Congressional Testimony

MONETARY POLICY AND THE STATE OF THE ECONOMY HEARING BEFORETHE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED FIFTEENTH CONGRESS SECOND SESSION JULY 18, 2018 Printed for the use of the Committee on Financial Services Serial No. 115–110 ( U.S. GOVERNMENT PUBLISHING OFFICE 31–509 PDF WASHINGTON : 2018 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm HOUSE COMMITTEE ON FINANCIAL SERVICES JEB HENSARLING, Texas, Chairman PATRICK T. MCHENRY, North Carolina, MAXINE WATERS, California, Ranking Vice Chairman Member PETER T. KING, New York CAROLYN B. MALONEY, New York EDWARD R. ROYCE, California NYDIA M. VELA´ZQUEZ, New York FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California STEVAN PEARCE, New Mexico GREGORY W. MEEKS, New York BILL POSEY, Florida MICHAEL E. CAPUANO, Massachusetts BLAINE LUETKEMEYER, Missouri WM. LACY CLAY, Missouri BILL HUIZENGA, Michigan STEPHEN F. LYNCH, Massachusetts SEAN P. DUFFY, Wisconsin DAVID SCOTT, Georgia STEVE STIVERS, Ohio AL GREEN, Texas RANDY HULTGREN, Illinois EMANUEL CLEAVER, Missouri DENNIS A. ROSS, Florida GWEN MOORE, Wisconsin ROBERT PITTENGER, North Carolina KEITH ELLISON, Minnesota ANN WAGNER, Missouri ED PERLMUTTER, Colorado ANDY BARR, Kentucky JAMES A. HIMES, Connecticut KEITH J. ROTHFUS, Pennsylvania BILL FOSTER, Illinois LUKE MESSER, Indiana DANIEL T. KILDEE, Michigan SCOTT TIPTON, Colorado JOHN K. DELANEY, Maryland ROGER WILLIAMS, Texas KYRSTEN SINEMA, Arizona BRUCE POLIQUIN, Maine JOYCE BEATTY, Ohio MIA LOVE, Utah DENNY HECK, Washington FRENCH HILL, Arkansas JUAN VARGAS, California TOM EMMER, Minnesota JOSH GOTTHEIMER, New Jersey LEE M. ZELDIN, New York VICENTE GONZALEZ, Texas DAVID A. TROTT, Michigan CHARLIE CRIST, Florida BARRY LOUDERMILK, Georgia RUBEN KIHUEN, Nevada ALEXANDER X. MOONEY, West Virginia THOMAS MACARTHUR, New Jersey WARREN DAVIDSON, Ohio TED BUDD, North Carolina DAVID KUSTOFF, Tennessee CLAUDIA TENNEY, New York TREY HOLLINGSWORTH, Indiana SHANNON MCGAHN, Staff Director (II) VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm C O N T E N T S Page Hearing held on: July 18, 2018 ..................................................................................................... 1 Appendix: July 18, 2018 ..................................................................................................... 63 WITNESSES WEDNESDAY, JULY 18, 2018 Powell, Hon. Jerome H., Chairman, Board of Governors of the Federal Re- serve System ......................................................................................................... 5 APPENDIX Prepared statements: Powell, Hon. Jerome H. .................................................................................... 64 ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD Powell, Hon. Jerome H.: Written responses to questions for the record submitted by Representa- tives Beatty, Gottheimer, Huizenga, Messer, Sinema, Sherman, and Stivers ............................................................................................................ 136 (III) VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm MONETARY POLICY AND THE STATE OF THE ECONOMY Wednesday, July 18, 2018 U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. The committee met, pursuant to notice, at 10:01 a.m., in room 2128, Rayburn House Office Building, Hon. Jeb Hensarling [chair- man of the committee] presiding. Present: Representatives Hensarling, McHenry, Royce, Lucas, Pearce, Posey, Luetkemeyer, Huizenga, Duffy, Stivers, Hultgren, Ross, Pittenger, Wagner, Barr, Rothfus, Tipton, Williams, Poliquin, Love, Hill, Emmer, Zeldin, Trott, Loudermilk, Mooney, MacArthur, Davidson, Budd, Kustoff, Tenney, Hollingsworth, Waters, Maloney, Sherman, Clay, Scott, Green, Cleaver, Moore, Ellison, Perlmutter, Himes, Foster, Kildee, Delaney, Sinema, Beatty, Heck, Vargas, Gottheimer, and Crist. Chairman HENSARLING. The committee will come to order. With- out objection, the Chair is authorized to declare a recess of the committee at any time. And all members will have 5 legislative days within which to submit extraneous materials to the Chair for inclusion in the record. This hearing is for the purpose of receiving the semiannual testi- mony of the Chair of the Board of Governors of the Federal Reserve System on monetary policy and the state of the economy. I now recognize myself for 3–1/2 minutes to give an opening statement. As we meet today, thanks to the fiscal policies of the Trump Ad- ministration and this Congress, many Americans are seeing the strongest economy of their lifetime. Most importantly, 3 percent av- erage economic growth is back, 90 percent of Americans are seeing bigger paychecks, and in the last quarter real disposable income in- creased a very strong 3.4 percent, and unemployment remains near a 50-year low. But the economy may be challenged in significant ways if either we find ourselves in a protracted global trade war or the unconven- tional monetary policy tools of the Fed are not carefully and skill- fully wound down in transition to normalcy. In February, during or last Humphrey-Hawkins hearing, I ques- tioned whether the Fed would ever return to a monetary policy bal- ance sheet after a decade of accumulating and maintaining, in con- trast, a macroprudential balance sheet. And my concern remains, because less than a year into the Fed’s balance sheet wind-down (1) VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 2 some FOMC (Federal Open Market Committee) members are al- ready calling to slow down or end the process. We were told by the Fed that letting the roll-off schedule run for 3 or 4 years would be less exciting than watching paint dry. But as we meet today, we face the prospect that maybe the paint stays wet. In other words, we seem to be faced with an increasing prospect of a balance sheet that may never return to a more conventional size or composition. I believe this is problematic. An unconventional balance sheet may well threaten ultimately the integrity and independence of the Feds’s conduct of monetary policy by enabling competing activities that lie outside its mandate for stable prices and full employment. This matter must be reviewed carefully. Additionally, I have governance concerns. I would note today that only three individuals, as a practical matter, are actually empow- ered to set U.S. monetary policy. This is a matter of concern. We know that interest rates on re- serve deposits have now supplanted open market operations of the FOMC in playing the lead role in conducting monetary policy, given that the Board of Governors can administer interest rates on reserve deposits without any input from the FOMC or any district bank president. This means three individuals—or, to be more pre- cise, two, given a majority vote—set monetary policy in the U.S. I certainly don’t believe this is currently being abused, but I do believe, as a matter of public policy, the full FOMC should vote on where to set interest rates on reserve deposits. And furthermore, I would call upon the Senate to expeditiously confirm the Federal Reserve Board Governors that the President has long since nomi- nated. Finally, many members, including myself, share a concern about the apparent inconsistency of a 2 percent inflation target with the goal of price stability. A 2 percent inflation target means that every dollar a couple sets aside at a child’s birth for her college education will have lost approximately 30 percent of its purchasing power by the time the first tuition bill arrives. I understand that other central banks do this. I understand this may be good policy. But if so, Congress should decide this, because Section 2A of the Federal Reserve Act mandates, quote, ‘‘stable prices.’’ And last I looked up the word ‘‘stable’’ in the dictionary it means quote, unquote, ‘‘fixed,’’ quote, unquote, ‘‘not changing,’’ or, quote, unquote ‘‘permanent.’’ And yet we see even some advocating a policy rate target that allows for even greater swings than the current 2 percent inflation target. Chairman Powell, we welcome you and we look forward to hear- ing more about these issues, and we look forward to a prudent path to normalization where interest rates are once again market based and credit is allocated to its most efficient use. I now recognize the Ranking Member of the committee, the gentlelady from California, for 3 minutes for an opening statement. Ms. WATERS. Thank you, Mr. Chairman. And welcome, Chairman Powell. Mr. Chairman, I am very concerned about the impact of the reck- less economic policies of Donald Trump on hardworking Americans, VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 3 vulnerable families, and our Nation’s economy. This President has started a trade war that is already harming American consumers and companies. For example, Whirlpool, based in Michigan has seen its share price drop over 15 percent as a result of Trump’s tariffs on steel and aluminum. Washing machines and dryer prices have increased 20 percent. According to The Wall Street Journal, the mayor of Clyde, Ohio, where Whirlpool has a plant, commented on the tariffs saying, I quote, ‘‘People’s anxiety level is higher because nobody knows what is going on,’’ quote, unquote. The tax scam that the Congressional Republicans and President Trump pushed through, explodes the deficit and raises taxes on 86 million American families to help out big corporations and very wealthy individuals. But most of these corporations are not using the windfall to pay better wages to their employees. Instead, they are buying back their own stock to boost share prices and enrich their CEOs. And in the end, this massive misguided giveaway will be paid for by future generations of taxpayers. In addition, the Trump Administration’s latest budget proposal makes deep cuts to important healthcare, nutritional assistance, housing and community development programs, and would be det- rimental to families, veterans, seniors, and persons with disabil- ities. In all, the Trump Administration’s policies are deeply harmful and threaten the hard-earned economic gains put in motion during the Obama Administration. As a result of Democratic policies and the policies of the Federal Reserve, we are now experiencing the longest stretch of private sector job growth on record, but with these harmful economic policies Trump is putting all of that progress at risk. So I am interested in Chairman Powell’s views on these matters, especially the long-term effect of Trump’s damaging economic poli- cies and what tools, if any, the Federal Reserve has to prevent a possible recession that could be triggered by the policies of this Ad- ministration. With that, I yield back the balance of my time. Chairman HENSARLING. The gentlelady yields back. The Chair now recognizes the gentleman from Kentucky, Mr. Barr, the Chairman of the Monetary Policy and Trade Sub- committee, for 1–1/2 minutes. Mr. BARR. Thank you, Mr. Chairman. Chairman Powell, thank you for testifying today. As Chairman Hensarling has already stated, the economy is strong and the data supports this statement. Americans have more money in their paychecks thanks to tax reform, job creation is strong, unemployment is near a 50-year low, and many Americans who left the workforce during the financial crisis are reentering it. While overall the economic outlook of America is bright, there are a few items that we need to carefully watch. One is uncertainty surrounding U.S. trade policy which impacts key Kentucky indus- try such as bourbon, agriculture, and auto manufacturing. Another is the legacy of the Fed’s unconventional monetary policies and bloated asset sheet that continues to distort credit allocation. A third is a flattening yield curve that some economists warn could VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 4 signal a downturn. And a final risk is out-of-date regulation, such as the G–SIB surcharge calculation that puts American banks at a disadvantage relative to their international competitors. Chairman Powell, thank you for your service at the Federal Re- serve, and I look forward to hearing from you today about these and other important topics. I yield back. Chairman HENSARLING. The gentleman yields back. The Chair now recognizes the gentlelady from Wisconsin, Ms. Moore, the Ranking Member of the Monetary Policy and Trade Subcommittee, for 1 minute. Ms. MOORE. Thank you so much, Mr. Chairman. Mr. Chairman, it is lovely to see you again. I am going to paraphrase and channel Ben Franklin here: Dodd- Frank gave America a stable economic system if we can keep it. I fear your greatest challenges in the future will be directly re- lated to the actions of Republican policymakers and our President. Ruinous trickle-down tax cuts, adopting their policies that drive debt and income inequality, and of course the Wells Fargo model, will saddle regular Americans with fourth-place payday loans to pay it all back. Destabilizing financial deregulation and unqualified nominees like Kathy Kraninger to head the Consumer Financial Protection Bureau, capricious trade wars, Harley in my district, farmers in my State bracing for ruin, fiscal mismanagement, low grade scams, and incompetence all seem to be hallmarks of Mr. Trump. But, as we discuss Esther 4:14, you have been called for such a time as this. God bless you. Chairman HENSARLING. The gentlelady yields back. The Chair now recognizes the gentleman form Michigan, Mr. Kil- dee, the vice Ranking Member, for 1 minute. Mr. KILDEE. Thank you, Mr. Chairman, for yielding. Chairman Powell, thank you for being here. I lead an initiative in Congress entitled The Future of America’s Cities and Towns. Its purpose is to fuel a national conversation around the economic health of our country’s older industrial cities and towns, places like my hometown of Flint, that have not fully recovered from the Great Recession. Even with the job growth and economic recovery we have seen, it is uneven. In economic terms there is no average American any- more. A whole cohort of communities across the country continue to experience the kind of stress that threatens their sustainability as communities and the fiscal solvency of their municipalities. I believe we have to have a much more serious and thoughtful conversation about how we support these places and the millions of people who live there. Many of the regional banks, such as the Boston, Cleveland, and Chicago banks, have taken an interest in working to improve the fiscal health of these places within their ju- risdiction. And so I would be interested in hearing your thoughts on how the Fed can help these places. Monetary policy is by nature a broad tool for economic growth. We must have a particular focus on creating more economic oppor- tunity for those families and those communities that continue to struggle. VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 5 Thank you, Mr. Chairman, for your indulgence. Chairman HENSARLING. Today we welcome back to the com- mittee for his second appearance Governor Powell, Chairman of the Board of Governors of the Federal Reserve System. Governor Pow- ell has previously testified for this committee, so I believe he needs no further introduction. Without objection, the witness’ written statement will be made part of the record. Chairman Powell, you are now recognized for your testimony. Welcome. STATEMENT OF THE HON. JEROME H. POWELL Mr. POWELL. Thank you very much, and good morning, Chair- man Hensarling, Ranking Member Waters, and other members of the committee here today. I am happy to present the Federal Re- serve’s semiannual Monetary Policy Report to Congress. Let me start by saying that my colleagues and I strongly support the goals that Congress has set for us for monetary policy: Max- imum employment and price stability. We also support clear and open communication about the policies we undertake to achieve these goals. We owe you and the general public clear explanations of what we are doing and why we are doing it. Monetary policy affects everyone and should be a mystery to no one. For the past 3 years we have been gradually returning interest rates and the Fed’s securities holdings to more normal levels as the economy strengthens. And we believe this is the best way we can help set conditions in which Americans who want a job can find one and in which inflation remains low and stable. I will review the current economic situation and outlook and then turn to monetary policy. Since I last testified here in February, the job market has contin- ued to strengthen and inflation has moved up. In the most recent data, inflation was a little above 2 percent, the level that the Fed- eral Open Market Committee thinks will best achieve our price sta- bility and employment objectives over the longer run. The latest figure was boosted by a significant increase in gasoline and other energy prices. An average of 215,000 net new jobs were created each month this year in the first half of the year. That number is somewhat higher than the monthly average for 2017. It is also a good deal higher than the average number of people who enter the workforce each month on net. The unemployment rate edged down one-tenth of a percent over the first half of the year to 4.0 percent in June, which is near the lowest level of the past two decades. In addition, the share of the population that either has a job or has looked for one in the past month, what we call the labor force participation rate, has not changed much since late 2013, and this development is another sign of labor market strength. Part of what has kept that participation rate stable is that more working-age people have started looking for a job, which has helped make up for the large number of baby boomers who are retiring and leaving the workforce. VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 6 Another piece of good news is that the robust conditions in the labor market are being felt by many different groups. For example, the unemployment rates for African Americans and Hispanics have fallen sharply over the past few years and are now near their low- est levels since the Bureau of Labor Statistics began reporting data for these groups in 1972. Groups with higher unemployment rates have tended to benefit the most as the job market has strengthened. But jobless rates for these groups are still higher than those for Whites. And while three-quarters of Whites responded in a recent Federal Reserve survey that they were doing at least OK financially in 2017, only two-thirds of African Americans and Hispanics responded that way. Incoming data show that alongside the strong job market, the U.S. economy has grown at a solid pace so far this year. The value of goods and services produced in the economy, or GDP, rose at a modest annual rate of 2 percent in the first quarter after adjusting for inflation. However, the latest data suggested that economic growth in second quarter was considerably stronger than in the first. And this solid pace of growth so far this year is based on several factors. Robust job gains, rising after-tax incomes, and optimism among households have lifted consumer spending in recent months. Investment by businesses has continued to grow at a healthy rate. Good economic performance in other countries has supported U.S. exports and manufacturing. And while housing construction has not increased this year, it is up noticeably from where it stood a few years ago. I will turn now to inflation. After several years in which inflation ran below our 2 percent objective, the recent data are encouraging. The price index for personal consumption expenditures, or PCE in- flation, as we call it, which is an overall measure of prices paid by consumers, increased 2.3 percent over the 12 months ending in May, and that number is up from 1.5 percent a year ago. Overall inflation increased partly because of higher oil prices, which caused a sharp rise in gasoline and other energy prices paid by consumers. Because energy prices move up and down a great deal, we also look at core inflation. Core inflation excludes energy and food prices and is generally a better indicator of future overall inflation. Core inflation was 2.0 percent for the 12 months ending in May, compared with 1.5 percent a year ago. We will continue to keep a close eye on inflation with a goal of keeping it near 2 percent. Looking ahead, my colleagues on the FOMC and I expect that with appropriate monetary policy the job market will remain strong and inflation will stay near 2 percent over the next several years. This judgment reflects several factors. First, interest rates and fi- nancial conditions more broadly remain favorable to growth. Sec- ond, our financial system is much stronger than before the crisis and is in a good position to meet the credit needs of households and businesses. Third, Federal tax and spending policies will likely con- tinue to support the expansion. And fourth, the outlook for eco- nomic growth abroad remains solid, despite greater uncertainties in several parts of the world. VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 7 Now, what I have just described is what we see as the most like- ly path for the economy. Of course, economic outcomes that we ac- tually experience often turn out to be a good deal stronger or weak- er than those in our best forecast. For example, it is difficult to pre- dict the ultimate outcome of current discussions over trade policy, as well as the size and timing of economic effects of the recent changes in fiscal policy. Overall, we see the risk of the economy unexpectedly weakening as roughly balanced with the possibility of the economy growing faster than we currently anticipate. Over the first half of 2018 the FOMC has continued to gradually reduce monetary policy accommodation. In other words, we have continued to dial back the extra boost that was needed to help the economy recover from the financial crisis and the recession. Specifically, we raised the target range for the Federal funds rate by 1/4 percentage point at both our March and June meetings, bringing the target today to its current range of 1–3/4 percent to 2 percent. In addition, last October we started gradually reducing our hold- ings of Treasury and mortgage-backed securities, and that process has been running quite smoothly. Our policies reflect the strong performance of the economy and are intended to help make sure that continues. The payment of interest on balances held by banks in their ac- counts at the Federal Reserve has played a key role in carrying out these policies, as the current Monetary Policy Report explains in some detail. Payment of interest on these balances is our principal tool for keeping the Federal funds rate in the FOMC’s target range. This tool has made it possible for us to gradually return interest rates to a more normal level without disrupting financial markets and the economy. As I mentioned, after many years of running below target, our longer-run objective of 2 percent inflation has recently moved close to that level, and our challenge will be to keep it there. Many fac- tors affect inflation. Some of them are temporary and others longer lasting. Inflation will at times be above 2 percent and at other times below. And we say that the 2 percent objective is symmetric because the FOMC would be concerned if inflation were running persistently above or below that 2 percent objective. The unemployment rate is low and expected to fall further. Americans who want jobs have a good chance of finding them. Moreover, wages are growing a little faster than they did a few years ago. That said, they are still not rising as fast as in the years before the crisis. One explanation could be that productivity growth has been low in recent years. On a brighter note, though, moderate wage growth also tells us that the job market is not causing high inflation. With a strong job market, inflation close to our objective, and the risks to the outlook roughly balanced, the FOMC believes that for now the best way forward is to keep gradually raising the Federal funds rate. We are aware that on the one hand raising interest rates too slowly may lead to high inflation or financial market ex- cesses. On the other hand, if we raise rates too rapidly the economy VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 8 could weaken and inflation could persistently run below our objec- tive. The committee will continue to weigh a wide range of relevant information when deciding what monetary policy will be appro- priate. As always, our actions will depend on the economic outlook, which may change as we receive new data. For guideposts on appropriate policy, the FOMC routinely looks at monetary policy rules that recommend a level for the Federal funds rate based on the current rates of inflation and unemploy- ment. The July Monetary Policy Report gives an update on mone- tary policy rules and their role in our policy discussions. I continue to find these rules helpful, although using them requires careful judgment. Thank you very much, and I will look forward to our conversa- tion. [The prepared statement of Mr. Powell can be found on page 64 of the appendix.] Chairman HENSARLING. Thank you, Chairman Powell. The Chair now yields to himself 5 minutes for questions. I don’t believe, Chairman Powell, there was a discussion about this on the Senate side yesterday. I didn’t hear much about it in your testimony. But I still seek greater specificity on the current goals for the wind-down of the balance sheet. It is my current understanding that it is the goal, with respect to the pace, that this wind-down will take about 3 to 4 years, that ultimately the size of the balance sheet, as of today, the target is 2 to 2.5 trillion. And with respect to composition, primarily Treas- ury’s, but some MBS (mortgage-backed security). Is my understanding correct? Is that the current goal of the Fed? Mr. POWELL. So the plan is to return the balance sheet over time to a mainly Treasury balance sheet. I have provided estimates, oth- ers have provided estimates, of how long that with take. They are fairly uncertain. But my estimate has been 3 or 4 years. What will guide the time at which we will ultimately stop shrinking the balance sheet will really be a function—and the ulti- mate size of the balance sheet—will really be a function of the public’s demand for our liabilities. During quantitative easing that was really about assets. In the long run what matters is the public’s demand for currency, which has grown very strongly for the last few years, and also the public’s demand for reserves. And in an era where we require the banks to have lots of high quality liquid assets, reserves are the ultimate high quality liquidity asset. So I think we are going to be finding out how big that demand is for those two liabilities, and also some others. I think there are estimates. We don’t have a target range, for example. Chairman HENSARLING. OK. So you really don’t know. Mr. POWELL. That is right. Chairman HENSARLING. Obviously, we all acknowledge there will be a greater demand for reserves, but I still would anticipate that in the 2 to 2.5 trillion that might actually exceed demand. So I guess, Chairman Powell, my next question is, is it a goal of the Fed—so I understand you want to keep IOER (interest rate on excess reserves), that particularly today this is how monetary pol- VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 9 icy is determined. But do you see a day, is it the goal of the Federal Reserve to again have open market operations, the FOMC, pri- marily drive monetary policy? So I guess this is really the debate between the floor and the cor- ridor. Currently we are using the floor. But is that the ultimate goal? Is this a permanent tool? Or will we see a future where IOER sets the floor, the FOMC sets the higher end, and let the market determine the interest rate in between that floor and ceiling? What is the goal of the Fed? Mr. POWELL. The committee has not made a decision on whether in the longer run will it go back to a corridor system or stay in what we have now, which is a floor system. Chairman HENSARLING. When might the Fed contemplate this? Mr. POWELL. We will be returning to that question, I would say fairly soon. It is something we have talked about periodically at various FOMC meetings. And my thinking is that we will return to that discussion in a serious way in the relatively near future. Chairman HENSARLING. Well, one thing I would have you con- sider, Chairman Powell, as the Board of Governors takes a look at this, is ultimately the potential risk to the Fed’s independence of having such an unconventional-size balance sheet. I would say regrettably, Congress raided a relatively small fund of the Federal Reserve to fund a transportation bill. I tried to fight that. I wasn’t successful. It has been raided twice. So I have joined in with my colleagues. We also know now that the Fed funds the Bureau of Consumer Financial Protection. Both of these have nothing to do with mone- tary policy. I could foresee a day with a large, large balance sheet out there, and with the potential of either municipalities of States on the brink of insolvency, having Congress decide the Fed needs to buy their bonds and prop them up. I can also see one day, an infrastructure bill coming down the pike, with no good way to pay for it, and there is a big pot of money that the Fed has, maybe the Fed should be directed to buy these bonds. And I think we are seeing some of this, frankly, across the pond when I look at the Swiss central bank or the ECB. So I am just curious, as you think about the size of your balance sheet, do you ever consider its impact on your independence? Mr. POWELL. We do think about those things. And we have said that the balance sheet will return to a size that is no larger than it needs to be for us to effect monetary policy in our chosen frame- work. Chairman HENSARLING. Well, I just assure you, Mr. Chairman, if there is a big pot of money out there, this Congress might find a way to get its hands on it. So you might consider that as you con- sider the size of your balance sheet. The time of the Chair has long since expired. The Chair now rec- ognizes the Ranking Member. Ms. WATERS. Thank you, Mr. Chairman. Chair Powell, while I have heard you state repeatedly that it is too soon to tell whether the economic efforts of the recent imple- mentation of tariffs will be either positive or negative, there are al- ready serious indications that we are headed for trouble. VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 10 In the most recent June FOMC meeting minutes, several partici- pants noted that their district business contacts had expressed con- cern about the adverse effects of tariffs and other proposed trade restrictions on future investment activity and that they were not planning any new investments to increase capacity. Mid Continent Nail, America’s largest nail manufacturer, based in Missouri, has already laid off 60 workers and expects to go out of business by Labor Day. Harley-Davidson, based in Wisconsin, is moving jobs overseas to Europe to avoid tariffs on its exports. Whirlpool, based in Michigan, has seen its share price drop over 15 percent as a result of Trump’s tariffs on steel and aluminum. Washing machine and dryer prices have increased 20 percent in the past 3 months as a result, the steepest rise in the past 12 years, according to the Department of Labor. These tariffs are affecting the price of everything from bicycles to washers to automobiles. In addition to these immediate effects, to your point, there may be delayed negative effect on the economy as well. While the U.S. is taking a protectionist stance toward trade policy, the rest of the world is moving forward on trade with- out us. What long-term economic effects can we expect to see if these tariffs continue to escalate to the point of a trade war? Do you ex- pect the economic effects of a trade war to be felt more acutely in certain regions of the U.S.? And furthermore, is the Fed well suited to respond to a recession caused by a trade war? If not, what can be done? Mr. POWELL. I should start by quickly reminding all of us, in- cluding me, that we stay in our lane at the Fed, and when we talk about things like fiscal policy and trade