~ 10 compare prices mO<e easily acroosSEIIers, poosibly impl)ing grcalcr oompeli~on lhal could be pulting dO\\'nwatd pressure on consumer prices (figure C). While !his hypothesis is certainly plausible. II does not ea~ly square wilh 1he observalion lha~ a! least wilhin die UniiEd Slales, prolil margins have been high (fogure D).' l. GoldntanS.Cio(lOin, -n..Am.zonEifectrn l'<r>peco,.; us. E"'""""ics Anall't !New Vorl:: Gold""n -1 S.Cio,Scjl...WlO). II { I I I I I I I I I I I l. SeeCouncilolfconorricAd\'i...,(2016), "BenEfos 20)1 MQ9 21)11 1(113 2015 2017 ol Corrpdioorurd lrdicoto" ol M.lrketll>w«; C..n<D ""?"(O'·t t Tlltd.U•:ti~~2011,¢hq.sa:rf:aoot)'l'C" o ht l . E ,s c i o k n / o J m on ic ta A •~ d i v t i > s l e l r o s u s Is e s . u .l e r B ch r i i . e . l , ~ . V g . <> , o h > i ~ r i" t " g l i l O e O l ( '~ c t t . \ f . t " es f j r > il a l g , < >' Sootcl: ~of~.bl)'Ul\'llltwtrAml}~ file!ll0160-II•_<N_<0111"'>1ionJ"""-bri<f.pdf. 83 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00087 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.81079103 MOMTARY POliCY REPORT: fEBRUARY 2018 I5 .... D. Corponle profllsasasbare of gmss oatioo3J prod·u-ol Qom~ - 10 - 9 - I• I - -12 ' - It - - I -.' I I I I I I II !! I ! I I I I I I I I I I 1111f!IIIJII!IIII!!!!!!!!!I!11!111!11!11 I 1999 200l 1005 200S lOU :!OU l017 19S2 19$'7 199l 19)1 200.! 2007 2012 ZOI7 N&ii: ~ultsattsalnrit«K.t:dst:\'l.'fll.,...«tr~or&1a N<m; Tht 4!12 exle<:d lh:oi.IF 2017~}. ~ p:oft.J ux:kr.t plwedb,t•tWkoyer«-bcrtdlertncdlta!IIIIRit&."t~O\'« ll!ll'tlt«)'n.b:IO;cd~~:.O::~..$. t::Oillmti)'IUO Pa~~:lot)'OI'mtyl:IO!t!e~o:lmt. ~ BlmuotEcooonu:~vuH.ntt.bt)U."4 SOI.Jtt li:WI ~iO:tBmc:ll. U.S.C4nla Btrt.c. second, son-eobservefs have pointed to global than other consumers.• OthffS have poinled to a de\oelopmen~ as helping to explain persi~ent low .slowdown in O'K'dical services price increases aaoss inflation across oounlties. These de'oelopmen~ a coun~ies, possibly associated with either heal~ ~>are include economicslack abro.ad or the integJation relonn"' il<cal au>~erity.' This slowdown has had a emerging econorries into the world economy, leading material eiiecl on U.S. Inflation, though the ectent to to increased compelition or downward pressures on which these declines will persist is uncertlin. wages.• BIA the evidence that global ~ad<C3n help In sumn13ry, while stlndard econon>ic models explain inflation in a gi'oen oounll)', be)ond i~ effect appear to explain rruch ollhe posi-Great Recesoion on oommodily and I"'IJOII prices, is mixed al best.' period of low inflation, they do not preclude olher Moreover, measures a integJation, such as global e"l'lanations. b-en as most pollqmakers eJqleCI trade as a fraction of gross don1eslic product or the inflation in !heir economies to """'e bad< to their partlcipalion in ~obal '1luechains, appear to have l<l~s <1'/er time, lhey remain attentive to lhe possibility leveled off in recent yeors. that lacro not included in those noodels, such as diOSe A number ol other explanations lor low ~obal described here, may keep inflation low. Atlhe same inflation ha'~ hem advanced as well. These lime, they ore auenti'~ to the opposite rislc ol inflation explanations include some tentati~-e evideooe moving undesirably high, should tightening demand suggesting lhat the aging ol the poJ>Jiation oould be condRions lead to laster ri~<S in wages and prices lhan ex<rting downward pressure on ~end inflation, perhaps currentlya nticipated. because retirees may tend to be mxe price conscious 6. S..)oflg-II'O<lYOO<\)i,;lllGm,•nd)ur>gjin lee(2014l 4. S..Oaudro 8onoandAndri!W RlanJo (lOOn, 'I11J>o1ctoiDerrogt.lphitO..~on lnilllion•ndlhe 'Giobalisation aJld lnllltioo: ~.., Ct.....CO.nuy E00ence M..:roeconomy.'l\\H\~rli~ Pap« WP/141210 l\V.S~nglOII: on d>e Global De"""i"'n• oiO.....UC lniiJoon, • BIS lniOfn.lUONI Mo""'ry' fund No\ontor), ht!pSi/w\>,,drri. 1\'or\ing l'.lpm 227 (Basel, S"ill«l.lnd: 8"'* for 1111£<NO""'I org·ox.,al~..o.f>\\pll014Mpl4210jldl. Ho\1•'"1 orh« s.tti"""'l> Ma)l, wwwbis.org~ll>llwork2l7 jldt aJld !'tidMce SlpiS inc:reastld inllatiwry pres5ure fronun R.phoel """' Ct•t.doo8orio, and Andrew filonJo(20in, 'Tho agire pq>ulai>Or<,.. Mbel )ustlius and 116d Tolans{IOIS), Globafisa;oo o( Inflation:l heGr. .i ng lfi1X'Unce o( Global "Con Demography olll«:tlnillliOtl•nd Mon<.,.ryPolicyr SIS V•l"" O..ins: SIS 1\'0<IingPapers 602 fs.s.t l•itzerland: SWor.li'-l! P.ap ers 485 (8>!01, S•itzerlond: Bank for lntemaliooal fHnkforl ntemJii(MI.ll S~, JatliJOU)'). V.WW.bis.orgt febfll>')'), hllp<1Mwwbis..or&\>IIW.Qfk.I8Sj>df. p<Jblhvork60l.pf. 7. SeeTimMohl'clyondM.Jmlll.pro(lOJn, 'IVho(s S. See )anelhrig, Ste1<n B. Kamil\ IJ<borah Und""' O...n•llh lnflatiOfl?' FRSSf £conomicl-l017·3S(San and jauYlOMatque<{1010), •~orne SinJ>Ie Tell< of !he Frant•sco: k!deral Reserve8ankdS..1nFrancisto, NOO.t'frber), Clobaliution ~nd lnflinon H)-podlesis; lnten'liltional Fin~ nee, htlpS1iw.YwJrbsf.Qf3'economic<eselrch~..OI•utionsl \U.I3(Winoer),pp.34l-7S;and(u"'fl"'nC.nuall!ank OCOflOnic·l-'2017"""..t.rt<onui>won.olow-p« (20Jn, •OOfl....rcandG)(b.l Or;-..,ollnRationlnlhe£uJO inRatior>lrO<I>lie.lltht"'*; and Goldmar1 Sa<fls (lOin, 'll'h.lt Are.,· fC8l<on<mk 8ulk<i>, no. 4 Ounol, pp. 72-96, lq>s;/1 AUnnW *e lNm( rom lO'!~tr II1J.jlion Abtood:r US. Ecetu;mics w.-..«b.etJrq».ru~..Oi>df/orh«'<oban20171)l_01.en.pdf. (NewYort Goi&NnS ad>s. N<Wtflro 12) 84 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00088 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.91079103 16 PAAT 1: R£aNT£CONOMICANOfiNAN0Al OMLDPM£NTS II. 5-lo·IO.ycM·fcn'Oid inflation compcns>tion nevertheless remain relatively low( fig.ure II)' The TIPS-based measure of 5-to-10-year fonvard inflation compensation and the analogous measure of inflation swaps are now - JJ slightly lol'l~r than 2Y. percent and 2~ percent, -l.O respectively, with both measures below the ranges that persisted for most of the I0 years -2.5 before the start of the notable declines -2.0 in mid-2014. - tJ Real gross domestic product growth -1.0 picked up in the second hair of 2017 I t 2 . 0 1 1 1 0 t. 11t 2 1 0 1 1 . 2 t .111 2 1 0 1 14 . J11.! 2 1 ( 1 11 . 6 1 11tt 2 . 0 " 1$ l I Real gross domestic product (GOP) is Nor£: The 6la •< wtU:fy &'lOp or Qu~ 411& ~ ~ Ol:wp reported to have risen at an annual rate of FebN1..1' I~ lei& TIPSGTrmeyWla~-uG.Se.-wt~n. nearly 3 percent in the second half of2017 Scw:t f'oidll llt:Sr:'\l: BW: c(N('TI YoU; S..-dl),; Ffdol Rt:M'I'''C Bocdr.a!na:-.14. after increasings lightly more than 2 percent in the fir:H half of 2017( figure 12). Mucho f that faster growth reflects the stabilization of inventory investment, which had slowed 12. Oungein.Wgtossdomeslicproducial>:lgroos oonsiderably in the first half of last year. domcslic income Private domestic final purchases-that is, final purchases by U.S. households and businesses. which tend to provide a betler -! indication of future GOP 8,ro111h than most other components of overaU spending- rose at a solid annual rate of about 3~ percent in the second half of the year, similar to the first half pace. The eon nomic expansiono ontinues to be supported by steady job gains, rising household wealth. f.worableo onsumer sentiment, strong economic gT01'11h abroad, and accommodative financial conditions, • GI'O$Jdomtu~ot«yt;l"u.bicror201HU. ScU.ct' &:mc.or~ArAy-..VlaHI\-c;~ including the still low oost of borrowing and easy access to c-redit for many households and businesses. ln addition to tbese factors, very 7. lnftation compensation impli«< by the TIPS bttaltev<n inllation rate is l>lsed oo lbe dill'<r-. at comparable maturities. betw<tll )ields on nominal Treasory securines and yiclds on TIPS, "1riclt art inde.oc<d 10 the beadlin< <00$1lM<r price index (CPI).lnllatioo mpS are contmu in •1riclt ooe pany mtl:es payments of certain fixed naninalamoun~ in acltange for cash ft01>~ thata .. inde:<<d tooomuJati,<CP! inftatiODOI'<r scme horizon. Fccu:sing on inftation compensation 5 to 10 yea. .a b.ad is useful, pani"'larly for monetary policy. because such forward measures encompass market participants' view'S about \\be-rt inftation will sctde in lbc long term after de,'dopmmts infiuendog inflation in lhe short tenn bare nm thrir coarse. 85 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00089 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.02079103 MOMTARY POliCY REPORT: fE8RUAAI' 2018 17 upbeat business sentiment appears to hare t3. Olangeio re>l pcrso1Uicons11Dplion «pmdnurcs supported solid growth Ol'er the past year. •od dispo~able pcr;<ml iooomc Ongoing improvement in the labor market and gains in wealth continue to - 6 -S support consumer spending ... Supported by ongoing improvement in the labor market, real c~nsumer spending rose at a solid amtual rate of 3 pertent in the second half of2017. a somewhat faster pace than in tbe first half. Real disposable personal income-that is. income after taxes and adjusted for price changes- increased at a modest average rate of I pen:ent in 2016 and 2017. as real wages changed little over this period (figure 13). With spending growth estimated to have outpaced income growth, the personal saving rate bas declined considerably since the end of 2015 (figure 14). - 12 Consumer spending has also been supported by further increases in household net wealth. Broad measures of U.S. equity prices rose robnstly last yea~ though markets have been \'Oiatile in recent weeks; house prices have also continued to climb. strengthening the wealth of homeowners (figure I5 ). As a result of the -l increases in home and equity prices, aggregate I I I I I I I I I I I I I I househokl net worth rose appreciably in 2017. 2007 l009 2011 lOU lOIS lOll In fact, at the end of the third quarter of 2017, N1:£: Da:am!lrvut:Dtn:mbc"2017. household net 11~>rth was 6.7 times the ~alue of SrJ.aa: lk.<u~Gf~:kd)U V.lhve A:alf.~ca. disposable income. the highest-ever reading for tl. Priccsof<Xi<tiogsingl. .& milyhoUS<S that ratio, which dates back to 1947( figure 16) . . . . borrowing conditions for consumers remain generally favorable ... - Wt'•5e-Shdle -IS ~tulm&t -10 Consumer credit expanded in 2017 at about the same pace as in 2016{figure 17). Financing conditions for roost types of consumer loans - s are generally favorable. However, banks have continued to tightens tandards on credit card -10 and auto loans for borrowers with low credit -IS scores. possibly in response to some up1111rd - lO drift in delinquency rates for those borrowers. I I I I I I I I I I I I I I 200'1 2009 lOll 2013 lOll lOll Mortgage credit has remained readilya vailable for households with solid credit profiles, but N!r.'i: Tbe dn (« lbrWJCat.sblk ~:do: QWd ~ So\-en~ 2017.1UWictet211w•ndutndtb!C'cn~b&xtx:cdlh."Ofilb it was still difficult to access for households Do:~ lOll, $'.UCi: Cord_. U~ PrxY ~ Z.tlw, SlP.tae.shUb US. 11ith low credit scores or harder-to-document Nat::IIHomtPrk'elm.ll:tSU.I(:..Shdlt:b:tlka~~S&P income& D l ~ l J . W . J ~ o i : d a ~ ~ tetlb U e! .C l t d f ' . w eo ; q e.. a e J t li c b d m ms pe ( t F ' o l r ' ~ J )cr.v Jcocs illtim 86 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00090 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.12079103 18 PAAT 1: R£aNT£CONOMICANOfiNAN0Al OMLDPMfNTS 16. Welltb-to income ratio ... Although household borro11ingc ontinued to increase last year, the household debt service burden- the ratio of roquired principal and interost payments on outstanding household - 1.0 debito disposable income, me<~Sured for the -6..! household sector as a whole- remained low by historical standards. - 6.0 ... and consumer confidence is slrong - !.S Consumers have remained optimistic about - !.0 their economic situation. As measured by the Michigan survey. c.o1tsunxr sentiment was I !!!!l!!!!llf!!ll!!!!!lllf I 1996 1999 200.! lOl5 lOOC lOll ztll;l 1017 solid throughout 2017, likely reflecting rising Ncnt:'P...tdo n:r.m! ~2011~). Thr te!!Satb! :a» of income, job gains, and low inJlation (figure 18). ~WiD:t.-ri~di~pmalm.-omt Funhermore. the share of households $OUQ: Fclc llelll'lrl. ~I Rtwn'l' ~ ~~tj!J:aJ Rekzse l-1, "fcao;W~oCtbtUncedS::a~rt"';f«~.amuorJ;.~ expecting real income to rise over the next year A:.I.I)'IIS\-.Ht•{t:~ or two has continued to strengthen and now 11. Olinges itb ooscbold deb< exceeds its pre-rocession le~~l. Aclivily in lhe housing seclor has -1,000 improved modestly Real residential investment spending incre<~Std around 2 percent in 2017, about the s.ame modest gllin that was seen in 2016.1iousing activity was sofl in the spring and summer, lOO possibly reftecling the rise in mongage interest rates early in the year. and ~1en picked up lOO toward the end of the year. For the year as a I! I I I I I I I I I I I I whole, sales of new and existing homes gained, 2007 1009 2911 1013 MIS 2017 and single-family housing starts increased l\'r.rTht~(«MI711:'t~ll'\\':1l.tSGftbetmO:allyelj:ls~ (figures 19 and 20). In contrast. multifamily IM S ! c l u l a l : u t re d ! q m uR l t R l . y et t tt l w 0 " B " o ~ tn 2 ! 0 . 17 S ; t Q n l ~:a~ R.dtut 2.1. ·rca:cid housing statts continued to edge down from AttcnJ of tht tkh!d S:tr.u.. the solid pace seen in 2016. Going forward, lean inventories are likely to support further gains in homebuilding acli\~IY, as the months' supply of homes for sale has remained near - uo low levels. - 100 ~~v Business investmenl has continued to 10 rebound ... !0 Real outlays for business investment- that - 70 is, private nonresidential fixed ilwestnxnl 60 rose at an annual rate of about 6 percent ;11- C~u:~lllr.ml - lG in the second half of 2017, a bit below the I I I 1 I I I I I I I I I I I II gain in the first half but still notably faster l006 ZOOl l:Oit ~U ):H! l!l& lOIS than the unusually weak pace n.'COrded Non; Tht del cn:id Osnqh Jicb.lDIIYlOIS; tbt ftbrl:cy d;t::a Ct in 2016 (figure 21) . Business spending on J(tlimw)' Tht~wtttillmlda:llft'~a:da:tbio:fd• 100c19(4Thtrull~a~-cb!&artob:ble.!utbtllt! equipment and intangibles (such as research pe-~ of~UWT~ o;~ fcily~ 10COtpsntre ~pric:nc!l::q'Wtt:al)n: (l'l'lt'()pl:s 1001011~ ~-~ •• !:ret<::.OCOIIIIO\qa~ Sol4a: U::!'o1ttli\)'ofMidirpi.SwvqtoCCocsl;mm._ 87 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00091 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.22079103 MOMTARY POliCY REPORT: fE8RUAAI' 2018 19 and development) advanced at a solid pace 19. Ne"'•andaistinghomcS3ks in the second half of the year, and forward looking indicators of business spending are generally f3vorable: Orders and shipments of 1.5- - 1.6 capital goods have posted net gains in recent -U months, and indicators of business sentiment - IJ and activity remain very upbeat. That said, business outlays on stn1ctures turned d0\\11 in - ·~ tbe second half of 2017, as investment groMh -.8 in drilling and mining structures retreated - .6 froma very rapid pace in the first half and in1<cstment in other nonresidential structures 3.0- declined. 1 I I I I I I I It I I I I I I I l006 2008 2010 2012 lOll 2016 2:018 ... while corporale financing conditions NT.E: Dl!J.L"tmomhly.New~Wesex!db'-&h~2017 have remained accommodative " t. " c P o -' :b mi ! ~ o , ~ "" l " • • r et. .•; :k!:·o!.m,;et,aym !" a " M " l p E l& m h : q - ""' i:d!dto SGu.a: Fo: '!Lft hccat salts. U.~ CeJUS ~batt: fo: exil!q belOit Aggregate flows of credit to large nonfinancial »b.l'i.llloll&l APocialiqa o(RcaJIOni: til ''H I\'\:' AW/tlct. firms remained solid through the third quarter, supported in part by continued low interest rates (figure 22). The gross issuance of corporate bonds stayed robust during the second half of 2017. and yields on both investment-grade and high-yield corporate -U bonds remained low by historical standards -1.6 (figure 23). -IJ Despite solid gro\\1h in business investment. - J outstanding c.ommereial and industrial (C&f) - .. loans on banks' books continued to rise only modestly in the third quarterof2017. Respondents to the Senior Loan Officer Opinion Suf\'ey on Bank Lending Practices. I I 2 006 I I 2 0l8 I I l aiO I I l OU I I 2 01' I I M lfi I I M IS I or SLOOS. reported that demand for C&l loans declined in the third quarter and was little changed in the fourth quarter e1•en as lending standards and terms on such loans eased' Respondenis attributed this decline in ·- demand in part to fim'l> dra11ing on internally generated funds or using alternative sources • ~~pmc:1 a! m:qil;.ltiZ(lf.d - u of financing. Financing conditions for small HI businesses appear to have remained favorable, and althoughc redit groMh bas remained sluggish, SUf\'ey data suggest this sluggishness is largely due to continued weak demand for credit by small businesses. S. Th.SLOOS ~available on lh< Boetdh<b&"., hltps1/www.fedetalrestl'l"e.gov/datal;loo;/~oos.htm. ZOIO 2011 2012 2011 201: lOIS ltll6 ~on 88 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00092 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.32079103 20 PAAT 1: R£aNT£CONOMICANOfiNAN0Al OMLOPMENTS 22. Sck<1ro <OOlp<:<><Dis of net debt fJJDDCiog for Net exports subtracted from GOP nonfmaodal bu:sjoc:sstS growth in the fourth quarter after providing a modest addition during the rest of the year - so U.S. real exports expanded at a moderate pace in !bes econd half of last year aflcr having increased more rapidly in the first half. supported bys olid foreign growth( figure 24). At the same time, real imporiS surged in the fourth quarter foiiOII~ng a slight contraction in the third quartet As a result, real net exporu moved from modestly lifling U.S. real GDP It I I I I I f I I I I I!! I gro111h during the firstthreequaners of2017 lOC1i !1m 2011 20U 1015 1011 to sublrllcting more than I percentage point in SCM.1:0: ftl!ml Rt:StM Bori Sl*:islital l!.dmt Z.l, T"a:tltl the fourth quarter. Although the nominal trade A«*1!!!5of!!lrllnM!S!C6." and current account deficits narro11~d in the third quarter of 2017, the trade deficit widened 23. Corporate bood >i<lds, by S<Cwities nting in the fourth quarter(figure25). Federal fiscal policy actions had a roughly neutral effect on economic growth in 2017 ... Federal government purchases rose I percent in 2017, and policy actions had littleelfect on federal taxes or transfers (figure 26). Under currentlye nacted legislation, which includes the Tax CuiS and Jobs Act (TCJA) and the Bipartisan Budget Ac~ federal fiscal policy I If !1 I I If I II II I I II II I t I I will likely provide a moderate boost to GDP 21))1) 200l 1006 1009 ::Oil 2015 :Gil growth this year! 1\'m::tbtyitldstbowta.•"t)id!soeiQ..)'u:~ ..SC,.-....c-a:.t CE k::l: o( ~ Mcrnl L)'1dll~ ~:Xi! wt.ll The federal unified defiCit continued to widen -- in fiscal year 2017, reaching 3\1, percent of 24. Cb!nge io !W imp<:<<saod exponsof goods nominal GDP. Although expenditures as a aodsmiees share of GOP were relatively stable at a lillie .. uoder21 percent. receipts moved lower in 2017 to roughly 17 percent of GOP( figure2?). ll'll~ Q>-IS The ratio of federal debt held by the public ·~ -_l,l to uominal GDP was 75Y. percent at thee nd of fiscal year 2017 and rermins quite elevated relative to historical norms (figure 28}. -6 - l 9. The Joint Olmmiuee oo Tuanoo tstimalts that the -l TCIA ~;u redooe avmge annoal ta\ revmoe by a tittle more lh. . I pen:entofGOPO\'erlhenttt few year;. Tbis mlllutestimate does oot aocoaot for lhe potential macroeoooomic etTects or the l-egislation. 89 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00093 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.42079103 MOMTARY POliCY REPORT: fE8RUAAI' 2018 21 ... and the fiscal position of most state 25. U.S. tndc and curm>t accooot bolanccs and local governments is stable The fiscal position of most state and local goVl!rnments is stable, although there is a range of experiences across these govemmen1S. - I Many state governments arc experiencing -l lackluster revenue growth. as income ta~ -l collections have only edged up, ona verage, in recent quarters. In contrast, house price -- ·l gains have continued to push up property tax revenues at the localle1~l. Employment in the -1 state and local govemment sector only inched I If I I I I 1 I I I I!!! I I I! I I up in 2017, while outla;~ for construction by lOOI 200) lOOS 20011009 1011 lOU lOIS 2011 these governments continued to decline on net Nor.E:ODPapudta.!rirp:odua.C't:tttl1a.."«<!bm~ (figure 29). ~101'-Ql. $r.(.'lC£ br::or~~Alal)-vlaHr;vc~u... .. Financial Developments 26. Cbnngt in real gQvemmc:nt exproditurt"S on c.onsumption and im·estme:nt The expected path of the federal funds rate has moved up -· The path of the expected federal funds rnte 1· · ~lt ~ cd lllnl implied by market quotes on interest rate deri•atives has moved up on net since the middle oflast year amid an improving global gro111h outlook (figure 30). Part of the upward shift occurred around FOMC communications in the falltbat were interpreted as implyinga -6 somewhat quicker pace or policy rnte increases - 8 than had been previously anticipated. The I I I I I I I I I I I I I expected policy patha lso moVl!d higlterarouod 2009 201tJ>II lOil2013lOI4 201S 2016ltl1 the time when the U.S. Ia.~ legislation was finalized. Survey-based measures or the expected path of the policy rate have been generally little changed on net suggesting that pari of the -_l6,. rise in the markct-irnptied path reftccted higher term premiums. In the Federal Reserve Bank of New York's Survey of Primary Dealers and -ll Survey of Market Participants, which 11~re -lO conducted just before the January 2018 FOMC - 11 meeting. the median respondents expecied -_,1.6 three 25 basis point increases intbe FOMC's target rnnge iOr the federal funds rate as the most likely outcome for this year, unchanged I II I I II I II 1J II I I II I II I I I 1991 1001 2005 2009 2013 MU from what they bad expected in surveys conducted before the June FOMC meeting. Mar~-et-based measures of uncertainly about 90 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00094 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.52079103 22 PAAT 1: R£aNT£CONOMICANOfiNAN0Al OMLOPMENTS 28. Foltral gov'"'""'" ~ be:d bye" pubuc the policy rnte approximately one to two years ahead have, on balance, edged up from their levels in the middle of2017. -W The nominal Treasury yield curve has -1<1 shifted up -60 .. The nominal Treasury yield curve bas shifted -_50 up on net since the middle of 2017, owing Lo greater optimism about the global growth outlook and invl:Stors' perceptions of higher -llO odds for the removal of monetary policy II I I I I I I I I I I I accommodation{ figure 31). Yields on shorter· 1M1 1m tm 1m 2001 2011 term nominal Tre.asU!y securities increased Nm:Thtdo>ma:tli!uotlPlOll:QJ, Thtwixll"'""""' relatively more than those on longer.term ~ 1! ( 6 G t O nl I d ' t ) kb u l t ~ ~ l r « . ' t." d :! i l:l e l: t c b t. d F d e& m n f l t d 4 e o b l t ~ l d !t d l ! d Q b f yt ' h d t b po c t : b t c f1 ~ 1 nominal Treasury securities. thus resulting in ll'tftad~(\'J,Iua;td.JllhttlllQ(iht~ some Oattening of the yield curve. According ~F'or(I)P,~:t!llloi'~A:talysitVItlf.n'tfkll)ti~b fmtral dett.. f«kkal itt1tM" Sod. ~B" ~ Z.l. 'fCJCQII to market participants, among the factors k0010ofltt lkli'.rdSllltf.. contributing to this outcome bas been the Treasury Department's stated intention to increase its reliance on issuance of short-dated securities, as discussed in the two most recent - 19.1 releases of the Treasury's quarterlyf inancing statement. -19.6 Consistent with the changes in Treasury yields, yields on JO.year agency mortgage-backed securities {MBS)-an intportant determinant -lfl of mortgage interest rates- increased but -19.-t remain quite low by historical standards ~ (figure 32). I I I I I I I I I I I I I '"' Broad equity price indexes have Non:1lw~...tl!ld.Gc~II'!OCcllly.IOdlt.~~.., qt->r~. ,..,_. .... B=o.rU!to:S-"'"'"""' increased further ... dn8wttOofS:cr~ Alulytls:all ''*lbvct.bl)'tn. Broad U.S. equity indexes. despite some declines seen in recent weeks, have. on balance, increased further since June2017. with most of the net gains occurring during the final quarter of last year (figure 33). Equity prices -l.l were reportedly supported in part by an increase in investors' confidence that changes -tO to the feder.ll tax law will boost corporate earnings. Stock prices generally increased - I.S across industries outside utilitits and real estate. two sectors for which the increases in - 1.0 interest rates described eadier are likely to have weighed more heavily ons tock prices: stock lOll lOIS :019 prices of banks rose more than the broader Nm: n.tftdtul#!:r!dl~,CaCpliedb)'qoornon~ltdtx market. Implied volatility for the S&P 500 ,,..._ dt::~\~'t toer! !ltd !I)~ tll~ll"t't lt&nl ~ :J!r. Tbe index, as calculated from options prices, ~litds:Qastlftbt\'a.")'li.WJt•('(IC'f*.'td..;lhtll•ofDJ.O. 201i.Thtpd:•mimr.fd'tirihlqlline~~·lttt!lpumfto. ofOb.upoa Tbtparhsatt.:ddroqti200:0.Q: Souaa:: Bl~kdtu!Recavt&a!daatres!&nllts.. 91 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00095 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.62079103 MOMTARY POliCY REPORT: fE8RUAAI' 2018 23 increased notably in early february, ending 31. Yi<ids on oomiml Tr"""l' S«<lities ... the period close to the med.ian of its historical , distribution. -T ... while risk spreads on corporate bonds -6 have continued to decrease -S Spreads on both high-yield and investment· _, grade corporate bond yields 01~r comparable· maturity Treasury yields have decreased - ! funher since the middle of last yeat with spreads for high-yield bonds moving closer - I to the bottom of their historical ranges. The narrowing of the spreads since the middle of I 2 I 00 I 0 2 I 0 0 I 1 11 I » I '2 0 I 0 61 I .t' I X I I S 2 I 0 10 I ) l )1 l 22 0 I J. I i lt I ' )l I 6 ! I 0 1 I t I 2017 appears to reftect both an anticipation Nm: The T~ceadpcilll.a)Q: o(thc Jl).yw ~OU'*Ilma1lllr.>' that the losses from defaults on these bonds kl)S~fctcua.·y13,l00l,cdns.~~~~(I!~IC'a¢\fCQf~9.»J6. 11ill be smaller and a lower compensation SGucr: ~oflb~ftus~~y. being charged for bearing the risk of such losses. (for a discussion of financial stability ......... issues. see the box "Developments Related to financial Stability.") 9- - 100 Markets for Treasury securities, mortgage· -2!0 backed securities, municipal bonds, and -200 short-term funding have functioned well - llO Available indicators ofTreasury market - 100 functioning have generally remained stable over the second half of2017 and early201S, lO with a variety of liquidity metrics-including - t bid-ask spreads, bid sizes. and estimates of ltl!!l!!!l!!!l!l!l!!! l transaction costs- mostly unchanged over l((I&2WJ:ZOO'l00620<B2010l01lllli'2016WI8 the period. Liquidity conditions in the agency Sots; ~ dlll~~t daily. YW~ &bow:! • (« !It fCIIIC ),~ lfl.)'tC tu~r:tt:~Cr.«<p:~Cta:tat•~!leW~d.S«\Titirs MBS market have also been generally stable. woddbtpxtdJ!pr.orf~.~Spera&sbotoiStolbt~dt!zo In recent months, the functioning ofTreasury 5 l - ~ a l : . d O I l L ~ l'II'OCI:&IiT.tml:l)')itiQ& lbtb!Atr.aldf:rcql!FtU'QI:y and agency MBS markets has not been notably Sol.'lltl: ~-=rtttol~tn~q.&di)'L alfected by the implementation of the Federal Reserve's balance sheet norn\1lization program 33. £qui1yprioes and the resulting reduction in reinvestment of principal payments from the feder:ll Reserve's securities holdings. In early february. anrid - 200 financial market volatility, liquidity conditions -m in the Treasury market deteriorated but have - ISO recovered somewhat since. Credit conditions -ll$ in municipal bond markets have also remained -100 generally stable since June 2017. 0\er that lS period, yield spreads on 20-year general obligation municipal bonds over comparable· S& maturity Treasury securities have narro11~ - l$ on balance. Nevertheless, significant financial f I I I I I I I I I 11 I I I I I I I I I f 20))200.!2004~200Sl0U)201ZlOI.t2016201$ strains 11ere still evident for some issuers. Sr.ua: ~k Poot's 1><1¢' Jo::.et b:!:i'es '' BI~(For Dow l«:al::6t.-n t. ." ff1SilJ&i:fom~ltioo., ~~tttht~co lhe:Cc:«al"f'.) 92 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00096 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.72079103 24 PART I: R!CENHCONOMICANDIINANCIALD MLOPM(NTS Developments Related to Financial Stability 0\~rall vulnerabilities In !he U.S. financial s)~em funding source fO< the oorporale sector--$13yed rermin rroderate oo balance.* Valuation ptessures oompressed.ln addition, nonprice terms eased on these ~tinue 10 be elevated aerO!> a rangulasset ~l"" of loans, indicating weaker i"'·estor protection classes, Including equities and comnerd.al real estate. than at the peak of the previous aedil cycle in 2007. Vulnerabilities from le.erage in !he financial sedO< Consistent wid> elf\11ed risk appetite, virtual currencies appear low, relleding in part CJpi~land liquidity experienced sharp price increases in 2017. ratios of banks that"''~ continued to lr11>r0\~ from Vulnerabilities related 10 financial-sector lf\-erage already strong positions. HO.\'E!\~ there are signs appear lo.v.le\"erage at insurance companies and at !hat nonbank financialle,..,.ge has been incr.,.sing b<oker-dealers is on the low end of its historical range, in some areas-for exaf'fl'>lt>, int he ptovision of and most indicator< of leverage al other noobanl< rmrgin credit 10 equiry lnveslor< such as hedge fund~ Onanclal firms are stable. How"'·er, there is some Vulnerabilities from nonfinanciallf\'fl3geare jtxlged evidence thai dealers have eased price tetmS lo hedge 10 be moderale. While housdlold debl balances ha'~ funds and real estate in,•estmenllrusiS, and thai~ been increasing modesdy.lhe lf\-erage of the business funds ha'~ gradually increased their use of le,-erage, sec;tor is elf\Oied, particularly among speculati,-e-grade in particular rmrgin credit lOt equity ltades. Although firms. Vul..,.bilities related to maturiry and liquidiry such ealing ol price terms has taken place again~ the transfonmtion remain low on net. backdrop of building valuadon pressures, the s~rong <ft~r !he second half of W17, valuation pressures capiial position of bank holding comp;~nies reduces edged up from already elf\~ted levels. In general. the risk thai sudden drops in asset prices could valuations are higller than would be expected based sig,1ifrcan~y affecl bank-affllialed dealer<. Risi·based solely on the cunent Je,-el of longer-term Treasury regulatory capital ratios for most of !he largest bank yiel~ In part reflecting gro"ing anticipation of the holding CO<Op;lnies continued to increase from already boost to futl1e(after·l3)() eamir>g$ frO<Oa corporate high le>tl$. l3x rate cu~ prire-to-earnif~:S ratios for U.S. stocks If interest rates were lo increase unexpectedly, rose through january and were close to their highest banl<s' strong capi~l position should help absorb the !e--els outside of the late 1990s(figure/1); ratios oonse<pent losses on sec. .i ties. About one-third of dropped back somewhat in early February. in a sign of the losses that could be experienced by banks would increasing valuation pressures in comrnertial real esl>te affect held-to-maturity securities. While these losses rmrl<ets, net operating income relati'-e to property values (referred to as capitalization rates) have been declining relative to Treasury )ields of CO<Op;lrable A. Forward pri(e.IO·eamings ratio afS&P 500 rums rmturity for lllJhifarrily and industlial p<operties. While these sp<eads narrowed furlher from already low levels, they are wider than in 2007. [\·en though the aggregate residential house price-lo rent ratio has been increasing fa~er than I~ long-run ~end, it is only slighlly elevated al p<esenl.ln OO<porale credit nurl<ets, sp<eads of corporate bond yields "'"'those of Treasury securities with COfT!lOrable maturities fell, and !he high-)Wid lpread is now near !he bottomo f its historical distribution. Spreads on lereraged loans and coUateralized loon obligations-which are a significant I. An O\<r\10W of !he lrame.ort (0< as..,.;'1 fiNnr:oal ieabilityin lht Urnted Stales is pr011·ided in Su!Vy Fischer l2017l. 'AnAA«smerll ollinanaal Sobili1y in 1he Unil«f ! S S > ~ t l . l n t in ' 'E S A ' , i · B m ~ an e d r c i e c o a a l , n ! i d h e C ' o C " m . " n ri 1 ' b .1 b 1 3 . ' 1 1 . K ! n h a e 6 a o I n M o d : F B A 1 e ! \ M s 'o t P r r w l r :! a : l e l c o d t p E i c c o o ~ n n f o r R rr c w N m < n 'S c ; ial d ~ u: i N ~ i C J t o ~ d ; o ~ t - i p : . W i e . 1 ' c p t b m i x t b o Q d t F l a ~ c o a l f a t ~ t O ~ fl • I l o l S c l c e \ l . f ' « t d l W f a l r i u l d • t 1 ~ b & II y o · !Q a : N s c l e : d i o 9 N O S u ~ ! S . x I t O : n : ~ c l d f d o J m ~ o 3 t C f t ' t S : l & l ~ 1 P ! : . ! 5 r ~ W 0 b M t 0 a . o C : i ( 1 m : & ~ l s f . Washingwn.June 27. WYtw.Jederalr('S(If\1f'.p'lr~twS€'\t'niSI Resrmt. ()m,a..-ebutdc ll~~.edttnlll'il'prtt.!oa:t. lp«<lv1lsd,..l0170617a.llun. Sl:u.ct:&.allutlmllt$butd:oc'lllo::llooRl\llm.IBES 93 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00097 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.82079103 MOMTARY POliCY REPORT: fEBRUARY 2018 25 would nol reduce regula tO<)' capit>l. they could s1ill quality liquid assets stand at high level sand exceEd ha'~ a \'anety ol nega~,. . consequences-lor example, those r"!uired by the liquidity CO'Ierage Ratio. The by """"'ing banks' funding terms. The large share ol share of core deposi~ in IOOIIiabilities at G.SIBs deposits in bank liabilities is also likely 10 solten the also remains 31 historically high levels. MOte lhan effect of an une>peeted rise in interesl rates on banlcs, -year after the money market fund reform, which becausedepolit rates tend to adjust with a delay and reduced"'" risk as investors shifted fromp rime to bank profll>bilitywould i"1'rove in the meantime. go.•emmcnt funds, the growth in alternative short- 0\'erall vulnerabilities arising frllm leverage in termi n.esttnent \'ehicles has been limited. Regarding the nonfinancial sector continue to be modernte. S«Uritizod produc~. although the issuance of asset CO<ltinuing its pattern in recent years, household debt backed securities V'-85) was Slrllng. overall i$$U3noe has expanded about in line with nominal inoon1C, hasremained 1vell below pre-alsis le>us for~ asse~ and the household credit·IO-GDPg ap rtrnains sizable classes. aJ\cl securitizations appear to in\'Oh-e lln;ted and negative (frgure B~ leverage in the nonfinancial maturity or liquidit)' ttansfonrotion. Nonetheless, ABS busine!