policy that are not as- signed to us, we try to stay at a high level, a principle level. But answering your question, if this process leads to a world of higher tariffs on a wide range of goods and services that are traded and those are sustained for a longer period of time—in other words, if it results in a more protectionist world, that will be bad for our economy. And it will be bad for other economies, too. It will be bad for the world economy. That is not what the Administration says they are trying to achieve. It isn’t up to us to criticize their policies in this activity. But the evidence is clear that countries that remain open to trade have higher productivity, they have higher incomes. Not every group is affected positively by trade. There are groups that are hurt by trade. And I think all countries have learned that they need to do a better job of addressing the needs of those populations, but not through trade barriers and tariffs of that kind. Ms. WATERS. While certainly the Fed does not have direct re- sponsibility for trade and for tariffs, were you consulted at all when the tariff decisions were made? Mr. POWELL. No, we play no role in the Administration’s discus- sions on these. Like I imagine just about everyone here, we hear from our extensive network of business contacts a rising chorus of concern. As you pointed out, lots and lots of individual companies have been harmed by this. We don’t see it in the aggregate numbers yet because it is a $20 trillion economy and these things take time to VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 11 show up. But we hear many, many stories of companies that are concerned and are now beginning to make investment decisions— or not make them—because of this. Ms. WATERS. Have you had any action at all in relationship to the Chamber of Commerce? Have they talked with you? Have they sought your opinion? Have you talked with them? What do you know about the Chamber of Commerce position on tariffs? Mr. POWELL. Well, I saw that they took a very strong public posi- tion against tariffs. We try to have good relations and strong rela- tions with the Chamber. I haven’t personally discussed their posi- tion on trade, but I know what it is. Ms. WATERS. Do you know what specifically they were concerned about as it relates to tariffs in a particular part of country, agri- culture, et cetera? Mr. POWELL. I shouldn’t speak for them, but I think it is really a general thing. The bottom line is a more protectionist economy is an economy that is less competitive, it is less productive. We know that. This is the torch we have been carrying around the world for 75 years. So it is not a good thing, if that is where this goes. We don’t know ultimately yet where this will lead. The Administration says they want lower tariffs, and that would be good for the economy, if we achieve that. Ms. WATERS. Well, thank you very much. And I yield back the balance of my time. Chairman HENSARLING. The gentlelady yields back. The Chair now recognizes the gentleman from Kentucky, Mr. Barr, Chair of the Monetary Policy and Trade Subcommittee. Mr. BARR. Thank you, Mr. Chairman. Chairman Powell, welcome back to the committee. Some economists argue that a flattening of the yield curve is an indication that an economy is headed for a recession. Obviously, with the strong data that we are seeing, we don’t see any indica- tion of a recession in the near-term. But I asked you this question 6 months ago in your last report, and I asked you, given the flattening of the yield curve and the risk potentially that short-term rates might exceed long-term rates, whether there would be any plans within the normalization strat- egy to accelerate the roll-off of longer-term assets more quickly to counteract the flattening of the yield curve? I believe you indicated that there were no such plans 6 months ago. I just wanted to ask you, given the fact that that yield curve has flattened even further in the interim, since we last met, is there any discussion within the FOMC to alter or accelerate the balance sheet reduction program in contemplation of this flattening yield curve? Mr. POWELL. Thank you. No, there is not. We very carefully developed and socialized to the public the balance sheet reduction, balance sheet normalization plan. It is working smoothly. We are not thinking really about changing it, except in the conditions that we have identified, which would be a meaningful downturn. VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 12 Mr. BARR. If that is the case, what are the Fed’s plans with re- spect to that flattening yield curve? And what risk does that pose to the economy? Mr. POWELL. Maybe let me tell you how I think about the yield curve. We know why the short end of the yield curve is moving up. It is because essentially out to 2 years or so really the market is pric- ing in its expectations of what the Fed will do, plus or minus maybe a little bit of a term premium when you get out to 2 years. So we know why the short end is moving up. The real question is, what is the story with long rates? So the long rate, like take the 10-year Treasury, you have to decompose that and ask what is in it. And I think the whole point of the yield curve conversation is that you can decompose that, and in that, whatever the long-term rate is, 2.85 percent this morning, 10-year—what is in there is a term premium. But there is also the market’s estimate of the long- run neutral rate. And so it is telling you something and we are lis- tening. But it involves many other things. You have to do a decomposi- tion to pull that out. And then that tells you what the stance of monetary policy is. So whether a policy is accommodative or wheth- er it is restrictive. And that is the important question, not the shape of the yield curve. Mr. BARR. Chairman, would you agree that the oversized balance sheet is putting downward pressure on those long-term interest rates, continues to put downward pressure? Mr. POWELL. Yes, but to a diminishing degree. Mr. BARR. Let me switch gears to IOER. For decades now the Board of Governors has administered interest rates on reserves, not for the intended purpose of fairly compensating commercial banks for required deposits at Federal Reserve banks, but rather as a monetary policy rate. Given the fact that IOER is now your principal tool for interest rate setting, would it not be better if IOER was set by the FOMC, a much more diverse body that includes not only the Governors, but also the five voting district bank presidents, as opposed to just the Board of Governors? Mr. POWELL. I guess I would—I think of it this way. The FOMC sets the target range for the Federal funds rate. IOER is just a tool to make sure that the Federal funds rate trades in the range that has been set by the FOMC. So it is really just a tool to follow through on the much more important decision which is made by the FOMC. Mr. BARR. Well, thank you. This committee and the Congress is considering a proposal to transfer that responsibility of IOER to the FOMC, the larger, more diverse group, and we continue to en- gage you on that. Let me finally conclude with a question about trade. I agree with your assessment that free trade and low tariffs result in better eco- nomic performance as opposed to a trade war or high tariffs. How important is it for the Administration to quickly resolve its trade and tariff negotiations? And what are the risks of a pro- tracted period of increasing tariffs? VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 13 Mr. POWELL. Again, wanting not to be an adviser or in any way a participant in these discussions, which are really up to the Ad- ministration, uncertainty is one of those things where businesses— there was a lot of momentum in the economy earlier this year. I wouldn’t want to see uncertainty lead people to start putting off de- cisions, and that would be the risk of a long, protracted discussion. Mr. BARR. Thank you for your answers. I yield back. Chairman HENSARLING. The time of the gentleman has expired. The Chair now recognizes the gentlelady from Wisconsin, Ms. Moore, Ranking Member the Monetary Policy and Trade Sub- committee. Ms. MOORE. Thank you so much Mr. Chairman. Again, welcome back, Mr. Chairman. You talk a lot about productivity, and indeed economists keep talking about an aging population, the boomers, and that is impact- ing productivity, and how lagging productivity is an ongoing drag on economic growth. I an wondering if you think that having a comprehensive immi- gration policy would help increase productivity? Mr. POWELL. Immigration is another one of those policies that is high up on the list of things that are not assigned to us, but I can—I can still—so I am going to try to stay in our lane. But I do think to the extent these issues connect to the health of the economy in the long run, then we have an obligation to speak to that. So you think about potential growth in the United States, you can really boil it down to how fast is the labor force growing and how much is output per hour growing. That is it, that is all you have. Ms. MOORE. Our CRS does anticipate that over the next decade or so it could increase our economy by a trillion dollars to get these people out of the shadows. You talk in your remarks about the lower unemployment rates for African Americans and Hispanics. That is something we are all celebrating. But I swear to you, I know a lot of African Americans, I am related to them, I don’t know many that don’t have two jobs in order to make it. I know some who have bachelor’s degrees, and yet they are forced to live with roommates because they can’t sus- tain themselves. So what we have found is that while there might be lower unem- ployment, wages have actually decreased, despite the tax cuts, which claimed that there were going to be $4,000 for everybody, we know we got these one-time-only bonuses. Wages have decreased and income equality has increased. And I am wondering what your projection is for flat or lowered wages de- spite increased unemployment. Mr. POWELL. We look at a wide range of wage and compensation indicators, and pretty consistently across the board, if you look back at where they were 5 years ago and look back where they are now, they have all moved up. They used to be right around 2 per- cent increase per year. Now they are around 3 percent. We think this is a good thing. Ms. MOORE. So African Americans, their wages are increasing? VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 14 Mr. POWELL. Yes. I think it is pretty broad at this point in dif- ferent— Ms. MOORE. And I would surely like to see these data, because other economists have said that it has actually decreased. All right. Thank you. I am wondering—I know you aren’t going to ask any questions about the tax cut, so I’ll let you off—I am wondering, though, about the big tax cut, I have to ask, the big tax cut that we just provided and it has increased income inequality. I am just wondering what your thoughts are and projections about how sustainable that is when 80 percent of these tax cuts have gone for shareholder type buybacks versus increase in wages or capital improvements. I am wondering what do you think going forward, what impact that will have on economic growth. Mr. POWELL. U.S. Fiscal policy has been on an unsustainable path for some time. It continues to be unsustainable. Ms. MOORE. Higher debt? Mr. POWELL. Yes. The debt is going up and I think it is growing faster than the economy. We need to get the economy growing fast- er than the debt, it comes down to that, and we are not doing that. It is something we should be working on now. We should all be working on that together. Ms. MOORE. Do you think that shareholder buybacks is a healthy indicator of healthy prospect for growth? Mr. POWELL. I think when a company decides to buy back stock, they are saying that we have more cash than we can put to work for our shareholders, that is the capital markets working. That money doesn’t go away, of course, it goes into people who then can spend it or— Ms. MOORE. This is more money for them to use to chase yield. Don’t you think that the chasing of yield creates bubbles and that is one of big problems that we had in 2008, is money chasing yield? Mr. POWELL. I think we certainly can find ourselves in a situa- tion where we are seeing financial bubbles. We watch that very closely. Don’t see that now, but it is a key risk that we monitor very carefully. Ms. MOORE. And I thank you so much, sir. Mr. POWELL. Thank you. Chairman HENSARLING. The time of the gentlelady has expired. The Chair now recognizes the gentleman from Missouri, Mr. Luetkemeyer, Chairman of our Financial Institutions Sub- committee. Mr. LUETKEMEYER. Thank you, Mr. Chairman. And welcome, Chairman Powell. Yesterday we had a hearing with our Financial Institutions Sub- committee, and I asked the question of Acting Comptroller of the Currency, Keith Noreika, about the implementation about S. 2155, and specifically whether or not the statutory language around the $250 billion threshold for SIFI (systemically important financial in- stitution) designation was clear. Mr. Noreika said that the lan- guage and Congressional intent were pretty straightforward. And so my question to you is, would you agree with your former colleague that the language is pretty clear, no ambiguity there, VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 15 that you know exactly what should be done with those banks under 250 with regards to SIFI activity and testing? Mr. POWELL. I think that it is very clear and I think that the language gives us the authority that we need. Mr. LUETKEMEYER. OK. So now we know what we should be doing. How long would you anticipate it is going to take to imple- ment the statute with regards to 2155? Mr. POWELL. So with regards to that particular provision, we are thinking already about exactly the framework we are going to pub- lish for comment and receive public comment on that will allow us to identify systemic risk or risks to safety and soundness among banks below 250. Some of the aspects of 2155 were already out of door. We pub- lished a document on Friday of July Fourth week which talked about many things that we are doing. We have a big job to imple- ment 2155 and we are going at it very hard. Mr. LUETKEMEYER. Thank you very much. And it is nice to know that—or it should be noted anyway—that those banks under 250 are not significantly important financial institutions from the standpoint of endangering the economy. That is what a SIFI is sup- posed to be, a bank that would endanger—while they are nice size banks, they are not something that is going to endanger the econ- omy and therefore they fall under a different regulatory regime. So we thank you for that. With regards to another issue I brought up yesterday, former Governor Dan Tarullo said in his farewell address that stress test- ing programs should be moved into the normal examination cycle. And I agree with that proposition and said while I don’t underesti- mate the importance of stress tests, those tests should be run by regulators. Banks are doing this right now on a regular basis with regulatory oversight. Would you agree with Governor Tarullo that we need to assimi- late those exams, the stress testing things into the regular exam- ination cycle, or do you want to retain those as a separate type of testing that the banks are going to be putting out information for and modeling? Mr. POWELL. I believe he was talking about the qualitative as- pect, so we are looking to return the qualitative part of the test over time to the regular examination cycle. And we are looking for the right way and time to do that. Mr. LUETKEMEYER. Well, it seemed to me, just to throw ideas out, that it would seem to me if the Fed would have several dif- ferent models and then they would go into the bank, take the infor- mation from it, throw it into those models, to see once if there is an area within the bank’s business model that is of concern, that could be pointed out by the various models and update those mod- els on an annual basis or whatever it would take. It seems to me like now the stress testing is a game of ‘‘gotcha.’’ The models are not disclosed until the very last instance. And then are the models going to actually be useful? So I would hope that you would think along those lines, that you could assimilate it into part of the examination process, take the information and put it into several different models to see once if VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 16 there is a weakness somewhere in the bank’s business model. Does that make sense? Mr. POWELL. Yes. We are working hard to make the quantitative side of the test and the qualitative side more transparent to the public generally and to the firms, and we think that is a key inno- vation. We have a proposal out on that. Mr. LUETKEMEYER. And one of the things also with regards to international banks, I have had some visits from our friends across the pond recently. And so while I am a staunch advocate for cap- ital, I am also concerned about this notion that arbitrarily parking capital around the globe creates a safer financial system. The Fed started this trend with FBO rule, something I pointed out to Chair Yellen during her tenure. Now Europe is following suit with the immediate parent undertaking rule, which will hit the U.S. and ultimately U.K. banks. It seems as though we are finding ourselves in a global back and forth here with regards to capital. Would you agree with that? Or what are your comments? Mr. POWELL. I think we feel like our intermediate holding com- pany regulation is working. It has settled down now and it is work- ing. We have been consulted as Europe has looked at something similar to that. And I think the last time I checked we felt that our concerns were being reasonably well addressed. I will look back, though, to make sure that is right. Mr. LUETKEMEYER. One of the questions I got yesterday from a group of politicians from Europe, was with regards to equivalency. And I am not a big fan of that from the standpoint of with the equivalency rules and regulations, somebody wins and somebody loses. I am fearful that we are going to lose in that situation. So just to comment. Thank you very much for being here. I yield back. Chairman HENSARLING. The time of the gentleman has expired. The Chair now recognizes the gentleman from Missouri, Mr. Cleaver, Ranking Member of our Housing and Insurance Sub- committee. Mr. CLEAVER. Thank you, Mr. Chairman. And thank you for being here, Mr. Chairman. Last week we were here having a conversation with Secretary Mnuchin, and when I raised issues, they related to the fact that I represent a rural part of the State of Missouri. I had a townhall meeting in Higginsville, Missouri, 2 weeks ago and brought in the Canadian consul general to talk with the farm- ers in my district. Standing room crowd. Nobody in there supported what was going on. Some of the farmers were questioning whether they should allow the beans to just stay in the fields this year, because, as you prob- ably know, the price is continuing to fall since the tariffs were im- plemented. First of all, I am concerned about whether or not the harm could spread and do damage to the economy. I know you were asked a similar question earlier, but it stands to reason that if the soybean crop is damaged, as it apparently is, there has to be a rippling ef- fect. VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 17 And I am wondering, right now we are just talking mainly about some farm products from my State. I think China buys $60 billion a year in soybeans, just in soybeans, $60 billion from us, from the United States. If you just deal with the $60 billion, is there cause to be con- cerned about the damage that other parts of the economy could ex- perience? Mr. POWELL. The answer would be yes. You are just beginning to see the retaliatory tariffs come into place, they are only just be- ginning. And so we hear a few reports here and there about this company and that company. The agricultural patch is clearly very seriously affected, but it is just beginning. So I think you want to be careful to walk on this path because it may not be so easy to get off it. Mr. CLEAVER. I have a large rural part of my district, and then I have the largest city in the State, Kansas City, in my district. So I have talked about my farm problem. When I was mayor of Kan- sas City, I was successful in bringing Harley-Davidson to Kansas City, they built a plant, went up to 1,000 employees. We made an investment as a city. Of course, we are now facing the possibility of an empty building. But the steel tariffs are going to also have a rippling effect. The SmootHawley Act is credited with making the Depression even worse. But I am just wondering if you are not going to answer this question, I understand it, so it is almost a statement, I have to say it. So I think when decisions like this are made they probably should be made with the Legislative Branch of the Government be- cause the issues are too significant for one human being on the planet. I don’t care if it is a Democrat or Republican or a member of the Oakland Raiders. We are talking about the world economy being impacted and only one person has something to say. Frankly, Congress hasn’t spoken on issues like this since 1930. We have just been frozen out of the process on an issue that can impact the entire world. Thank you for listening to me. And I would also—just like to yield back, Mr. Chairman—I would also like to express appreciation that you speak English. When I was first elected to this committee a lot of people from the Fed didn’t speak English. Mr. POWELL. Thanks. Mr. CLEAVER. Thank you. Chairman HENSARLING. The Chair takes note that the Chairman of the Fed speaks English. The Chair now recognizes the gentleman from Michigan, Mr. Huizenga, Chairman of our Capital Markets Subcommittee. Mr. HUIZENGA. Thank you, Mr. Chairman. Chair Powell, good to see you again. And I think my friend from Missouri is very pleased for English versus economese or economistism or whatever you want to tag it with. But this clearly is some complicated stuff. I have a number of issues I want to hit on very briefly. And one of them is just a simple thing, something that we had talked about with the FEC, the FORM Act bill that I had proposed previously. VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 18 We had a provision that we had put in there that each Federal Re- serve Board Governor should be able to hire up to two senior staff members. And just wondering if you could maybe briefly comment on that or whether you have looked at that. Mr. POWELL. I think it is a good idea. Don’t need legislation on it. That is now the rule. Mr. HUIZENGA. All right. Well, good, we are making progress al- ready. As Chair of the Monetary Policy and Trade Subcommittee, I had worked on monetary policy and the effects of that. Now as Chair of the Capital Markets Subcommittee, we still see a lot of that tie- in in the world economy and the health of what is going on. I have real concerns about the Volcker rule situation. Last month the Fed, along with the other four Federal agencies, something that Mr. Quarles had called the five-headed hydra at one point. Had put some proposed rule changes in there. And my understanding is that the goal of the new rule is to sim- plify the regime and make it easier on the regulators, as well as the regulated institutions, to identify proprietary trading while al- lowing banks to continue providing important market-making ac- tivities. How do these reforms address the Volcker rule so that compli- ance can be streamlined, rules clarified, and markets actually made more efficient? Mr. POWELL. I think for the smaller institutions we will be streamlining quite a lot. Let me say, this rule is out for comment and we are very, very open to better ideas, how to do this better. But we want to stay faithful to Congress’ intent, which is, these institutions, particu- larly the largest ones, should not have big proprietary trading busi- nesses, shouldn’t be doing proprietary trading as a business line. Mr. HUIZENGA. I look forward to continuing to explore how the Fed and FOMC will be properly tailoring the Volcker rule. How- ever, I have been hearing some complaints from some companies that the proposed rule, as introduced, has a new concept of using accounting rules to identify prop trading, which were not included in the original Volcker rule. I have been told that this could actu- ally result in more activities getting caught up in the Volcker re- gime than there are pulled in today. Can you please tell me how that result, to simplify the rule, ap- pears to make it actually a little more cumbersome and complex? Again, my understanding is a new metrics regime could result in a roughly 50 percent increase in metrics reporting by the banks subject to the rule. Mr. POWELL. That is not the intent at all. And I assume we are going to see those comments through the comment process, and be- lieve me, we will give them careful consideration. Mr. HUIZENGA. OK. And we are wide-ranging and far afield here on a number of issues. My next issue, on page 39 in your report you had your chart about the rules. You mentioned this on page 5 of your testimony. You gave an update on monetary rule. This is a quote from your July Monetary Policy Report, gives an update on monetary policy rules and their role in our policy discussions. VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 19 I understand you have a series of rules that you reference as you are moving forward, including the Taylor rule, the adjusted, the Taylor rule as it is. What is the balanced approach rule? I am not familiar with that. The balanced approach rule would have called for the most nega- tive interest rates during the downturn. Could you unpack that a little bit? Mr. POWELL. So each of the rules have an estimate of the neutral rate inflation, they have how far you are away from your inflation target and how far you are away from your unemployment target or your slack target. What the balance rule does is, it doubles the coefficient on the slack target. So in this case unemployment. So the weighting is doubled. That is all it is. Mr. HUIZENGA. And then real quickly, Chairman Barr had talked about the yield curve flattening. And I am wondering if there could be a circumstance when what might be good for the Federal Gov- ernment, lower interest rates long term as we deal with our na- tional debt load payments, frankly, might that not necessarily be beneficial for the overall economy? Mr. POWELL. We are concerned with carrying out the mandate you have given us, which is maximum employment, stable prices, financial stability. We are not concerned with fiscal. Mr. HUIZENGA. Do you have discretion as to whether to sell short-term versus long-term? Mr. POWELL. Sure. Mr. HUIZENGA. OK. And if you sell long— Mr. POWELL. So we are not selling anything. We don’t sell any assets. We let them mature. Mr. HUIZENGA. OK. I will have to follow up with some written on that, because I am curious, if you did sell those long terms could the long-term rate go up. Thank you, Mr. Chairman. Chairman HENSARLING. The time of the gentleman has expired. The Chair now recognizes the gentleman from Connecticut, Mr. Himes. Mr. HIMES. Thank you, Mr. Chairman. Chairman Powell, welcome. It is a pleasure for me to have this opportunity to chat with you. It is something I hope we can do on an ongoing basis in the future. I want to use my 5 minutes to ask you about two specific risks and for your elaboration thereon. The first one is related to finan- cial stability and stability in the overall financial system. I watched carefully the conversation you had with Senators Warren and Brown about capital. I am actually interested in hearing you for a couple of minutes, because I do have two questions, elaborate on risks that we might not see coming, that aren’t conventional capital risks. So my concern of course is that we tend to get hit by the bullets that we don’t see, and while we are focused on Volcker rule or cap- ital, what happens, what comes upon us out of nowhere. These things tend to come with a speed and severity that we don’t pre- dict. VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 20 So what keeps you up at night that is not conventional capital ratio type issues? Is it student loans? Is it proprietary trading? Is it ETFs? Elaborate for me, if you would, on things that concern you with respect to stability in the banking system in particular. Mr. POWELL. The clear answer to me from that would be cyber risk. We have spent 10 years building up capital, helping the banks be much more conscious of their risks, building up liquidity, stress testing all those things. And we have a really good playbook there. I think we carefully monitor all of the things that you mentioned, although some of them are worth talking about as well right now. But the thing that is really hard, is the idea of a successful cyber attack. And we work hard on having a plan for that. The Adminis- tration plays a leading role in that. That would be the big one. I think if you turn to traditional financial stability, we think that risks are at the normal/moderate level. You see some high asset prices. You don’t see high leverage among households or among banks. You do see a little bit of high leverage in nonfinancial corporates, and that is something we are watching very carefully. But again, nothing really is flashing red in our observation of it in the financial market. Mr. HIMES. Let me ask you to elaborate. You said there are some worth talking about, and then you highlighted asset prices. Which category of assets in particular were you? Mr. POWELL. Just generally, you have had 10 years, almost 10 years of low interest rates and we are in the process of normalizing policy. Bond prices are high, equity prices—broadly speaking, com- mercial real estate prices are in the upper range, generally ele- vated. I wouldn’t use the bubble word here, but I would say that many financial asset prices are elevated above their normal ranges and we will have to see. Mr. HIMES. With respect to cybersecurity, which is where you started, what would you recommend to this body that we do as you do your reviews and whatnot, within the banking industry, what should Congress do to assist in the process of addressing cybersecurity risk? Mr. POWELL. I would say as much as possible, and then double it. So we do a great deal and it is about making sure the banks have basic plans in mind. A lot of it is just basic cyber hygiene and making sure that your systems, you are implementing the latest things that come out. So—and I think planning for failure too is very important. That is what we do. We do everything we can to prevent a failure, but then you have to ask yourselves, OK, what would we do if there were a successful cyber attack. You have to have a plan for that too. So those are the things we are working on. Mr. HIMES. OK. Let me ask you another category of risk that is maybe a little bit more sensitive. But like so many people, I scruti- nize the words in this report—my words, not yours—very bullish on the economy. Careful on inflation. You note that inflation has moved up. Our challenge will be to keep it there. I am reflecting on where we have been in the last 10 years in that regard. We saw a pretty substantial fiscal stimulus in 2009. VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 21 My friends on the other side of the aisle completely rejected Keynesian economics at the time and said that wasn’t going to work. They then had an epiphany and embraced Keynesian eco- nomics around a $2 trillion deficit-financed fiscal tax cut at a time in which the economy was growing robustly. It has been a long time since I studied economics, but stimulus in the face of a robust economy concerns me from the angle of inflation. You say that the 2 percent objective is symmetric in the sense of your concern. How would you divide the probability that we see upward trending inflation versus downward trending inflation going forward from this point? Mr. POWELL. I would say it is roughly balanced. I think maybe slightly more worried about lower inflation still. But I think, for a long time, inflation was below target and we were pushing it. We have now just about reached a symmetric 2 percent objective, so it is very close. And I think from this point forward the risks are roughly balanced. Mr. HIMES. Thank you. Thank you, Mr. Chairman. Chairman HENSARLING. The time of the gentleman has expired. The Chair now recognizes the gentleman from North Carolina, Mr. McHenry, Vice Chair of the committee. Mr. MCHENRY. Well, Chair Powell, thank you for being here. I want to shift to cryptocurrency, which is a bit of your monetary policy hat, but also a bit of your regulatory hat. And I want to get your thinking along the lines of cryptocurrency. So the Bank of International Settlements just released a report saying that cryptocurrencies were, quote: ‘‘a poor substitute for the solid institutional backing of money.’’ You have stated publicly that cryptocurrencies are currently not big enough yet to matter, or something along those lines. I would submit the report by the Bank of International Settlements misses the mark of the potential of blockchain, the potential of crypto, more broadly, but there is a great deal of interest in your views and Central Bank’s views more broadly on cryptocurrency. So can you just outline to me your thinking on cryptocurrency? Mr. POWELL. Sure. So, first, I would say I think the question I was asked that you are referring to was, do cryptocurrencies cur- rently present a serious financial stability threat. And my answer was they are not big enough to do that yet. Mr. MCHENRY. Sure. Mr. POWELL. That is really what I was saying, not that they are not a longer term thing. So they are very challenging because cryptocurrencies are great if you are trying to hide money or if you are trying to launder money. So we have to be very conscious of that. I think there are also significant investor risks. Investors, relatively unsophisticated investors, see the asset going up in price and they think, this is great, I will buy this. In fact, there is no promise behind that. It is not really a currency. It doesn’t really have any intrinsic value. So I think there are in- vestor or consumer protection issues as well. Another thing I will say is that we are not looking at this, at the Fed, as something that we should be doing, that the Fed would do a digital currency. That is not something we are looking at. VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 22 So mainly, I have concerns. If you think about what currencies do, they are supposed to be a means of payment and a store of value, basically. And cryptocurrencies, they are not really used very much in payment. Typically, people sell their cryptocurrencies and then pay in dollars. In terms of a store value, look at the volatility. And it is just not there. Mr. MCHENRY. Well, has there been discussion with other G7 central banks along the lines of cryptocurrency? Mr. POWELL. It comes up a lot, yes. I am only just starting to go to G7 meetings, but it comes up quite a bit in international fo- rums of various kinds. There is a broad concern that the public needs to be well in- formed about this, again, the money laundering and terrorist fi- nancing and all of that is a big risk. Mr. MCHENRY. It is a big risk, but is there any conclusion that you are hearing or is it just a broad concern? Mr. POWELL. Well, I think the BIS report and others have called out these risks and called on the appropriate regulatory bodies to address them. We don’t have jurisdiction over cryptocurrency. We have jurisdic- tion over banks. And so we know in their activities with cryptocurrency companies and cryptocurrency, we can address that. The SEC can address the investor protection aspects of it. Mr. MCHENRY. But you don’t see this as impairing your ability to act on monetary policy just given the current shape and scope of the size of the market? Mr. POWELL. Really not at all today. Mr. MCHENRY. OK. We currently have some level of framework around regulation of cryptocurrency. You have a money service li- cense at the State level. In our 50 States, they all have some re- quirement. So there is a great look into that conversion, the move- ment of cash into cryptocurrency or out of cryptocurrency back into cash. We have some element of regulation of the CFTC and the SEC. So there is some broad framework of it, but not a concerted effort by the Federal Government to understand what is happening in cryptocurrency. Do you have any staff resources devoted to figuring out cryptocurrency or following cryptocurrency? Mr. POWELL. Yes. So we have looked at it carefully. I spoke about it. Other Governors have spoken about it, Reserve Bank presidents. Certainly, we have work going on. But, again, we just don’t have regulatory authority to deal with it, so I think that is the key thing, is to be looking at the places where there is that regulatory authority. Mr. MCHENRY. Thank you, Chairman. Chairman HENSARLING. The gentleman yields back. The Chair now recognizes the gentleman from California, Mr. Vargas. Mr. VARGAS. Thank you, Mr. Chair. First of all, I would like to thank you for one thing that is obvi- ous, and that is that you haven’t gotten yourself in trouble. You have been a great public servant, and I really appreciate that. Mr. POWELL. Thank you. VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 23 Mr. VARGAS. Unfortunately, you shouldn’t have to say that these days, but you really do, with what we have seen recently. I do want to ask a little more about cryptocurrency, however. You talked about terrorism and you also talked about hiding money. I had a bill here with a colleague of mine on the other side ex- actly on that point. And I would like you to go a little deeper on that. You said it is not an issue yet because it is not large enough, but it does seem to be growing. And you said you also have jurisdiction, you have jurisdiction over the banks. Should you have jurisdiction here, cryptocurrency? Mr. POWELL. That is a deep question. We are not seeking it. Mr. VARGAS. But should you? Mr. POWELL. I am not going to say yes today. We are not looking to—it is right in the middle of the SEC’s turf, the investor protec- tion aspects of it. I think, Treasury and FinCen and other people have—I think it should be well regulated. I don’t really see us as probably the right group to do that. Mr. VARGAS. But it seems to me right now, that no one seems to have quite a hold on it either. It seems to be this amorphous blob that is moving around. You talk to the SEC and they, at the same time, kick the ball around also. Shouldn’t there be a more concerted effort to try to figure out who is in charge here of cryptocurrency? Because I think that there are lots of opportunities here for, not only terrorism, but also for drug trafficking, sexual exploitation, human trafficking. You said terrorism, but all sorts of bad actors can use this. And I don’t think that we have a good hold on it yet. Mr. POWELL. I think it is a good idea to focus on getting the reg- ulation at the Federal level of this right. Again, we are not seeking that at the Fed. And I know Treasury has done some thinking on this. This would be an area where they would have the lead to identify the right regulatory structure. They may have already pub- lished something on this. I am not sure. Mr. VARGAS. In fact, part of the bill asks them to speed that up and to report back to us. I do want to ask you also about the issue of wage increases. You said that there has been some movement upwards, 2 percent, 3 percent. I think you said 3 percent, so it is beating inflation. But the question was then specifically on people of color, African Ameri- cans and Latinos. You said you had some breakout numbers for those. Mr. POWELL. Not handy, I don’t. I can get those for you. Mr. VARGAS. OK. I would be interested in that, because I see the same situation in California where you have people that have been underemployed working very, very hard, two and three jobs, and they continue to say that they haven’t seen that wage increase yet. We have seen, for sure—I think you are correct about the unem- ployment go down, but we haven’t seen yet, certainly not in my dis- trict in any measurable way, the increases in wages. Mr. POWELL. Wages in general have been somewhat slow in mov- ing up and as the labor market has tightened. We understand that really matters to people, people’s lives a lot. VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 24 Mr. VARGAS. Yes. Mr. POWELL. And we do see the moving up in the aggregate, but I will be happy to supply. Mr. VARGAS. You said there was an issue of productivity, because maybe this time the reason the rates haven’t increased as much is because of productivity. Could you talk about that for a second? Mr. POWELL. Sure. So over a long period of time, wages really can’t forever go up faster than productivity. Productivity is slow, but there is a reason for that. And that is, after the financial crisis—there are many reasons for it—after the financial crisis, though, companies didn’t invest much because there was no need to or there wasn’t demand, the economy was weak. And so weak investment casts a shadow over productivity growth for a number of years. So we are still—investment has now popped up. Investment was strong in 2017. That continues in 2018. That is really important, and we are glad to see it, but it may take some time to show up in higher productivity. It is not because people aren’t working harder. It is because you need those information technology and other tools to be more productive. Mr. VARGAS. And again, with the last moments that I have, I just want to thank you again. The way you have comported yourself, the way you have been open to talking to people, the confidence that we have in you. I think the American people really need, at the moment, someone like yourself that we can look up to and say you are not involved in any scandal, you are not involved in any other thing out there that would lose confidence. It is just the oppo- site. And I want to appreciate that and thank you for that. Mr. POWELL. Thank you, sir. I will try to live up to that. Mr. VARGAS. I hope you do. Chairman HENSARLING. The gentleman yields back. The Chair now recognizes the gentleman from Wisconsin, Mr. Duffy, Chairman of our Housing and Insurance Subcommittee. Mr. DUFFY. Thank you, Mr. Chairman. And thank you, Mr. Powell. Some of my colleagues on the other side of the aisle have discussed harmful economic policies. Some in their opening statements, specifically. So if you look at the harmful economic policies that have taken hold over the last year and a half, so President Trump has worked hard to streamline and reduce regulation. We had a historic tax cut. We have tried to rebuild our military. We have pushed for American energy independence. When you take together all of, I would quote, ‘‘those harmful eco- nomic policies, what has that actually done for the African-Amer- ican unemployment rate in America?’’ Mr. POWELL. As I mentioned, I think— Mr. DUFFY. Is it going up? Mr. POWELL. It is going down significantly. Mr. DUFFY. Say that one more time. What has happened to Afri- can-American unemployment? Mr. POWELL. It is come down quite a bit. Mr. DUFFY. It is come down quite a bit. How about the Hispanic unemployment rate? Has that gone up under these harmful economic policies? VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 25 Mr. POWELL. It has come down quite a bit. Mr. DUFFY. It has come down quite a bit. So is it fair to say these policies actually aren’t harmful? They are actually growing the economy. They are putting people back to work. Is that a fair assessment, Mr. Powell? Mr. POWELL. It is fair to say that the unemployment rates are very low and a lot of things go into that. Mr. DUFFY. So you wouldn’t say today that it has anything to do with regulation or tax? Mr. POWELL. I am reluctant to get into the credit assignment game. It is really not up to us. I can report on the economy, but I do think that— Mr. DUFFY. But you report on the economy and you look at all the different factors that come into play in the economy. Mr. POWELL. Yes. Mr. DUFFY. So have these factors had anything to do with the growth that you have seen in this economy? Mr. POWELL. So I attribute declining unemployment to positive surveys among businesses, really they feel good about the business climate. Mr. DUFFY. Why do they feel better about their businesses, Mr. Chairman? Because they get to keep a little more of their money? Is that possible, maybe? How about if instead of having to navigate government rules and regulations, they actually get to focus on running their business. Could that attribute to the positive view they have on the economy and their businesses? Mr. POWELL. I think you have seen very positive business con- fidence surveys. Mr. DUFFY. So I will take it that you are not going to answer my question. I understand the position and what you said. I want to talk to you about trade. I am a free trader like you are. I think free trade is great for our economy. But I also think that if you don’t have fair trade, if you have deals with places like China where you have American companies that invest millions or billions of dollars in their technology and you do business with China and they steal it from you, and/or they subsidize their com- panies that come and do business in America where we have, for the most part, free trade ourselves, where we actually can’t—they have barriers to American-produced goods, how long does that rela- tionship last where our economy is open and theirs is closed? Does that set us up for a long-term successful economy as it relates to China? Mr. POWELL. I strongly agree with you that trade needs to be fair as well as free. Mr. DUFFY. Is it fair now? Mr. POWELL. Well, I think—so if you look at the rules-based post- war system, it has consistently resulted in lower and lower trade barriers. Mr. DUFFY. No. Our relationship with China, is it a fair trade— do we have a fair trade relationship with China? VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 26 Mr. POWELL. I think it is very clear that some countries, and China in particular, have less open trading systems than we would like. Mr. DUFFY. It is not fair. Mr. POWELL. And it is inappropriate for us to address that. Mr. DUFFY. And so do you think it is easier to deal with China 15 years from now when their economy is that much larger and stronger or maybe their military is larger and stronger than it is today? Mr. POWELL. That is really a judgment for the people who have responsibility for trade. Mr. DUFFY. I would agree with that. I am going to quickly turn to the President’s America First pol- icy. Do you agree with that? Mr. POWELL. Maybe you could be more specific. Mr. DUFFY. Do you think we should put American interest first? Do you think we should look out for the global interest or American interest? Mr. POWELL. We work under a statute that has us focused on maximum employment and stable prices here in America. Mr. DUFFY. Maximum employment for Americans, not for the globe. Mr. POWELL. Here in America. Mr. DUFFY. So we are looking out for Americans. Mr. POWELL. Of course, we live in a global economy where the global economy affects that. Mr. DUFFY. That is true. But we go to the global economy, but always how it affects our own— Mr. POWELL. Entirely domestic. Our goals are entirely domestic. Mr. DUFFY. Do you believe the U.S. insurance companies are well capitalized and solvent today? Mr. POWELL. Yes. Mr. DUFFY. Do you believe that our system of regulating Amer- ican insurers has worked well over the last 150 years? Mr. POWELL. I can speak to the last decade or so, and I would say yes. Mr. DUFFY. Pretty good, huh? Mr. POWELL. Yes. Mr. DUFFY. So would you agree that we should not enter into any international agreement or standards that would undermine our U.S. insurance regulatory system, State-based model? Mr. POWELL. Yes, I would. Mr. DUFFY. Great. My time is up. I yield back. Chairman HENSARLING. The time of the gentleman has expired. The Chair now recognizes the gentleman from California, Mr. Sherman. Mr. SHERMAN. I commend the gentleman from Wisconsin and the Chair of the Fed for their comments about insurance. And I will probably disagree with many other things. Thank you once again for returning where you will be inde- pendent and accountable, tall and short, the Fed plays an inter- esting role. First as to cryptocurrencies. You and we should have the courage to ban them. As an investment, they are an investment with no in- VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 27 vestor protection, and they take the animal spirits, the willingness to invest, divert them from the real economy, and instead engage in what is basically gambling. Many jurisdictions support gambling only if there is local taxation, but cryptocurrencies don’t pay gam- bling taxes. As a medium of exchange, cryptocurrencies offer no advantages over regular currencies, unless you are a terrorist, a narcotics deal- er, or a tax evader. There is no positive role for us for cryptocurrencies. A lot of discussion in here about who deserves credit for the good economy. Let me point out, since Dodd-Frank, 17 million jobs have been created; 15 million of them under Obama, 2 million under Trump. That is 15 million, 2 million. That’s the right ratio. Now, the Trump Administration claims credit for the last 3 months of the Obama Presidency, but Obama was actually presi- dent until January 2017, but his policies remained in force all through 2017. Dodd-Frank, Janet Yellen’s balance sheet, and Obama tax policies were in force until the beginning of this year. And in fact, the Fed policies and the securities regulation remained pretty much unchanged since the Obama Administration. The chairman of this committee urges you to abandon all of the unconventional tools, while taking credit for the good economy that is in part a result of your unconventional tools. I would say keep your balance sheet as big as it was when we achieved the economic growth that is so good that Democrats and Republicans are fighting over who gets credit, and certainly do not cut your balance sheet until Chairman Hensarling tells you how he is going to increase taxes to replace the $80 billion of profit you gave us last year because you had a big balance sheet. The Chair talks about the inflation rate, the Chair of this com- mittee. You ought to have a goal of 2–1/2 percent, not 2 percent. The law that we passed in 1978 draws a 3 percent objective or maximum for inflation and for unemployment. So unemployment is still too high and inflation is too low, and if we have a looser eco- nomic policy, maybe we will get somewhat higher inflation and the labor shortage necessary to increase wages. He puts forward the idea that somebody would save for their daughter’s college education by putting money aside in a mattress where its value would decline by 30 percent by the time his young girl got to college. I would say if you are smart enough to save for college education once your daughter is born, you are probably smart enough to in- vest the money in something that grows faster than inflation. As to trade, my party suffers from Trump derangement syn- drome which is, whatever Trump does, we have to be the opposite. The fact is China launched this trade war against us in the year 2000, right after two-thirds of Democrats voted against giving China most favored nation status. We were right then; we shouldn’t change now. There are those who say that trade deficits don’t have a harm. They lead to hollowed-out manufacturing, which leads to manufac- turing towns where you have opioids, alcoholism, and votes for Donald Trump. Three terrible scourges that hit the Midwest. VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 28 As to your testimony, Mr. Chairman, you say that wages are growing a little faster than they did a few years ago. That is nomi- nal wages. Real wages, if anything, have stagnated over the last year, depending upon your measure of inflation. One more reason for a looser monetary policy, faster economic growth. And believe it or not, I have a question, that is, LIBOR was tainted by scandal. You have the alternative reference rates com- mittee. Most of the LIBOR referenced debt is derivatives, but what really matters to people is mortgages. And what are you going to do to make sure that the new benchmark doesn’t increase mortgage bargaining costs or disrupt the mortgage market? That is the one question. Mr. POWELL. That is a great question. So you are right, many, many mortgages reference LIBOR. LIBOR is a rate that is under a lot of pressure. It may not be there in 3 or 4 years, so there is a big move to find a good backup. We have identified a backup, and it is not designed to represent an increase at all in people’s mort- gage costs. Rather, it is designed to represent just a more sustain- able rate that will always be there and less volatile and more pre- dictable, more reliable. Mr. SHERMAN. And it will be as good for mortgages as it is for derivatives? Mr. POWELL. Yes. Mr. SHERMAN. Good. Mr. BARR. [presiding]. The gentleman’s time has expired. The Chair recognizes the gentlelady from Missouri, the Chair of the Oversight and Investigation Subcommittee, Mrs. Wagner. Mrs. WAGNER. Thank you. I thank the Chair. And welcome, Chairman Powell. In comments that you made shortly after being sworn in as Chairman of the Federal Reserve, you noted that you were com- mitted to, and I quote: ‘‘explaining what we are doing and why we are doing it, and will continue to pursue ways to improve trans- parency both in monetary policy and in regulation.’’ Sir, how much value do you place on being as open and trans- parent as possible so that, not only Congress, but the American people understand the decisions the Fed is making, why they are making those decisions? I am just interested in what that kind of transparency and openness looks like. Mr. POWELL. I think it is our obligation to explain ourselves. What we do is very important, sometimes not well understood. And it is really on us to explain what we are doing with financial regu- lation and monetary policy. We have this precious grant of independence. We have to earn it by being accountable, and the way we do that is through lots and lots of transparency. I see myself as following in the footsteps of three prior chairmen who worked on this: Greenspan, Bernanke, and Yellen. Mrs. WAGNER. When you say transparency, what are we talking about in a specific fashion? Mr. POWELL. So we doubled the number of press conferences. Mrs. WAGNER. OK. Mr. POWELL. I will have a press conference after every FOMC meeting. That is, in monetary policy, that is a way for me to get VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 29 out and talk about what the committee did at each meeting and communicate to the public in a comprehensible way. I have also focused very much on communicating in terms that people can understand generally, not just economists. There is a very small professional audience that understands what we do very, very well—economists on Wall Street. And I think the rest of the country needs to be let in on this too, and I am trying very hard to do that. Mrs. WAGNER. I absolutely agree, especially in this era where we have a savings crisis and people need to understand the move- ments that you make as Fed Chair, how it relates to monetary pol- icy and how it affects them and how they invest for their future. So I absolutely applaud your efforts in terms of press con- ferences, but also trying to shape the vernacular so that everyday low- and middle-income investors and savers in this country can understand what your policy actually means to them personally. In 2012, the Fed dealt with a leak of confidential information re- lating to the deliberation of the Federal Open Market Committee, FOMC. Access to that information is valuable to markets and in- vestors because the Fed does not make clear what it is likely to do in the future. The committee believes that a monetary policy rule would pro- vide the public transparency into future monetary policy decisions and eliminate the value of leaks. Again, you have talked a lot about being transparent, and we have discussed it here previously, but you are the new boss. And what is going to change on the issue of securing some of that con- fidential information and transparency to prevent this going for- ward? And then also, when will the board improve its internal gov- ernance, so episodes like these don’t repeat themselves, sir? Mr. POWELL. We take the confidentiality of our deliberations very, very seriously as you, I am sure, know and would imagine. We remind every person who has access to FOMC information, in- cluding all the participants, but also all the staff every year have to review those rules, have to signify that they understand, have read them, and are bound by them. So we do all of the things we can humanly think of to make sure that people understand their obligations to confidentiality. And I think— Mrs. WAGNER. If I could interrupt, sir, as Chairman of the Over- sight and Investigation Committee, we have looked into this spe- cific leak. We have had difficulty receiving specific information about your internal governance and exactly how it is that we make sure these episodes don’t repeat themselves. I would like your brief comments on that, and also want to work with you to make sure that we are receiving the information in our role of oversight and investigation into these kinds of matters. Mr. POWELL. I will be happy to take that offline and talk to you about it. I don’t know what you are referring to about information you can’t get. Obviously, there is a lot of confidential information that we don’t release that we try to protect, but in terms of our proce- dures and the kinds of things that we do, I would think that is the kind of thing we— VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 30 Mrs. WAGNER. Specific to improvements of internal governance, I believe, so— Mr. POWELL. OK. Mrs. WAGNER. I thank you. I look forward to following up with you. Mr. Chair, I yield back the remainder of my time. Mr. BARR. [presiding]. The gentlelady’s time has expired. The Chair now recognizes the gentleman from Georgia, Mr. Scott. Mr. SCOTT. Thank you, Mr. Chairman. Chairman Powell, welcome back again. And I want to thank you for spending some private time with me. We had a wonderful dis- cussion and covered a lot of territory when you were here last. But I watched your testimony over in the Senate yesterday, and I want to clarify something with you. You talked about the regional banks, those banks that are between $100 billion and $200 billion in range. And you talked about Senate bill 2155, which I supported very strongly, and we got good support on, in terms of the banking regulations. But in Senate bill 2155, we gave you, the Fed, substantial au- thority through rulemaking to tailor regulations for these mid-sized banks, for these important regional banks. And I watched the testimony, and you reassured the Senators that the Fed wasn’t going to just flip the switch off on a bunch of the enhanced prudential standards, but instead would diligently work through a thoughtful and careful rulemaking. And I was very pleased to hear that. But I want to get some clarifying information from you. Because Georgia, as you may know, is the home of a couple of these very important regional banks: Regents Bank and SunTrust Bank. And the question is, do you envision the end product of this thoughtful and diligent rulemaking process to be a set of enhanced prudential regulations to the SIFI banks that is drastically dif- ferent than those of the G-SIBs or the global banks? Mr. POWELL. I anticipate that we will begin by identifying and then putting out for comment a framework that we will use to as- sess financial stability and safety and soundness risks of those in- stitutions from $250 billion down to $100 billion. And then we will take comment on that and then we will go ahead and move forward with a framework. And I anticipate that many of the factors that are used to iden- tify the SIFIs will be used in this context as well. We are still working on exactly how to think about it. We have great flexibility under the law, which we appreciate, and we will be coming forward with something on this pretty quickly, I think. Mr. SCOTT. Do you see any problem areas that these mid-size banks or regional banks might have to be concerned about? Or do you see a clear field here? Mr. POWELL. Well, I guess I would just say we are going to go ahead and do what the law asks us to do. I don’t see why anyone should be concerned about that. Mr. SCOTT. Good. Wonderful. That is good to hear. Those banks, all our banks are very important. But we have so many different VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 31 sizes, we have to make sure there is a level playing field for all of them. Now, let me ask you this question. One of your fellow Cabinet members was here, the Treasury Secretary. And we got into discus- sion on the trade situation. So I want to ask you a question that I asked him, and I am hoping I will get a different answer. And that is this: Are we or are we not in a trade war? Mr. POWELL. Let me say, of course, as an independent regulatory head, I am not a member of the Cabinet. And also, I am not at an independent agency that has any authority over trade, so— Mr. SCOTT. Yes, but the reason this is so important, you may not be a member of the Cabinet, but let’s face it, Chairman Powell, when you sneeze, Wall Street gets pneumonia. Mr. POWELL. It is better than the other way around. So on this, we do have responsibility for the economy, and to the extent we see— Mr. SCOTT. But my timing is coming up, I need an answer. Are we or are we not in a trade war? Mr. POWELL. It is just not for me to say. Sorry. Mr. SCOTT. Well, Mr. Powell, you are our anchor. You are, as the head of the Federal Reserve, the fulcrum of our economic system. And on top of that, I talked with you, and you are a very learned intelligent person, and you do have a very important opinion that the people of this Nation will want to hear from you. Are we are or are we not in a trade war? Mr. BARR. [presiding]. The gentleman’s time has expired. The Chair now will recognize the gentleman from Oklahoma, Mr. Lucas. Mr. LUCAS. Thank you, Mr. Chairman. Chairman Powell, you are my fourth Chairman of the Federal Reserve that I have had the opportunity to interact with as a mem- ber of this committee. And I have over time come to appreciate that the best use of my time perhaps is to focus on more specific issues since my friends are very broad sometimes in their inquiries of you. So I would like to ask you about the recent proposal the Fed re- leased with other agencies regarding the Volcker rule. And while a great deal of attention has been paid to proprietary trading re- strictions, I would like to focus on the manner in which banks have been restricted from making long-term investments in small busi- nesses, startups, merging growth sectors as a result of the covered funds provisions. I can understand that the agencies want to ensure that banks cannot evade the trading restrictions of the Volcker rule through certain private funds, but I am concerned that the agency’s inter- pretation of the restrictions on investing in funds that facilitate capital formation has resulted in prohibitions on an activity that we want banks to engage in, such as making long-term invest- ments in American companies to help them grow. These restrictions cut off as a source of capital where they are both needed and important to economic growth. And I will note that the venture capital groups also share my reservations, and Comptroller Otting testified last month that bank lending provided key funding to small businesses by investing in these funds. VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 32 Do you have any plans to modify the scope of the restrictions on banks’ long-term investments in covered funds so that the banks are able to serve as an important source of capital to these funds? Mr. POWELL. We put out that proposal and we are very eager to hear comments on that. I think we