$ sector remains high, with ~issuance of rislcy issuance was boosted by the securitization d assets debt clini>ing in recent months. Howa~r, the .hare of that were rarely securitized in dle pas!, such asaircraft the lowest-qualitydebl in 10131 issuance declined, and leases and mobile phone conttacts.ln adcltion, certain relati,.ty low interest expenses mitigated some ol the nontraditional liabilities of life insurers, including vulnerabilities associated with eiC\'aled leverage. funding.agceemer>t·badced securities, ha'·e grown In port attributable to regulations inttoduced not>Ny recently. although levels rennin low relative to since the financial crisis\\llnerabilities associated the broader market fOf securitizations. 1 v.ith liquidity and maturity ttansfonnalioo-that is, Financial vulnerabilities in (()(eign ec:cnomies are the financing ol illiquid Of long-maturity assets with moderate O\roll. Advanced foreign economies, many short-maturity debi--continue to be low. lhe reliance of which havesttong financial and real linkages to ol global sy~crrically l...,ortant banks (G-51Bs) on the United Stales, continue to llrllggle wilh elevated short-term wholesale funding has risen only slightly '~luations. the disposal of legacy assets, and, In SOfne frllm poll-aisis lows, while their holdi~ ol high· coses, worrisome rises in mortgage debl. Some major emerging market ecooomes ha!bor more prooounced vulnerabilities, rell~ng ooe or more of the following: subslantial corporate la-erage, fiSC<~ I coooerns, or e.xcessi\'e reliance on foreign funding. The counterq-clical capital buffer (CC)'B) is a maaop<udential tool the federal Rese~. . Board can -ll usc to increase the resilience of the finarrial S)'Stern by raising capital requirements on inlffnationally - 10 adi\'C banking ~nimtions. The CCyB is activated when there is an elevated risk of above-normal future - l losses aJ\cl when the banking o~ganizations for which copit>l requirements 1wuld be raised by the lxiier are exposed to Of are contributing to this ele\Oted risl<-either directly Of indirect!)'· The financial stability developments, assessments, and fran\0\YO<k described and used here bear impa<tanU)• on the Board's !etting oltheCCyB.1 ln December2017,the8oard 1'0tedto af Orm the CCyB at its level of 0 percent. Ho N d: ( r ) i t :· l ~ :~dll l fi t le x r ' . T c he l : l m d~ 5 : t O d I 1 N ; ,,. Ql ~ c . d .. a ~ s : p : m » o o ds o C or ! f b d :J g m q w • /<OOMued on ne.t page) lt\'U.SIIOClUWIIXdbyttNa!IOI!al Bu:ttuoiF.:o:lccc:d:Rmant..(bps h p A r o S o a l d o w o t u . : ' b l X . t t t 2 d d F . t w t & b t t t l a U l 8 c h r l . . 1 c c d v t ! d S Y b :. t ' c a f & - ~ ; . ~ . ~ d o . ( o St . .: ~ t o t: ( : ~ o f l . . - ; 1 l o 1 ; e .x it ! z d u d e c i ~ A V L m G ! D l J ) P n , I ' v 1 S ~ c a t l . b tD v - t ~ J r ( F l r 0 o l , 1 . . 6 . S . ) . . . . ' o . R c B l e . o g f a o u r l r < a ! l t r < O rp I r y C le C m O a < p \ f " it l " a o l " n R g " u t < h l. i o , t h : u T o s h F . e e d s f e e . r. . d ~ . e t I < R 1 J 1 I 1 e C R s e M o s u . e n . n S l f ~ ) f < q B l < e o m o b r c d a 's l A:.ll)tl.'1, 111ttoeel e.."'efft. a:d ~ a.'tCilll!tS, Tal* I 1.5: G:ou U!>it>IBtif«,• iooul policy"'"'"'"'(!)«~;« No. R-1S l9). llo:lo>:l'mrtlloan!JU«c•l:•"""'- fodon/1/egis!er, \'01.81~ 16),pp.6l681-88. 94 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00098 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.92079103 26 PART I: R!CENHCONOMICANDIINANCIAL DMLOPM(NTS Developments Related to Financial Stability {(1)(1tJnued} 0\~r lhe second half of 2()17,1he Fede<al R~e also adopted a fonal Nle 10 if11lr0\'e lhe resolwbllil)' Board has takm son-e key steps lo reduce regulatOI)' and resilience of G-SIIls and !heir subsidiaries to burden while promocing lhe financial stability of lhe res~iclions rega~ding lhe cerms d. cheir nondeared United States. The federal Reser1<e Boord, Office of qualified financial cootracts.'ln addi6on,lhe Board lheCOf11ltroller ohhe Currency. and federal Deposit proposed changes to ils super,•iSOI)' rating system Insurance Corporation joindy proposed amendn-enls lor la<ge financiallllllitulions lo belt" align wilh lhe to lhe banking agencies' commercial real estate post-crisis supetl'isory program f011hese Orms; smaller appraisal regulations that raised the threshold price institutions, irduding ccmmunicy banks, would fe< mandating appraisals fre<n S250,000 10 $400,000, oonlinue 10 use lhe current rating system.' Finally, lhe !hereby redJcing the number of required •PP'aisals.' Boord requested CO<Oil'enl on a package of proposals In addition, the federal banking agmcies issued a thai would increase lhe lr.lmparcncy of ils stress-testing proposal lo simplify aspects of oommunlly banking program. in particular, the proposals would provide organintions' regulaiOI)'capil>l rules, with lhe goal mO<e iniO<mation aboullhe noodcls used to estimate oi reducing regulaiOI)' burden on smaller institutions h)'polhetie>llosses in lhe stress tests while maint>ining while maintaining the safety and soundness of the the Board's ability lo lest 1he resilience of the nation's banking S)'slem.• largest and rmst complex banks' The Boord requested comment on a COJpO<ate governance proposal to enhance lhe effectiveness of financial firms' bo31dsof director~ The proposal refocuses d~t Federal Reserve\ superviSO<y expectations f r e e < s p th o e n s l ib a il ~ it t ie s fu a m nd s ' w b o o3 u 1 ld ds a o ls i o d r i e re d c u tO c < e S u o n n n e t c h t e 'S ir S C a O ry < e T•o ff<lp0531~ Co<po..!f eo.. .... nctand RatingS)Will burden f01 the boards of smaller institutions.' The Board fOt~rge Fimnciallmtitutions, .. press~~ August 3, ht.,.~ll>-.w.fed«•l....,...govre.'K'I<n~jx"""l"""" bc:reg1017080lahlm 6. Seel!oordofCo~«no• rJ ihef't<JE<•I Resen~System l. S..Off<e olthec..,..,uoller ol theCuttency.li<lrud (20 17), •R..nc;ons on Qtt.llified Financial Conua<IS rJ of GOI.....,rsol d" -IR e!<n• $)Stell\ n•n, d the S)slfmic.lly lrrporum u.s.8 anki'll Orgariz>oons and the f't<JE<al ll<posit lnsur>rw:e Cotpo<a;on (20 I ·R.,J! sulf U.S. OpE<ldons rJ S)>tonially I"""""' foreign B>riing "Wai!31s; n04ice rJ pr<pO<ed rulen\l~ng and r<quest IO< Org.wizations; Revisions lO the Oefinition of Qwlif)i'1 -t(l)oel"No.R-ISi>ll),Foderzlllegiut>r, voi.Sl Mlstet NettingA~tand ~ated Oelinilions,• fir.al ru~ Ouly 31), pp.l5413-9l. (l)oek<tNo.R·ISl8), fede<l/Riog$<er.IOI.31ll<!>-ll), 4. S..Off<e rJiheC""1'uoller rJ theCuttt>r<y. Boord W· 4lstl-916. ofGOI.....,rsrJdte-IRe«n•Sl"''"•ndthe-1 7. St!re Board of Go~nors, "ffderal Reser\~ Board lnvhes Otpositlnsll'•rw:e(oiJ>Of•don(I01n, 'Sirrplific>tionsoothe PIA>Iic Cotrrnem on Two ff<lpOS31~' in 11010 S. Capio.l Rule Purs.,ntiO the [oooooic C.owlh •nd Reglti>IDry 8. See BolJd of Co-.rno• of the federal Resen~ S)"'"" P.lpe~»orkReducbCiflActof 1996: oociceof pc<pO<ed (lotn, -r.detal R...,.Boord R"JuesuCoornentoo rul..,.~'ll !Dod:<\ No. R-1576).ft'dml Rtogistt>r, vol.82 P.ltb&o ofPtoposa~ That \-\~lAd in<r..,. the Trnnsparerw:y (Octob« 27).pp.4~500-14. rJ I• SOES6 Tes<i'll Ptogr>"'" press relea,., O.Cent.< I, S. See Boord of Grw!morsoflhe F<d"'l Resen"' Sys~em .ww.feder.llresen. .p 'newse~<en•'Jlres.<l<!i..,.Y (lOJn, 'F<dt'r•l Reserve Board ln1ites l'lblic CO<nntenlon bcreg10171107ahom 95 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00099 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.03079103 MOMTARY POliCY REPORT: fE8RUAAI' 2018 27 In particula~ prices for Puerto Rico general 34. Ratio oftol>t commcrci.ll billlk mditlo oominal gross obligation bonds fell notably after Hurric.ane doweprodu<l ,_ Maria ltitthe island and its economic outlook deteriorated even further. However. these developments len lillie imprint in broader -?l municipal bond nk1rkets. Conditions in domestic short-term funding markets have -~-10 remained stable since the middle of last year. - -., Bank credit continued to expand and - -IJJ bank profitability remained stable Aggregate credit provided by commercial -Sj banks continued to expand in thes econd It I I I I I I I I I I I I I I I I I I half of2017 at a pace similar to the one seen ZOO! UIOl ~OOS ~001 UI09 ~II lOll 201.$ $11 earlier in the year but more slowly than in ~ N4cnl ltttm~ Bori. SU!aW Rtlwt IU. -~ Jill! 2016. Its pace was also slower than that of A ~ :idyll1 '" o * C B C A o: - : w at . r w M l) I o S ,u . W 1:1. I» U011td. S:.l<n". BlrM: fi EtoctD: nominal GOP, thus leaving the ratio of total 35. Profitlbitity oflxutk holding compl!llies C()Dlfllilrtial bank credit to current-dollar GOP hlecd,_.,,_, slightly lower thane arlier in 2017 (figure 34). ~--- Measures of bank profitability were liLLie changed at levels below their historical ~ u 0 - - R<t=c...., -lO averages (figure 3S). . -Jl lA- .s- - 10 International Developments 0 .S- -10 Economic activity in most foreign 1~- economies continued at a healthy pace in - Jl lJ- the second half of 2017 to- - lO Foreign real GOP appears to have expanded I ! I I I I ! I I I I I I I II I I ! I I »l1200llt»S »l72009MII:blll201!2tll1 notably in the second half of2017,extending NT.£: Thcdfte:t~i~e:da:rteaw.dya!f..ld.'Tbtb:a~ e th c e on p o e m rio ic d g s r i o n w ce t h m p id ic - k 2 e 0 d 1 6 u p w b b e ro n a t d h l e y p a a ro ce u n o d f t S !o S t q t. O W ~ 21 t n F f « ~ o B Q .3 l c m l t :l R lc t: M Se : \ & <t C B « o < d IJ . ! r d . t , t . . FR Y-9C. Cc~u>bd.lkd rlflll>...a the world. 36 Rcal!IIOSSdomestic product growth in sel«tcd !ldvtmctd fortign C'Callomi~ Growth in advanced foreign economies ., was solid, and unemployment fell to ... multidecade lows ... . 11-.J1olK. ...... - J In the advanced foreign economies (AFEs). •I"EC'-O""''a :n HJ _, ll1e economic reco~~ry has continued to firm. Real GOP in the euro area and the United Kingdom expanded at a solid pace in the se~ond half of the year (figure 36). Economic activity also continued to expMd in Japan, _, though real GOP gro"1h slowed sharply in lbe fourth quarter. in Canada, data through November indicate that economic growth l1lll lOll moderated romewllat in the second half ~ 1\tdQfortbe Umltd(q.dcadtbt«tt ..n ~ following a very rapid expansion earlier in fluhct:tlt'l.itlf«2011~. Thtdai«Jtpe ~~~t:'11311Y et:l:ll&le bl011:Qt.l':&Qc&f«C'cDcxldlliilnqhl011:Ql. tile year. Unemployment declined further as Stntt F«theU:t.l'!dK~OifiC'ff«N!!.:a!Sta.x..'1; -~ Clbl:dOCil~Go\'l':ll:'l!ll!Ofhran;forlbft(.!Oz;tt,Ei..~fk('.zmd&. S".utaC~ill"'Rtv!!rA:cl)'lll:'l. 96 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00100 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.13079103 28 PAAT 1: R£aNT£CONOMICANOfiNAN0Al OMLOPMENTS wei~ reaching 40-year lows in Canada and the United Kingdom, while growth in labor compensation ticked up only modestly. 37. Coosumerp ri~X ir.Oll~n ic seltdtd a!h'RDCed foreign ecooomies ... but inflation remained subdued ... Consumer price inflation rose somewhat in -· most AFEs. boosted by the rise in commodity prices (figure 37). Howe1•cr. headline and - l especially core inflation remained below the central banks' targets in the euro area and -l Japan. In contrast, U.K. ioDation rose rurtber - I above the Bank or England's {BOE) 2 percent target as thes ubstantial slerling depreciation observed since the June 2016 Brexit - I referendumc ontinued to provide some uplift to import prices. (For more discussion l!11t1 Z 1 :tO 1 lt 1 t,!11t" lO ' U t.!.t b3 " 16 " ""'' l " OI ' J " '"' b " ll ' $ " 'I of inflation both in the United States and Nor!: lht&~foe~«::rn~!lzlh&bntortti«Jmt121)' abroad, see the box "Low Inflation in the :O S Jt o . l ~ .ta W : f t « « C th 4 e 1 ll' 1 :t 1 td 4 J a :. i qd ! o O m d .O h i p f" s "t n ra ~ r ~ l\ ~ ~1 & 02 . I " S t t !! s t ! ! & t £ r . 2 a tl ; 1 r1o.r 1~ Advanced Economies'' in the Domestic Muuy t( ~ Al&a Cld Com::a::~:a:.o:a,. (r.r ihc CWO eta, Developments section.) Sta!ai!IC'IIOif~etoftllf~C~forC«::adt.S:a)t).:J Cata.!a;aiiV'llk\>r.AIW)~I.'&. ... leadingAFE central banks to maintain accommodative monetary policies The Bank of Japan kept its policy rates at historically low levels, with tbe target for JO.year government bond yields around zero. In October, the European Central Bank extended its asset purchase program until September2018. albeit at a reduced pace. The lS. Real gross dom<Stk p!oduct grow1h in selmcd Banko r Canada and the BOE both raised cmngiogD lJfkct t'c:OIIOilliC$ their policy rates but also indicated that they intend to proceed gradually with further removal or policy accommodation. -12 In emerging Asia, growth remained solid ... -' - ' Economic groMb in China remained relat~·ely strong in the second hair or2017 even as the - l authorities enacted policies to limit production in heavily polluting indiJStries, tighten financial regulations, and curb bouse price growth - J (figure 38). Most other emerging Asian - 6 economies regisJered very s1rong growth in the l014 lOll third quarter of 2017, fueled by solid external s.m: 1M dlla rornea~ ~~· adJ"'~t·lcd by Sod DJt Tbt~ demand, but slowed in the fourth quarter. for Kott&, llftxa.., ao.1 &cam ~Y &qutcd bf Ibn mpo.'li"'« COYG'"~~.lbedalli'Ora.t~~:eetlltiiellm:M ZOI1Qol., TbtdoiOr&-mla:d:th:or.:ab2017;QJ. ScUo; FarChir.a,CU!a~ncal&:mu.otS':atim:r«K«t&.BI:i ol MiRa; for ~Cai.."'. l::st=IO Naao:;;allft Utad.aD. y C-oopt, io; lka.ol bll:Uto&ulltro~Gttpliar Eu:lf!ir.'l; Ill'' Hl\-cr A:atyli.:t. 97 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00101 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.23079103 MOMTARY POliCY REPORT: fE8RUAAI' 2018 29 ... while the largest Latin American 39. Equity indexes for selected roreign economies economies continued to struggle In Mexico. real GOP declined in the third - 1>4 quarter as two major earthquakes and a - I~ - lAO hurricane significantly disrupted economic - ll! a F c o t ll ~ o ·i w ty i , n b g u a t r p e r b o o lo u n n g d e e d d p in e r t i h o e d f o o f u c rt o h n q tr u a a c r ti t o e n r. . - - - U l I Q ~ lt the Brazilian economyc ontinues to recover. - m -lit but only at a "~ak pace. Pm'llte investment bas - 10! remained sluggish amid corporate delevcraging - 100 9S and continued uncertainty about government !0 policies, althougb it turned positive in the third , l .b , > <! , <- I,,, I, I - I » quarter for the fir.>! time in nearly four years. 2014 lOU No?E:T"...!~ctwetl!y~fi&.:i!yb!Amdeu,a~ Foreign equity prices rose further on net. .. ~ SG l QcJ· l F ,l e J : l N l~ O a;n. OJ b S'R:tt l:dn: to. ~ TOPIX 5*"' Solid macroeconomic data and robust -t ~ nr:a.; Co.r U M :u S \tl O ! J i.~ ~ F T M SE d 1 t 0 : > s S L 'lO o d c : d l lld ~ rx: f« c l : ! ! ld 1 e t t t :; R .t ~ tl \'lS. corporate earnings helped broad AFEa nd emerging market economies (EMEs) equity indexes extend tbeir2016 gains througb the start of this year (figure 39). Declines since the end of January have erased some of these gains, and volatility in foreign stock markets increased. On balance, most AFE stock prices are higher, and E:VIE equity markets significantly outperformed those of AFEs. Capital fto"~ into emerging market mutual lOO - • • & ~ c ' d ' !m " d '" llo '' " " ' ' c ' . - . ' ;u c) :r t i u l o ) ) - 60 funds generally remained robust as higher -'0 commodity prices added to optimism about the economic outlook (figure 40). -lO . . . and government bond yields - lll increased -'0 Longer-term government bond yields in most lSO - El.tBI+Ild!:am) -60 AFEs were noticeably higher than their mid- 2017 levels, reOcctingstrengthening growtll ::014 lOU 1016 201J lOll and mounting prospects for the nomulization Nr.l: Tbebo::d~C'I\Wty~l»wl.Dmf\U&fldyllm!lolv.~ of monetary policies (figure 41). In Canada. da:a.ltcnah:.:Myl,201,.~&."C11bc31,20J1,d:'IIOtllhlySII:IIIG( v.'CekJ)·4Uf:alcr;crl,lOI~WFdruatyJi,lOit The~tlcnfsdlll where the central bank has raised its policy ndldt f:ods b.~ c Cbma. 1be l.l.l.lqc f.lllqq ).(Wll Bo:4 interest rate 75 basis points since June, the rise l""'l'lllS(llMIII<)Ialac.W«l::ya"""'<l<!oilydolldn!t>l in longer-term yields was panicularly notable. ~s-.ucrF:~ F ~ « b l ol:.d 0 ~ 13 t . q Jtl}' ~.md flows, EPfR C.w.J; («: EMBI+, 1,. MoqaEtacrgC,~Cdtls Ba:d.llllalt:.$\it Bloooilcq. On balance, spreads of dollar-denominated emerging market sovereign bonds over U.S. Treasury securities were stable around the levels observed in mid-201 7 (as sh0\\1l in figure 40). 98 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00102 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.33079103 30 PAAT 1: R£aNT£CONOMICANOfiNAN0Al OMLOPMENTS 41. NominaliO-yc:u g<Wc:rtllllCill bood yield< io The dollar depreciated on net S<kct<d odvao<<d """""""" ...... The broad dollar index-a measure of the Jrade-weighted value of the dollar against foreign currencies- fell roughly S percent in -l.O the first half of2017. Notwithstanding some -l.$ appreciation in e:1rly Febn1ary, the currency - lO has depreciated funber since the end of June. - t.s partially reversing substantial appreciation - 1.0 realized over the period from2 014 to 2016 (figure 42). Tbc weakness in tbe dollar mostly reftects a broad-based improvement in the outlook for foreign economic growth. Brexit It I !t' ,,, I I •.. I I I,,, I'·' I I related headlines weighed on the British pound lll~ ZOIS l016 leU lOit at times during the second half of 2017, but progress regarding the terms of the U.K. separation from the European Union boosted the currency later in the year.lncontrast, the dollar appreciated against the Mexican 42. U.S. doD:1r <l<th:mg<r at< iod<l<« peso, on net, amid uncertainty around North American Free Trade Agreement negotiations. - Dolmapperia~ - 170 i - 16<1 -ISO - I'll -uo - uo - 110 - 100 - llO (I I I I! I ! • I! I! I ' I I ZOIL lOIS l\116 1017 101$ ~ lbtdi2,~attcl'o!tit=~uni!Jj~trtol~.ttftt\1y tw:rttnoftiyc%all!dtmld~f~21,101S.Asi:6t:t~b) tf&l'!OW,I:t."ttUtfCtht da!a~ US. dolll: app~i&icc,d &mu.s.,.,_u.s.