are bound by what the statute says, but within that, we don’t see it as an activity that typically threatens safety and soundness. We would be willing to do what- ever we can within the statutory language and intent to accommo- date that activity. Mr. LUCAS. I am going to define that as a very positive answer. And in the respect for my colleagues, yield back the balance of my time, Mr. Chairman, while I am ahead. Mr. BARR. [presiding]. The gentleman yields back. The Chair now recognizes the gentleman from Texas, Mr. Green. Mr. GREEN. Thank you, Mr. Chairman. I thank the Ranking Member as well, and welcome the Chair back to the committee. I want to thank you for this effort that you are making to talk to Members of Congress. I think it is important for you to hear from us, and I appreciate greatly your outreach. Also appreciative that you have made some reference to African-American unemploy- ment in your statement for the record. I think that is important as well. And like many, I salute the notion that African-American unem- ployment is low, comparatively speaking. But I still am concerned about the historic position that it continually occupies in that of being twice that of White unemployment, generally speaking. Sometimes a little bit less, sometimes a little bit more. And to this end, you and I will continue our interaction about this to see if there are some things we may be able to do collectively to have an impact. I want to move quickly to something related to the United State of Texas and tariffs. Texas is the 10th largest economy in the world. And based on GDP, it is, of course, our Nation’s top ex- porter. In Texas, we export 42 billion in goods to China, second only to Mexico. Half of the U.S. cotton exported to China comes from Texas. While you have not captioned it, you have not styled it as a trade war, I assume that you would say there is a dispute. And this trade dispute is having an impact on people in Texas. But I would like for you to give your thoughts on how it will impact middle class Americans, if you would. Mr. POWELL. Sure. So I think as it relates to China, it is appro- priate to address the problems with China’s trading regime as well. That is a very appropriate thing for the U.S. to do, and we have been doing it for a long time and I think it is something to carry on. Again, we are not in charge of trade, but I think it is hard to know exactly where this process goes. If it goes to a place where we lower trade barriers elsewhere and U.S. trade barriers go down, then it might be worth paying a little bit of a short-term price to get to that better place. Lower trade barriers, lower tariffs help our economy over time. They make for a better, more productive economy, higher incomes. VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 33 They don’t help every single group, and we need to do a better job of addressing the groups that are not helped by trade. I think if you go more broadly in a more protectionist direction over time, for a sustained period, that is bad for our economy. That will mean lower incomes and lower productivity and I just hope it doesn’t go in that direction. But I think it is hard to say where it goes from here. Mr. GREEN. Well, we do have Canada and European allies en- gaged in the dispute currently, so it is a little bit bigger than China. To what extent it will grow is, I suppose, to be seen. But given that it seems to be consuming other nations as well, how, again, will this impact middle class people, assuming that we con- tinue along the path that we are going? Mr. POWELL. I think an open trading system worldwide with low barriers is good generally. It creates rising incomes for middle class people and all different kinds of people, generally. Not every group is helped, though, and we know that for factory workers who lost their job over the years. And I think we need to do a better job of addressing those issues. Mr. GREEN. So is it fair to say that persons who have been tradi- tionally among those who are unemployed at a higher rate, that they will be impacted adversely to a greater extent? Mr. POWELL. I think that is probably right. I think the groups who are more at the margins of the labor force, at the lower end of the labor force in terms of compensation, things like that, who get hit the hardest in a downturn. So unemployment goes up the most for those people. And I think they tend to be the ones who are hardest hit by downturns, generally. Mr. GREEN. And for the record, I would simply add that it ap- pears that African Americans would probably be a part of that group. And I thank you for nodding. I yield back the balance of my time. Mr. BARR. [presiding]. The gentleman’s time has expired. The Chair now recognizes Mr. Stivers, from Ohio. Mr. STIVERS. Thank you, Mr. Chairman. Thank you for being here, Mr. Chair. We appreciate your ability to be very accessible to all of us. I know you were in my office. You have been in a lot of our offices. I appreciate that. This hearing today is about the state of the economy and mone- tary policy. And if you could just give me some true or false’s here, we will give a quick summary to people. Is it true or false, economic growth is 3.1 percent, the best in over 20 years? Mr. POWELL. I didn’t know where you have 3.1 percent, but it was 2 percent in the first quarter. It is going to be way higher than that next quarter. Mr. STIVERS. This quarter that is projected to be 3.1 percent? Or around that? Mr. POWELL. It is going to be higher than that. Mr. STIVERS. OK. Higher than that. Mr. POWELL. Projected to be higher than that. Mr. STIVERS. All right. So good economic growth, true? Mr. POWELL. Yes. True. Mr. STIVERS. Low unemployment, below 4 percent? VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 34 Mr. POWELL. It is at 4 percent today, projected to go lower. Mr. STIVERS. OK. Around 4 percent. Wage growth is increasing? Mr. POWELL. Has increased. Mr. STIVERS. Has increased. And we have stable prices? Mr. POWELL. We are close to our stable price mandate. Mr. STIVERS. Close to our stable prices. So as you think about the full employment mandate that you have, the Fed has historically used the unemployment rate. And over the last 10 years, what we have seen, although it is picked up a little bit lately, is a decline in the labor participation rate. Don’t you think that would be a better proxy for you to use when you compare the United States to the U.K. or Japan? Their labor participation rate is 5 to 7 points higher than ours among working- age people. Mr. POWELL. We say in our longer run statement of principles in monetary policy strategy that we actually look at a broad range of indicators to define maximum employment. And it is many, many measures of unemployment. It also includes labor force participa- tion. I would strongly agree with you that is a very important area of focus for us and I believe for you as well. It is an area where the United States has fallen behind other advanced economies, and it is an area where we need to do better. Mr. STIVERS. I think we need to transition there. There are lot of people left behind. And whether they are looking for work or not, we need to figure out how to get them moving toward the American dream. And I appreciate you being willing to look at that. Quickly on the Volcker rule, I just want to speak for middle America. We have a lot of banks in my district, medium-size banks, little banks. They are precluded from investing in our economy. They can loan to our economy, but they can’t invest in our econ- omy. The preponderance of the wealth that is invested in private equity and other things is on the coasts. If we were to—and I know it would require a statutory change— if we were to allow some of that investment to happen, but sepa- rately capitalize those funds at the banks so they can’t just come to the Fed funds window—that is the concern, I get it, and why the Volcker rule is there—it would really help middle America. I’m not asking to you comment on it, but I would love to work with you on that issue. Mr. POWELL. Great. We will do that. Mr. STIVERS. Quickly, a follow up from Mr. Himes on cyber pol- icy. With regard to the thing that keeps you up at night the most, I think everybody you regulate inside the financial system has in- centives that are aligned with behavior that works. Because the customer is limited to a $50 loss, the financial institutions have skin in the game. The problem is many other people in the cyber system, retailers and others, offload their financial risks while they have reputational risks to others, and it has become a jurisdictional fight between our committee and Energy and Commerce. I believe we need to change that. VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 35 And I think the way to do it is to use cyber insurance the way we used workers’ compensation insurance in the 1900s to improve worker safety. If we gave safe harbors for certain coverages and made sure the payouts aligned the incentives, I think you would be able to price a system, but you would have a dynamic system instead of naming standards and having them being out of date the next day. So we look forward to working with you on that. I don’t expect you to comment on that either since I am just throwing it at you right now, but I think it is a different way that maybe can break through our jurisdictional problem inside Con- gress. But I agree with you, it is one of the biggest threats that we have right now. And quickly, one last thing, and this is a question that I do want you to address. Because there have been some comments on the committee about stock buybacks and how they don’t do anything. But, I think it is important that we note that when a company de- cides to buy back stock, that money doesn’t just disappear into the wallets of wealthy people; it goes to work inside the corporation. It is their way of saying this is a better way to put our money at work. But when you look at stock ownership, many people in the mid- dle class have 401(k)s, and that money gets a better return for them as well as every other stockholder. So I guess the point is—and you have answered it a couple times, but just to be more clear, do you believe that stock buybacks can help the economy and the middle class, including 401(k) stock- holders? Mr. POWELL. I see stock buybacks as a way for companies to allo- cate funds that they don’t need in their own business through the capital markets to those who do need them. Mr. BARR. [presiding]. The gentleman’s time has expired. Mr. STIVERS. Thank you. I yield back. Mr. BARR. [presiding]. Thank you. And just as an announcement, the chairman has requested a brief break at noon. So we will recog- nize the gentleman from Minnesota and then take a recess for a few minutes. And now we recognize the gentleman from Minnesota, Mr. Ellison. Mr. ELLISON. Thank you. Good morning, Mr. Chairman. How are you doing? Mr. POWELL. Great, thanks. How are you? Mr. ELLISON. So there has been a little bit of discussion about whether or not real wages have gone up or going down. But I am just looking at what was reported by the Bureau of Labor Statistics yesterday. They said that the median weekly earnings of the Na- tion’s 116 million full-time wage salaried workers rose 2 percent on the year, but inflation was up 2.7 percent over the same time pe- riod. That says to me that the median full-time wages have actu- ally been falling in real terms for the past three quarters. Would you agree with my analysis? Mr. POWELL. Yes, as far as it goes. Mr. ELLISON. OK. So thank you. And I appreciate that, because that allows me to ask what I really want to know, which is why in such low unemployment do we have wages either stagnant or VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 36 even declining a little bit over the last three quarters? And I will just give you a minute or two to try to give me some under- standing—all of us. And it is not a setup question. It is a real question, because you would expect, with this level of low unemployment, we would see wages go up, but they are not. So what some of your observations as to why that is happening? Mr. POWELL. So if you look at a range of wages. Of course, there are four or five main ones, but there are many, many others, and they have differences. None of them is exactly right. And if you look at them, they have overall moved up from around 2 percent to pretty close to 3 percent now. That is good. We like to see— Mr. ELLISON. Nominally. Mr. POWELL. This is nominal. Yes, this is nominal. It is reported in nominal, not real. So that is a good thing. We like to see that moving up. I have said before, and I still think you would have expected, when unem- ployment moves from 10 percent to 4 percent, you might have ex- pected a little bit more in the way of increases. On the other hand, inflation has been—employers are looking at this through the lens of how much are prices going up. And the an- swer has been, inflation has been low. And also, how much more output am I getting? In other words, people should earn inflation plus productivity. Both of those have been low, through no fault of any worker. Mr. ELLISON. Now, Mr. Chairman, I hate this process because it makes me interrupt you. Mr. POWELL. I am sorry. Mr. ELLISON. And I appreciate what you are sharing, so I didn’t want to do that, but I think it has something to do with anti-com- petitive practices that we see across various sectors. For example, many of us have a piece of legislation to ban something called no- poaching agreements. Do you know what a no-poaching agreement is? Mr. POWELL. I do, yes. Mr. ELLISON. Could you describe in about 30 seconds for the folks listening what a no-poaching agreement is? Mr. POWELL. So, for example, you work at a fast-food outlet. As a condition of getting that job, you have to promise not to take a job at another fast-food outlet. It is probably unenforceable, but a worker working at a fast-food outlet doesn’t have the means to go to court and might not know to go to court. So it is a way of re- straining competition. And there is really nothing good to be said about it. Mr. ELLISON. Right. And to me, I think that Congress needs to be aggressive about this. Because if we are truly believing in free- market economics, the free market is being strained by these anti- competitive practices. This ought to be a bipartisan thing where we are together saying that if—you cannot, Mr. Employer or Ms. Em- ployer, have an agreement between yourselves that you will not hire each other’s employees if they go to you looking for a better wage or have a noncompete clause. VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 37 Mr. POWELL. I think just shining a light on it helps. By the way, you may have seen some of the big fast-food companies announce they won’t do that anymore. Mr. ELLISON. Well, because some Democratic attorneys general went after them, and they said, OK, we won’t do it, because they know they are going to be held accountable. But deeper than that I think is the fact that we have highly con- centrated markets these days. Can you talk about market con- centration in this particular economy? It seems like every industry you look at has highly concentrated markets. Look, for example, Amazon, how they are a dominating online retailer. If you look at search engines, look at what Amazon is doing. It could even be beer or pizza or chicken or whatever it is. It seems like the other side of a monopoly is a monopsony, with limited number of buyers of labor, which makes it easier for them to simply hold wages down. I wonder what you think about that. Mr. POWELL. It is true that we do see measures of concentration going up, but I think that the tech companies that come out and invent a new business, they are a special case. And it is hard to know how to think about that in terms of the traditional antitrust in other ways. It is not something I feel like there are really clear answers on yet. Mr. ELLISON. Would you consider having the research depart- ment at the Fed talk about concentrated markets and the impact on wages and the fact that they are growing very slow in an unex- pected way? Mr. POWELL. We will look into that. Mr. ELLISON. Thank you. Mr. BARR. [presiding]. The gentleman’s time has expired. And pursuant to the announcement just made, the committee stands in recess, subject to the call of the Chair. The Chair antici- pates that we will reconvene in 10 minutes. [Whereupon, at 11:57 a.m., the committee was recessed, subject to the call of the Chair.] Mr. BARR. [presiding]. The committee will come to order. The Chair now recognizes the gentleman from California, the gentleman of the Foreign Affairs Committee, Mr. Royce, for 5 min- utes. Mr. ROYCE. Thank you, Mr. Chairman. And let me ask this, Chairman Powell. Housing financial reform remains the great undone work of the financial crisis, and you have previously called for reform stating that we need to move to a sys- tem that attracts ample amounts of private capital to stand be- tween housing sector credit risk and the taxpayers. A nationalized mortgage market is an unsustainable status quo, obviously, from a moral hazard perspective on this thing. And sadly, the situation we find ourselves in today was a predictable one. In 2003, I introduced legislation, and again in 2005, which would have reigned in the GSEs, allowing them to be regulated at that time for systemic risk. Then Fed Chairman Greenspan backed the amendment, but it was not enough to overcome the outsized polit- ical pressure brought by the GSEs themselves. VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 38 To be fair, you said last summer that this was not a normal issue on which the Fed would comment, but that we were in a now or never moment for reform, as there is not a current risk with a healthy economy now in the housing system. How long with this now or never moment last? And what are the consequences of inac- tion on this? Mr. POWELL. I think now continues to be a good time to move forward on this. It is one of the big pieces of unfinished business from the crisis. It is unsustainable to have effectively the U.S. housing finance system on the government’s books for the long run and it’s not healthy. I don’t know how much long—we are going to need to address this. I assume we will at some point, and I would just say the soon- er the better. Mr. ROYCE. Let me ask you another question on this front. Chairman Greenspan often commented on the role of the GSEs in our economy. In 2004, in testimony before the Senate, he said: Con- cerns about systemic risk are appropriately focused on large, highly leveraged financial institutions such as the GSEs. To fend off pos- sible future systemic difficulties, which we assess as likely if the GSE expansion continues unabated, preventative actions are re- quired sooner, rather than later. Those were his words in 2004; ominous words no doubt. Today, pressure is being brought on the Administration to re- lease the GSEs out of conservatorship. Although I oppose this move, absent Congressional action, I am hopeful that if this were to occur, there is no doubt today that Fannie and Freddie, given their size and role in the housing market, would be regulated as systemically important. Do you share this view? Mr. POWELL. I—so the form in which this reform takes place will, of course, be up to you, not to us, and it is not in our lane. I would say I would really hope that these institutions would not be sys- temically important at some point. I would think when you figure out a process where they can be moved off the balance sheet, the idea would be that they would not present systemic risk, ideally. Mr. ROYCE. Let me move to another question, Chairman Powell. Earlier this year, this committee passed legislation that would re- verse the previous SEC rule requiring that certain money market funds float the NAV. I certainly remember when the Federal Re- serve fund broke the buck in 2008—I remember where I was when that occurred—and the massive backstop the U.S. taxpayers pro- vided to restart the entire market as a result of this and other fac- tors. The fact is that the value of the underlying assets of those prod- ucts fluctuate. They go up and down. As I said in opposition to the bill at the time, if we learned anything from the financial crisis, it should be that the price should reflect risk. While understanding this is the primary jurisdiction of the SEC and Chairman Clayton has already expressed his concerns, I was hoping, as a member of the FSOC and as someone uniquely positioned to comment on macro financial stability, that you could comment on any concerns with this potential move. VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 39 Mr. POWELL. I very much share your concerns. This was one of the many critical weaknesses identified in our financial system during the crisis. We worked hard to address it, I think success- fully, to some extent. And I would not like to see that undone. Mr. ROYCE. Chairman Powell, I am out of time. Thank you very much. Mr. BARR. [presiding]. The gentleman’s time has expired. The Chair now recognizes the gentleman from Illinois, Mr. Fos- ter. Mr. FOSTER. Thank you, Mr. Chairman. Chair Powell, the last time that you were here, I discussed with you a policy of countervailing currency purchases as a response when a country has been determined to be a currency manipulator. I believe that my staff has transferred to your staff the ideas from the Peterson Institute on the specifics of how countervailing cur- rency intervention may be an appropriate response. But I am actu- ally more concerned now about the currency manipulation than I have been. Obviously, President Trump has recklessly now begun a trade war with many of our trading partners, particularly with China. I think many of the countries that are on their currency manipula- tion watch list that gets reported every so often by Treasury have been either hit or threatened by tariffs. Some of these countries are going to run out of gas in terms of the products that they can im- pose retaliatory tariffs on, at which point I think it is quite likely that they will resume currency manipulation that they have done in the past. And China is probably top of my list on this, because they have— they will run out of gas fairly quickly. And the damage that has been done in the past by Chinese currency manipulation is enor- mous and one that many of my constituents have felt in their busi- nesses. And so I think it is more pressing than now that we actually have a response in place, ready to go, if and when any one of those countries, in particular China, resumes currency manipulation. Countervailing currency manipulation is something that can be done. I think it is an appropriate response and it can be done. And so I was wondering, has Treasury contacted you in any way with our suggestions that we have given to them on getting—hav- ing this take place? Because, obviously, a significant response would be a joint project between Treasury and the Federal Reserve. Mr. POWELL. The currency issues are entirely up to Treasury. I don’t know whether they have technically consulted with us about it or not. It is the first time hearing about it. Mr. FOSTER. OK. Well, anyway, so I encourage you to look into this. If you find that there is any legislative impediments to that, I believe the suggestion from the Peterson Institute is that if this goes forward, it would be a joint effort where the currency pur- chases would be jointly done by Treasury and the Fed. Mr. POWELL. We would just be implementing their decisions, though. We wouldn’t be making those decisions. Mr. FOSTER. Correct. But it is something that I hope that we are prepared for, because the risk of anything of a resumption of sig- VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 40 nificant currency manipulation has certainly gone up because of the Republican tariffs. And so I just want to flag that for you. Second, there has been some discussion in the previous testi- mony about wage growth and so on, and this plot that’s up here. Did you see the article in The Wall Street Journal a couple of days ago about how inflation is eating up workers’ wage increases? Yes. And this is essentially the plot from that showing that while work- ers wages were out—during the Obama era, workers wages were modestly outstripping inflation; that is no longer true in the Trump era that things like the massive tax cut for the wealthy and the deficit spending have driven inflation more than they have driven wages. As a result, for wage earners, the situation has not im- proved. That is in great contrast to the situation for CEOs and so on who have seen their compensation go up way faster than infla- tion. And so there was an announcement by the Federal Reserve, I guess a month or so ago, that the historic milestone of household net worth exceeding $100 trillion, which I think it was a very inter- esting milestone in the recovery itself from, I believe, around $55- or $60 trillion during the deficit of the crisis. And so it is a real milestone, but that is an aggregate number. And so one of the things we are seeing more and more is a diver- gence between average numbers when you average in the results of the very wealthy with numbers like this, which is the wages for wage earners where the situation is very different. What I would like to urge you to do is when you report, for example, household net worth, to report it not only as an aggregate but as quintiles or top 1 percent, top 10 percent, and to report this on a quarterly basis the same way you report the aggregate number. I think it would really illuminate a lot of where our economy is going. And I would like to see that in the next report and future reports, if that is possible. Mr. POWELL. I will look into that. Mr. FOSTER. All right. Well, thanks much. Chairman HENSARLING. The time of the gentleman has expired. The Chair now recognizes the gentleman from New Mexico, Mr. Pearce, Chairman of our Terrorism and Illicit Finance Sub- committee. Mr. PEARCE. Thank you, Mr. Chairman. Mr. Chairman, I appreciate you being here today and your lead- ership on the economic front for the country. So you had given tes- timony yesterday or whenever to the Senate about the effect of opioids and the labor force participation rate. Can you walk through that briefly for me? Mr. POWELL. Yes. Well, labor force participation by prime age males has been declining for 60 years. It has been declining for fe- males for maybe the last 15, 20 years in the United States. We stand out compared to other countries. So many things that hap- pened in the economy are global. This is really something that we have. A significant number of those in their prime working years who are not in the labor force, close to half I think in that one estimate was 44 percent, are taking painkillers of some kind, which is the opioid crisis to some extent. So there are many, many people who VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 41 are out there in their prime working years, not in the labor force. We would all be better off if they were in the labor force, including them. And part of the reason they are not is the drug issue. Mr. PEARCE. The problem is especially egregious in much of New Mexico, and so we passed a series of bills here that are directed at beginning to stem that problem. Have you looked much at the legislation that we have passed through the House, anything that stands out as being especially effective in your ideas or the ideas of the committee? Mr. POWELL. I haven’t looked at it carefully. I did see that, but I will be happy to go back and look. Mr. PEARCE. OK, yes. Now, for New Mexico, we have a little bit of an aging population and we also have a lower income population. That all argues for less complexity in the investments. And so, typically, they would like safe investments, but then the interest rate is always at such a low rate that it is driving unsophisticated investors into sophisticated items seeking rates of return. Any ideas how it can help out our seniors who typically fall into that category? I am thinking about my mom. The last few years of her life, she just wanted not to lose money and just to have it safe. And yet we are seeing a lot of seniors chasing rates of return and getting into very unsafe things, then they lose their nest egg. So how is the Reserve looking at that? Mr. POWELL. We are not responsible for investor protection, but we are responsible— Mr. PEARCE. No, it is the rate of return. It is the rate of return on simple investments. The rate of return on passbook savings or money markets, that is the question. Mr. POWELL. Right. We have kept rates low for a long time, and we think that has had a very positive effect on the economy. It has boosted employment, it has boosted activity. I think it has defi- nitely been tough for seniors who are really relying on their pass- book savings, for example, for interest. But overall for the economy, it has been a good thing. Rates are going up now, to reflect the strength of the economy. So that should be helping some. Mr. PEARCE. Yes. As we talk about the labor force participation rates, we are also noting a lot of skilled atrophy. People who have been on different public assistance programs for some time actually don’t have much skills. So as the President talks, he talks about the apprenticeship pro- grams. Have you all taken a close look at how the apprenticeship programs could be directed at the people who have been out of the labor force, not the people in the high schools, but the people who have been on the sidelines for some time? Are there any studies available to us on the effectiveness of those programs? Mr. POWELL. Yes. We have an excellent group of labor econo- mists, and that has been a particular focus. So we would be de- lighted to supply that to you, discuss it with you or your staff. We would be happy to work with you on that. Mr. PEARCE. The energy economy that you reference in your re- port a couple of times is one that is playing out in the southeast part of New Mexico. Some of the largest finds in most productive wells being drilled are occurring right there. The pipeline capacity is becoming a chokepoint and then also the refining capabilities. So VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 42 we are suggesting building a refinery in New Mexico and asking for White House help to get the permits done. All of that would help us to become energy self-sufficient. Thank you, Mr. Chairman. I yield back. Chairman HENSARLING. The time of the gentleman is expired. The Chair now recognizes the gentlelady from Ohio, Mrs. Beatty. Mrs. BEATTY. Thank you, Mr. Chairman, and thank you, Rank- ing Member. And thank you, Chairman Powell. Good to see you again. I just have a couple of quick questions I am going to try to get through. Mr. Chairman, I brought the Federal Reserve supervision and ex- amination of the insurance savings and loan holding companies up previously with Federal Reserve Governor Quarles. And my staff brought this topic up with the Fed staff on several occasions. Since the economic crisis, the number of insurance and saving and loan holding companies has dwindled from some 30 to just 11, according to the Fed’s 2017 annual report. I have two of these in- surance companies in my district which employ thousands of peo- ple. And one of them just announced that they are closing their de- pository institution. While I understand that there are several business reasons for an insurance savings and loan holding company to close their own depository institution, there is little doubt that one of the factors why they are closing them down is due to the burdensome and inef- ficient supervisory regime by the Federal Reserve. I have worked with my colleague on the other side of the aisle, Mr. Rothfus, to introduce legislation that would force the Federal Reserve to tailor their bank centric regulations to those to insurance companies, which are wholly different from banks. While I think there should be some cost of admission for an insurance company to own a de- pository institution, I don’t think that cost should be so high that it makes no financial sense to own one, which is where I think that we are headed. Do you think that this problem that these insurance companies are closing their banks, that this is part of the reason, or is it the Federal Reserve’s desire for no insurance companies to own a de- pository institution? Mr. POWELL. It is certainly not our desire to drive anybody out of owning a bank who can legally own a bank. I think in the case of depository institutions that are owned by insurance companies, our interest is in the safety and soundness of that depository insti- tution. So we work very carefully not to duplicate the insurance regulatory work that the State insurance supervisors capably do, but we have a role to play as the holding company supervisor as it relates to the depository institution. And that is what we care about. That is really all we care about. I think my recollection—these companies are getting out of own- ing depository institutions mostly for business reasons as opposed to for regulatory reasons. In any case, we are committed to doing that as efficiently as we can and— Mrs. BEATTY. Are you familiar with our legislation? Mr. POWELL. Yes, I am. Mrs. BEATTY. Is it something that will be helpful, or do you have an opinion? VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 43 Mr. POWELL. We have raised concerns. The concern that we raised is that we would be effectively out of the business of super- vision at the holding company. We would promulgate standards, but they would supervised by the insurance supervisor. And the in- surance supervisors, they do a fine job of supervising insurance, but they are not prudential regulators of banks. And we think if you are going to own a bank, you should be subject to regulations by a prudential regulator of banks, which would be us in this case. Mrs. BEATTY. But you would be at least willing to see if we could tweak it or work together? Mr. POWELL. Absolutely, absolutely. Mrs. BEATTY. OK, thank you. On another good note, let me also say thank you for being very responsive to our letters to you from the Congressional Black Caucus and from you on diversity. I really appreciate that. As you will probably recall, we have had several conversations about the Beatty rule that is patterned after the Rooney rule. If you are looking for minorities and, more specifically, African Amer- icans to serve on the Federal Reserve, then you have to put them on the list. You have to include them in the room. So while we weren’t necessarily overjoyed with the last appoint- ment, I am pleased that Mr. Bostic is there, and just hoping as more openings come, that you will keep that in the back of your mind. Last, I have an odd question. I was on my way back to Wash- ington, I stopped in a restaurant, and a gentleman came up to me and chased me down, and said, I know that Mr. Powell’s going to be coming before your committee, would you ask him this question. We are going to paraphrase it because my team wasn’t quite sure what he was asking and he stated it more as a fact. But I think what the constituent was asking me, and he stated it more as a fact than a question, but he essentially wanted me to ask you whether or not you believe the Federal Reserve’s monetary policies exacerbates the wealth inequality in our country. I think for some reason he felt that organizations who receive the interest payments on our national debt is destroying the middle class. Mr. POWELL. No, we don’t think monetary policy is exacerbating inequality. We think, in fact, it is helping those who didn’t have jobs get jobs. So those are the people who need those jobs. Mrs. BEATTY. Thank you very much. And I yield. Chairman HENSARLING. The time of the gentlelady has expired. The Chair now recognizes the gentleman from Florida, Mr. Ross. Mr. ROSS. Thank you, Chairman. Chairman Powell, thank you for being here. Your predecessor, for whom I have a great deal of respect, I know struggled for some time with regard to the impact of the quantitative easing, the low interest rates, the high unemployment. And I see that, based on your report today, the outlook is much brighter and doing much better. I echo the concerns of my colleague, Mr. Pearce, because I have a great deal of retirees in my community and they want to start seeing some return on their investment, of course, instead of hav- ing to keep dipping into the principle of their savings. VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 44 Chairman Powell, it has been more than 9 months since the Fed- eral Reserve had its first official Vice Chair for supervision sworn in. Prior to Vice Chair Quarles taking office, the responsibilities of his position were unofficially shared between former Fed officials to such an extent that it was never really sure who was in charge of regulatory affairs at the Federal Reserve. As a consequence, it felt to many of us in Congress that the divide between the Federal Reserve’s regulatory responsibilities and those related to monetary policy wasn’t as explicit as it should have been. Further, there seemed to be a high risk that Federal Reserve regulations were not being given the necessary oversight and evaluations. There were more and more regulations coming out. And now with the position filled by Vice Chair Quarles, I would like to hear if things have changed at the Federal Reserve. Do you find that having a Vice Chair for supervision has allowed you to focus more on monetary policy the side of the Federal Reserve’s work? In other words, does it help prevent inappropriate overlap of the Fed’s roles now that you have distinguished supervisory roles in the Fed? Mr. POWELL. Let me say it is great to have Vice Chair Quarles in his role. And I know he was confirmed yesterday into his under- lying Governor term. He is terrific. I worked with him 25 years ago, so he has been great. We think of the roles as pretty complimentary actually. We think that, essentially, the financial system, more broadly, and the bank- ing system is the transmission channel for monetary policy. So we think we learned a lot about what is going on in the economy and also about how monetary policy is getting out into the economy by virtue of the fact that we are in supervision. We do have a separate division that takes care of all that, and Vice Chair Quarles as the Vice Chair has particular authorities under the statute to recommend policies to the Board. I hope I am getting to your question. Mr. ROSS. Yes. But as I mentioned, I think the past 10 years, as a result of financial crisis, we have seen new regulatory schemes being imposed. And it seems to me that now would be an appro- priate time for the regulators to take a step back and conduct a ho- listic review of the impact of these regulations. And I believe that having Vice Chairman of supervision renders this holistic view more appropriate at this time. Do you think now would be a good time for such a review? Mr. POWELL. It is a good time. In fact, we are doing that. We are committed to sustaining the important post-crisis regulatory re- forms, higher capital, higher liquidity, stress testing, resolution. We are also committed to looking at everything that we have done in the last 10 years and making sure that it is right sized and ef- fective. Mr. ROSS. Has your review revealed any duplicative or burden- some regulations that could probably be done away with at this point? Mr. POWELL. Yes. I think we are finding quite a lot to do, mainly as it relates to smaller and medium-sized institutions, which I think there is quite a lot of good work that we can do on that front. VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 45 Mr. ROSS. And also part of your report you note that residential investment has leveled off for the first 5 months this year. And that is a little disappointing to me, because I think that is a lead- ing indicator force in terms of residential investment. When I go home to central Florida, I can see skyrocketing de- mand for homes, but for some reason developers just can’t keep up. One of the things that you have talked about, and I think that Mr. Pearce talked about also, is the, quote, ‘‘tight supply of skilled labor.’’ Can you expand on that? How long have we been approaching this tight supply of skilled labor? My concern is this, is that we have a great tailwind behind us right now. We have a 4 percent GDP. We have lower unemploy- ment than we have had in a long time. We have more capital than we have seen before, but yet if we are not going to have the eco- nomic recovery because we don’t have a labor market, what is in store for us? And how can we best address this labor market short- age that is facing us? Mr. POWELL. It is a real challenge. Plumbers, carpenters, elec- tricians in short supply. A lot of people left the industry after the crash. Now there is a need. And also, it is very hard to get lots. It is difficult. The zoning and everything is quite difficult. Mr. ROSS. The training programs? Mr. POWELL. They are also facing high materials prices. Mr. ROSS. Which is a component of it too. But even if we—we have to have the labor is what I am getting at. And even if we have to import the labor, we need the skilled labor. Mr. POWELL. I think you are right. There is a good question about how the economy will absorb all of this momentum, and I think the tools to expand the labor force are really not ours, they are really yours. Mr. ROSS. I agree. Thank you. I yield back. Chairman HENSARLING. The time of the gentleman has expired. The Chair now recognizes the gentleman from North Carolina, Mr. Pittenger. Mr. PITTENGER. Thank you, Mr. Chairman. And thank you, Chairman Powell, for being with us. I really want to commend you for taking the initiative to provide time to be with members and allow those discussions to occur. I think it is very helpful for us. Mr. Chairman, as I understand, it is your directive to promote stable prices. Some of your policy committee members have ex- pressed interest in replacing the current inflation target with dif- ferent target measures that would provide even greater variability. Given that, would you help me just better understand the dif- ference between price stability and stable prices? Mr. POWELL. I think they mean the same thing. I wouldn’t say there is a big difference there. Mr. PITTENGER. Good. Well, thank you. That clarification helps. In this year’s monetary policy report, you state that the labor force participation rate has been in decline for decades. And has seen a recent increase among prime age individuals. Despite the factors that continue to cause the decline persisting, you have said VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 46 that the continuation of increases seen over the past few years is possible if favorable labor market conditions continue as well. Have you seen these favorable labor markets, at least more re- cently, remain or even show increases since the passing of the Tax Cuts and Jobs Act? Mr. POWELL. We do see the labor market continuing to strength- en. And as you point out, labor-first participation by prime age males and females has kicked up in the last couple of years. That is a great thing to see. We really hope those gains are sustained against a longer run trend of decline. But we hope that this is a great chance for people to get back in the labor market and we hope stay there. Mr. PITTENGER. Would you draw any correlationship between the Tax Cut and Jobs Act bill and that dimension? Mr. POWELL. I think that there are a variety of things contrib- uting to this. Certainly, the business tax cuts are helping support activity, and the individual tax cuts too. Mr. PITTENGER. How has the Tax Cuts and Jobs Act affected your current monetary policy? Mr. POWELL. It is hard to single out an effect. We really look at many, many different things. The economy’s strong and we are on a path of gradually raising rates, and I think that reflects all of the things that are going on, including the changes in fiscal policy. Mr. PITTENGER. Yes, sir. With the new tariffs coming from both at home and abroad, some businesses are shying away from both capital and labor force investments. The report States that exports had increased in the second quarter, led by agricultural exports. Do you see this changing, especially in light of the retaliatory tariffs on numerous agricultural products from Canada and the European Union? Mr. POWELL. I think there is a lot of uncertainty about how this round of discussions between us and essentially all of our major trading partners will come out. I think if it does wind up in a lot of reciprocal tariffs, then it would certainly affect our exporting in- dustries, including in a big way, U.S. agriculture. So it is a risk. Mr. PITTENGER. Yes, sir. You previously stated that the U.S. fi- nancial system is substantially more resilient than the decade be- fore the financial crisis. Should there be a trade war, what tools do you have, to move quickly to ensure this continued resiliency in economic growth? Mr. POWELL. I think the financial system is well capitalized and so much more strong and resilient in so many ways that it is there in a position so that it can resist or be resilient against shocks of various kinds, and that would include changes to trade policy that became disrupted. Our monetary policy tool we can always use to— it really relates to demand. So if demand weakens, then we can support demand. The harder issue is you could be seeing higher prices because of tariffs at the same time you are seeing lower economic activity. And potentially, that would imply higher inflation. A mirror in- crease in tariffs wouldn’t mean necessarily higher future inflation, but if it did have that implication, it could be very challenging for policy. Mr. PITTENGER. Thank you. My time has expired. VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 47 Chairman HENSARLING. The time of the gentleman has expired. The Chair now recognizes the gentleman from Pennsylvania, Mr. Rothfus. Mr. ROTHFUS. Thank you, Mr. Chairman, and welcome, Chair- man. I want to talk a little bit about the automatic SIFI designation being set at $250 billion in S. 2155. This was an important change that right sized the regulatory burden for a significant number of small and medium-sized institutions. In setting the threshold at $250 billion, however, we grouped large regional banks together with banks that have assets in excess of $1 trillion. These institutions do not only differ from each other in terms of size, they also differ in their levels of risk and com- plexity, as well as their capital structure and their business mix. Would you agree with that assessment that there is a distinction between those large regional banks and those other banks? Mr. POWELL. Very much so. Not just size, activities as well. Mr. ROTHFUS. Given this distinction, how will the Fed be tai- loring regulations for banks above the $250 billion threshold? Mr. POWELL. Working on a framework now. Some ways away from publishing it, but it will take into account a range of factors, including size will be one, but also many others, such as com- plexity, interconnectedness, the nature of their activities, all those. We will take in a wide range of factors. The bill gives us a great deal of flexibility to identify the appropriate factors, and we are just in the process of doing that. We are going to put that out for comment and listen carefully to public reaction too. Mr. ROTHFUS. Any timeframe yet on when that might happen, comment period? Mr. POWELL. I can’t be precise. I will just tell you we are working hard on it right now. Mr. ROTHFUS. When Secretary Mnuchin testified before this com- mittee, I asked him about an issue that many of us on this com- mittee have expressed concerns about: Nonbank SIFI designations. I have advocated for an activities-based approach to addressing systemic risk. I was pleased to hear that Secretary Mnuchin also supported adopting this approach and that the FSOC was moving in that direction. Do you support an activities-based approach? Mr. POWELL. Yes. I think that makes sense. Mr. ROTHFUS. What would be the status of FSOC’s implementa- tion of that approach? Mr. POWELL. Really a question for the Secretary, but I think that is more how we are looking at things these days, is looking at ac- tivities, as well as we can always look at institutions when it is ap- propriate. But for now, we are looking at a lot of activities. Mr. ROTHFUS. If I could talk a little bit about the yield curve. The inversion of the yield curve is typically viewed as a sign of a coming recession. The yield curve is currently flattening and this has attracted a lot of attention. In a recent post, Minneapolis Fed president Neel Kashkari wrote, quote: ‘‘This suggests that there is little reason to raise rates much further. Invert the yield curve and put the brakes on the economy and risk that it does, in fact, trigger a recession.’’ Do you agree with this view? VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 48 Mr. POWELL. I don’t see any evidence that a recession is immi- nent. We are not forecasting a recession. And so I don’t really think we see a recession coming. Mr. ROTHFUS. Do you have an opinion on how strong of a signal the yield curve inversion is? Mr. POWELL. So the inversion of the yield curve has been—just as an empirical matter it has been associated with downturns in the past. But I would just say the real point is the yield curve in- verts—we know why short-term rates go up, because basically they are looking at the Fed’s expected rate path. The real question is what is going on with longer term rates. And if you back out the term premium and look at that, then it is really an assessment in the market of what the neutral longer term rate is, what it will be. So if, in fact, monetary policy is higher than that, then that means that policy is tight. You are actually tightening policy. So the yield curve is simply a way to identify what is really the important thing, which is where is current policy and where is ex- pected policy relative to neutral. So I prefer to look directly at the question at hand. And you think about the yield curve as giving you evidence on that, so the yield curve is not inverted now. It is still at a positive slope and it is something that we will watch. All of us have a little bit different ways of thinking about it. That is how I think about it. Something we are looking at carefully. Mr. ROTHFUS. Thank you. When you last testified before this committee, we discussed the importance of monetary policy inde- pendence and potential risks to that independence posed by both our national debt and the Feds outsized balance sheet. Would swapping mortgaged-backed securities holdings for treasuries help to mitigate some of the political risks that follow for monetary poli- cies becoming credit policies? Mr. POWELL. I don’t see our MBS holdings as—they are dwin- dling over time now. They are in normalization mode. I don’t see them as presenting a particularly salient independence risk to us right now. Mr. ROTHFUS. Thank you, Chairman. I yield back. Chairman HENSARLING. The gentleman yields back. The Chair now recognizes the gentleman from Maine, Mr. Poliquin. Mr. POLIQUIN. Thank you, Mr. Chairman, very much. Thank you, Chair Powell, for being here. You have been here, sir, for almost 3 hours with a 10-minute break, and you look like you need a vacation. I want to remind you that Maine, that I represent, is vacation land. You don’t even need air conditioning up there. And I am sure you and your family would enjoy it. If you want to go up there, just give us a call, we will send you in the right direc- tion. Sir, the past couple of years, the economy has been getting stronger and stronger, and you mention in your testimony that the national unemployment rate has been about the lowest it has been in 20 years. Up in Maine, we have also good news. The unemploy- ment rate is roughly 2.8 percent. It has been the lowest in about 50 years, and folks are making more money and they are able to change jobs if they don’t like the one they have. And some of our young workers are able to come back to the State, where in the VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00052 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 49 past, they haven’t been able to. And our confidence with our con- sumers and our small businesses is all very strong. Now, if you look at the prior 7 to 8 years, the exact opposite was going on. Unemployment rates were very high. Confidence was low. Taxes and regulations were high, and we had a real problem every- where. Now, my point to you, sir, if you would agree with me, that this strong economy we have now is not by accident. It didn’t fall out of sky. There is something that had to be done to correct this. Would you agree with me that making it easier for businesses to grow and hire more people and pay them more through lower taxes and fewer regulations, more predictable regulatory environment, has helped the economy? Mr. POWELL. Yes. I guess I would just say in principle that regu- lation should be balanced. Mr. POLIQUIN. Sure. Mr. POWELL. And it should be fair and that will support— Mr. POLIQUIN. Anybody that is running a business—and I come from that part of the world, sir—would agree with that. And I ap- preciate—I know you don’t want to dig into policy that we do here and I understand that. One of my concerns, my major concern, Mr. Powell, is how do we keep this going? How do we keep this going for our families in Maine and elsewhere? I look back at the last few recessions. In 2001, we had a bubble in the dot.com sector of the tech stocks and that caused a recession. The terrorist attacks of 9/11 caused a mild recession after that. That is an external event that we can’t control here anyway. And then in the 2008 to 2012 Great Recession, again, a real estate bub- ble in part brought on by financial instruments that dealt with the real estate market brought that on. So I think we can both conclude that what happens in the capital markets, what happens in the financial sector has a huge impact on what happens on Main Street when it comes to a growing econ- omy or the other way around. Now, here is my concern, Mr. Powell, and I would love to have your response to this. During the past 10 years—for most of the past 10 years, interest rates have been very low, in some cases at zero, unusually low. And that has caused a rising financial sector, whether it be the equity market or the fixed income market. So I am looking and I am saying, here we have the Chair of the Fed before the committee of jurisdiction in the House. What advice can you give to Congress, Mr. Powell, to make sure that we keep this strong economy going? What should we make sure we do not do? Mr. POWELL. Well, let me say we strongly share a goal to keep this expansion going, and we think that continuing to gradually raise rates for now is the right way to do that. As I think we dis- cussed when we were together, I think it is important to address things like we talked about earlier, things like labor force partici- pation, things like education and training. We need people. We need more people who can fill these jobs that are going to be com- ing open. My concerns are really about the supply side at this point. We are close to full employment, maybe not quite there. But it is the VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 50 issues like labor force participation and job training and addressing the people who are out of the labor force, get them back in. Mr. POLIQUIN. There are some folks that think we ought to raise taxes and go back to where we were before. Is that a good idea? Mr. POWELL. I am not going to give you advice on fiscal policy. Sorry. Mr. POLIQUIN. OK. The national debt—I am pivoting a little bit, Mr. Powell—is about $21 trillion. It is horrible. The interest on that debt now is approaching roughly $300 billion per year, which is about 1–1/2 times what we spend to care for our 7 million vet- erans every year in this country. At what point do you think the debt service payments, the interest on that debt becomes a problem for our economy? Mr. POWELL. It is hard to identify a particular point. I would just say we have been on an unsustainable fiscal path for some time and the theory is we should be addressing it when the economy is strong. Mr. POLIQUIN. Do you agree with me that a balanced budget amendment for the Constitution is a good idea to force Washington to spend within its means and start paying down our debt, sir? Mr. POWELL. No, I do not. Mr. POLIQUIN. Thank you, Mr. Chairman. I yield back my time. Chairman HENSARLING. The time of the gentleman has expired. The Chair now recognizes the gentleman from Minnesota, Mr. Emmer. Mr. EMMER. Thank you, sir. Mr. Chairman, it is again a pleasure to have you here and have an opportunity to hear you and speak with you. For starters, I would just like to make a brief comment about tai- loring regulations. You mentioned the importance of taking a tai- lored approach to financial regulation when you appeared before our committee in February, but that was actually prior to the pas- sage of the Economic Growth, Regulatory Relief, and Consumer Protection Act. Eliminating the one-size-fits-all regulatory mindset for small community financial institutions is obviously important. However, S. 2155 was explicit in its requirement that Federal regulators shall tailor enhanced prudential standards for all financial institu- tions based on their risk instead of asset size. This is a very impor- tant issue, and I hope that we can keep an open and constructive dialog on this issue in the weeks and months ahead. Again, for us it is the issue of risk versus asset size. And I see you are nodding, so hopefully that means we are going to keep a constructive dialog. Mr. POWELL. Look forward to that. Mr. EMMER. Moving on, Chairman Powell, your committee initi- ated a balance sheet roll-off less than a year ago, October 2017. During your—shortly thereafter, during your confirmation hearing, you testified the balance sheet reductions would likely stay in place for, quote, ‘‘about 3 or 4 years.’’ I understand, however, that now, some FOMC members are al- ready calling for an early end to what has been a seemingly slow balance sheet normalization schedule. Are you considering a pre- mature end to your balance sheet roll-off program? VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 51 Mr. POWELL. No, but let’s be clear. We have always said that there is significant uncertainty about how long it will take. Ulti- mately, the balance sheet will be no larger than it needs to be for us to conduct monetary policy and will consist primarily of Treas- ury securities. And its ultimate size in the long run will be driven by the market’s demand and the people, public’s demand for our li- abilities, principally currency and reserves. So we are learning, along with everybody else, as the balance sheet shrinks, as to what the new normal will be. And I have to say there is a significant amount of uncertainty. We will learn a lot. The markets are moving their estimates up, but I don’t think we are going to know for some time exactly what that equilibrium size will be. It will be much bigger, though, than it was before the crisis, because the public wants—currency and circulation more than doubled since 2008, well more than doubled, and reserves have gone up substantially because they are a highly desirable liq- uid asset for banks. Mr. EMMER. All right. But at this point, there is no plan to pre- maturely end the roll-off? Mr. POWELL. Certainly not prematurely, no. Mr. EMMER. All right. The European Central Bank is reportedly convinced that the region’s economy is strong enough to withdraw some of its crisis-era support. Our economy, by contrast, has been humming for more than a year. If the EU is lifting off from its un- conventional stance, should we be slowing or stopping return to fundamentals? And would doing so leave us stuck with a balance sheet that remains conflicted between monetary and macro pruden- tial policy? Mr. POWELL. We are much more significantly down the road in the normalization process. The European Central Bank has said that they would stop asset purchases, assuming certain conditions are met by the end of year, and would not begin to raise interest rates until at least the end of the summer of 2019. So they are some years behind our process. We have been raising interest rates since December 2015. Our balance sheet has been shrinking, as you pointed out, since last October. And I think our path is working very well. We think the gradual rate increases are right, just about right. And we think the balance sheet normalization process is working very smoothly. Mr. EMMER. Has your committee devised a strategy for how and when to change the balance sheet roll-off schedule? I am taking you down this road because I understand your answer earlier is there is a lot of uncertainty and we learn as we go. But what is the strategy here or is it just that general, that we are going to see how this goes and we are going to leave ourselves the flexibility to jump in and change things? Mr. POWELL. We said we would continue the program as an- nounced, unless there were—and we will get the exact terms, but it is really a significant economic downturn requiring a meaningful reduction in interest rates, words close to but not exactly that. Mr. EMMER. I don’t know if you will have time, but I do want to ask this. Do you think, Mr. Chairman, that market participants have the transparency they need to make productive investments VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 52 in our economy? And what data would persuade your committee to speed up, slow down, or even stop? Mr. POWELL. A significant downturn in the economy required meaningful reduction in the interest rates. I think the markets un- derstand it very well. Chairman HENSARLING. The time of the gentleman has expired. The Chair now recognizes the gentleman from Washington, Mr. Heck. Mr. HECK. Thank you, Mr. Chairman. And thank you, sir, for being here. So for over a year now, I have been helping to lead a task force trying to understand why home prices and rents, frankly, are soar- ing all over the country. And it turns out the answer is pretty sim- ple: We are not building enough housing units, period. I looked this morning, and as it turns out, new home starts are lower than when you started at Treasury under the first President Bush. And a lot of time has passed and the population has grown considerably. Fewer home starts than way back then. So prices are rising because of the simple fact that we are miss- ing millions of homes and we have too many people bidding for too few homes. And we are trying to understand why construction isn’t happening and what can be done about it. We feel pretty strongly about this because homeownership is still an integral part of the American Dream and, frankly, it is the number one source of re- tirement security for most Americans. But it also strikes me that it is pretty important to your work, sir. Now, in my mind, I have a simple model. When the economy goes bad, you all cut rates, and that means that more people buy more automobiles and more homes, and the workers in those indus- tries work longer hours and get more wages, and it creates a vir- tuous cycle of economic growth. But what happens if home con- struction doesn’t or can’t respond? The weakness in housing in this last recovery was clearly a rea- son why it was at historic, some would say anemic levels. And if home construction continues to be broken, and there is every bit of evidence that it is, I am wondering what that means for the next recession and what your response can and should be. Does it mean you have to cut interest rates even more aggressively to get the economic response? Because it didn’t seem to work out very well that way this time. Mr. POWELL. So you are right, those back in the day, it was noth- ing to see—well, it was common to see 2 million housing starts in a year and more. And we don’t see that now. And part of that is just the population’s growing a lot less, like a lot more slowly now, much, much slower than it was, so there is less demand. And I am sure you talked to a lot of home builders and their rep- resentatives in your work, and what they say now is it is