&>Ut"""'..,;,. "'S"c"u"a':" F " tr " d . m . l Rdt:w Bori. Swit:tbl B.dt»t H.IO, "f.:n~ 99 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00103 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.43079103 31 2 PART MoNETARY Poucv The Federal Open Market Committee the COmmittee expected that it would stabilize raised the federal funds rate target range around that target over the mediumt erm. At in December its most recent meeting, which concluded on January 31, the Committee kept the target For more than two years, the Federnl Open rnnge for the federal funds rate unchanged." Market Committee (FOMC) has been gradually increasing its target range for Monetary policy continues to support the fedemt funds rate as the labor market economic growth strengthened and headwinds in the aftermath of the recession continued to abate. After Even with the grndual increases in the federnl having raised the target range for the federal funds rnte to date, the Committee judges funds rate twice in the first half of20t7, that the staoc.: of monetary policy remains the Committee mised it again in December, accommodati\<e. thereby supportings trong bringing the target range to IY . to IY , percent labor market conditions and a sustained return (figure 43}.10 As on previous occasions, the to 2 percent inflation. The federnl funds rate decision to increase the fed ern! funds rate in remains somewhat below most estimates of its December reflected realized and expected labor neutral rate-that is. the level of the federal market conditions and inflation relative to the funds rnte that is neither expansionary nor FOMC's objectives. Information available at contractionary. that time indicated that economic activity bad been rising at a solid rate and the labor ~rket In evaluating tbe stance of monetary policy, had continued to strengthen.ln addition. policynm:ers routinely consult prescriptions although ioftation bad continued to run below froma variety of policy rules, wbicbcan the FOMC's 2 percent longer-runo bjective, serve as useful benchmarks. However, the tO. See Boani of Go>~mors of dlel'tdernl Reserve t I. Set Boani of GOI<mors of th< Federal Syst<m (20t7 ). "F<d<Itll Reserve Issues FOMC Restrve System (2018), "Fed<rnl R<Setw Issues Statement," press relm<, Deoemb<r 13. https:i/ FOMCS tatem<nt,"p=relea«, Janu31) 31, https1/ .." WW.ftderalteserve.govln. .., evmts/pr=elease;/ .....w .federalres<f\<.gov/newsmntslpressrelease;/ mon<tai)·20J71213a.btm. monetl!l)'20180131a.btm. 43. S<iemd iruerest rates - s 100 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00104 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.53079103 32 fAAll: MO'!TAAY POliCY use and mtcrpreution of SIICb prescripuons The size of the Federal Resen.e's balance require careful judgments about the chon sheet has begun to decrease and measurement of the inputs to these rules as 11~11 as the implications of the n\lny T tim he e C th o a m t m it i i l n le te e n h d a e d d c to om re m du u c n e ic t a h t e ed s iz fo e r o s f o me considerations these rules do not take into the Federal Reserve's balance sheet once a a n c d c o T u h n e t ir ( R ~ o t l h e e i n b o th x e " F M ed o e n r e a t l a R ry e s P e o rv li e c ' y s P R o u l le ic s y normalization of the lc,·el oft~ federal funds rate was well under way. At its meeting in Process"). SeptembeL tbe F0~1C decided to initiate the Future changes in the federal fund> rate b3l3nce sb«t n~tion program described 11-ill depend on the economic outlook as in the June 2017 Addendum to the 1\>licy informed by incoming data Xormalization Principles and Plans. This program is gradually and prodicubly redocing The Commiuee bas continued to emphasize the Federal Reserve's securities holdings by that, in determining the timing and size of decreasing the reinvestment of the principal future adjustments to the target range for payments it recei1ocs from securities held in the the federal funds rate, it will assess realized System Open Market Account (S0~1A). Since and expected economic conditions rebtil~ to Octo~r. such payments haw ~en rein\'eS!ed its objecllllS of tm:timumemployment and only to the extenttbatthey exc:ttded gr.tdually 2 perctntanHatiOn. This assessment "•II take ri:.ing caps (figure 44). into ac:(()unt a \\ide range of information, includmg measures of labor market In the fourth quarter. the Open ~1.arket Desk conditions, indicators of inOatioo pressures at the Federal Reserre Bank of New York. as and inflation expectations, and readings on directed by the Commiuee, reinvested principal financial and international developments. payments from the Federal Resem's holdings The FOMC has emphasized that it will of Treasury securities maturing during each carefully monitor actual and expected ioDation calendar month in e:<eess of S6 billion. The de\·etopments relati\'e to its S}mmetric in Dation Desk also rein,-ested in agency mortgage. goal. as mHation bas betn running persistent() backed securities (\ISS) the amount of belollthe 2 perctntlonger-run objectil-e. principal payments from the Federal Resel\-e's holdings of agtncy debt and agency ~fBS The Comminee expects that the oogoing rece~·ed during eachc alendar month in exc~ strength in the economY 11illwarrant further of S4 billion. Since January, pa)'111ents of gradual increases in the federal funds rate, principal from maturing Treasury securities and that the federal funds rate will likely and from the Fedeml Reserve's holdings remain, for some time, below the levels that of agency debt and agency MBS bm·e been the Committee expects to pRI'aiJ in the rein,·ested to the extent that they h3\'e exceeded looger run. Consistent "ith this outlook. Sl2 billion and SS billion. respectil--ely. The in the most recto! Summary of Economic Commiuee has mdated that the cap for ProjeciiODS. "bich was (()nlpikd at the time of Treaswy ~uritics wdl continue to increase the December FO~iC meeting, the median of in steps of S6 billion at three-month intel\-als particip~nts' assessments for the appropriate until it reaches S30 btllion per month. and level of the ntidpoint of the target range that the cap for agency debt and agency MBS for the federal funds rate at year-end rises will continue to increase in steps of S4 billion gradually over the period from 2018 to 2020, at three-month intervals until it reaches remaining below t~ median projection for its S20 billion per m011th. These caps will remain looger-run le\'d through the end of 2019.u in place until the Commiuee judges that the Federal Resel\e is holding no more securities t l S..lllt D<cembet s-or E'.coocm< mm•~<Sc( m< D<amb<r 12· IJ,l017.m<rinl o( Ill< Plo,....... ~~Jc:b 8J>P"rod as ao &ddmdliDIIO lbt FO~!CaodiSp,_t<d mP an 3orthis,..port. 101 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00105 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.63079103 MOMTARY POliCY REPORT: FEBRUARY 2018 33 44. Principal jX!ymaus 00 SOMA -riti<S . .. '''"".' -... .. a R ~ tm\'atllX nb - 00 • Rem\utmeaiS - Ill - M.,illY"P -~ - M. .I ~"P -70 -60 -60 -_l.,l -_l.,l r+-+ill-+-1--30 ,~llllllll.llllllllllllll~ : :UI1 '2918 201.9 Nort: Rritt\'t'Simtotaod redttqlli.;,otn)()Ct)IJ;(I{ 9teo"Y rnx~pg;Miacktd !leCIIriliesart rr~'tiooutaning ill Jauuary2(!18. The data t:Umd t.ltroutb ~anber 101~. S<mc.: Fed<r~ R-.. BmoiNowYort; Fed<nl R""'' Boardsial!<ai:W.ooOi. than n~ssary to implement monetary policy a small fraction of the SOMA securities efficiently and elfcctively. holdings. Consequcotly, the Federal Reserve's total assets have declined somewhat to about llle initiation of tlte balance sheet S4.4 trillion, with holdings of Treasury normaliz.1tioo program was widelya nticipated securities at approximately S2.4 trillion and and therefore did not elicit a notable reaction holdings of agency debt and agency MBS at in financial markets. Subsequent~·. the approxin\1tely St .8 trillion (figure 45). implementation of the program bas proceeded smoothly without materially affecting Treasury Interest income on the SOMA portfolio has and Ml lS markets. With the caps having continued to support substantial remittances been set thus far at relatively low levels. the to the U.S. Treasury. Preliminary financial reduction in SOMA securities bas repre.sented statement results indicate that the Federa.l 45. Fed<nl R<s<rvt -~ •nd tiabilnies -s.t - <.5 -U -B -- lu.t -2.0 -15 --1.s0 -' -.s -u - 15 -11 -25 --ul.t -4.0 -<.5 qS.O N01!: "Qcdr. DJ lipirily fao:•lili:l'" coif'.s o! f'liuly. ~. a1 ~I a:o&!; late caQcQ <ndit ocwaJ bank lipi:y ,....: st4'po:t for M Ma a tl i r & :e t t l M l.a ll ! ! l l e ii , J B f\ e ll t d S J m ..Q !ls al , h c y o F d a A ci I l G ity ; , D t.' d )e o C t o h : t r t t t c c :r r t c d i i t t l ! P a ~ c c il : it r .e P & ' , l tildinc~ Fad ! ~ i:y, P e r : i d n w !b 'y e T D c W tm e A t C ss m et : & tit e F k ~~ e o: d iU S ry o , . f " i ' e lr . il A i« s s L d· a B m a. e f k- l o c :t i ~ ~. " b 't.bt l tma . a• h M . D " n b C b Y !.IID'XI':IIZ<d ~ t:ld ~on ki."U!'t.io )lcld Olllrigbt. "(Apital DJ «her bllbili!les" itdada: mctK ~ lpctUII'o.i. iho l!.S. T:cul.l)' Cioooni-..StloU.S.T"""l'~f"""-a.A......_lbo ......... r:...pfcb.""'YI~lOit S<m.a: Fecknl Rac:\'f. BoW. S:llit:.i"-1 Rdwt K.ol 1. "F..:o3A!f'~bJR.acr.-c:8~. . 102 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00106 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.73079103 34 fAAil; IO'i.l~POUCY Reserve remined about S801 billion of its ranr,e and generally traded near the middle estim:ued 2017 net income to the Treasury. of the IJC\4 laiget moge amid orderly tradmg conditions in money markets. Usage of the The Fedtral Remve's implementation of ON RRP facility has declined on net since the monetary policy has continued smoothly middle of 2017, reflecting relatively attractive In J)ec(mber 2017,1he Feder:!! Resen~ raised }idds on altemati1·e inrestmeots. ? c S W 1 m I t r D i t R t h n p h h e n r f e ~ e e e e R ' l e s ~ t t l r m c d h : h i e e P e i i B e ' i i s n e m S f f t o n m t p o f o h i t e e d t r n e c o a f a e b c a t i r e r f b r n s l e t t e e e y ~ d I a e l c i s p r s n r l v y l e ) o . m i o t a u . t e r n T u e n t r t f r a o g t a f r o a n c c h h e t e G r t h e t 2 e r k d e s e e t a s a h o e e t m e p r F J J s e t t \ f r r e X X e e o e r f a a e i m e e F I I l d r t n r i i a o c e d d O I n ( e f s g : ~ t u t n r t o o o ~ i o r h I a r v n 1 e n f r u n i ! l e e p f 4 s e d . m e C R m S e r m s f Y a r p ' e e r O e e e p s r e e r ' q d r s n d a e < r e p n m u e e p t t c n l o t a e i r r s i d o e s r v a l r n U s e l l e n b l m e e i ( a o I d c l 0 y d b f o n . i o y ~ u n n a v a d ~ i v I p J n c n a e n n a a e r . r d r c c t u d d n i R e h o r a t b m s x a i e e i d h e i : o r R g r s e n a . a m d i a 0 n e h ~ s s c g r I i t d c 1 y ' i r t t h a d e s n e i . t i \ n l 3 e ) s o g r s o . s r S o n e n s e t , g e c o A w o t r p r t f p F h o h e a o p o n a e e l e a e t r n d t e r h e r d e h t t e T e d r s c b t m a o o e r o u c y o e : e t c f u ! c e i e r f f s ! o o m g p s s f t t I p e e n R n s a h s u . r r d d b : n e r l e u r t t : : p c e l s d h S > l h d s e s e o r e t t e i a e a l e r p s s " v h n r l a n t e o e v f p e a t d o r b s e o o o a s i i p r h o s n t l i f m f . p l a n t a e F s h 2 r s m I m t s a n a o n 0 s c o l o c n c a a i 1 o a v z o i e i p i l 7 l n d n n l a e e i f e ; - t g d t t d t r v r y o a s i i . a i e o t a n e i t t w u T d . n h v i l h n u u o e o i w e e e e s n e o n n n d r m r i o g e . n m - f s p d o t o r t t c o t 1 o e o b a h c o o p p 1 r l e y : e t e r e i i n e h ~ c e t s r D d h m r d S l s y t a a y e t u e a e t t o r p , t S i c i s t l a o o n h o o l t t k t s o e o h n e n s e e o d l e s i a t a s l a t e t l s o i r i a l n n y y f s g in line 1\itb the increase in the FO\fC's laflel 103 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00107 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.83079103 MOMTARY POliCY REPORT: fEBRUARY 2018 35 Monetary Policy Rules and Their Role in the Federal Reserve's Policy Process What are monetaryp olicy rules? the tlwee key principles of good monetloy policy noted earlier. Each rule tokes into a<:count estin131es Monetary policy rules are forroolas 1hat prescribe of holv far away the econonny is from achieving lhe the setting of a policy rate, such as lhe federal funds Fede<al RO$e<\'e·sdual-mandate goals d maximum rate, that should pre~~il in relation to lhe values oi a employment and price stability. Specitocall)', most ol small number of other variables-t)'Pic.>lly including the rules include the difference between the rate of the gap be~vee<>actual and target inflation along with unefrllloyment that is sustainable in the longer run (<r') an estimate ol resource slack in the econonny. Policy and the rurrent une...,loyment rate (the UnffTilloymmt rules can provide helpful guidance ior policyn\lkers. gap); the fir~·daference rule includes the change in the Indeed, since 2004, prescriptions from policy rules une...,loyment gap rather than i~ le>ol.' In addition, ha1~ been part of lhe information regularly reported r1105t of the rules include the difference between to the federal Opm Market Committee (fOM<:) inflation and its longcr·run objecti••e (2 ~t as ahead ol i~ meeting~' However, h>terJ)retation of the mea.!Ured by the annual change in the price inda prescriptions ol policy rules requires carelul judgn-ent for personal consumption expenditurES (I'Cf), in the aboutlhe me3SUrement of lhe inpu~ to lhe rules and case r:J lhe federal Reser.~). while lhe price-le•ol rule the ifrlllications of the m.1ny considerations the rules includes the gap bellveen the le\'01o l prices toc!Jy do 1101 take into aocount. and the l"'el of prices that would be obselved II Policy files can incO<po<ate key principles of good inflation had been constant at2 percent from a monetaoy policy. One key principle is that monetaoy specit.OO starting year. policy should respond in a predictable way to changes lhc layl01 (1993), oolanced·3JlllrOOCh, adjusted in economic conditi~ h second key principle is Taylor (1993), and price-le•ol rules pr<Wide that monetaoy policy should be aoc.ommodati1-e 1vhm prescriptions for the level ol the fedml funds rate and inflation is below lhe desired level and emplo)ment require an estin13te of the neutral real interest rate in is befow its maximum sustainable level; conversely, the longer run (r"}-that I~ the level d the real federal o m p o p r> o < s - i t t l e oy h p o o ld li s c . y / I s h th o i u rd ld k b ey e r p e r s i l n r c ic ip ti l l e ~ i s w d h l e a n ~ t t h o e ~abilize (coot.Ulued oo n<JCI I"&•I inflation, the policy rate should be adjUSled by more than one-for-ooe In response to persi~ent int~eases or R M ul o es n ( " C '' h l' i c l' o o g li o c : y U i n M i,. " ,s '; i t i y n o Jo f f 0 rn \ ic B a . T g a o ) l P o r t e ! e $ d ), . p M p o .l n 1 f 9 < - J 4 '} 1 ' P . o T . h 'it e :y decreases in intlation. adjusledT•ylor (t99Jl rulewa<lll<lied in Oa1id Reifschneider EoonomiliS ha1~ anal)'led many monetary policy andJofrnC. 1\'illiams(lOOO), 'llrreel"""'sforMo•,...ry rules, including the well known Ta)ior(t993) rule Policy in a Low.Jnllauoo Er~ Jooma/ of A~ Cttdi,.OO as well as ocher rules that will be discussed later: the 8>/lking. 101. 32 (NOl..mer), pp. 9~.A price-1"-.1 rule •balanced approach' rule,lhe 'adjusted TaylO< (1993)' >n~d"'=uSiedinRdJen E. HolllJ!;S-1), 'MoneoryS...Ieg}' rule,lhe 'price level' rl.le, and lhe •first difference' • P o il l l i > c y a , n p E t b c s c t « ic d P i~ tke d S o a n s d y . " u 1 d '0 ,' ' i i u n m h s i p c o e M S O ub re ili d r y b a y n lh d e P I R JI ! ; d /i e c r al rule (t~gureA).' These policy rules generally errlxxly R""'~ 8011k ofK.nsos Chy, held inJacl:son Hole, W1o. A'4!'J~ 2-3 (}(ansuCny: ft<ltr•l Res<n~ Bani< d K"""' City). pp.IJ7-59, h""'tw.w.k>n!OSCit}'fed.~ptblicaV S)"1""-''9$1~j>Cf. Anally. the fiot~ifi.,_rule was I. Ptc-«<ippioffsfrO<nl110f"<UrypolkynAes"eincluded introduced by Athwsios Orpl>onides UOOl), 'Hiooric•l in lhe t!oard !tlffs T,.lbook (previOtllly lhe Blutl>ooll: the /l~"'ry PolqAnalysisand lhe T>jior Rule,' /outm/ T pr h e e c " is ' e " " se r c i o p f " r u i l n e d s p b t n es e e f n ~ te d fl \ h l1 a t s f < ia N b n f g or e d F O f1 M om C t n im .. e . to U t ~ im e. o co fM n-p m re & he '} n ' s k N cn t r c e m vie il w :$ d ,1 o p i o . li S c O y Q ru u l l e ) s l, i p s p in . J ! o l. h !3 n - 8 1 . 0 la ll ) . l A o< dl1ough ~011ore .vailableoo !he t!oard's w<bsite" ht•ps:/1 and John C. 1\'llliams (2011), 'Silr9ie and Rooi.ISt Rul<s fo. WYI'W.f«<efa.IEesM'e.gQV/'Ill)fleUr)l)l)hC)?fonlC _h 1stori(~l. Monwry Polq.• in BMj~nin 1\l Friednurund Michael hunln lhe"'ueriats from 1011, lhepolicy n.leptescription< WoodiO<d, eds, H~~ d Monetlty(<""""i<s, 101.38 arecontaint'din the~\I,Jneta.ryPdic)•SU".ltegi<'sSfrCiionof (Amsterdant Nooh·Hollandi, pp. 819-59. The""" 1olu111e Teal boot B.ll!e briefrng material< lh>t FOMC pol'9ma'-" oftheHlJldbool. dMoneury(conMli;$ alsodis<usses reviewreg>Aarly olso onclude the Boord ltlffs ~one opprooche>o<her th.ln policy n.l<'< for c~<m;ngp<il<cy rate f<>«<:ossiO<theoconcmyandfllOd<l siorulauonscla10rie<yof pr<'SCiip<ions. alternative smurios in~ended to ptO\;du SMStd the effects 3. The Taylo. (1993) rule r'Jlresenled slack in resource o s:t f a " ff " sb " a s p e l l a i i n .I e S f ib < l l e ft ~ 'C c as p t. m ent> !hat ... ,. no< Included in the c u u b1 rr i e z n al t )o lc n .. - u .1 s d if1 " i " nO g ~ r" U " l dgoJp" "(t'h"e' d pr i o ff w £f c e t r ( a C b O E P tw ) a et n > d n • th h e a t ~.The T>yi0<(199J) n.lewas fi•uugges•<lin John 8. GOP would bt if th! KMOn"')' was cper.tlif! at ma.lif'l'llm Ta)lo< (1993), 'Oiscre<ion '"'"'Policy Rul<'< in Pooic:e,' tfl1)1o,menO. The rules in fi,&l.lreA ~esent$1ad. in resource Clmegit-RDdle<fftCoole<ence SOOts oo Pvb5c A>!i:y. 1-oi. 39 UDiiulioo IISing lhe lffllllloyrrentgap insiead. bEcause !hal JOecennE!}, pp. 19S.114. The bolantfd·;approoch rule was g;pbeltil capcures thefO.\IC's SGIIlory go>! toP""""" an.1ly<ed in John 8.T oylor (t999), 'AH 1S10rkol Anol)1is of m.u:inJJm envloyment. M0\1.'ti~S In~ ahernJth>e 104 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00108 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.93079103 36 PAAll: M::>N!TAAY POLICY Monetary Policy Rules and Their Role (conlinvedJ A. Monetary policy rules Taylor(I99J) ruk &lanced-approocb rule Taylor (1993) rule, adjlstcd R;-""'1 =maximum (Rf"-Z1.0) Prict-levelrule Rr' = maximum (r.'" +" ' +( U."'-uJ +O .S(PLgap,),O) Filst-dift'<rence rule NorE: Rf", Rf'.il;""1• Rr'.and R[D r<presan theval~ofthenominalfederal funds rate prescribed by the Taylor {1993), balanned-appt()Qch, adjUited Taylor {1993), prict-1.-~L and 6nt-dift'erence rui<S, ,..'])«ti\•ely. R, denot<S the acroalnominal federal fund! rate for quaner 1, •• is four.quaner prioe inflation forquaner 1, u1 is the unemplo)ment rate in quarter r, and rt' is the kvd of the neutral rral fcderalfunds rate in the longer nm that. on awrage, is expected to be consistent Viith sustaining maximum employmen1 and inftalion at its 2 perc.nt long<r·tun obj«tive, ""'· In addibon, u."' is the rate of unemployment in the longer run. z, is the curnulati,·e sum of past de'iations ofthe federal funds rate from the prescriptions of the Taylor (1993) rule~nen th<U rule prescn'b<sseuing the federal funds rat< below:r<ro. PLgapr is the perc.nt d.,;ation oftheacruall<''d of prioes from a price le-.1t hat rises 2 peroent per )<ar from i~ 10\~l in a speciJied starting period The Taylor(1993) rule and other poticy rules are generally written in tetmS ofthede-iation ofrral output fran i1sfull capacity leveL In these equations, the output !iiP has been replao:d wilh ute gap beiWCen the rate of unemplo)ment in the longer run and its actual level (using a relationship known as Okun 'slaw) in ordtrto represent the rules in ~<rms ofth< FOMC's statutory goo~. Histo.rically, mOI'ements in the output and unemplo)ment gapS have been highlyoorrdated. Footnote 2 prO\ides rtferenoes for the policy rules. funds ralf that is cxp«:ted to becoroistent in the Ionge< In four of the rules, the interesl rate responds to run with sust>ined maximum emplorment and stlble de\'iations of inOation from Its longer-run value of infblion.' In contras~ the first.cJifference rule prescribes 2 percent; in the price-le~d rule, h01ve\<r,the interest how the le\'el oi the federal funds rate at a gi,..., time rate responds to lhe price.!.-.. gap (PLgap). This sllould be altered from its pre\'ious le\'cl-tllat is. it gap measures OO.v far the price 1<!\-el is from where it indicates how the existing rate sllould be itl(re;~sed 0< would ha'-e been had it been lnc<easingat 2 percen1 dccre.Jsed in a pMicular fl"'iod. each year' The price-level rule thereby takes account The adjusted Ta)iOr (1993) rule recognizes tlttt ol des•latiOO$ <i lnOation from the longe<-run objective the federal funds rate cannot be reduced materially in earlier periods as well in the current period. Thus, bElow zero, and that following the prescriptiOn$ <i if Inflation ltts been running fl"'~Slently abo1-ethe the Tarlor (t99l) rule after a period 11ilen Interest central bank's objecti''f, the price-les•el rule would rates ha,~ ~constrained may no1 provide enougn prescribe a hi~ policy Interest rate than rules that use policy acconmxlation. To make up for the cumulati'-e the current inflation gap. likewise, if inOation has~ sllordall in accommodation (Z), the adjusted rule running pet1i~ently below the central bank's objective, prescribes only a gradwl retum of the policy rate to a price-le\'el rule would prescribe setting the policy the (pooiti,..,) le\'els prescribed by the unadjusted Ta)'lor rate lower than rules that use the current in03tion gap. (1993) rule as the~ reoo\'e!S. The purpose oi this dependence on previous inflation r m r e or ~ e i ar n e f s o r o ! i N tE tiO $0 I U \ s i e te e u ! b h li e t a n t o i t o e n b a e r l e o w hi g 1 h tg l \ y u c e o A n . eb1ec:l For "'" S. " l E l s ) t . i . i r N rt.ir « t l h < e : p l r d i v c ! e p ~ r M i l c e fr ~ o r m ule •h re id q l u iO ire c ss t• e n l« w ri t n e g t a he 4. Toylor~)l't Nles-lncluding John TO)io(s origi"'l 1 pet'COOt annwl inOatioo. Fonhe U.S. economy, 1998 is used rul~ha\'t' dten been esDmated assunlng !hal the \';llue of "the ..r ting r••r. •roond IN tome, theunderl~'l!"""" dlf new,ll reJI intf(estU~Iein dle longer r~ P, is equa1110 of inllob<l<l •nd long«·lfml inf4tiorl expecutbioenis" s rabaized 2 pete..._ •~icb roogtly C<ltresponds to the """80 hist<ltic>l at a 1{>\'fl co~is!Mt 'Ailh PCE price infblion dose 10 v.tlutofthe real ieder.al runck r.at~bebe d~e financial crisis. lpettent 105 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00109 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.04079103 MOMTARYI'OliCYREPORT: fE8RUARY2018 37 bEhavior is to bring the price level back into line ~>ith B. Re>l·time eslimates oft!:< DCu•ol re:l! interest where it would be if it had been running a! acons:IJnl nit 3lld tl:< Wl<lllploym<nlntc in illc looger run 2 J)E<Cerlt per )'E'ar. Like the adjustedTayiO< (1993) rule, the pric.e-le1'E'I rule recognizes !hat the federal funds rate cannoc be reduced rroterially below zero. 12- If intlatioo runs bela.v the 2 percent objective during 10- periods when the rule prescribes setting the federal 1 1 6 1 - - - $. . funds rate well below zero, the price-level rule will ~·­ - 16 r m ec a O ke \•e u r p s. for pa~ inflation shortfalls as theeconO<ny u l ~ O ~ - -l• The adju~ed TayiO< (1993) and price-le--d rules u -1.2 may prescribe rro<e awropriate policy settings than u -!& i t h a h i l g e ls h o l b y th e s e l i o r m w r p u z l l i e e f s i r e o f d o . l H a lo n 0 w d 1 1 i d n " o g " e a n r, o p a t e l a l r i p o o t l d u t h • r o e e A r l t e u h n l e e t s s h u e s b h $ p o t o a w l n i n c U y a a l r r e a te u t0 8, - _- E. - G o ~ : I u U : IU ! i h f t k b t} i ' p l : l : al ~ l . - _, .u . oomplexity of the U.S. economy. furthermore, both I I I I I I II II II I II I II II I the level ol the neutral real interesl rate in the longer 2001 'Z(C)l 'ms 1e07 2009 2011 lOU lOIS 20H s ru u n st a a i n n d a b lh le e i l n e - t ~ h 1 e o lo f n th g e e r u r n u e n m a p r l e o d ym iff e o n c t u l r t a t t o e e th sl a im t i 3 s te . t .. h . N m ! o M t - t: ~ l ! b T t h b C t $ T c I f . ! H : . t S o : U a l Y b li . b t a l d l : l : : l m t & G a : p l d : a m o l : ;t m ( : ' ~ : . t td d : t . o e ~ m ~ r li t l c t t i £ l b c t t q t i p : t q O a I f t f & U n i & : ~ i a t ) ' C ' tQ l ! t W b k ' k 1 f l ~ h ~ y t precisely, and eslimates made in real tinJe may differ =5WJI'rte6a:alll~mlbtprnc&tlo:ps~ subslantblly from esijmates made later on, after S0W:S: Wotm taraw. Skit O:IP 6:01101X ~ the relmnt econorrk dala ha1'0 been revised and additional dala ha1~ become available.' for example, since 2000, responden~ lo lhe Blue Ctip sun'ey have In the economy by lowering short·term interest rates. markedly reduced their projections of the longer· run This asrn1me~ic rio!< h.>s, in recent )'Cars, pro•ided a level of the real short~erm inleresl rale (figure B). sound rationale fO< following a more gradual poth of Sur~'ll)' respondents ha1~ also made considerable rate increases than that p<escribed by peAky rules' In changes Ol'et time to their eslimates of the rate of these circumslanct'S, increasing the policy rate quiddy unemployment in the longer run, wilh con>6juences In~ lo h.>•·e room to cui rates during an econonic fO< the unernpiO)moot gap. Revisions of this magnitude downtum could be counterproductive because it would to the oeu11al reJI interesl rate and the rate of make the dOIYntum more likely to h•A>OO· unemployment in the longer run can ha1~ imporl<lnt Utim ates of the neulral re.1l interest rate In the implicalions for the federal funds rnle prescribed by longer run (such as those in figure 8), taken logether monel<lry policy rules. Policy rules must be adjusted to with the fOMC's inflation objedi•e c4 2 J)E<CenL take into account these changes in the projected values suggest lhat the neutralle,'el of the federal funds rate of longer~run rates as lhey occur O\'ef time. ~1at can be expE<:led to prt!lllil in the longer run is cu....,~y around 3 percent, 11-dl below the aVEJage federal funds rate of 6 percent from 1960 to 2007. Accounting for risks to the economic With the oeutrol federal funds rate so low, there is outlook a likelihood that the policy interest rate will hit its Monetary policy rules do noc l>ke account of lower limit oi zero rrore frequently than in the past brooder risk considerations. In tlle rears following the Hi~orically,the fOMC has culthe federal funds rate fmancial crisis, with the federal funds rate still close by 5 percentlge points, on a.mge, during downtums to zero, the H)MC has rec~ized that it11oold have in the econom)'-Cutting the policy rate by this rruch limited scope to respond to an uoexpecled weakening starting from a neul!alle~'el c4 3 percent woold nol be feasible. Under these drcurn<lanct'S, the ptescripeions from many policy rules would lead 1o poo< ec:onorric 6. Thegfoirsot<dl"ii"f'o"r"e"n"ce nAuhown in f'll•reA reduces the per!O<mance, with Inflation averaging below the need for oll""l'"·run ""s b«a.,. it 00.. (conlinued on ne.t ~ge) nol ~irt an estl~mlfof d~ nMJal rNJ lntereS.t me 1n lht ~ 1\11. How('\'ef,lhis rule hal il.i ov. nsi'M::ttorrings. Foe <1Q"l'le, researdl sugge• that this sortol nAewill r...,ltin gc~wr \()latility in tcrploymHt ard ini'blion K'bli~ lO 'A' hal 7. Asyrrrnooic risi: need not af~ats pro\'ide ~ tatiocult ""'ldboci>oined unclor illeTa)io<(l99l) and balanced· IO<' m>regr.dwl poth; if the nsl< •er•"""'B'Y bllt'd approach rules unless the estmu~eJ cl the new .tl re1l federal t'""ol wbsuMi•l•nd perso...,OI.,lwting and wo-tigh funds""' in thel""l'" run and the ,.,.o( 000f1'\110f"""t in intlatiOO. the asymnv:uic risk coold .1rgurt Ki higtwf rates INn die long« n11 are$ tJ(fic:iendy fa1 from their true ,arues. presaibod by on1'1• rul. .. 106 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00110 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.14079103 38 PAAll: M::>N!TAAY POLICY Monetary Policy Rules and Their Role (cMmuedJ C<>mmttee~ 2 percent cbjocti•e.• Rules that tty to olfSI!l and the estimates of the neullal real interest rate in therumulati1'0shortlall of accommodaijon posed by the longer run and oi the r.~te ol un~oyment in the the ze<o bound on inte<est rates, such as the adjusted longer rurl-datl and estimates that werea,-ailable to Taylor(t99l) rule, or nukeupthecumulati1'0shortlall fOivtC policyrrokers at the dme.) Moreo\'ef, the rules in the 1.. ...1 o f prices, such as U1e price le.el rule, a<e sorrEtimes prescribe Sl!lting shO<t·term interlOI rates intended to help achie\-e average innation at or net~r well be!<!lv z~ setting that is not feasible. With 2pe«:<ntcwertime.' the excep«ion of the adjusted Taylor (199l) and pric., Different monetaty policy rules oltm offer quite level rules, which impose a lower limit ol zero, all ol different prescripoons for the federal funds rate, and the rules sh<!IYn in figure Cc alled fOf the federal funds there is no unambiguous metric for fa\'Oringo ne rule rate to tum negative in 2009 ~ncl to stay below zero <!I'Cr another. While moneta')' policy rules often agree for several years thereaflel. Thus. these rules indicated about the direction (up or down) in which poliC)makers that the federal Resen~ should pr"'ide more monetaty should m<!le the federal funds rate, they frequendy stifllJius than could be achieved by setting the federal disagree about the appropriatele;~l ci that rate. funds rate al zero. Almost all of the policy rules have HiSIOrical prescriptions from policy rules differ from called for ri!ing values ol the federal funds rate in one another and al«> dif!Cf from the Comminee's targ<i recent )IM, but the pace of tightering that the n.les fe< the federal funds rate, as sh<!lvn in figure C. (These prescribe has varied widely. Prescriptions from these prescriptions are calculated using both the actual data rules fe< the lt'l-el of the federal funds rate in the foorth quarter of 2017 ranged from 0 basis points (price.le,-eJ 3. for fll1her disct6sioo ol th<se ;,...,, !<'t Micflar.H. rule) 10 l.O percent (balanced·a pproach rule)." Kilty and )clln M. Rd>Ms 110t7), 'Mon&l)' Pel icy in a lew l""'estR. ..W odd; 8rooi.ilgs Pilp<N"" f(f)llOmic:Aao·ly, Sprire pp.l17·71, l'orpsi• ., wwbrool.ings.«<u'"l><or<ooV tl'loads/2017.1l&l.iiE!)IDtif1171ifl<.>jldl. in Ntw Chai.'M8« lot MM«>ry POOcy. proc<fdi~s ol a 9. (conom51ShaV('(ou001hata "m.1~polkyan syfll)OSium 'P<'f!SOied bv lhe Fedenll R~\'e BankofK.ns<ts ~~~~~=ti~~=;~:«N~~;~, Cioy, held in ladson Hole, W)'O., Augt6t l6-l8 (1(.,... Ciry: r.detal R""'"'BankofK>nsasCil)'),pp.m-lt6, 'M<>neUry Policy in a New Era,' papE< presentod at hti>S1iwl1w.bnsascit)ied.or&~ublicatiom'research'escpl 'RI<hinM~ Macr~c p~· a corkrence held atohe syrrposiums'escp·l999. P'ttec$0n l~ituteb lntemJ.tional Econonia, W.-.shing~on. 10. As nol<d earlier; ohepric. .~ ev<~ rule ll\ll.es 'I' r., rt.. 0<1obtr 12·13. h'1>S'i,.....wbrool;ngs.<'du\,p<anrcMI cunwiJtnoe shorWO int he ptict lc<\'{'1w hen iN'lation runs 'l'loads/2017/lObe<nanl.e.r""•m~mocro.r.noljldt below 2 percenL8 ec>t6(' inflarion Jw b. ..b elow 2 i"'C"" ard MicNelll'oodford (19991 'Commeoory: How Should in recent yt-JIS, the price-IE!\'el n-'tCfllls for !he fedetal funds Moneo.uy Polley BeCondtK'Ierltn an Ero ol Price Stabilnyr ntttorerNinalzero. C. t£S!Orical fedml iilnd! r•" p...ttptioas from. :..Pie policy rules """ lOOt ll»l 2007 ~II lOIS 2011 NoTi: Thftultst~~t!HI-Iimt~v-.ot~~(f'dml~:n.lll!tbel:t::p!Ofme!!tta.lnlbilci&~tdubl'oa:.quanrr~l!fll d:r.~ ett!':t~ecdt.x &>r~i10(~~ apm:!ibl tl~looda:xl t:~cq,r. Qa.~tlrP"..-1ia:.sol~<e<rJbt r~~~'er f«<tnn ta11ktU cd~~aucec!criYtdllrorcb~llboclofbtiM.:.IIrr~eo=Bb~~~ lltkq_-n::nktford.aOOcis fiu!tts2ptltft!t.T.br~''».!toltbe,r:bWidetJ\'t:f9~'tloft.fp:i:tcdo:IO!:pmoe-Ata~qricct'l~txtl:qi»d~er.;ryll ljl9$,ntnpoh:tdn2pet;C'l!t('lt'rytsl So.ta:: Fllkrallt.t.urYtBckolrtlla&lrt-;WokmKIIIW'If,BbCbip&.•(oXIIkb!ian:n;FcQmlltscr.·c&cdcall'~ 107 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00111 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.24079103 39 3 PART SuMMARY oF EcoNOMIC PROJECTIONS The following material appeared as an addendum to the minutes of the Docember 12-13, 2017, meeting of the Federal Open Market Committee. In conjunction with the Federal Open 010netary policy. growth in real GOP in Market Commiuee (FOMC) meeting held on 2018 would be somewhat stronger than their December 12-13,2017. meeting participants individual estimales of its longer-run rate. submilled their projections of the most likely All participants projected that real GOP outcomes for real gross domestic product gro111h II'Ould moderate in 2019, and nearly (GOP) gro111b, the unemployment rate. and all predictc<lthat it would ease further in inOation for each year from2 017 to 2020 2020; a solid majority of participants thought and 01<er the longer runu Each participant's that growth in real GOP would be at or projection was based on information available close to their individual estimates of the at the time of the meeting. together with ttis economy's longer-run growth rate by 2020. or her assessmem of appropriate 010netary All participants who submiuc<llonger-run policy- including a path for the federal projections expected that the unemployment funds rate and its longer-run value-and rate would run below their estimates of assumptions about other f.1ctors likely to its longer-non normal level through 2020. alfect economic outcomes. The longer-run Participants generally projected that inflation, projections represent each participant's as measurc<l by the four-quarter percentage assessment of the value to which each variable change in the price index for personal would be expectc<lto converge, over time, consumption expenditures (PCE), would under appropriate monetary policy and in the step up toward the COmmittee's 2 percent absence of further shocks to the economy." objective in 2018 and be at or dose to that "Appropriate monetary policy" is defined as objective by2019. Most partici)>ants indicated the future path of policy that each participant that prospective changes in fc<leraltax policy deems most likely to foster outcomes for were a factor that led them to boost their economic activity and inOation that best projecJions of real GOP growth over the next satisfy his or her individual interpretation of couple of years; some participants. however. the statutory mandate to promote maximum notc<lthatthey bad already incorporated at employment and price stability. least some elfects of future tax cuts iu their September projections. Several also noted the All panicipants who subm illed longer-run possibilily that changes to tax policyc ould projections expectc<lthat. under appropriate raise tbe level of potential GOP in the longer run." Table I and figure I pro11desunm~ary tl Fcormembersoflhe BoaroofGovemors•~r< statistic~ for the projections. in offie<aubelim< of the Dt<anb<r 2017 meelin~olh< sam< n1llllb<ras in Septemb<r 2017. Hoo-<vtr. sin« As shown in figure 2. participants generally lhe Scptcmb<r meeting, one member, S1anley Fis<b~:~; expected that the evolution of the economy r<Siped from tb< Boaro and anolh<r, Randal K. Quarles. relative to their objectives of maximum joined. The incoming presidtnt of the Federol ResctVe Bant of Richmond is sdleduled co a.