really supply side constraints. They can’t find electricians, plumbers, car- penters. Also, it is hard to get zoning, it is hard to get lots. Very difficult to do that. They are yelling loudly about materials prices, lumber in particular. And so that is what they are doing is they are building fewer homes and the prices are going up more quickly. We don’t really have the tools to deal with that. VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00056 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 53 In terms of the importance of housing, though, the economy is so much bigger than it was before and housing is smaller than it was before. So it is a less important driver of economic activity at the aggregate level. It is still tremendously important for individuals. It is still part of the American Dream and part of what young fami- lies and folks want to have. But I don’t think it has—it doesn’t have—it is not the single most important factor driving monetary policy right now. I think these issues are really issues out in the labor market that we don’t directly affect. Mr. HECK. So would you agree, however, that historically, hous- ing construction has played a much more important role in eco- nomic recovery? Mr. POWELL. It was a far bigger part of the economy and it was also—can be very cyclical. So yes. You go back to the seventies and eighties, it was, first in first out, first in the recession, first out. Mr. HECK. And before, during recoveries—and if you do the math on what the increase in GDP growth would be, if we simply had a housing market that was in balance, then it wouldn’t be too hard to calculate a material increase in GDP growth. Would you agree with that? Mr. POWELL. It would be bigger. If housing starts were 50 per- cent higher or something, yes, that would be meaningful, for sure. Mr. HECK. So some of what you said, not only do I agree with, but our study concludes as well, which is that these other inputs, land, labor, lending, lumber, or materials, are the key drivers here. But the takeaway I have from you today is that those inputs and whatever limitations and challenges that they are presenting is holding back housing construction may, in fact, be immune to in- terest rate reduction and so we better get to work on those factors. Mr. POWELL. Well said. Mr. HECK. Thank you, sir. Chairman HENSARLING. Time of the gentleman has expired. The Chair now recognizes the gentleman from Illinois, Mr. Hultgren. Mr. HULTGREN. Thank you, Chairman Hensarling. Chair Powell, welcome. Glad you are here. I would echo much of what my colleagues have said on both sides of the aisle of our grat- itude for your openness and willingness to meet with us and hear from us, and that is so affirming. So thank you very much and I appreciate your work. I have shared some very specific concerns with you about how our current risk-based and leverage-based capital rules are dam- aging to liquidity and the listed options markets. Title 7 of Dodd- Frank requires central clearing for derivatives in case of options. This service is generally provided by bank clearing members. The Financial Services Committee reported a bill, with unanimous sup- port, which recently passed the House directing bank regulators to adjust the capital rules. However, as I understand it, no change in law is necessary for the Fed to provide targeted capital relief. I wonder if you have thought any further about how the Fed can address this issue in an expeditious manner. And do you believe SA-CCR can be implemented within the next 8 to 12 months? I un- VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00057 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 54 derstand that there is not even a proposal out for comment yet, but we have an issue in the options markets right now. Mr. POWELL. We think SA-CCR is a good policy, and we are working on a rule on it now. And I hope it can get out before 8 or 12 months. I will go back to the office and check in. But it is a priority. I know there is actual drafting going on and negotiation between agencies, so it will happen. Mr. HULTGREN. That is perfect. That is what we want to hear. I think you can see from even just the action yesterday and in the last couple weeks of very strong bipartisan support to make sure that these markets work well. I sent a letter to financial regulators with responsibility for the Volcker rule back just a couple weeks ago, July 6, requesting that they reconsider the definition of covered funds. That definition cur- rently excludes venture capital. As my letter states, the Congres- sional Record clearly demonstrates, through a colloquy between Senator Boxer and then Chairman Franks, that investing in ven- ture capital was never intended to be prohibited by the Volcker rule when section 619 was drafted by Congress. This prohibition re- stricts access to capital for startup companies. I wonder, do you believe the Volcker rule should be amended in a way that ends this prohibition on investment and venture cap- ital? And have you discussed this issue with your peers at the other financial regulators? Any thoughts on odds that there could be change made here? Mr. POWELL. I am not directly handling those discussions now, but, we put a draft out for comment, and we are hearing on this point a lot, I believe. Although, I guess the comment period, the comments haven’t really come in yet. The comment period hasn’t started running yet because we haven’t published the notice. But our idea is that these activities are not ones generally that threaten safety and soundness. So consistent with the letter and intent of the law, we want to allow what flexibility there is and we look forward to getting input on how we can do that. Mr. HULTGREN. Great. Thanks. I recently sent your office a letter that I hope will draw your attention to the growing issue of wire fraud. This is something that we have heard testimony on in the Financial Services Committee last year. In general, since reviewing my letter, I wonder if you have any ideas for how to prevent wire fraud. And have you considered any recommendations, maybe some that I have made, of having finan- cial institutions apply a payee matching system when initiating a wire transfer? Mr. POWELL. So we appreciate your letter. I was looking at it again this morning, as a matter of fact, and we are putting to- gether a nice response. Some of the data in your letter is quite alarming. So I appreciate your bringing that to our attention. Mr. HULTGREN. Great. Mr. POWELL. So we will come back to you with something in de- tail. Mr. HULTGREN. That is great. Thank you so much. If there is anything else you need from us or that we can be help- ful with, again, I think it is something that is so important for that VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00058 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 55 confidence, especially in home purchases and things that are being abused right now. Last question, last minute here, and a lot of my colleagues on both sides have talked about this, but over the last 18 months, by almost every measure, we have had a very strong economy and taken appropriate actions to allow this momentum to continue. We have seen a boost in consumer and business confidence following the recent tax cuts and continued regulatory relief efforts. That said, there are certainly issues that Congress must continue to address, like better training of our labor forces to meet labor de- mands of our expanding modern economy. I wonder, do you have concerns that protectionist trade measures may generate headwinds that counteract the recent stimulus provided by Con- gress and the Administration? And do you believe a trade deficit is somehow a measure of whether the U.S. is winning or losing in the global economy? In other words, do you believe trade is a zero sum game? Mr. POWELL. We have these discussions going on with basically all of our major trading partners, NAFTA, the EU, China. And we are not responsible for those. We are not even a participant. We are not consulted in any way. But it would be good if they resulted in lower tariffs broadly. If they resulted in higher tariffs, higher trade barriers, then that will be a bad thing for our economy, for our workers, and for incomes. Mr. HULTGREN. Thanks, Chair. I yield back. Chairman HENSARLING. The gentleman yields back. The Chair wishes to inform all members that I will be excusing the witness at 1:30. I anticipate clearing four more members. Cur- rently in the queue are Mr. Gottheimer, Mr. Loudermilk, Mr. Da- vidson, and Mr. Budd. The Chair recognizes the gentleman from New Jersey, Mr. Gottheimer. Mr. GOTTHEIMER. Thank you, Mr. Chairman. Chairman Powell, thank you for being here today. Our economy is entering a phase of increasing technological dis- ruption, including automation through artificial intelligence. These factors are expected to eventually increase our productivity, but also to significantly affect our workplace. McKinsey recently issued a report on automation and jobs that projects 16 million to 54 million Americans will have to find new occupations by 2030, depending on how quickly technology is adopt- ed. If you take the taxi industry as an example, the use of ride-shar- ing apps has devalued assets like taxi medallions and transformed that industry. And it has pushed some drivers out and brought new entrants in. And as tech companies strive for more automation and leverage artificial intelligence, more drivers will likely be pushed out or transitioned. AI and automation will have the same effect on other spaces, like trucking and trading and a host of other industries. And I believe in tech, and I obviously don’t believe we should become Luddites. We need to look toward the future and constantly innovate. It is a big competitive advantage for our country, and obviously our for- eign competitors are doing the same. VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00059 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 56 I believe our government needs fiscal and monetary policy to ease the transition, or at least be aware of it and understand what we need to do in this process. And the Fed’s monetary policy is ob- viously a blunt tool, but given your dual mandate, are you moni- toring automation’s impact on productivity and our labor? And what tools are you considering in this transition, sir? Mr. POWELL. We look very carefully at those issues. We have great researchers at the Fed. We don’t have a lot of tools to deal with it, but they do present really challenging issues for us in the future and now. Mr. GOTTHEIMER. Are there things that you believe that Con- gress should be considering to help minimize the effects of these transitions or make sure we are prepared as a workforce? Mr. POWELL. I think when I graduated from college, I think there was this sense that people would find a career and find an em- ployer, and many of them would spend 30 years with that em- ployer. I think that is not the world we are in so much anymore, not that some people won’t do that. So I really think the idea that education ends when you get out of college or grad school, we need to be thinking a lot about midcareer training and education so people can go on and have an- other leg to their careers rather than being let out to pasture at age 40. So I think that is a key thing we need to be doing, and Congress can certainly play a role there. Mr. GOTTHEIMER. Thank you, sir. And just to switch topics slightly, and I appreciate your response there, on the housing front, I wanted to speak to you about the market a bit, specifically, the change we have seen in the Federal Housing Administration’s (FHA) insured loans, but also the market as a whole. The mortgage market is now dominated by nonbank lenders. They are upwards of 75 percent of FHA loans. Prior to the housing crisis, in that frothy era, this number was flipped on its head. Banks made up more than 75 percent, if not more, of the housing market. What risks do you think this presents as the credit cycle turns? That is my first question, if you don’t mind. Mr. POWELL. So in housing now, we do see that most of the bor- rowers now have much higher credit scores, so it is a very different market. The question is, was that line drawn at the right place? But it is clear that most of the people who have access to mort- gage credit now are people with fairly high credit scores, so it is quite different. And that is where the household borrowing is, again, from people who are well off. Mr. GOTTHEIMER. So you think if there is a downturn, we are better prepared for it? Mr. POWELL. We are better prepared for it, yes. Mr. GOTTHEIMER. Are there things that you think, as you look at this, that Congress should be doing to get banks back into the mortgage market more to ensure lending during economic downturns looking forward there? Mr. POWELL. Well, I think a good question for Congress is—and it is not one for us, but for you—is coming out of the crisis the one VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00060 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 57 place where we really changed credit availability was in mortgages, and that had to be done because we know that mortgage credit was—people were making loans that they may not have under- stood, but that really shouldn’t have been made, lots and lots of those. So, the question is, was that made at the right level? Are there still, at the margin—and there has been some work done on this— there are probably significant numbers of creditworthy borrowers who are not getting access to mortgage credit. And I would think part of it is that the banks know that they made these terrible mis- takes and paid great prices for it, and so do the households. Still, I think it is worth looking at that. It is not too soon to be looking at that. Mr. GOTTHEIMER. I think you are right. Thank you, Mr. Chairman. I appreciate your time. Mr. POWELL. Thank you. Chairman HENSARLING. The gentleman yields back. The Chair recognizes now the gentleman from Georgia, Mr. Loudermilk. Mr. LOUDERMILK. Thank you, Mr. Chairman. Chairman Powell, thank you for spending the time with us today. I actually want to circle back to something that Chairman Luetkemeyer raised earlier today. And since that was probably a couple hours ago, refresh. He was talking about the banks that fall between the $150 and $250 billion in assets, and how after the 18-month period, they are relieved from SIFI regulation. After that the law allows the Fed the ability to restore the regulations if the bank chose to be a systemic risk. Regarding current conditions, recent CCAR (Comprehensive Cap- ital Analysis and Review) results and GSIB surcharge risk data show, that banks with less than $250 billion do not present a sys- temic risk at this time. And I, as well as many others, believe that there should be exemption from the SIFI regulation for those. So I want to follow up, that when you testified back in February, I had asked similar questions. And you had said that banks under $250 billion are more engaged in traditional banking and less com- plex and generally do not pose a systemic risk to the economy. So my first question is, am I correct in assuming that since the CCAR results further confirm your view, that these firms don’t pose a systemic risk at this time? Mr. POWELL. It is interesting, as a general matter, yes, actually one of the eight SIFIs has less than $250 billion in assets and is still a SIFI. One of them does because of the nature of its activity. So we look at a range of things. I would stand by what I said, though. Under 250, these are institutions which generally are sim- pler, they are less complex, and they are engaged in traditional banking activities. So they are different from the very large ones that deserve and get the higher scrutiny. Mr. LOUDERMILK. OK. Well, I appreciate that. And at yesterday’s hearing you discussed a thorough rulemaking process, that you are going to make sure that these firms are strict- ly reviewed before receiving regulatory relief. VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00061 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 58 On that topic, some bankers who I have spoken with are con- cerned that your staff wants to tailor the regulations or partially apply them to firms that are not systemically risky. If this is true—which would be somewhat troubling—I think data and evidence should determine the outcome. Can you confirm that firms that don’t pose a systemic risk will be exempt from the SIFI regulations? Mr. POWELL. We are going to do exactly what the bill orders us to do, which is publish a framework for how we are going to think about risk to financial stability and safety and soundness. This is the language of the bill. We are going to put that out as soon as we can possibly get it thought through. We are going to get com- ment on it. And then we are going to go forward from there. And we very much take to heart the letter and spirit of the bill, and we will look forward to getting input when we finally propose something, I hope soon. Mr. LOUDERMILK. So am I right to interpret that we are going to let the data determine the outcome? Mr. POWELL. Yes, we are in the process now of identifying the factors that we will think about. The bill gives us a lot of flexibility, identifies some factors, and gives us other flexibility. We are going to publish a framework that says how we are going to look at activities and institutions below 250, and then we are going to hear back from the world about how we did and how we should think about these things. And it is a process that the statute orders us to undertake, and that is what we are doing. Mr. LOUDERMILK. So is it conceivable that—or maybe it isn’t— is it, I guess, possible that you have a regional bank, let’s say $150 billion or so, that may have partial regulation of SIFI? Or is it going to be either they are systemically risky or not? Mr. POWELL. I really haven’t faced that question yet. We have al- ways tailored, even when the limit was 50, we always tailored the application of the so-called enhanced prudential standards under 165. We tailored those a lot in the prior world. So we will obviously do that, too. And we will certainly continue to do that. Mr. LOUDERMILK. OK. And probably don’t have time to get into my last question, so I will submit it to the record. And I will yield back the rest of my time to maybe allow somebody else to get in before the hard time. I yield back, Mr. Chairman. Chairman HENSARLING. The gentleman yields back. The Chair now recognizes the gentleman from Ohio, Mr. David- son. Mr. DAVIDSON. Thank you, Chairman. Chairman, thanks for your testimony. Thanks for the work you are doing there. And I look forward to the Senate giving you some more colleagues soon hopefully. You have spoken a fair bit about trade. A lot of our colleagues are concerned about trade and the impact that bad trade practices have had on our economy. Frankly, some concern about the tactics that have been employed to engage in that. VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00062 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 59 I wanted to see if I have your quote right. ‘‘Trade is really the business of Congress, and Congress has delegated some of that to the Executive Branch.’’ Do you think it would be a positive development from the econo- my’s perspective to have collaboration across the entire cross sec- tion of the economy that Congress represents? Mr. POWELL. I think this is really—Congress—the Constitution gives this to you, authority, and you have over time delegated some of it to the Executive Branch. But it is your authority. Mr. DAVIDSON. Thank you. And we are working to reclaim it with the Global Trade Accountability Act, H.R. 5281. We are al- ways looking for cosponsors. And this leaves the authority in the President’s hands to negotiate, but similar to the REINS Act, gives authority to Congress to review. And I think it would promote a more collaborative process than Peter Navarro has recommended and, in fact, persuaded folks to implement. Do you think that if we had practices that were more targeted in the effect that we could be able to focus on bad things then? Let’s just phrase it the other way. Do you think uniform action across all countries in all sectors is potentially more disruptive to the economy than targeted actions? Mr. POWELL. Mr. Davidson, we don’t have this authority. This is authority that— Mr. DAVIDSON. Correct. I am just asking about the impact on the economy, macroeconomically. Mr. POWELL. I think on issues like fiscal policy, trade policy, im- migration policy that can affect the economy, I think we have a role there because we are responsible for the economy, but I think we need to stay at a higher level of principle. And what I am com- fortable saying is that a more protectionist approach to trade, if it is sustained over a period of time, has not historically been good for economies. It has meant lower incomes, less opportunity for workers. Mr. DAVIDSON. On the economic principle of trade, it is the called trade because it is reciprocal in the sense both parties benefit in trade. Do you see trade as a zero-sum game? Mr. POWELL. No. I do think that trade needs to be fair as well as free, and I think it is very appropriate to have an internation- ally agreed set of rules, and when anybody breaks those rules, they have to face the other countries in that setting and change their policies. I think that is a healthy way to go. I don’t think a bilat- eral trade deficit is a good measure of trade between countries, though. Mr. DAVIDSON. Thank you very much. One of the things we have also dwelled on is workforce participa- tion. And one of the big barriers to the growth rate in the economy is workforce participation. Without alluding to specific policy—and I don’t want to put you in that spot—we have tried to make some reforms on bills. Most notably, recently, the farm bill, which is really only about 20 percent about farming, a very incremental change to expect that working-age adults, 18 to 59, able-bodied, no dependent kids at home, not in an economically depressed area, a couple other quali- VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00063 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 60 fiers, that in order to continue to receive support through food stamps, that they would work. Would this, in your mind, policy tools that motivate people to participate be effective at workforce participation? Mr. POWELL. I can’t really take a position on that. I will say that there is not a lot you could do that would be more constructive than to find ways to support labor force participation that will work on a bipartisan basis and can be enacted. It is tremendously important. Mr. DAVIDSON. Thank you for that. Thank you. And so cryptocurrency is a big thing. And so without talking about specific things in our policy, we are working with Basel on a number of fronts. And some concern, we always protect our sov- ereignty in that. Where do you see Basel going with respect to cryptocurrency? Because essentially, the concern there is that even if the U.S. creates a better regulatory framework than we have today, there is still arbitrage in markets. So there is a desire to have some regulatory framework. Is Basel addressing that, particularly with respect to cryptocurrency? Mr. POWELL. I think anybody who owns—if a bank owns cryptocurrency, then it will be subject to capital. It will have to hold capital against that. I guess a good question is, should it be more than the normal level of capital, because it is a risky asset? Mr. DAVIDSON. Right. So to the extent that it is an asset, it would be treated, if it is a commodity, treated as if it is a com- modity. If it is truly a currency, it would be treated as a currency based on its amount of volatility as a currency. For example, the pound sterling is probably a different reserve currency than the Thai baht. Mr. POWELL. Yes. And I don’t know that we—so it is not mainly a bank capital issue. Of course, I think the regulatory issues facing cryptocurrencies are big and broad and go way beyond banking. Mr. DAVIDSON. Thank you. My time has expired. Chairman HENSARLING. The time of the gentleman has expired. The Chair will recognize one more member and then we will dis- miss the witness and adjourn. The Chair recognizes the gentleman from North Carolina, Mr. Budd. Mr. BUDD. Thank you, Chairman Hensarling. Chairman Powell, again, welcome back. It is always good to be with you. I appreciate you being here today. So I want to start off with Volcker. I think a lot of us can at least appreciate the intent behind Volcker, which is to reduce risky ac- tivities in banks, in particular high risk prop trading, and that po- tentially makes sense. However, it seems to be odd results that under the current rule activities such as providing capital and loans to growth and startup companies, activities that we should be encouraging banks to en- gage in, are materially limited as a result of that rule. Your recent NPR is open-ended on covered funds and does not provide a lot of guidance about where the Fed may intend to go. Yet, these funds can be critical sources of capital for companies looking to grow their businesses. And the prohibition on funds is VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00064 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 61 fairly broad and even includes restrictions on venture capital funds. So, Chairman Powell, is there a way for the Fed to simplify the covered funds regime to help smaller companies obtain greater ac- cess to capital? Mr. POWELL. And we are looking for ways to simplify Volcker in ways that are faithful to the language and intent of the statute, and that is one particular provision. And we look forward to getting constructive comments on how we may do that better. Mr. BUDD. So you are just waiting through the NPR period, then, on that? Mr. POWELL. Yes, we are really looking for input here on—this is a notice of proposed rulemaking. We want a lot of input. Our job is to implement Congress’ wish, and that is the Volcker rule, but we want to use such flexibility as we have that doesn’t undermine safety and soundness. And there would clearly be some flexibility around the issue you are talking about. Mr. BUDD. Thank you. I want to switch topics to the ongoing ne- gotiation of new international capital standards, or ICS. First, I want to thank you for such a quick and thorough re- sponse to questions I had after we met last time. We don’t always get quick responses, but you did, so thank you. We are genuinely grateful. And the following question, sir, it was originally intended for Vice Chairman Quarles, but a letter he sent back to my office on this question we received just yesterday and chose not to respond at this portion. So hopefully, I will pitch it to you for an answer. Governor Daniel Tarullo stated in a speech at the National Asso- ciation of Insurance Commissioners’ International Insurance Forum—this is May 20 of 2016—he said, quote: ‘‘There are, as you all know, a lot of ideas out there as to how we should construct the capital requirements we will apply to in- surance companies. Some, such as variations on the Solvency II ap- proach used in the European Union, strike us as unpromising. ‘‘Evaluation frameworks for insurance liabilities adopted in Sol- vency II differ starkly from U.S. GAAP and may introduce exces- sive volatility. Such an approach would also be inconsistent with our preferred or strong preference for building a predominantly standardized risk-based capital rule that enables comparisons across firms without excessive reliance on internal models.’’ ‘‘Finally’’—this is a mouthful, isn’t it—‘‘Finally, it appears that Solvency II could be quite pro-cyclical.’’ So do you agree with what Governor Tarullo said there? Mr. POWELL. It makes sense to me. I have to admit I don’t recall that speech and what issue he was talking about there. Mr. BUDD. About Solvency II, being used by the EU, being pro- cyclical rather than countercyclical. Mr. POWELL. I would want to check with our insurance capital experts. But, yes, I do believe that, I think that reflects our view. Mr. BUDD. Good. Can you give us any explanation as to why the Federal Reserve staff participating in the Kuala Lumpur negotia- tions agreed to accede to the Europeans at the IAIS to mandate that the financial reporting for the referenced ICS be done using a Solvency II approach—what we just talked about—Solvency II VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00065 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 62 approach, and not something more suitable for the U.S. insurance industry, like GAAP or statutory accounting? Mr. POWELL. I will have to check up on this. I don’t have this kind of detail. Mr. BUDD. Pretty in the weeds, but I appreciate you thinking through it. And if we could give that back. Thank you. And finally, do you agree with Governor Tarullo that a Solvency II accounting approach introduces excessive volatility into the U.S. insurance markets? And if so, how do you plan on remedying this at the next IAIS negotiations on ICS? Mr. POWELL. I am really going to have to go— Mr. BUDD. We just delved further into these weeds. Well, if we could get a response it would be great, at another time. Thank you so much, again, for your time. Mr. Chairman, I yield back. Thank you. Mr. POWELL. Thank you. Chairman HENSARLING. The gentleman yields back. I would like to thank Chairman Powell for his testimony today. The Chair notes that some Members may have additional ques- tions for this panel, which they may wish to submit in writing. Without objection, the hearing record will remain open for 5 legis- lative days for Members to submit written questions to these wit- nesses and to place their responses in the record. Also, without ob- jection, Members will have 5 legislative days to submit extraneous materials to the Chair for inclusion in the record. I would ask Chairman Powell that you respond as promptly as you are able. This hearing stands adjourned. [Whereupon, at 1:28 p.m., the committee was adjourned.] VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00066 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm A P P E N D I X July 18, 2018 (63) VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00067 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 64 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00068 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 100.90513 ereh 1 oilof tesffo tresnI For release at 8:30 a.m. EDT July 18,2018 Statement by Jerome H. Powell Chairman Board of Governors of the Federal Reserve System before the Committee on Financial Services U.S. House of Representatives July 18,2018 65 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00069 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 200.90513 ereh 2 oilof tesffo tresnI Good morning. Chairman Hensarling, Ranking Member Waters, and other members of the Committee, I am happy to present the Federal Reserve's semiannual Monetmy Policy Report to the Congress. Let me start by saying that my colleagues and I strongly support the goals the Congress has set for monetary policy--maximum employment and price stability. We also support clear and open communication about the policies we undertake to achieve these goals. We owe you, and the public in general, clear explanations of what we are doing and why we are doing it. Monetary policy affects everyone and should be a mystery to no one. For the past three years, we have been gradually retuming interest rates and the Fed's securities holdings to more normal levels as the economy strengthens. We believe this is the best way we can help set conditions in which Americans who want a job can find one, and in which inflation remains low and stable. I will review the current economic situation and outlook and then tum to monetary policy. Current Economic Situation and Outlook Since I last testified here in February, the job market has continued to strengthen and inflation has moved up. In the most recent data, inflation was a little above 2 percent, the level that the Federal Open Market Committee, or FOMC, thinks will best achieve our price stability and employment objectives over the longer run. The latest figure was boosted by a significant increase in gasoline and other energy prices. An average of215,000 net new jobs were created each month in the first half of this year. That number is somewhat higher than the monthly average for 2017. It is also a good deal higher than the average number of people who enter the work force each month on net. The unemployment rate edged down 0.1 percentage point over the first half of the year to 4.0 percent 66 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00070 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 300.90513 ereh 3 oilof tesffo tresnI -2- in June, near the lowest level of the past two decades. In addition, the share of the population that either has a job or has looked for one in the past month--the labor force participation rate- has not changed much since late 2013. This development is another sign oflabor market strength. Part of what has kept the participation rate stable is that more working-age people have started looking for a job, which has helped make up for the large number of baby boomers who are retiring and leaving the labor force. Another piece of good news is that the robust conditions in the labor market are being felt by many different groups. For example, the unemployment rates for African Americans and Hispanics have fallen sharply over the past few years and are now near their lowest levels since the Bureau of Labor Statistics began reporting data for these groups in 1972. Groups with higher unemployment rates have tended to benefit the most as the job market has strengthened. But jobless rates for these groups are still higher than those for whites. And while three-fourths of whites responded in a recent Federal Reserve survey that they were doing at least okay financially in 2017, only two-thirds of African Americans and Hispanics responded that way. Incoming data show that, alongside the strong job market, the U.S. economy has grown at a solid pace so far this year. The value of goods and services produced in the economy--or gross domestic product--rose at a moderate annual rate of 2 percent in the first quarter after adjusting for inflation. However, the latest data suggest that economic growth in the second quarter was considerably stronger than in the first. The solid pace of growth so far this year is based on several factors. Robust job gains, rising after-tax incomes, and optimism among households have lifted consumer spending in recent months. Investment by businesses has continued to grow at a healthy rate. Good economic performance in other countries has supported U.S. 67 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00071 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 400.90513 ereh 4 oilof tesffo tresnI -3 - exports and manufacturing. And while housing construction has not increased this year, it is up noticeably from where it stood a few years ago. I will tum now to inflation. After several years in which inflation ran below our 2 percent objective, the recent data are encouraging. The price index for personal consumption expenditures, which is an overall measure of prices paid by consumers, increased 2.3 percent over the 12 months ending in May. That number is up from 1.5 percent a year ago. Overall inflation increased partly because of higher oil prices, which caused a sharp rise in gasoline and other energy prices paid by consumers. Because energy prices move up and down a great deal, we also look at core inflation. Core inflation excludes energy and food prices and generally is a better indicator of future overall inflation. Core inflation was 2.0 percent for the 12 months ending in May, compared with 1.5 percent a year ago. We will continue to keep a close eye on inflation with the goal of keeping it near 2 percent. Looking ahead, my colleagues on the FOMC and I expect that, with appropriate monetary policy, the job market will remain strong and inflation will stay near 2 percent over the next several years. This judgment reflects several factors. First, interest rates, and financial conditions more broadly, remain favorable to growth. Second, our financial system is much stronger than before the crisis and is in a good position to meet the credit needs of households and businesses. Third, federal tax and spending policies likely will continue to support the expansion. And, fourth, the outlook for economic growth abroad remains solid despite greater uncertainties in several parts of the world. What I have just described is what we see as the most likely path for the economy. Of course, the economic outcomes we experience often tum out to be a good deal stronger or weaker than our best forecast. For example, it is difficult to predict the ultimate outcome of current discussions over trade policy as well as the size and timing of the 68 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00072 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 500.90513 ereh 5 oilof tesffo tresnI -4- economic effects of the recent changes in fiscal policy. Overall, we see the risk of the economy unexpectedly weakening as roughly balanced with the possibility of the economy growing faster than we currently anticipate. Monetary Policy Over the first half of2018 the FOMC has continued to gradually reduce monetary policy accommodation. In other words, we have continued to dial back the extra boost that was needed to help the economy recover from the financial crisis and recession. Specifically, we raised the target range for the federal funds rate by 1/4 percentage point at both our March and June meetings, bringing the target to its current range of 1-3/4 to 2 percent. In addition, last October we started gradually reducing the Federal Reserve's holdings of Treasury and mortgage-backed securities. That process has been running smoothly. Our policies reflect the strong performance of the economy and are intended to help make sure that this trend continues. The payment of interest on balances held by banks in their accounts at the Federal Reserve has played a key role in carrying out these policies, as the current Monetary Policy Report explains. Payment of interest on these balances is our principal tool for keeping the federal funds rate in the FOMC's target range. This tool has made it possible for us to gradually return interest rates to a more normal level without disrupting financial markets and the economy. As I mentioned, after many years of running below our longer-run objective of 2 percent, inflation has recently moved close to that level. Our challenge will be to keep it there. Many factors affect inflation--some temporary and others longer lasting. Inflation will at times be above 2 percent and at other times below. We say that the 2 percent objective is "symmetric" because the FOMC would be concerned if inflation were running persistently above or below our objective. 69 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00073 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 600.90513 ereh 6 oilof tesffo tresnI -5 - The unemployment rate is low and expected to fall further. Americans who want jobs have a good chance of finding them. Moreover, wages are growing a little faster than they did a few years ago. That said, they still are not rising as fast as in the years before the crisis. One explanation could be that productivity growth has been low in recent years. On a brighter note, moderate wage growth also tells us that the job market is not causing high inflation. With a strong job market, inflation close to our objective, and the risks to the outlook roughly balanced, the FOMC believes that--for now--the best way forward is to keep gradually raising the federal funds rate. We are aware that, on the one hand, raising interest rates too slowly may lead to high inflation or financial market excesses. On the other hand, if we raise rates too rapidly, the economy could weaken and inflation could run persistently below our objective. The Committee will continue to weigh a wide range of relevant information when deciding what monetary policy will be appropriate. As always, our actions will depend on the economic outlook, which may change as we receive new data. For l,'Uideposts on appropriate policy, the FOMC routinely looks at monetary policy rules that recommend a level for the federal funds rate based on the current rates of inflation and unemployment. The July Monetary Policy Report gives an update on monetary policy rules and their role in our policy discussions. I continue to find these rules helpful, although using them requires careful judgment. Thank you. I will now be happy to take your questions. 70 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00074 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 700.90513 ereh 7 oilof tesffo tresnI For use at 11:00 a.m., EDT July13,2018 Poucv MoNETARY REPORT july 13, 2018 Board of Governors of the Federal Reserve System 71 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00075 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 800.90513 ereh 8 oilof tesffo tresnI lETTER Of BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Washington, D.C., July 13,2018 THE PRESIDENT OF THE SENATE THE SPEAKER OF THE HOUSE OF REPRESENTATIVES The Board of Governors is pleased to submit its Monetary Policy Report pursuant to section 2B of the Federal Reserve Act. Sincerely, Jerome H. Powell, Chairman 72 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00076 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 900.90513 ereh 9 oilof tesffo tresnI STATEMENT ON LoNGER-RuN GoALS AND MoNETARY PoucY STRATEGY /\doptecl etfective January The Federal Open Market Committee (FOMC) is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decisionmaking by households and businesses, reduces economic and financial uncertainty, increases the effectiveness 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. Moreover, monetary policy actions tend to influence economic activity and prices with a lag. Therefore, the Committee'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 system that could impede the attainment of the Committee's goals. The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee reaffirms its judgment that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. The Committee would be concerned if inflation were running persistently above or below this objective. Communicating this symmetric inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of signii!cant economic disturbances. The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a llxed goal for employment; rather, the Committee's policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Information 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 percent. In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee's assessments of its maximum level. These objectives are generally complementary. However, under circumstances 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 potentially different time horizons over which employment and inflation arc projected to return to levels judged consistent with its mandate. The Committee intends to reallirm these principles and to make adjustments as appropriate at its annual organizational meeting each January. 73 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00077 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 010.90513 ereh 01 oilof tesffo tresnI Summary .................................................. 1 Economic and Financial Developments ........................................ . Monetary Policy ........................................................... 2 Special Topics ............................................................. 2 Part 1: Recent Economic and Financial Developments ................ 5 Domestic Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Financial Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....... 23 International Developments ................................................. 30 Part 2: Monetary Policy ....................................... 35 Part 3: Summary of Economic Projections ......................... 47 The Outlook for Economic Activity ............................................ 48 The Outlook for Inflation ................................................... 50 Appropriate Monetary Policy ................................................ 51 Uncertainty and Risks ...................................................... 51 Abbreviations .............................................. 63 List of Boxes The Labor Force Participation Rate for Prime-Age Individuals ......................... 8 The Recent Rise in Oil Prices ................................................ 16 Developments Related to Financial Stability ..................................... 26 Complexities of Monetary Policy Rules ......................................... 37 Interest on Reserves and Its Importance for Monetary Policy ......................... 44 Forecast Uncertainty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 62 Non: This report reflects information that was publicly available as of noon EDT on july 12, 2018. Unless otherwise stated, the time series in the figures extend through, for daily data, July 11, 2018; for monthly data, June 2018; and, for quarterly data, 2018:Q1. In bar charts, except as noted, the change for a given period is measured to its final quarter from the final quarter of the preceding period. For figures 16 ,mel 34, note that the S&P 500 !nde>x and the Dow Jones B.mk !ndex are products of S&P Dow Jones !ndices LLC and/or its affiliates Jnd have been licensed for use by the J division of S&P Global, dnd/or its affitidtes. All Redistribution, reproduction, ond/o;;ohotocctov;,nQ in any included regardless of the cause and, ln no event, DTCC or any of indirt•ct, special or consequential damages, costs, expenses, legal f<'es, or lossC's (including lost income or lost profit in connection with this publication. 74 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00078 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 110.90513 ereh 11 oilof tesffo tresnI Economic activity increased at a solid pace a sizable increase in consumer energy prices. over the first half of 20 18, and the labor The 12-month measure of inflation that market has continued to strengthen. Inflation excludes food and energy items (so-called core has moved up, and in May, the most recent inflation), which historically has been a better period for which data are available, inflation indicator of where overall inflation will be in measured on a 12-month basis was a little the future than the total figure, was 2 percent above the Federal Open Market Committee's in May. This reading was \12 percentage point (FOMC) longer-run objective of 2 percent, above where it had been 12 months earlier. as boosted by a sizable increase in energy prices. the unusually low readings from last year were In this economic environment, the Committee not repeated. Measures of longer-run inflation judged that current and prospective economic expectations have been generally stable. conditions called for a further gradual removal of monetary policy accommodation. In line Economic growth. Real gross domestic product with that judgment, the FOMC raised the (GDP) is reported to have increased at an target for the federal funds rate twice in the annual rate of 2 percent in the first quarter first half of 2018, bringing it to a range of of 2018, and recent indicators suggest that I Yi to 2 percent. economic growth stepped up in the second quarter. Gains in consumer spending slowed Economic and Financial early in the year, but they rebounded in Developments the spring, supported by strong job gains, recent and past increases in household The labor market. The labor market has wealth, favorable consumer sentiment, and continued to strengthen. Over the first higher disposable income due in part to the six months of 2018, payrolls increased an implementation of the Tax Cuts and Jobs Act. average of 215,000 per month, which is Business investment growth has remained somewhat above the average pace of 180,000 robust, and indexes of business sentiment have per month in 2017 and is considerably faster been strong. Foreign economic growth has than what is needed, on average, to provide remained solid, and net exports had a roughly jobs for new entrants into the labor force. neutral eJTeet on real U.S. GDP growth in the The unemployment rate edged down from first quarter. However, activity in the housing 4.1 percent in December to 4.0 percent in June, market has leveled off this year. which is about :;, percentage point below the median of FOMC participants' estimates of Financial conditions. Domestic financial its longer-run normal level. Other measures conditions for businesses and households of labor utilization were consistent with a have generally continued to support economic tight labor market. However, hourly labor growth. After rising steadily through 2017. compensation growth has been moderate, broad measures of equity prices are modestly likely held down in part by the weak pace of higher, on balance, from their levels at the end productivity growth in recent years. of last year amid some bouts of heightened volatility in financial markets. While long Inflation. Consumer price inflation, as term Treasury yields, mortgage rates, and measured by the 12-month percentage change yields on corporate bonds have risen so far in the price index for personal consumption this year, longer- term interest rates remain expenditures, moved up from a little below low by historical standards, and corporate the FOMC's objective of 2 percent at the end bond issuance has continued at a moderate of last year to 2.3 percent in May, boosted by pace. Moreover, most types of consumer loans 75 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00079 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 210.90513 ereh 21 oilof tesffo tresnI 2 SUMMARY remained widely available for households with accommodative, thereby supporting strong strong creditworthiness, and credit provided by labor market conditions and a sustained return commercial banks continued to expand. The to 2 percent inflation. foreign exchange value of the U.S. dollar has appreciated somewhat against the currencies The FOMC expects that further gradual of our trading partners this year, but it increases in the target range for the federal remains below its level at the start of 2017. funds rate will be consistent with a sustained Foreign financial conditions remain generally expansion of economic activity, strong labor supportive of growth despite recent increases market conditions, and inflation ncar the in financial stress in several emerging market Committee's symmetric 2 percent objective economies. over the medium term. Consistent with this outlook, in the most recent Summary of F'inancial stability. The U.S. financial system Economic Projections (SEP), which was remains substantially more resilient than compiled at the time of the June FOMC during the decade before the financial crisis. meeting, the median of participants' Asset valuations continue to be elevated assessments for the appropriate level for despite declines since the end of 2017 in the the federal funds rate rises gradually over forward price-to-earnings ratio of equities and the period from 2018 to 2020 and stands the prices of corporate bonds. In the private somewhat above the median projection for nonfinancial sector, borrowing among highly its longer-run level by the end of 2019 and levered and lower-rated businesses remains through 2020. (The June SEP is presented elevated, although the ratio of household in Part 3 of this report.) However, as the debt to disposable income continues to be Committee has con tinned to emphasize, the moderate. Vulnerabilities stemming from timing and size of future adjustments to the leverage in the financial sector remain low, target range for the federal funds rate will reflecting in part strong capital positions depend on the Committee's assessment of at banks, whereas some measures of hedge realized and expected economic conditions fund leverage have increased. Vulnerabilities relative to its maximum-employment objective associated with maturity and liquidity and its symmetric 2 percent inflation objective. transformation among banks, insurance companies, money market mutual funds, Balance sheet policy. The FOMC has and asset managers remain below levels that continued to implement the balance sheet generally prevailed before 2008. normalization program described in the Addendum to the Policy Normalization Monetary Policy Principles and Plans that the Committee issued about a year ago. Specifically, the FOMC has Interest rate policy. Over the first half of 2018, been reducing its holdings of Treasury and the FOMC has continued to gradually increase agency securities by decreasing, in a gradual the target range for the federal funds rate. and predictable manner, the reinvestment Specifically, the Committee decided to raise of principal payments it receives from these the target range for the federal funds rate at securities. its meetings in March and June, bringing it to the current range of I% to 2 percent. The Special Topics decisions to increase the target range for the federal funds rate reflected the economy's Prime-age labor force participation. Labor continued progress toward the Committee's force participation rates (LFPRs) for men and objectives of maximum employment and price women between 25 and 54 years old-that is, stability. Even with these policy rate increases, the share of these individuals either working the stance of monetary policy remains or actively seeking work-trended lower 76 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00080 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 310.90513 ereh 31 oilof tesffo tresnI MONETARY POLICY REPORT: JULY 201 B 3 between 2000 and 2013. Those trends likely when deciding on a policy stance they deem reflect numerous factors, including a long-run most likely to foster the FOMC's statutory decline in the demand for workers with lower mandate of maximum employment and stable levels of education and an increase in the prices. They also routinely consult monetary share of the population with some form of policy rules that connect prescriptions for the disability. By contrast, the prime-age LFPR policy interest rate with variables associated has increased notably since 2013, and the with the dual mandate. The use of such rules share of nonparticipants who report wanting requires, among other considerations, careful a job remains above pre-recession levels. Thus, judgments about the choice and measurement some continuation of the recent increase in of the inputs into the rules such as estimates the prime-age LFPR may be possible if labor of the neutral interest rate, which are highly demand remains strong. (See the box "The uncertain. (See the box "Complexities of Labor Force Participation Rate for Prime-Age Monetary Policy Rules" in Part 2.) Individuals" in Part 1.) Interest on reserves. The payment of interest Oil prices. Oil prices have climbed rapidly on reserves-balances held by banks in over the past year, reflecting both supply and their accounts at the Federal Reserve-is an demand factors. Although higher oil prices essential tool for implementing monetary are likely to restrain household consumption policy because it helps anchor the federal in the United States, much of the negative funds rate within the FOMC's target range. effect on GDP from lower consumer spending This tool has permitted the FOMC to achieve is likely to be offset by im:reascd production a gradual increase in the federal funds rate in and investment in the growing U.S. oil sector. combination with a gradual reduction in the Consequently, higher oil prices now imply Fed's securities holdings and in the supply much less of a net overall drag on the economy of reserve balances. The FOM C judged that than they did in the past, although they will removing monetary policy accommodation continue to have important distributional through first raising the federal funds rate effects. The negative effect of upward moves and then beginning to shrink the balance in oil prices should get smaller still as U.S. oil sheet would best contribute to achieving and production grows and net oil imports decline maintaining maximum employment and further. (See the box "The Recent Rise in Oil price stability without causing dislocations in Prices" in Part 1.) financial markets or institutions that could put the economic expansion at risk. (See the box Monetary policy rnlcs. Monetary policymakers "Interest on Reserves and Its Importance for consider a wide range of information on Monetary Policy" in Part 2.) current economic conditions and the outlook 77 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00081 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 410.90513 ereh 41 oilof tesffo tresnI 5 1 PART RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS Domestic Labor market conditions have continued to 1. Net change in payroll employment strengthen so far in 2018. According to the Bureau of Labor Statistics (BLS), gains in }-mo ~ n ~ l - h - m - o ~ v i - n - g - a ~ v e - rag ~ es - ~~------------~ ! bottsandsofJobs total nonfarm payroll employment averaged 400 215,000 per month over the Jirst half of the Private year. That pace is up from the average monthly 200 pace of job gains in 2017 and is considerably faster than what is needed to provide jobs for 200 new entrants into the labor force (iigure I).' 400 Indeed, the unemployment rate edged down from 4.1 percent in December to 4.0 percent 600 in June (figure 2). This rate is below all 800 Federal Open Market Committee (FOMC) participants' estimates of its longer-run normal level and is about 'h percentage point SocRCf: Bureau of labor StallstJcs via Haver Anal)-tlcs. below the median of those estimates-' The unemployment rate in June is close to the lows last reached in 2000. The labor force participation rate (LFPR), which is the share of individuals aged 16 and older who are either working or actively looking for work, was 62.9 percent in June and has changed little, on net, since late 2013 (figure 3). The aging of the population is an iinportant contributor to a downward trend in the overall participation rate. In particular, members of the baby-boom cohort are increasingly moving into their retirement years, a time when labor force participation is typically low. Indeed, the share of the civilian population aged 65 and over in the United States climbed from 16 percent in 2000 to 19 percent in 2017 and is projected to rise to 24 percent by 2026. Given this trend, the flat trajectory of the l. Monthly job gains in the range of 130,000 to 160.000 are consistent with an unchanged unemployment rate and an unchanged labor force participation rate. 2. See the Summary of Economic Projections in Part 3 of this report. 78 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00082 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 510.90513 ereh 51 oilof tesffo tresnI 6 PART 1: RECENT ECONOMIC AND EINANCIAL DEVELOPMENTS 2. Measures of labor tmderutilization SOlJRCE: Bureau of Labor Statistics via Haver Analytics LFPR during the past few years is consistent with strengthening labor market conditions. Similarly. the LFPR for individuals between 25 and 54 years old--which is much less sensitive to population aging--has been rising for the past several years. (The box "The Labor Force Participation Rate for Prime 3. Labor force participation rates and Age Individuals" examines the prospects for employment-to-population ratio further increases in participation for these individuals.) The employment-to-population ratio for individuals 16 and over-the share 85 La\x:lrl(m;cpartlctpatwnm!c 68 of the total population who are working 66 was 60.4 percent in June and has been gradually increasing since 20 II, reflecting the combination of the declining unemployment rate and the flat LFPR. Other indicators are also consistent with a strong labor market. As reported in the Job Openings and Labor Turnover Survey (JOLTS), the rate of job openings has remained quite elevated3 The rate of quits has 3. Indeed, the number of job openings now about matches the number of unemployed individuals. 79 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00083 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 610.90513 ereh 61 oilof tesffo tresnI MONETARY POLICY REPORT: jULY 2018 7 stayed high in the JOLTS, an indication that workers are able to successfully switch jobs when they wish to. In addition, the JOLTS layoJT rate has been low, and the number of people filing initial claims for unemployment insurance benel1ts has remained ncar its lowest level in decades. Other survey evidence indicates that households perceive jobs as plentiful and that businesses see vacancies as hard to fill. Another indicator, the share of workers who are working part time but would prefer to be employed full time---which is part of the U -6 measure of labor underutilization from the BLS--fell further in the first six months of the year and now stands close to its pre-recession level (as shown in figure 2) . . . . and unemployment rates have fallen for all major demographic groups The continued decline in the unemployment rate has been reflected in the experiences of multiple racial and ethnic groups (Jlgure 4). The unemployment rates for blacks or African Americans and Hispanics tend to rise considerably more than rates for whites and Asians during recessions but decline 4. Unemployment rate by race and ethnicity 80 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00084 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 710.90513 ereh 71 oilof tesffo tresnI 8 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS The labor Force Participation Rate for Prime-Age Individuals The overall labor force participation rate (LFPRJ has increases in automation, such as the use of robotics, generally been trending lower since 2000, and while and various aspects of globalization have spurred the aging of the baby-boom generation into retirement the elimination of some types of jobs~in particular, ages provides an important reason for that decline, some manufacturing jobs that have historically been it is not the only reason. Another contributing factor, held by workers without a college education-and as shown in figure A, is that the LFPRs of prime-age emerging jobs may require a different set of skills. These men and women (those between 25 and 54 years developments may have led some workers to become old) trended lower through 2013 even though prime discouraged over the lack of suitable job opportunities age LFPRs are largely unaffected by the aging of and drop out of the labor force.1 The rising share of the population: The prime-age male LFPR has been college-educated workers, which may partly reflect declining for six decades, and the prime-age female individuals responding over time to the declining LFPR has drifted lower since 2000 after a multidecade demand for jobs that require less education, has likely increase. Nevertheless, prime-age LFPRs have moved prevented even steeper declines in the prime-age LFPR, up notably and consistently since 2013, as improving as better-educated workers have higher LFPRs and labor market conditions have drawn some individuals may be more adaptable to unforeseen disruptions in back into the labor force and encouraged others not to particular jobs or industries. leave. These recent increases in the prime-age LFPR, Another potential factor may be that an increasing in the context of the longer-run trend decline, raise the share of the prime-age population has some difficulty question of how much additional scope there is for working because of physical or mental disabilities. further increases in prime-age labor force participation. For example, figure C shows that about 5 percent of To gauge whether further increases are possible, a both prime-age men and women report that they are useful starting point is understanding the factors behind out of the labor force and do not want a job due to the longer-run decline in the prime-age LFPR, as these disability or illness; those shares have trended higher factors may limit additional increases if they continue over the past several decades. Other research suggests to exert some downward pressure. One factor may that increased opioid use may be associated with a be a secular decline in the demand for workers with lower prime-age LFPR, although it is unclear how lower levels of education. Indeed, as shown in figure B, much of the decline in the prime-age LFPR can be the long-run declines in prime-age LFPR are much directly explained by opioid use or whether increases larger among adults without a college degree than (continued) among college-educated adults. Research suggests that 1. For evidence on displacement from technological A. Prime-age labor force participation rates see David H. Autor, David Dorn, and Gordon H. "Untangling Trade and Technology: Evidence from local Markets," Economic journal, voL 125 (Mna y), pp. 621-46; Oaron Acernog!u and Pascual Restrepo (201 "Robots and Jobs: Evidence from U.S. labor Markets," NBER Working P<lper Series 23285 (Cambridge, Mass.: National Bureau of Economic Research, March), Daron Acemoglu and lntC'!!igence, Alltomation, 24196 (Cambridge, Mass.: Research, january), ,vv,w.