<s1lllle offiee on employment and 2 peocent ioDation would January I, 2018; Firsc Viet President Mart 1.. Mullinix sobmined e<onomic projections at lhisme<ling as be did in S.ptcmb<r. t5. Participontsocmpteted cbeirsubmissioos for t4. One panicipont did not submic longer-run the Summary of Economic Projections b<fore the projections for ml output gll7NCh, the unemplo)m<nt recoo<iliatiooofthe HoUS<and Senatecu Mlsin the r.ue. or lhe federal funds rate. Congress. 108 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00112 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.34079103 40 PARI 3: SUM.\1>\RY Of £CO~OMIC I'RO!£CTIONS Table I. Economic projections of F«<erol R"""'' Bootd members and F«<eral Resen• Bank presidents, under !heir mdividual assesoneniS of projeco«<appropriaoe moneoary poticy, December 2017 r..... I I I I I Ill))) It:!" ~17 ;>liS ;>)19 ~)!) I~:!" lOll ~II ~" Cba~~ttintafG-DP 1.S lJ 2.1 2.(1 f u l"'-lJ U..U 1.9..1) I 7-l.O i IJ.IJ 1C.l6 2.2--2.8 1.7-14 1.1-2.2 j U..U Scptr.bto,projectioa 1.4 2..1 1e u; u 2.:t.-2J. l_h.,Jj L7..J.I 1.'-'l.Ojl.J...l.O 2.2 ..2 .1 u. .H ~.. ..u 1..._.1tjl.)...2.1 UatmrW;10dllra. 4J l9 3.9 4.0 Ii •4..,. 6 4J l.l-4.0 l~ H-4.11~4--4.7 4.1 l~.O l.l-41 l.l-l.li4J-M ~krprojlcCJoa ~l •J •.• u <J-U <.0-4.2 l.t-4< <.o-4.lj<J-<.s u.u l.9-4.l l-*-'.S Ji-<!j•-•-s.o PC'Eiabioo '' 1.9 2.0 2.0' 2..0 U·~U 1.1.1..9 l.G lO.J,I Ii U IJ..1.7 l.i..JJ I.S...U U~l-li 10 $tpnbt1p ro~tioa 1..61.9l&l01I1 h IJ...U 1.$..2.1) l.G :t&-2.1 10 I.S~IJ 1.1~2.(1 1.$..2.2 l.t-1.21 2.0 Co ~ ttPC k Bifl r ft p l r l o f ~ t' ~ 1 u .5 1 1 . .9 9 w l.& 2 ~ . o 0 t5 t - S l " U IJ - - l 1 . . O .9 1 l. . l 9 ) U lO l - - J lJ .d ! 1 1. . 4 4 - - 1 1 . . 5 7 I I J J - - l 1 .O .0 I I S ~ -- U lJ 1 U .9 -2 -H 3! i Mm~o:P~ I i appropialrpola:y~b ~f S t q t ln t :k d r t pr l: o ut j «ioo 1 lA .4 1 lJ J l l J J ! 1 . 9 i l i u u l.I • - . J • A U l.t- - 1 H 4 l 2 4 .4 - - 3 J J J I U J - - L U 6 U IJ- - 2 U .6 I 1 J .4 - -- 1 3 4 .6 1 I . J 4 - - 1 4. 9 1 ! ~ 1 l 3 l - - . l l J O No:a:~•ot<b&IIIINI~~~«(G1>P)LI4poo~fork6ot~~~:wofll.&it1011t.,;oacat~trlma.'""~tw1Uoft~~,utto lki>.,~qJattcto!~JUt•tno.! PaWat»Ju4«~nPa!ldtO*utlkpct:c;11f!~~~~~f<blflla.:t~IM~.otsbrpcti(IUI~capcW:ltu (i"CEJ..-J .. p:kllcdo.I.XPCEutW-akotfuftOI:D-~IIWbW•~rrutM~;:~:l:otlbt~(fl",l&aua~lorl:niM•tl'b.lh•wtcrof!k)'nf ll»!lcttt.l E.ct;ownFGI'•~ .." kM<dlr«kuu~amrttoft;F«-;fll.'ll: m:otiUJpolq 1o•:.ne~.et~"P"Iutadl~fn:..:mee~ot6tnlt llf~tdftli.t~-l!bt cqoc(!JdiO<QI:I'Ctjll•idu•~7f'OfOl.'tlmU~IJ~~-·hs.Ut:r:.dl'v~rrlt.xb~olbtto:r..q. nt~brlbtfWe!tlf'ml tt:tl.lt!k-.oftk-po~UOfl1~llf'.II'O(..t~ltltUII''"*Ifb!klt4tni.Jtan~torltrJ~(It4~ll:et.I'IClJndl)rl1cft4tltlhltbtl!Ct.;lt.cQdtftM tpec6rdOtlt:l4lfJUIOIO"V!ltt!Qcj'l!ta 1\c~~~~~~ il«eq~tl(b)ldl}.e.lfi:~!D,o!tt:fFt'.t!&l0pu~u\¢Coc:aill.tcoa$t;«mbetlMI, 20U¢11,~4ttJOt•~-~)CIO~brtbl:~ltltmiGDP,I)c~IIU11h.Ofdlt~e:'allU41~1tiU014'. ..' 11\1,1)1St~llJ..& l<ltl,OClilll"Cott~p&at44~te~n"-iilit4~je(WIU1t~.clcrl-.i.fttt\«rrhttll-IJ,10t1,11ifC".;Jif, I. &Pd~~ik-.tlaalllk.U:.~t ...l *~"runup4hco~I.IO!libii.\\1.Qik•rrkot~ulwu,lh_.. ••h ,,'lfi1J ofltlttwO!dt~Hll~• L TM een"1111t!tr.Judl4u !b 11~ ~lui udtlm biiUI}~jf(!~ou~ult ~~lull& ,ru. J l'wtattitbii'MlNI•t$1UJ'CM•dl4cftl!;uu.-...u'~s,!~ttalowea10llik!.l:otlbt~e6u.,ut • l..oaifU•I'41~ectU.bt<O"PC!id~mXI!oollede;i likely warrant further gradual increases in as broadly similar to the avernge of the the federal funds rnle. Compared with the past20 years, and all participanls saw! he projections they submiued in September, uncertainty associated with their projections some panicipants raised their federal funds for real GDP gro\\1h, the unemployment rnte, rate projections for 2018 and 2019, while and inflation as essentially unchanged from several other.; lowered !heir projections, leaving September. As in September, most participants the median projection for the federal funds judged the risks around their projections for rate in those years unchanged; the median economic groMh, the unemployment rate, and projection for 2020 was slighlly higher, and the inflationa s broadly balanced. median projection for the longer-run normal level of the federal funds rate was unchanged. The Outlook for Economic Activity Nearly all panicipants saw it as likelyt o he appropriate for the federal funds rate to rise The median of participants' projections for the above their estimates of its longer-run normal gro\\1h rate of real GDP for2018, conditional lml at some point during the forecast period. on their individual assessments of appropriate Participants generally noted several sources monetary policy, was 2.5 percent, the same of uncertainty about the future course of as for2017. The median projections forGDP the federal funds rnte, including the.d etails growth in2019 and 2020 were slightly lower, of potential chang,es in tax policy, bow !hose at 2.1a nd 2.0 pen:ent, respoctively. Compared changes would aft'ectthe economy, and the \\~lh the Summary of Economic Projections range of factors influencing inflation o•~r the (SEP) fromS eptembe~ !he median of !he medium term. projections for real GDP growth for2018 was nombly higher, while the medians for real In general. panicipants '~ewed the uncertainty GDP growth for 2019 and 2020 were modestly attached to their economic projections higher. The mediano f projections for the 109 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00113 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.44079103 MOMTARY POliCY REPORT: FE8RUAAV 2018 41 Fi&•« I. M<dians, ,...,,ral 1rndcncics. and ranges of «<nomie pJO#lions. 2017-lfJ and "'" lh< loog<r nm "'""'' Q,.r;emreaiODP - Mtdian ot projtd;.. Q (d.hlerldt..:yorp ojecdOM -I~ofprojK'{iou /"'--- m iiiiii .,...-.. -l ~ _, -~ 1(112 ::!Ill W14 Wll 2()16 1(111 1()1S :!019 2010 L<'nt« nm "'""'' l.foen>plo)mtnlrale -_8, ~ -_, --,- -. ffi ~ c::J ::!Ill Wll ))14 :!IllS 11116 ll11 :!IllS lll9 :!Ill! Lont« nm "'""' PCEinllalion - J :c .....- iiiiii - - l I:CI ~ ~ - ' :Wll :Wil :!014 :!IllS 11116 lOll :IllS lilt lOll Lont« nm "'""' C«t PCEmllaUOD -l .- ,=- ::c - l i:i:J ~ = - I llll2 ::!Ill 1(114 lOll 2()16 Wl7 "-'liS 2019 2010 LOUl'f nm Non: D<limd""'of ,.,_and olh<1<tpl,.aliooomio lbeool<S m l>blo l. Tbedala for lbe a<tull vol"" of lht nriabla artatti!Ulll. 110 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00114 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.54079103 4] PAA13: SUM.w.RVO f ECO~OMIC I'RO!ECliONS Figure2. FOMC pani<ipQols'assessmeoiSofappropria~tmooclarypO!icy: ~lldpOinlofflllltl ~angeorlllrgct le--d for lhe fod<ral funds"" ----------------------------------------~,----------- lO ···~··························- ·······f ·················-.f..S ·······················································································(·················· ------------------------------------~"~--;·-----------<0 .. .................,' . ................ . • - __________________________ _•:__ ______. ,.:...- lJ -···························································································.····· ····································- ~-·----+----l.O _ .,,,, ..............................-.....................................................................'. .........l ~!t········- - ·················· .. ···················•· ·······················.···.··.··· ······ .. ·············.··.·" ''''"'''I' ···········- ···········- 1.5 _ ..................................... . .. . .. . .. ...................... . .. . .. ....................... I . .............Il ...................... , .. _ ' ----------------"-'-----------------------~.----------- u .................. .... ~ 11111111111111 ...... , ' ' . ..... ········- IJ " --------------------------------------- ... - .. - ... ;,' . -...-...-..-...-...-..-.. .- --- IJ ' -'''''''''''''''"'"'''''''''''''"'''''''"'"'''''''''''''"''''''''''''"'"''''"''''''''''"'''''''"1''''''"''''"''''''"''''- t)j ' ---··-···-···-···-··-···-··"-''-''-"'-"'-'''-"'-"-'''-'"-'''-'''-''-'''-'''-'''-'''-'"-''-"'-'''-''"-'-'''-'''-'''-'''-''-'"-'''-'"-''T'' ' '-''"-'"-''-'''-''"-'-'''-"'-"--00 20t7 loDt"flUtl Non: ~b s.hJded arde itldicates I he \'llut (rounded to 1ht neamt IJ8 pt:t'OO!lJIIt pouu) of an iOOnidtL'd partkipant's JU<ll!lll"'l c{ llle nudpoinloflh..,ppropnate "'~' rnnte for llle Ceclefallilnds ra1<or lbe approPlatelartell"-.1 for lbe fodetat fut1dJ ratt ai lhett~d l)rtbes[»:lfiedcal~dllr year« orer lhf.ltJDtff run. Oft~ pa.tticipant did oo1 sulrnii h)oger-run JM'~I)OGS for Lilt redml run& ntt. longer-run normal rnte of real GDP gr<m1h the unemployment rate ticked up slightly to remained at 1.8 percent. Most participants 4.0 percent in 2020. pointed to changes in tax policy as likely to provide some boost to real GDP gro111h Figures 3.A and 3.B show the distributions of om the forecast period; in Septembe~ fewer participants' projections for real GDP growth than half of the participants incorporated and the unemployment rate from2017to 2020 prospective tax policy changes in their and in the longer run. Tlle distributiono f projections. Severn! participants indicated individual projections for real GDP growth that they had marked up their estimates of for2018shifted up, with more tbao half of tbe magnitude of tax cuts, relative to their the panicipants now e~pocting real GDP assumptions in September. growth of2.5 perctnt or more and none seeing it below2.2 perc-ent. Tbe distribution ne medians of projections for the of projected real GDP growth in 2019 and unemployment rate in the fourth quarter 2020 also shifted up. albeit only slightly. The of both 2018 and 2019were 3.9 percent. distribution for the longer-run normal mte 0.2 percentage point below the medians from of GDP growth was little ohanged from September and about % percentage point September. 111e distributions of individual below the median assessment of its longer projections for the unemployment rate in run normal level. The me-dian projection for 2018 and 2019sbifted down relative to those 111 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00115 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.64079103 MOMTARY POliCY REPORT: FE8RUAAV 2018 43 Figart JA Oisuibutioo of pani<ipanls' projtaioo:s for lhecbange in real GOP, :ID17-20 and OV<r the loogcr n1n lOll 0 • • ~ ~ k k l r l p b r n o p i r « ~ ' I C »> " O * n -- - - H I I· I I -12 -_I,t _, .,1 r ,._ ,._ ll- lA U- U· lt- )4. II 11 I$ 1! U J:l " 11 1\"""'''"'l< l018 -II - 16 - I< -l2 D. --_1s0, j" - - ,.._._., _, r e------' JlD - -,l 11- IJ 1"- U- 1.1- U- U- U- 14- 11- 11 u U 1.7 It U U lJ 11 1t l019 -II -16 -H r--, -- - _ _1s J 0, Z , r e - - r,.:_;,-rlD O r==] -,l 1 l 1 t - l U l - , I , S . _ 1 1. 4 1 - U It - 2 21 - 1 U 1 - U U - l 2 - 1 4 - 1 u 1 - Ptrtelltnmge -_,1.1 - 16 _,. - 12 .r: --, - rf"='=1, -_ _s, , ,-- r:rLJ; r ,._ -,l , IJ 11- U- U- U- U- U- !A- U- ll JJ IJ U ~ U U " IJ Ptrc~alrunge Nfduolpttt$111 _ Loor,errun -IS -16 -II ............ - ll --1s0 nL--:~ --6· c ... e--:!!....=..=.r_r==J- ,._ ,._ -,l II l U l · l 1 A 5 · l 1. i 1 • U It • l l ' f l · 1 U 1 · u u " u · l~rttll:liiUitf 112 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00116 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.74079103 44 PAA13: SUM.w.RV Of ECO~OMIC I'RO!ECliONS Figort J.B. Oisuibouoo of perticipan~· projections for lhe on<mploymcol """ 2017-20 and o,·er lhe looger run ur--L -IS ~~ •• .. •. ~c--~.~-~--~,.7_--~,7,.----,~,.-~~ ~.ou.. ~.j7.~~.~.-~~.~,----~~ ---~,7 --~ )J )$ J.-7 Jt 41 AJ AJ 41 AJ $1 ))ert(DtJIIDgt 20!8 -II - II - 14 . r:Jr--,__- - - _1 1 0, 2 -1.--, -_,I c 1 u 1 - J J S ,t - J l. 4 1 - ! U t - t A l I - 0 H - . 4 U .5 - H H - . . . , . " ·· -,l Ptretll-lfati:F;t 2019 - II - II -14 -12 - 10 -_I, -6 c ,._ -,l ·,·, U U " !'Wa.buot,.r'-'l;ula - 11 - II - 14 -ll - 10 _- ,I -6 c ,_ e- -, -,1 .,. U- 50- JJ U 0 51 _lo11gerruu -II -II -14 -ll -10 -_I, -6 ...,l c ,_ ,. ,.. ,,_ JJ " ll " 113 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00117 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.84079103 MO~(IARI' POliCY R(POIH: FE8RUARI' 2018 45 an Scptembet broadly consistent 111th the the projec110ns 11ere 2.69 percent at the end changes 1n the distnl>utions for re:!l of 2019 and 3.07 perctnt at the end of 2020. GOP growth. Nearly all panicip3nt.s projocted that it would likely be appropriate for the feder:!l funds The Outlook for Inflation rate to rise above their individual estimates of the longer-run normal rate at some point The median of projections for headline Ol'tr the forecast period. Compared ~ith their PCE price inflation was 1.9 pe~ttnt1n 2018 projections prepared for the September SEP. and 2 perctot in 2019 and 2020, the same a few p3rtrip3nts raised their projections for as in the September SEP. Most p3nicipants lbe fedmtl funds rate 10 the longer run and anticip3ted that inftatioo would continue to one kll'•ertd it; the median was unchanged at run a bit below2 perrent in 2018, and only 2.75 perctnt. one panicip3nt expected inftation above 2 pertenttbat year. A majority of participants In discussing their projection~ many projected that inftation would be equal to particip3nts once again expressed the view the Cornmiuees objective in 2019 and 2020. that the appropriate trajectory of the feder:!l Se\'er:!l panK:ip3nts projected that inflation funds ratemtrthe ne~l few years would IIOUld slightly exoeed 2 percent in 2019 or likely imoll'e gradual increases. This \lew 2020. The medians of projections for core PCE was predicated on SC\l:r:!l factors. including a price inftatioo 011:r the 2018-20 period 11m judgment that the neutr:!l real inten:st rate the same as those for headline inftauon. ll'liStumntly low and would n101-e up only slowly, as ~~II as the balancing of risks l'igun:s J.C and 3.0 provide informationo n associated ~ith, among other things, the the distributions of partK:ipants' views about possibility that inflation pn:ssures could build the outlook for inOation. On the 11hole. tbe if the economy upands well beyond its long distributions of projections for headline run sust.tinable lml, and the possibility tlu!t PCI :. price inOation and core PCE price the forces depressing mOation could pro\-e 10 inftatioo ~nd 2017 v.-ere little changed be more persislentthan cumntly anticipated. from September. As always, the actual p3tb of the feder:!l funds rate 11iU depend on C\'01\ing economic Appropriate Monetary Policy conditions and the1r impl~tions for the economic outlook. Figure 3.E provides the distribution of participants' judgments regarding the Uncertainty and Risks appropriate target-or midpoint of the target range-for the feder:!l funds rate at the end In as=ing the path for the federal funds rate of each year from 2017to 2020 and 1n the tlu!t in their view, is likely 10 be appropriate, longer run. 0\l:r:!ll the distnl>utions dtlfertd FO~{C p3nicip3nts tal.-e account of the an only small ways from those reponed in range of possible econormc outcomes. the September SEP. There was a moderate the lil;elihood of those outcomes. and the reduction in the dispersion of the distribution potenti.ll benefits and C0>1S should they for 2020 and for tbe longer run; some of the occur. As a reference, table 2 provides a lower-end projections for those horizons from measure of forecast uncertainty, based on the September SEP were re~ised up in the the forec.ast errors of various I>rivate and current projections. gO\>emment forecasts over the past20 }'ears. for real GOP growth, the unemployment The median projection of the year.tnd feder:!l rate. and total consumer price inftation. That funds rate continued to rise gradually 011:r the mea;."'lre is UICorpor.ued graphically in the 2018 20 penod. The median p10Jtct10n for the lop p3nels of figures 4.A. 4.8. and 4.C. which end of 2018 was 2.13 percent: the med1ans of display "fan chans" plouing the median SEP 114 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00118 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.94079103 46 PAA13: SUM.w.RV Of ECO~OMIC I'RO!ECliONS Figurt 3.C. Distn"butioo of partiapQoiS' proj«tioos for PCE inllatioo, 2017-20 and 01~r lht loog<r ruo 2017 0 D«tmbttp~os - 18 •• Sq>1rabtq,roj((1ioc" =l~ :~:~:_.-.-.-.-.-.,~~;[~:-~-~~-~-~~-~~L---:-:,------:-:------:-:--_§; ~~ b ~ C 1 12 I ~ ' U ~ ~ ~ ~U ~ ~ Pcrc('Jitra~ 1018 -_1,8. - II - 12 -_1,0 --8· :1 (• : ,._ -,2 ~r-----.~,,-----~--~~,~---~~ 11· U- 16 u a u 1< l'troenlrut< 2019 - 18 - 16 II.--. -II ------ - 12 -r~ -- -_ 8 1, · 0 r ... r----- . ~. ,, ~: 1.1- )f. ll· " IJ Jt U l'troenlr"'*" - 18 - 16 - II :[ - 12 h -_1,0 --8· I: .,2 ,_ ,._ ,. " u L7 - ull - ) lA J . Peroeu1raoge - 18 -16 -II I! - -_1 l , l 0 -- ·8 r " ... u1.7 - fl l " J · u ll - , ) , J . -,l Ptrctl!trallt't 115 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00119 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.05079103 MOMTARY POliCYR EPORT: FE8RUAAV 2018 47 Figart 3.0. O~Cributiat of par11<ipao1S' proj«tims for a>r< PCE inftatiat, 2017-20 lOll C .. . S~tpblctmrkpolop n }ro!jltdtiK<G*l - - ! I I I -H - 12 -10 -_,s I I _, =-----~~ -4 .,.. I I -- 1 IS & - - -- u1.1 - - -, " u · 1 U < - I l'elt<Glrnllg< 2018 ,.----.., ,, IJ. IS· 11· 11· 1i tl I< -11 -" - u - 12 -10 r~----~ -_,s ;---- _____ rr===JI _, ... .J:n -l .. I u~ " I 1 J .1 .. 1 IJ t . . U u - "'-'""!.< - 11 - 16 -H - 12 - -_1,s 0 -· .. - I 2 u .. IS. " 116 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00120 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.15079103 48 PAA13: SUM.w.RV Of ECO~OMIC I'RO!ECliONS FiguJt 3.E. O~tn1>uti<JJ of particip311ts' judgmam oftb< midpOint of the appropri.lte llll!tt r31lg< for tb< f<dtral funds'"' or tb< •ppropli3te target lev<l for the f<deral funds""· 2017-20 one! 0''" the longer run ;:!011 0 • C • S D tp tu tt m m b b r ft t p p o r j c e j f c ti t O lic II .t I - -_ I ,t ! .8 - tl -- ·to . -8 - I .. -6 -~-.J I Cle: I : U ::: - l l!t- -- U . S . - , I.U- l.U- u•- UJ- ue- Jll- .".',· )Q. . 4 , U , - ...,~ IJ'l JQ U7 lll l.Ji 242 UJ lU JJ1 "' "' l'<tct~~tl1ll&e ~rmtrflfPI!tlelPl,. 2018 - t8 -I! -14 - ll - to ... -- - 6 8· -,l UJ.. 138:- UJ- 1.11- lll· tl&- JQ. 10- Jll- JJI. lQ. '"· ltJ IQ U? lU UT l-41 U1 JU "' "' Ul "' HI Pttcentrante Nla61rflip.r.•• - t8 - I! - 14 - ll -_,to --8· r r l - ll- .._ 13t- a:= lQ ::= - " UI- .. W - - J'§ 2.3 E 8- 3 2. ' 43- ( 1 = 13- T~ lll l - = tl J t- ·- JQ. Ul- .cu. -,l 1.11 JQ U1 212 2J1 U2 211 112 JJJ J;Q "' 41) HJ Pt-:ceot range -IS -- ·t! - 14 - ll -_t,o ;...:..: .=-;Oil..=--... ____ ,r=:=w ; l Cr-..,'==' rUnJ - l t l c * · u l. 1 Q 2 U 11 l · l U U t - W 1.3 3- l lJ h T l - l U .U 2 • l U l 1 l ' - 1 lQ 3* - U J.Q l . l ~ * 11 i • . U cu J .. Ptrteotrtllte - 18 - I! - 14 -ll - to _,-c:;EJ'O -- - 8 6· r -,l Ul· ur- :u- 1.33- UJ- ut. Ill 211 2J1 lQ UT JJ2 nwze 1\'ttl'tll 117 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00121 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.25079103 MOMIARY POliCY RlPORI: I£ BR\ull11' lOIS 49 projections for !be three variables surrounded Table 2. .A." fai< b!lloncal projt¢don error ran&es bys ymmwic confidence intervals derived Jl«a. . po.t.l,.. . from the forecast errors presented in table 2. ~~~ ~~ If the degree of uncertainty auending these CU.,.io ...G OP' tO! !ll projections is similar to the typical magnitude Unc.plo)lllf'lll ttlr' tO.! tot ll.t of past forecast errors and the risks around Totd<eai-.tpfiottl ttl :10 •u tu the projections are broadly balanced, future Slloct-fllmiiDII!Ir.IIUIIft1• tt.l !U 11.9 !U outcomes of these variables would have l":l•fnorN. . ~lltiiKIWM .. tl•«-tkiOOl ...I .. Mitd UfiOfllt!¥1 >tltrl,.,tiO·lO"'".,..~!uNII!ic•'ffl'1"f''IOt about a 70 percent probability of cocurring '"""• •, .,._,* :~*"'l Al ....... lllkM. ""'Ml.JiooWI• !J."tMW(!W!WaWJtrJ~-.t)m•tM.It",..,.. . ~thl~ within these confidence intervals. For all " W IO \ I I I M DIJ .N lw it ln l_ iO ., O ... P ,, . . • , • _ ., . _ ,. ,_ . _. u,,tl.'. .".. _ ,«~t._ktf_iDl,Jh.nal6,c.,.4,1. m u th n r c ee tr t v a a i r n ia ty b l i e s s s . u I b bi s s t a m n e ti a a s l u a r n e d o f g e p n r e o r j a e l c ly ti on .F ll.o t d ru*.tr" ". .l.'.l ..f. _ :.t ,.D .,..." ,,. - . ... P ,.. t .a r . , .. • w. o . . . r ..O . . i . . U . . I ! . S C . I . d . I ~: U U• ! c d . . ~ . o . l . ' . c q . - N . e . p S f l i ' J t I ~ l I • l 1 · t ), ) h " 1 . 0 1 . 1 7 - . . . n c Q . P in a c r r t e i a c s ip es a n a t s s ' t h a e ss e fo s r s e m ca e s n t t s h o or f i z !b o e n l l e e \- n e g l t o h f e ns. .( . . W . .1' . I . _ I l 0w.. , U o .6.. . F r 1.. H . i ,1- W . . . - U. . . . ._ . i .o . m . . , .t. . . . . .. . ~ f .... . , . . . _ . O ... , , r . , ... . ~ = .. . ._ . . t .. _ , . .. - . . .. . . . . _ , . . _ .. t . . _ _, . . J . . o . . . I ., .. l _ . ., "1 - . .. . . ."1 . .. _ N . 1".. . M , X . '. I ," . • . .., . " . • , . . .. . , , 't..' , . . "n . t. . . , * . . f. _ . , 't. . . . I . _ . W. . .. . . . . . . , . .. . . , . I. . M . . . , . . ~ . I _ . I . , . uncertainty surrounding their economic .. J ............. ... projettions are shO'i\11 in tbe bottom-left .. - ... ~ ... ~ .... ........ r.t_", . ............ ~. panels of figures 4A 4.8. and 4.C. 1\early all participants viel\-ed the degree of uncertainty consistent 11ith aS )mmetric fan chan. The attached to their ccooomic projections about baboce of risks to tbe cconollliC outlook GOP p1b. the unemployment rate. and sbtfted slightly to the direction of strength, in Dation as broadly sinilar to the ~-erage of 11ith two more partiCipants seeing upside risks the past20 yea~ a •iew that was essentially to pth in real GOP thu in September and unchanged from Septembet" About half of one more seeing risks to the unemployment the participants who commented on this topic rate as IICf&bted to the do1rnside.ln add1tion. suggested that uncertainties about the details one more participant than before saw risks to of the pending tax re<>eisi.Uion bad raised their inflation as weighted to the upside. assessment of uncertainty for GOP gro111b. albeit not by enough to tip their assessments Participants' assessments of the future into the higher-than-average category. path of the federal funds rate consistent with appropriate policy are also subject Because the ~1n charts are constructed to be to considerable uncertainty. Because the symmetric around the median projection, Committee adjusts the federal funds rate they do not reflect any asymmetries in the in response to actual ~nd prospective balance of risks that participants may see developments over time in real CD I' growth, in their economic projections. Accordingly, unemployment. and inflation, uncertainty participants' assessments of the balance of surrounding the projected p.1th fOr the funds risks to their economic projections are shown rate importantly reOects the uncertainties in the bon om-right panels of figures 4.A, 4.8. about the path for those key economic and 4.C. As in Septembet most participants variables. Figure 5 provides a graphical judged the risks to their projections of representation of this un«rtainty. plotting real GOP growth, the unemplo)ment rate. the median SEP projection fOr the federal headline inOation and core inOation as funds rate surrounded by confidence intervals broadly balanced-in other words. as broadly deri\-ed from tbe results presented in table 2. As with lhe m.1C!'OOCOOOmic \'llriables. forec~t t6. Allbtmdofdussllll!!!!3t): tbtbos "Forecast un«rtainty IS substantial and IOCfeases for < lln ( o " e " n " a " u '" u " y " " '~in lht.. , " . ' , ' . " .. ' . " ; " ." " " '" " " "' ' " •m ., r d pr a tta p D lll O llS D longer horizons. lbt aw-JI•IS<d IOISOI$$ lbt """"""'>'ODd ll$l:s ••mdins lht pomaparus proj«ooos. 118 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00122 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.35079103 50 PART 3: SU~\'MRY Of (CONOMIC I'ROj(CIIONS r,gur<4J\. Uno.nainryand risl:sin projeclionsofGDPyowlh M<dian proj«rioo and coafidnu:e in1<n'81 bas<d oo historical ro...-""'" OIIJ>tOior<>IGDP -· -~Wi:l•ofpojtl.~ - •1\fA~ood•ltnaJ -) - l - I -0 2012 201) lOll lOIS 2016 2011 2018 1019 2010 FOMC potticipaniS' a;sessmmtsohncerminryand risks around th<ir«a>omic proj<ctioo< n· ... N1mb« cl pa.rti.ipu.u - ·n· ::: u-tainty abool GOP 11. .1 11 Ri>btoGDPrr. .1 h : D •• sD.c,o. oc.ut .b<et,.por;o«j .r.d.~. " • " II '"' D ·· ~ O • r l a l m t l t rt p c c P oj fo c ; c a ~ io oo •• s · - I I I ! •II I -12 I ·It I I • s I I • I I I • ' . I I . ' I 1===-JI,• l' • Iy :-::-:1 • ' [ [j - - - - I I] l Hi!l><r Broodly Wtig)><dto •p!id• bolan«d ,>I..., Non: Tht blot IJid rod ti"" ill lilttl'p P'll'l W>·•o.1aal ''~~"'and""""" projo<t<d "'P"'Ii'.ty. ofllte..,...t cba"t" ia reaJu""clo""""prod""(GDP)Crom lilt fourlhqu.ll1"cfliltprnioosJ<:lTIO lhtfou.lb qow1<1 oflhtJW i s D q » w ." < 'I d t« m l. ~ T n h : e ( ) ~ { » ' D W 6d u co s x p i ri o ' k - n a~ ~ t a :u o 0 d 1 t .1 " 1 ' d 'm tb ll t m rr l i l fl l 'l J r( ' p l.- r as ~ ts l m t a d d ': e d o ll o le . S tt i t s b iS ep $ r U t' I t I i I t e l d o t s Q z b o e > S 't ) a li n U .; Z I I I I I !t N 0; t a ic o ( d O ~ f : ll s \l b ti o c o o l a o b o o r c o l o ll t h m es t e ;& d n t •a is avria'bl;e mt at*1 . Bc\71!$C CUtftDI ~niml)' difkr ft\'!ID lhct!t that prC'Yitikd. «< a\U2&4 0\tf ~~~ 1-'"'~US20 )ar$., the •idrb and tltaprofllte «'116rl<o:<intoml••ledon lilt b>si$ohh< hlslorioll for<I:>Sierroa aray DOC r<G<\1 FOMC i p n .u ll t r i e .i p lo ;m •'< ts t : · p c o v l r ld c s o . l O ~ . " D SS < D n t l t ly l t 'J s l o t r W abe Z 11 , 1 p 0 o er n t i a < i i D . t ,. ) . ' a o • d llo ri s j" b " a " ro ' 1 lh 11 e 1 l d l l lb l« c 'r ir l a p i r l \ n lP y , a .i b .io o o u s l ; l l lh te a ir e p c r a o r j r o e : o o t l o a D ss J e u s: " s. 1 m > m \" ts r a ll r y ts s u i m m m il & l(' r 1 iz 0 « < cbc t\"tft¢tk>ds l.'(lht P'l!t 10 )t-¥'5 Ytl)uld ,icw the •idlb ~rtht c«~6b.~ io.tcr.~ M-n i11 tbe: !tislori.:aJ flU! chan as tartd)' C«<.iistl'DI ~ilh lheiCIS.'leS$IIlfti.IJ ~tile ~aiQl)'ab."'~U lbeirpr~J.. l.a1;no.~ pmicipaDIS'\Iibojlld&etlle rists IOtbei' poj(\'1.io-nus "'broad!)' bllm."td'* woald \itw Jhct(ICJ)dtet:e i1tCf\"'31aro!ZDCI tbtit projt\"1i\tDS u ap~ttlysymmtlrit. f« ~niioo$ofUDCfttaiutya:od ri:skJ iUO;!DOmk:poj«tiOO$.a-tthtbo,x "f(t'«ast lJucatai11ty: 119 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00123 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.45079103 MOMTARY POliCY REPORT: FEBRUARY 2018 51 Figure 4.8. Une<nainl)' and rhls in projections of lhe unemploymmr rate Median projection and oontidenoe inremd based on bi<rorical for<a~SI error< ........ u...,pi0)11XIlrrare - -~~ dprojrdiou -10 _.r~~intrMJ -9 - I -_1, --·! -) -l - I I lOll lOll 11114 lOll 2016 2017 2013 2019 )ill) FOMC portia pants' "-""'mmrs o{ uncertainty and risks around !heir ecooomic projecdoos N11abrtof,.ani:~11U : n· tlo«rtaittryaboutlllttmtm~tratt RiWtoll!ettDtlllplo)'llltntratt : D • • S ~m tp b c t m rp k c r o J p t r < ~ ti o o n os s -IS : 0 • • S D t{ l! ll f u f a llb b t n tp 'p ro ro Jl j« (t ! i K ot . u s _-1,8, :~ I 1 -10 : : I =: r-lf::] ~ I L - ___ ,1 -I : Lo~~o-er Broadly similar Non: The bhx and red lmH iD the top pantl.sllowactual \'alUC$aod IUtd.liiD prvjxtcd \'llut$.. rtspXll\cly. c.f the 3\'tr.J:tt civib:UI UMtDploymea1 nee ill !.be foorth qoarttr oftbe reatJDdica1«1. The c.,:~!Wdeo..;e tatcrval arov.Dd lbemNiu pr".iect«l vahles is assumed to beJ)liiJI)f:trie and is basedo%1 rootmeaa squared mon(){ \'arious priva1eat1d ll)\'tr.D.metH for«as.U made o\tt cbe pmioas 20 )e.m: IUC!II! infOCtDJtioa ~~ th& data ISt•-:ubblc io cable 2. B«anseC'Ur!tDt conditions m11yditftt from those: tbal prevaiJed, oo a\wa~ O\'er !be pre-.wus 2(1 year5.tbtwidtll11Dd shapeoftbeooofideoctiDttn"'li estimated on the: bun(!f the biuorx:al fore.:au mon may oot rdlect FOMCparOOpantl" carrtr~t asse3UD.tniJ c( the W1Certamtyand ri3b ar~>und thrir projectioo:s; Lhtseet~ntOl wtS&nltt~ts artsummariud iD lht IO'!\-'tr ~t GeomDy q:'C'lkin&. ~rtiipnnu whG jud&e the UDCert.a~I~Iyaboollhev prQjecCM>DS as "broa4Jy sn:niJar" to the average Je\tlsof the pa.sl20 yean would ¥iew lbe width of the ronfide:ocemtefVal s.h~11w the histOii."tl flUI cba.rt as latr,dy toosis:tet!l 'Ailh l.bftr as..o:ressmeouof tbe W11:tftainty abont thttr prcjtctwos.l.ikto\1~ plrtlapana "'M Jlldte tht. nsl:s to lhc.r pro)tl.':tltous u "broadly balaii'Ced" ...- uwd \ttWtbe c.oofide~ iDUT\11 aroaod tlltu proj«ti®sas awroo~imtelyS)111mf'lnc. For &tirntions of u::ocmlintyaod r~k.s ia toooormc proje.;t.ons, see the box "For«ast Uooenaioty." 120 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00124 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.55079103 52 PAA13: SUM.w.RV Of ECO~OMIC I'RO!ECliONS Figurt4.C. Uoctr~aintyand risks in projectioruofPCEillllation Median projection and CXlllfideoct intaval based on h~toriatl forecast errors PCEmftati~ - Medsuor prcj«lioet •10%toor..1motinr.tMJ -J -1 - I -0 2011 2014 lOIS 2016 ::011 :018 2019 11120 FOMC partieipaots' a.~<niSofunctnainl)' and tisl<s ar_oaod tb<ir«<>oonm ieprojoctions _,, N•brtofparDop~~o• llao:maintyoboutPCl.inllatioa Risb ~ PCE inft:ati~ - . 0 . .. S ~ t m J* b m n b p e o r F pr i o i }t o «i a or • tt - - I I I I = 0 • • S l> t N pl r f a t& bn b p c r r o p je c c o t F iO w O M J - - I I S I -H -14 -I! - - - -1 I 0 . ' = 1 --- I I = -1 : 0 -r----~ ~ -• r1 r---=:1_ Lr=-='=3 111 Lo•..- Broadly Hither ll'ctpuolto llroo<lly ll'<ojjltcdto !inillar dO'It'Dside: balaoctd Up!:ide _n UDC«tawtyab:lul COR PCE iolbtioo RllkltoOORPCEinlhllOa = . C . • ~ i)(Q b e t mb l uJ p (O K j I r } c tC lio ti r o tl . - -I I S ' = D . . s O . r " to " t• " k " rP " ' ' o " ,i ' « " ' ' t ' i ' o " a• ' - -1 IS 6 -1< -I< -ll -10 --- I --ltol -I = =: -' I I -' ·r ----1 : - : l f•IE""""""7-"fEE£311. Broadly Wo&Jl!ed to ltrOI!IJy Wcit:Jltcd 10 similu dOl'>sitlo balit>ced D!'li<l< N0tt1: The bl"'aad red lul<Sia lhe "'P JIOll'l sllowo:tual ''~~"'""dm<dian proj«red vaiU<S, "'J'CCii'Oiy, oflhe """" <han&etn lhe p-icttodcl for persotlll CIJDSumptiOU e!p!Odittues(PCE} (rOOitbe fourth qwtrln oftbe F•ious yt.ar (b the r,unh qt1311tr ofche yearmth:ated. The c:oc.fitbcetoten'll ar011111l t.ht medsc ~1«1 valutS iJIS$liJXI«l to bt s;mmetri:-ltld is~ oo rool rneau squared mmofvarioos !Ji\"J.It&Ddt~Wm~.mect fM!OtSIS mtu.ieowr lht pre~iocs 1Qyem:moreinf\lnnaoon aboultht$edata isanilable iD 111*2. Btcauseettrm~t oooditioll$ tta)' di.fi3' from tho!t lh.at prl!'l'tiled. oa 1\~ O\'er the prfYioUJ2llyear$-.lhe'l'idllta~~dJhapeoftbe~ioterw.JestimatedootbebasiscflbebntQrictl(orecaste:rrorslt)lyWI rtll«t FOt..tC panicipanll cwn:ot a;:-essrueolll'ftlw: III!Certai!lry and ri5ks aroWid tbrir rr~ti.:'!as: tbesecwnat assessltlillll are !Ummarired ill lhelo.-er pllltls. Gol<nlly SJl'Umt. parti<iP"'" wbo j\ldte tbt """"•mty abo1ll thcir proj«lioo<., "broo<lly similar"lo the a\mt;e le•~oftht plSI 20 years ,.·oold \W'o\' the "'idtborthec:oddcocemttmlsbo"l1 ia the b.kloB:al t'aucltan a lh s e l a a t p tt r J o y j c « o < o io si D st < tu " t " ll b l; r l " l ' l d t l b fb eu a i a >D< ~ td" '" IS" o "v f tiheew ut l l o h e e r c t o ai a o li r d y < a l b > o < u t t i a t l h < e rV ir l p ll r a o r j o ec tl t l K ld !n l s h . e li o k e p '! " ll J is " e ( . i j. > W " ti ' c " i p lp ;w p! t O s w D -h n o > j ltdy ~ l)1 t l b W e < ri V sb i< t . o For de&itioos of tn):ertlU.Oty aod ri!b io «<oomk pr\.'lj«tk1a' Stelbr OO.r '"fon'C&S1 Ut~CXT~aiuty.• 121 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00125 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.65079103 MOMTARY POliCYR EPORT: FE8RUAAV 2018 53 Figu.-5. Un«11aincy in projec1ions of lhe fedtral funds,.,. Median projtaion and oonfideoce interval bas«! on historical forecas< errors FaX-raJ fWlih rate - )b;lpoill~oftlqtUIIl" --Ma.m.or~,. i\J'hmlidrootllltt'VIIl• - s _, -) -l - I -t Ntm: The bloe aod R<l inesare bo;ed oo o:IUal '11"' aod moliOll projected '1llues, '"""""ly· olllle Coounittoe's laJlel for lllefed!ralfands rnrt" llle ..d ofille)Ollt indi:am Tbeacroal ,.,...,. llle midpoiutoftbelaJlellllllt'; lllemediatl proJO'Ied ,-J.Jurs are baW oo cihtr t~nudponu cltbe laJttl nmr,r C"T the ~~lc\~1. Tbt C(lllfidr.nct uHrrval around Lht mediaD jX(ja:ltd \'allieS is based OD root meaD squared mOB of YUJOIIIS pi•taSt aod &->Vet:IIJOOIL fmc3SUmade 0\'el" tbe ~ious 20 )em. The cooliikn<o inl<r\'11 is DOislri:llyCOCl!is""twith llle pn>j«tioosforllle fed!ral fondsrMO, primorilybeca"' llle!e pr<ti«tioos ore DOiforewuol'"lh"e"l"i"lY.e !iestooiOOilleSforlllefedenlloudsl1t~butntherprojectioosolponi:ipwlu'io<lilicloal'""""""uo! IIJl!lopriart l"l~y. Slill, luolorical fl'rt<ast"""' prll\1de a broad...,seolllle llllC<tUioty around llle fm~~tt poillof llle (OO..'Dl fllllds ralrtmerat«l b)' llle u:ucertaiutyaboUI tbe macrt»:onor,)JC \'Uillbiesas v..'cll asadditio!W adJus.tnx'OU 10 m.o~nry polic:ylltat may be owopriote t.>om.t llle c&:u of shocks"' tbeo:<>Dilllly. Theconfideoct iDtcrva! isamuo.ed to beS)tn:nttriceuq:c 'A 'btl) i1 is tnux:atedat m4>-tbe bout:lm of the Jo~~ol!lt la.tf:Ct ratite fer the federal funihrate that bas bo.'tl adopkd.Jo thc-pa:st bythe.Commiuoo. Thistnlllcaticn would ooL 001nlmdtd LO mdntc lbe likelihood of Lbe use ol oega tr.'t mterest r,nt$ so pro\lde addi oonJ mootwy pobcy act0t1111l0datioo tf doiu& so "'aSj ladc<d "ffl'''"''ff'~.lo sucb O!llatlon< ille Comrrutteecollld alsompoyoilltr tools. rndudi!l&f«Wlltd !)lid,..a Dd latte..:alea"" purchases, to jXOVide additiocal ~ni!UodallC'll. &.--alljCctuJtiU cooditWos maydifftr fr® tbo!t that prevailed, on O\'tratt, owr lbe pre-•lOUS 20 )UU.lbe ,.idtb aud sllape of tbecoafideDOeiultJWJ estlm.aled. OD lhe b.lsi:soitbe biStQncal fmcast err\ Irs may 1101 rellea FOMCputicipants' ciUreot a~a of tbe ltOC:tt13liU}' and rsks oJou.nd tbeir pro;tct;ocl. • Tbee«~tldtnceintcr'\'l\1 isdtrivtd rrom forttaSI!of t.ht averattlt·.'d <>f short·ltrm iottrt$1 rate5Jnlhefottrtb q~~~rtn ollht )·tar iodated; mort infonD31lOD aboutlbne dma is anibbk iu lablt l The sbaded an.a~o.n:opas5tl )e$$1hau a 70 r.ma~t conlideooeiotaval ift he confih't interval has b.>(oo UUD.-aitd at ztro. 122 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00126 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.75079103 54 PARI 3: SUM.\1>\RY Of £CO~OMIC I'RO!ECTIONS Forecast Uncertainty The economic projecli01"6 pro,icJed by !he members of uncertainty S~.<rounding their projections aresunrnarized the Board ol CovEmOI> and the p<esidents of the federal in the botton>! <it panels d those f'Sures. Pal1icipants Reser'oe Banks inform discussi01"6 ol mon&ry policy also provide judgments as to wfleth!Y !he risks to their among poliqlll3k<Ys and can aid public unde1$l>nding projections are weig irted 10 the upside, are weighted to of the basis for policy actions. Considerable uncertainty the downside, or are broadly balanced.Th3t is, while the attends these projections, howe-~r. The eoonomicand S)mmetric histO<ical fan charts shown in the top panels of sta~stical models and relationships used to help produce f~gures 4.1\ through 4.C imply that !he risks to pal1icipants' eoonorrk IO<ecasts are nooes!3rily imperfect descripUons projections are balanced, panicipants may judge thai of the real world, and !he future path of ~>eeconomy there is a greatlY risk that a gh'E!Il variable will be abo,. . can be affected by myriad uniO<eseen de.oelop<nents and raiher than below their projections. These judgments 0\oenls. Thu~ in setting the st~nce of monecary policy. are summarized in the lower·right panels ol Ogures 4.1\ pal1icipants consider noc orly what appears to be the through 4.C. mosllikely econorri<: outcome as <Ynbodied in their As with real adi'·ity and inflation, ihe outlook for projections, but also the range of aliemati\oe prlS'ibilities, the future path of the federal funds rate is subject to the likelihood of their occurring. and the pocential cosls to considerable uncertainty.llis uncertainty arises primarily the economy should lhey occur. because each panicipanrs assessment ol the appropriate Table 2 sunmarizes the average historical accuracy stance ol mon&ry policydepcrtds importantly on of a range of fOtecasts, including those reported in past the evolution of real activity and inflalion OV<Y ti...,.lf MO<Jelary Policy RepotU and those prepared by the economic conditions e\dve in an unexpected manner 1 Fodera! Res<YVe Board'sst>ff in advanceol meeting< then a,..,.meniS ol the appropriate setting of the fedc<al of the federal Opoo Marl<et Comrrinee (fOMQ. The funds rate would change frorn that pointlonvard. The projcclion enor ranges shown in thel.llie illustrate !he final line in table 2 showsthecrror ranges forforcca<ls of considerable I.I>C!Ytainty associated with economic short·tenn interest rates. They suggest that ihe historie~l fo<ecasts. for eocample, suppo!C a pal1icipant projecls that confidence intemls associated with projections of lhe real gross dornesoc product (COP) and tocal consumer federal funds rate are quite wide. It should be noted, prices will rise steadily at a nnw I rates of, respecti,oely, howev<Y, thai these confidence tntenols are noc stric~y 3 pertent and 2 perce<\L illhe uncertainty attending those consistent with ~~e projecijorlS lor the federal funds projections is similar to that experienced in the past and rate, as these projections are noc forecasts of the most the risks around the projections are broadly balanced, the likely quartalyoutcomes bui rather are projections numbers reported In table 2 woold ilrfly a probability ol ol participants' individoal a5$CS$n>en1Solappropriate about 70 pe<eenllhat actual COP would expand within monwry policy and arc on an end.of·)'eaf basis. a r:mgeol2.2 to 3.8 percent in !he current )'Car, 1.3 to Howe,>er, !he forecast error,; should pro' ide a sense ol ihe 4.7 percent in the second )'03<, 0.9 to 5.1 pe<eenl in the unc«tainty around lhe future path ollhe federal funds rate third year, and 0.8 to 5.2 pe<eent in the foul'lh)oear. The generated by the uncert~inty about the rroooecooomic corre-sponding 70 pe<ccnt COilftdcnce inlen•ls for overall \otiables as well as additional adjustments to monetary inflation v.oold be 1.8to 2.2 pe<eent in !he current year, policy that would be appropriate to offset the effects of 1.0 to 3.0 percent in the second year, 0.9to 3.1 pe<eent shocks to the economy. in the third )ear, and 1.0 10 3.0 pe<eent In the fourth If at sorne point in the future iheconftdence inteMI year. Figures 4.A through 4.C illustrate these conOdence >round the federal funds rate were to extend below tEto, bounds in 'ian charts• that are syrr.netric and cent<Yed Oil it would be truncated at zero for purpcoes of the fan ch3rt the medians of fOMC par1icipanls' projections f<lf COP shown in Ogure 5; z<Yo is the bottom olthe lowest target ~rowth, ihe unemployment r.ne, and inllation. However, range for the federal funds rate that has been adopted in some instances. the risks around the projections may by ihe Comrrillee in the past. This approach to the noc be syrrme~ic.ln pa11icular, ihe unemployment rate construction of ~telederal funds rate fan chart would be c.annot be negative; iurthamore, the risks around a merely a COO\'ention; it would not have any impliations: pal1icular projection might be tilted 10 either !he upside or for possible ltAure policy decisions regarding lhe use ol the d<>vnside, in which case the corresponding ian mart negat:i\'f: interest rates to pro'Oide additional monetary would be as)mn>arically positioned aroond the median policy accommodation if doing so were appropriate. In projcclion. such situations.lhe Comn111ee could also employ other Because current conditions may differ from those that tools, including fonvard guidance and asset purchases. to prevailed, onc l\'erage, o\'er history, participants provide pro,;de additional accommodation. judgment$ as to whethe< the uncertainty atiached to While f~gurO$ 4.1\ through 4.C prO\•ide information on their projections or each economic variable is greater the unce-rtainty around the econaric projections, frgure I than, smaller than, or broadly similar to t)'picallevels pro,;des information on ihe rangeol view~ across FOMC of fO<ecast uncerl.lfnty seen in !he past 20 )'Oaf$, as participaniS. Ac omparison ol figure 1 v.ith f.g1nes 4.A presented in table 2 and rellected in the widths of the through 4.C shows that ihe dispersion of the projections conftdence intervals shown in !he top panels of f.g1Jres 4.1\ across pal1icipants is much srroii<Y iltan !he average through 4.C. Parlicfpants' current a~ments of the foreca~ erro<s over the pa~ 20 ye31$. 123 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00127 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.85079103 55 ABBREVIATIONS AFE advanced foreign economy BOE Bank of England C&l commercial and industrial EME emerging mark-et economy FOMC Federal Open Markel Commiuee; also. the Conuniuee GOP gross domestic product LFPR labor fon;c participation rate MBS mortgage-backed securities Michigan survey University of Michigan Survers of Consumers ONRRP overnight reverse repurchase agreement OPEC Organization of the Petroleum Exporting Countries PCE perwnal consumption expenditures SEP Summary of Economic. Projections SLOOS Senior Loan Oftlcer Opinion Survey on Bank Lending Practices SOMA S)~lem Open Market Aecount S&P Standard & Poor's TCJA Tax Cuts and Jobs Act TIPS Treasury lnllation-Protected Securities 124 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00128 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.95079103 2121112018 Login Free TriaVSubscribt = AMERICAN BANKER The Latest {0/SJ SIFI hike could kick-start bank M&A By Jackie Stewort Published November 14 2017, 4~2pm EST Mort In Regional bonks, M&A, SIFis, Dodd· Fronk f in "# ~ ••• Print f!€1 Reprint Sweeping regulatory changes could nudge more big bonks to consider acquisitions. A big port of o deal between Senate Bonking Committee Chairman Mike Crapo ond o key group of Democrats to amend the Dodd· Fronk Act involves raising the systemically important financial institution threshold from $50 billion in assets to $250 billion. That could immediately free o handful of bonks from enhanced oversight, including capitol requirements, while giving institutions nearing the current threshold more confidence that organic growth and acquisitions will not lead to added regulatory burden. 'All of those bonks that ore interested could be more active' with acquisitions, said Brion Klock. on analyst at Keefe, Bruyette & Woods. tn 125 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00129 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.06079103 212S/2018 SIFIIIike COt.ld kitk-slart bank M&A 1A mencon B•nke< Dwellers on the threshold These bonks could get a reprieve from fast-approaching standards for SIFis e Assets New York Community •••••••IIIIIIIIIIL_ __ !jPe'1.Qogle's United Po ulor ••••••••••••L_ _____J SiliJi nature First Citizens BOK Financial S novus F.N.B. $208 $308 $408 $SOB $608 Sources: Federal Reserve, Sandier O'Neill Optimism has been building among bonkers that lawmakers would eventually increase the SIFI threshold. Washington's outlook on regulatory relief seems "o lot more favorable today than it was o year ago" in terms of compliance issues such os the $50 billion-asset mark, Dovid Rosato, chief financial officer at People's United Financial in Bridgeport, Conn., said during o conference coli lost month to discuss the $44 billion-asset company's financial results. ADVERTISING 217 126 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00130 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.16079103 212812018 StFI hike could kid<-otart bank M&A 1A mel'can Banker Still, People's United continues to act as though no relief is imminent, Rosato said, noting that the company continues to prepare for the stress testing required for SIFis. The Crapo-led plan could allow SVB Financial Group to 'focus even more on lending and job growth,' Greg Becker, the $48 billion-asset company's CEO, said in a statement issued Tuesday. People's United and SVB are among a cluster of about a dozen banks with $35 billion to $50 billion in assets that should benefit greatly from the plan, said Greyson Tuck, an investment banking adviser at the law firm Gerrish Smith Tuck. The proposal would let institutions, especially those with less than $100 billion of assets, avoid annual stress tests, higher capitol and leverage requirements and other heightened standards. Only one bank - CIT Group - has clearly crossed the SIFI threshold with an acquisition. A significant increase from $50 billion could open up more options for banks that were keen on deals but concerned about becoming a SIFI. 'If you're a $45 billion-asset institution and you want to [buy] a $15 billion bank ... you can increase your size by a third but not pick up everything that goes along with becoming a SIFI,' Tuck said of the proposed legislation. For some, the $48 billion-asset New York Community Bancorp's effort to become a SIFI by buying Astoria Financial was a test case for the industry. The deal, however, fell apart late last year over regulatory concerns. For many quarters, the Westbury company has been actively managing its assets to stay below $50 billion. 'While we believe SIFI status should not be determined by size, but by individual bank risk analysis, we certainly welcome raising the threshold to $250 billion, as has been reported,' 3fl 127 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00131 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.26079103 2128/2018 SIFI tlike ccMd kick-start tank M&A 1A merican Sanker Joseph Ficoloro, New York Community's president and CEO, said in a statement Tuesday. 'It is a critical first step in the right direction and will be a positive for our company and beneficial to the industry, and the greater economy, as a whole." Banks that are already considered Sl Fls should benefit, too. The annual Comprehensive Capitol Analysis and Review has constrained banks' deployment of capital; it also influences how they approach a number of decisions, including acquisitions, industry experts said. Immediate relief A plan to ease certain bank rules would instantly free these institutions from some forms of enhanced oversight t Assets Discover -- - -- - - - -- ~ -~-~-~- BBVA Compass Comerica Zions Deutsche Bank CIT Group $408 $608 $808 $1008 Source: Federal Reserve, Sandler O'Neill Giving more control of capital management back to CEOs could spur more acquisitions. "I think it is o capital management issue." said Scott Siefers, an analyst at Sandler O'Neill. "Rather than ask permission once a year, you can probably more in real time advise [regulators about) what you're doing rather than asking to do it." Though the plan raises hopes for more consolidation, same industry experts remain skeptical. While the proposed legislation could remove one impediment to M&A, Charles Crawley, a managing director at Boenning & Scattergood, said it is unlikely to lead to a 'huge wave' of l'ltlps:J.WWW.americanbatlktt.c:omlnewslsi!Wlike-coui<Sobe·thMicl<·slart·barlk·m.&fleeds 4/7 128 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00132 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.36079103 American- 212!12018 SIR hikt CCIIId10ck..w1 bonlc M&A I big ~eels. 'Sometimes investment bankers and attorneys soy there will be a wove - and it is just wishful thinking,' he said. At the some time, there ore limited options for big bonks to gain significant scale with just one acquisition, industry experts said. And there ore two roughly dozen bonk holding companies with assets of $50 billion to $250 billion. Larger bonk deals will likely continue to be highly scrutinized by regulators. and community groups ore more opt to rally against bigger mergers since such deals typically impact many markets. Several big bonks ore still working through issues tied to the Bonk Secrecy Act. the Community Reinvestment Act and fair-lending lows. Many of the nation's biggest bonks are likely to steer clear of acquisitions altogether, Tom Michaud, KBW's president and CEO, said during a panel discussion last month hosted by the University of Mississippi. Banks that nave crossed the SIFt threshold are unlikely to see compliance costs meaningfully decline, Industry experts said. It is doubtful that management teams would dismantle systems and processes just because of a legislative change. "You might be able to pu.sh a few consultants out of the building,' said Jeff Davis, managing director of Mercer Capitol's financial institutions group. 'But I don't see how you turn it off.' White Paper Virtual card payments made easy The increa.sing adoption of virtual cord payments by accounts payable departments has created an unexpected ... PARTNE.RI NSIGHTS SPONSOR CONTENT FROM: Cb illtrusf Pcrymtnb February 1 517 129 VerDate Nov 24 2008 15:30 Mar 21, 2019 Jkt 046629 PO 00000 Frm 00133 Fmt 6604 Sfmt 6604 S:\DOCS\30197.TXT SHERYL spe.46079103 V2812018 S1F1 hike cMI <kk-slart bankM$A IAtnericon 8anhr Bonkers may remain cautious even if o low is passed in order to find out how regulators will implement any changes. For instance, the Crapo-led plan would let the Federal Reserve target companies with less than $250 billion in assets if they ore viewed as o risk. The $41 billion-asset Signature Bonk in New York is on track to become o SIFI by early 2020. 'We're going to wait and see what changes' regulators might make, Signature President and CEO Joseph DePaolo said when asked during o recent quarterly conference call about the potential benefits of o raised threshold. 'Then we'll be able to give better guidance." f in '# li:il ... Print e If! Reprint Jackie Stewart Jackie Stewart covers community bonks and mergers and acquisitions for American Banker. io'3 ~ Comment Sponsor Links dianomi· New, lower Term Life Rates: Whorton's Venture Capital A paperless office: 5 steps to Starts at $14.19/month Program: Think Like an help gain efficiencies & AIG DIRECT Insider reduce costs. WHARTON EXECUTTVE EDUCATION FIOWT\' INVESTMENTS

Jerome H. Powell (2018, February 28). Congressional Testimony. Testimony, Federal Reserve. https://whenthefedspeaks.com/doc/testimony_20180301_chair_the_semiannual_monetary_policy_report

@misc{wtfs_testimony_20180301_chair_the_semiannual_monetary_policy_report,
  author = {Jerome H. Powell},
  title = {Congressional Testimony},
  year = {2018},
  month = {Feb},
  howpublished = {Testimony, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/testimony_20180301_chair_the_semiannual_monetary_policy_report},
  note = {Retrieved via When the Fed Speaks corpus}
}