<me,c.oc:y For evidence on g!obalization~in 2000s-see David Oorn, and Gordon H. Hanson (2013), Syndrome: Local Labor Market Effects of Import Competition in the United States/' American Economic Review, vo!. 103 (October), pp. 2121-68. A discussion of these and other explanations is also provided in Katharine G. Abraham and Melissa S. Kearney (2018), "Explaining the Decline in the U.S. Employment-to-Population Ratio: A Review of the Evidence," NBER Working Paper Series 24333 (Cambridge, Mass.: Research. National Bureau of Economic Research, February), ww\v.nlwr. SoLRn.: Bureau ofi.abor Statistics. PI g/pclperS.\\'2-1333. 81 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00085 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 810.90513 ereh 81 oilof tesffo tresnI MONETARY POliCY REPOH JULY 2018 9 B. Prime-age labor force participation rates by education Men Women Nun::: The data arc seasonally adjusted 12-month moving averages and extend through May 2018. The shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research. SocRCE: U.S. Census Bureau. Current Population Survey. in opioid use are an indirect result of poor employment responsibilities as women participate in the workforce opportunities. 2 in greater numbers. For some--especially those for Caregiving responsibilities play an important role in whom childcare costs are not a major concern~not explaining why LFPRs for prime-age women are lower participating in the labor force may represent an than for men, and they may play an increasing role in unconstrained choice to care for other members of their explaining declining prime-age LFPRs for men as well. families. For others, however, this decision may reflect As shown in figure C, roughly 15 percent of prime- a lack of affordable childcare. age women report being out of the labor force for Additionally, the shore of the populotion- caregiving reasons--by far the largest reason for prime particularly black men---·with a history of incarceration age women to report not wanting a job----but this share has increased over time. Individuals who have has been fairly flat over time. ln contrast, while a much previously been incarcerated often have trouble finding smaller fraction of men are out of the labor force for work, in part because many employers choose not to caregiving reasons, that share has trended up in recent hire people with such "background and likely also decades, likely reflecting some shift in household in part because incarceration prevents people from accumulating work experience and developing skills 2. Evidence that opioid use could be significant for valuable to employers. Discrimination could also help understanding the declining LFPR is provided by Alan B. explain the lack of participation for some minority Krueger (2017), "Where Have A!! the Workers Gone? An groups, as they recognize that such discrimination Inquiry into the Decline of the U.S. Labor Force limits their job opportunities. Rate," Brookings lnternotional comparisons may help clarify the kruc~crtextfa17bpea.p<if, importance of some of those factors. Since 1990, the opioid prescriptions and employment at the county is (continued on next page) found in janet Currie, Jonas Y. jln, and Molly Schnell (2018), ''U.S. Employment and Opioids: Is There a Connection?" NBER Working Paper Series 24440 (Cambridge, Mass.: National Bureau of Economic Research, March), ww·w.nher. Some evidence on whether the opioid varies with local economic conditions is provided Larrimore, Alex Durante, Kimberly Kreiss, Ellen Merry, 82 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00086 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 910.90513 ereh 91 oilof tesffo tresnI 1( ) PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS The Labor Force Participation Rate (continued) C. Prime-age non participation by reason Men Women Percent Monthly Puccnt 16 1-l 12 10 12-month moving averages and extend through May 2018. by the National Bureau of Economic Research. SocRcE: U.S. Census Bureau. Current Population Survey. prime-age LFPR in the United States has declined self-report as wanting a job (despite not having actively considerably for both men and women relative to other searched for a job recently) has been declining since advanced countries. Some factors, like automation and 2010, that share for men remains between 1f4 and globalization, have affected all advanced economies to 1h percentage point above its 2007 !eve! and earlier some degree and for some time, yet diverging long-run expansion peaks. Furthermore, prime-age men and trends in prime-age labor force participation have still women who had previously reported being out of the occurred. Research suggests that part of the relative labor force and not wanting a job due to disability or decline in the United States is explained by differential illness have been entering the labor force at increasing changes in work~family policies across countries. rates in recent years. Other parts of the divergence may be explained by Looking forward, how can policymakers support other policies, including policies designed toward additional improvements in the prime-age LFPR? keeping those affected by automation anrl globalization Favorable labor markN conditions can likely help, attached to the labor force, or other factors-such as and monetary policy can therefore play a role through incarceration or opioid use-that differ across those supporting strong cyclical conditions as part of its countries. 3 maximum-employment objective. However, structural Although many of the factors behind the factors (in contrast with cyclical ones) are also multidecade decline in the prime-age LFPR may important to address; policies to address such factors persist, some continuation of the increases in the LFPR are beyond the scope of monetary policy. over the past few years nevertheless seems possible, especially if labor market conditions remain favorable. and how this may affect differences in LFPR, see International Indeed, as shown in figure C, although the share of Monetary Fund (2018), "Labor Force Participation in Advanced nonparticipating prime~age men and women who Economies: Drivers and Prospects," chapter 2 in World Economic Outlook: Cyclical Upswing, Structural Change 3. For recent trends on prime-age LFPRs in the United {Washington: IMF, April), pp. 71-128. For evidence on how States compared with other developed countries, see work~family policies may affect prime~age lFPRs in the United Organisation for Economic Co-operation and Development States relative to other OECD st.>e Francine D. B!au (2018), OECD United States 2018 (Paris: and Lawrence M. Kahn (2013), Labor Supply: Why OECD Publishing), Is the United States Falling Behind?" American Economic en. For a description of policy differences across countries Review, vol. 103 (May), pp. 251·-·56. 83 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00087 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 020.90513 ereh 02 oilof tesffo tresnI MONETARY POLICY REPORT: JULY 2018 11 more rapidly during expansions. Indeed, 5. Prime-age labor force participation rate by race and the declines in the unemployment rates for cthnicity blacks and Hispanics have been particularly striking, and the rates have recently been at or near their lowest readings since these series began in the early 1970s. Although differences in unemployment rates across ethnic and racial groups have narrowed in recent years, they remain substantial and similar to pre recession levels. The rise in LFPRs for prime age individuals over the past few years has also been evident in each of these racial and ethnic groups, with increases again particularly notable for African Americans. Even so, the LFPR for whites remains higher than that for the other groups (figure 5)4 Increases in labor compensation have been moderate ... Despite the strong labor market, the available 6. Measures of change in hourly compensation indicators generally suggest that increases in hourly labor compensation have been moderate. Compensation per hour in the -· 6 business sector-a broad-based measure ~- 5 of wages, salaries, and bcnchts that is quite volatile-rose 2% percent over the four quarters ending in 2018:Ql, slightly more than the average annual increase over the preceding seven or so years (figure 6). The employment cost index-a less volatile measure of both wages and the cost to employers of providing bcnefits··-likewise was 2% percent higher in LL___:_ L_ _L__L_L__L_ __ L_. . _L_ ... _LJ 2010 2012 20!4 2016 2018 the first quarter of 2018 relative to its year earlier level; this increase was \1, percentage point faster than its gain a year earlier. Among measures that do not account for benefits. average hourly earnings rose 2% percent in June relative to 12 months earlier, a gain in line with the average increase in the preceding few years. According to the Federal Reserve Bank of Atlanta, the median 12-month wage 4. The lower levels of labor force participation for these other groups differ importantly by sex. For African Americans, men have a lower participation rate relative to white men. while the participation rate for African American women is as high as that of white women. By contrast, the lower LFPRs for Hispanics and Asians reflect lower participation among women. 84 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00088 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 120.90513 ereh 12 oilof tesffo tresnI 12 PART 1 o RECENT ECONOMIC AND FINANCIAl DEVElOPMENTS growth of individuals reporting to the Current Population Survey increased about 3'1. percent in May, also similar to its readings from the past few years. 5 ... and likely have been restrained by slow growth of labor productivity Those moderate rates of compensation gains likely reflect the offsetting influences of a strong labor market and persistently 7. Change in business-sector output per hour weak productivity growth. Since 2008, labor productivity has increased only a little more than 1 percent per year. on average, well below the average pace from 1996 through 2007 of ~-- 4 2.8 percent and also below the average gain in the 1974-95 period of 1.6 percent (figure 7). The weakness in productivity growth may be partly attributable to the sharp pullback in capital investment during the most recent recession and the relatively slow recovery that followed. However, considerable debate remains about the reasons for the recent slowdown in productivity growth and whether it will persist6 Price inflation has picked up from !he low readings in 2017 In 2017, inflation remained below the FOMC's longer-run objective of 2 percent. Partly because the softness in some price categories appeared idiosyncratic, Federal Reserve policymakers expected inflation to move higher in 20187 This expectation appears to be 5. The Atlanta Fed's measure differs from others in that it measures the wage growth only of workers who were employed both in the current survey month and 12 months earlier. 6. The box "Productivity Developments in the Advanced Economies'' in the July 2017 Monetary Polic_v Report provides more information. Sec Board of Governors of the Federal Reserve System (20 17), Monetary Policy Report (Washington: Board of Governors, July), pp. 12-13, h!tps://v,. \\\\ Jcdcralr.-:scnt'. go\/monetar) policy!2017-07-mpr-part l.htm. 7. Additional details can be found in the June 2017 Summary of Economic Projections, an addendum to the minutes of the June 2017 FOMC meeting. See Board of Governors of the Federal Reserve System (20 17), ·'Minutes of the Federal Open Market Committee, 85 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00089 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 220.90513 ereh 22 oilof tesffo tresnI MONETARY POLICY REPORT: JULY 2018 13 on track so far. Consumer price inflation, as 8. Change in the price index for personal consumption measured by the 12-month percentage change expenditures in the price index for personal consumption Monthly 11-mo - n - th - p - e · r - c · e · n · t · c - h - a - n · g - e · - expenditures (PCE), moved up to 2.3 percent in May (figure 8). Core PCE inflation, which Total 3.0 excludes consumer food and energy prices that 2.5 are often quite volatile and typically provides 2.0 a better indication than the total measure of where overall inflation will be in the future, 1.5 was 2 percent over the 12 months ending in l 0 May-0.5 percentage point higher than it .5 had been one year earlier. The total measure exceeded core inllation because of a sizable increase in consumer energy prices. In contrast, food price inflation has continued to NoTE: The data extend through May 20 18; changes arc from one year be low by historical standards--data through car her. May show the PCE price index for food and beverages having increased less than Y, percent over the past year. The higher readings in both total and core inllation relative to a year earlier rellect faster price increases for a wide range of goods and services this year and the dropping out of the 12-month calculation of the steep one-month decline in the price index for wireless telephone services in March last year. The 12-month change in the trimmed mean PCE price index-an alternative indicator of underlying inflation produced by the Federal Reserve Bank of Dallas that may be less sensitive than the core index to idiosyncratic price movements-slowed by less than core inflation over 2017 and has also increased a bit less this year. This index rose 1.8 percent over the 12 months ending in May, up a touch from the increase over the same period last year. 8 June 13-14, 2017," press release, July 5, llltps:// 8. The trimmed mean index excludes whatever prices showed the largest increases or decreases in a given month; for example. the sharp decline in prices for wireless telephone services in March 2017 was excluded from this index. 86 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00090 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 320.90513 ereh 32 oilof tesffo tresnI 1 4 PART 1: RECENT ECONOMIC AND FINANCIAl DEVELOPMENTS 9. Brent spot and futures prices Oil prices have surged amid supply concerns ... Week.l} -------·-· _ As noted, the faster pace of total inflation this year relative to core inflation reflects a substantial rise in consumer energy prices. 100 Retail gasoline prices this year were driven 90 80 higher by a rise in oil prices. The spot price of 70 Brent crude oil rose from about $65 per barrel ·- 60 in December to around $75 per barrel in early 50 July (figure 9). Although that increase took 40 30 place against a backdrop of continued strength 20 in global demand, supply concerns have become more prevalent in recent months. (For a discussion of the reasons behind the oil price increases along with a review of the effects of ICE Brent Futures via Bloomberg. oil prices on U.S. economic growth, see the box "The Recent Rise in Oil Prices.") 10. Non fuel import prices and industrial metals indexes ... while prices of imports other than July2014 ·)0{) July20!4-l00 --------·- energy have also increased 120 102 Nonfuel import prices rose sharply in early 110 2018, partly reflecting the pass-through 100 of earlier increases in commodity prices 100 (figure J0 ). In particular, metals prices posted 9R sizable gains late last year due to strong 80 96 global demand but have retreated somewhat 70 in recent weeks. 60 -- 94 Survey-based measures oi inflation expectations have been stable ... Expectations of inflation likely influence actual inflation by affecting wage-and price-setting decisions. Survey-based n1easurcs of inflation Analytics. expectations at medium-and longer-term horizons have remained generally stable so far this year. In the Survey of Professional Forecasters conducted by the Federal Reserve Bank of Philadelphia, the median expectation for the annual rate of increase in the PCE price index over the next I 0 years has been around 2 percent for the past several years (figure II). In the University of Michigan Surveys of Consumers, the median value for inflation expectations over the next 5 to I 0 years has been about 2 Y2 percent since the end of 2016, though this level is about V. percentage point lower than had prevailed through 2014. In contrast, in the Survey of Consumer Expectations conducted by the 87 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00091 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 420.90513 ereh 42 oilof tesffo tresnI MONETARY POLICY REPORT: JULY 2018 15 Federal Reserve Bank of New York, the 11. Median inflation expectations median of respondents' expected inflation rate three years hence has been moving up recently -------------~~~---- and is currently at the top of the range it has occupied over the past couple of years. ·-- 4 ... while market-based measures of --~ inflation have moved sideways this year ~ SPF expectations Inflation expectations can also be gauged for next 10 years by market-based measures of inflation compensation. However, the inference is not straightforward, because market- based measures can be importantly affected by changes in premiums that provide compensation for bearing inflation and liquidity risks. Measures of longer-term inflation compensation--derived either from differences between yields on nominal Treasury 12. 5-to-lO~ycar-forward inflation compensation securities and those on comparable-maturity Treasury Inflation-Protected Securities (TIPS) or from inflation swaps-have moved 35 sideways for the most part this year after having returned to levels seen in early 2017 30 (figure 12).9 The TIPS-based measure of 2.5 5-to-l 0-year-forward inflation compensation and the analogous measure of inflation swaps 2.0 arc now about 2 percent and 2'1, percent 1.5 respectively, with both measures below the 10 ranges that persisted for most of the 10 years before the start of the notable declines in mid-2014.10 9. lnllation compensation implied by the TIPS hrcakeven inflation rate is based on the difference, at comparable maturities, between yields on nominal Treasury securities and yields on TIPS, which are indexed to the total consumer price index (CPI). Inflation swaps are contracts in which one party makes payments of certain fixed nominal amounts in exchange for cash flows that arc indexed to cumulative CPI inflation over some horizon. l-<Ocusing on inflation compensation 5 to 10 years ahead is useful, particularly for monetary policy. because such forward measures encompass market participants' views about where inflation will settle in the long term after developments influencing inflation in the short term have run their course. 10. As these measures are based on CPI inflation, one should probably subtract about ~ to 11'1 percentage point-the average differential \vith PCE inflation over the past two decades--to infer inJ1ation compensation on a PCE basis. 88 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00092 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 520.90513 ereh 52 oilof tesffo tresnI 16 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS The Recent Rise in Oil Prices Oil prices have increased more than 50 percent the country's economic and political crisis. Prices also over the past year, with the spot price of Brent crude increased after President Trump announced on May 8 oil rising from a bit below $50 per barrel to around that the United States was withdrawing from the !ran $75 per barrel (figure A). For much of the period, nuclear deal and that sanctions against Iranian oil further-dated futures prices remained relatively stable, exports would be reinstated. in the neighborhood of $55 per barrel; however, since The pattern of spot and futures prices indicates February, futures prices have moved up appreciably, that market participants generally anticipate that oil reaching over $70 per barreL prices will decline slowly over the next few years, in Both supply and demand factors have contributed part reflecting an expectation that supply, including to the oil price increase. In particular, the broad-based U.S. shale oil production, will grow to meet demand. improvement in the outlook for the global economy In addition, the higher prices put pressure on OPEC's was a key driver of the price increase in the second November 2016 agreement with certain non-OPEC half of 2017. In recent months, supply concerns have countries to restrain production. A stated aim of the become more prevalent, affecting both spot and further agreement was to reduce the glut in global inventories, dated futures prices. Despite sharply rising U.S. oil and, in recent months, inventory levels have fallen production, markets have been attuned to escalating rapidly toward long-run averages. In response to both conflict between Saudi Arabia and Iran as well as the lower inventories and higher prices, OPEC leaders precipitous decline in Venezuelan oil production amid slightly relaxed the production agreement in june this I continued) A. Brent spot and futures prices n,uly DoJiaroperbarrd ---------------··· QO 80 70 60 50 40 -----:___ _____, _ _____ ,___ ___ [ __ ---_L_ J Jan Mar May July Sept Nov. Mar May July 2017 201S SOURCE: ICE Brent Futures via Bloomberg 89 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00093 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 620.90513 ereh 62 oilof tesffo tresnI MONETARY POLICY REPORT: JULY 2018 1 7 year, reducing some of the upward pressure on prices. power abroad than in the past, as much of the negative That said, futures prices have not returned to their early effect on GDP from lower household consumption 2018 levels, implying that market participants expect is likely to be offset by increased production and some of the recent increase in prices to be long lasting. investment in the growing U.S. oil sector. On net, the What is the expected effect of the recent rise in oil drag on GDP from higher oil prices is likely a small prices on the U.S. economy? To begin with, higher oil fraction of what it was a decade ago and should get prices are likely to restrain household consumption. smaller still if U.S. oil production continues to grow In particular, the increase in oil prices since last year as projected-·flgure C-and the net oil import share is estimated to have translated into a roughly $300 shrinks toward zero. increase in annual expenditures on gasoline for the Indeed, if U.S. oil trade moves fully into balance, average household, from about $2,100 to $2,400. the offsetting effects of a change in the relative price of However, as U.S. oil production has grown rapidly oil might be expected to net out within the domestic over the past decade, the ratio of net U.S. oil imports economy. However, even if the United States is no to U.S. gross domestic product (GDP) has declined longer a net oil importer, to the extent that higher substantially (figure B). As a result, higher oil prices oil prices cause credit-constrained consumers to cut now imply much less of a redistribution of purchasing spending by more than oil producers expand their investment, this redistribution of purchasing power B. Net oil import share could still have negative effects on overall GDP. Pertent<lfnomma!GDP C. U.S. crude oil production 3.5 -- 3.0 Qtwrtcrly 2.5 13 2.0 12 L5 1.0 11 10 90 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00094 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 720.90513 ereh 72 oilof tesffo tresnI 18 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS 13. Change in real gross domestic product and gross Real gross domestic product growth domestic income slowed in !he first quarter, bu! spending by households appears to have picked up Pcr<:cnl,annua!rJ.tc in recent months After having expanded at an annual rate of 3 percent in the second half of 2017, real gross QJ domestic product (GDP) is now reported to have increased 2 percent in the first quarter of this year (figure 13). The step-down in growth during the first quarter was largely attributable to a sharp slowing in the growth of consumer spending that appears transitory, and gains in GDP appear to have rebounded in the second quarter. Meanwhile, business investment has SOURCL Bureau of Economic Analysis via Haver Ana!ytics. remained strong, and net exports had little clfect on output growth in the first quarter. On balance, over the first half of this year, overall 14. Change in real personal consumption expenditures and disposable personal income economic activity appears to have expanded at a solid pace. The economic expansion continues to be supported by favorable consumer and business sentiment, past increases in household wealth, solid economic growth abroad, and accommodative domestic financial conditions, including moderate borrowing costs and easy access to credit for many households and businesses. Gains in income and wealth continue to support consumer spending ... Following exceptionally strong growth in the fourth quarter of 2017, consumer spending in the lirst quarter of this year was tepid, 15. Personal saving rate rising at an annual rate of 0. 9 percent. The slowdown in growth was evident in outlays Momhly for motor vehicles and in retail sales more " generally; moreover, unseasonably warm weather depressed spending on energy services. 10 However, consumer spending picked up in more recent months as retail sales lirmcd, and PCE in April and May rose at an annual rate of 2Y.. percent relative to the average over the lirst quarter (!igure 14). Real disposable personal income (DPI), a measure of after-tax income adjusted for inflation, has increased at a solid annual rate of about 3 percent so far this year. Real DPI 91 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00095 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 820.90513 ereh 82 oilof tesffo tresnI MONETARY POLICY REPORT: JULY 2018 19 has been supported by the reduction in income 16. Prices of existing single-family houses taxes owing to the implementation of the Pcrcentchangcfromycarcarher Tax Cuts and Jobs Act (TCJA) as well as the continued strength in the labor market. With 15 consumer spending rising just a little less than 10 the gains in disposable income so far this year, the personal saving rate has edged up after having fallen for the past two years (figure 15). Ongoing gains in household net worth likely have also supported consumer spending. 15 House prices, which are of particular 20 importance for the balance sheet positions of a large set of households, have been increasing at an average annual pace of about 6 percent in recent years (figure 16).11 Although U.S. equity prices have posted modest gains, on net, so far this year, this flattening followed several years of sizable gains. Buoyed by the cumulative 17. Wealth-to-income ratio increases in home and equity prices, aggregate household net worth was 6.8 times household Quan~rly Ratto income in the first quarter, down just slightly from its ratio in the fourth quarter--the -- 7.0 highest -ever reading for that ratio, which dates back to 1947 (Jlgurc 17). 6.5 ... and borrowing conditions for 6.0 consumers remain generally favorable ... 5.5 Financing conditions for consumers are 5.0 generally favorable and remain supportive of growth in household spending. However, banks have continued to tighten standards 2000 2003 2006 for credit cards and auto loans for borrowers Non:: The series is the ratio of household net worth to disposable personal with low credit scores, possibly in response to some upward moves in the delinquency Ana!y~is via Haver Analytics rates of those borrowers. Mortgage credit has 18. Changes in household debt remained readily available for households with solid credit profiles. For borrowers with low Bi!lionsofdoilaro,annualrnte credit scores, mortgage Jlnancing conditions Mortgages --- !.000 D11 Consumer credit have eased somewhat further but remain tight -Sum 800 overall. In this environment, consumer credit 600 continued to increase in the first few months 400 of 2018, though the rate of increase moderated 200 some from its robust pace in the previous year (figure 18). 200 4110 600 II. For the rnajmity of households. home equity makes up the largest share of their \Vealth. 92 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00096 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 920.90513 ereh 92 oilof tesffo tresnI 2 0 PART 1' RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS 19. Indexes of consumer sentiment and income expectations ... while consumer confidence remains strong I.MTus1onmdcx Index Consumers have remained upbeat. So far this year, the Michigan survey index of consumer sentiment has been near its highest level since 2000, likely reflecting rising income, job gains, and low inflation (figure 19). Indeed, households' expectations for real income changes over the next year or two now stand above levels preceding the previous recession. Business investment has continued to rebound ... Investment spending by businesses has continued to increase so far this year, with average. notable gains for spending, both on equipment SOCR("F.· University of Michigan Surveys of Consumers and intangibles and on nonresidential structures (figure 20). Within structures, 20. Change in real private nonresidential fixed investment the rise in oil prices propelled another steep ramp-up in investment in drilling and mining Percent, annual raw structures-albeit not yet back to the levels Structures II Equipment and intangible capital 20 recorded from 2012 to 2014---while investment !5 in nonresidential structures outside of the energy sector picked up after declining in 10 2017. Forward-looking indicators of business investment spending remain favorable on balance. Business sentiment and the profit expectations of industry analysts have been positive overall, while new orders of capital 10 goods have advanced on net this year. . . . while corporate financing conditions SouRer: Burcatl of Economic Analysis \'Ja Haver Ana!ytics. have remained accommodative 21. Selected components of net debt financing for Aggregate flows of credit to large nonfinancial nonfinancial businesses firms remained strong in the first quarter, supported in part by relatively low interest rates and accommodative financing conditions 1 Il f l j C B o o m nd m s ercial paper 80 (figure 21). The gross issuance of corporate IIIII Bank loans bonds stayed robust during the first half of Sum 2018, while yields on both investment-and 40 speculative-grade corporate bonds moved 20 up notably but remained low by historical standards (figure 22). Despite strong growth in business investment, outstanding commercial 20 and industrial (C&I) loans on banks' books 40 rose only modestly in the first quarter, although their pace of expansion in more recent months has strengthened on average. In SOJJRl'E: Federal Reserve Board, Statistical Release Z.l, "Finannal Accounts of the United States." 93 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00097 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 030.90513 ereh 03 oilof tesffo tresnI MONETARY POLICY REPORT: JULY 2018 21 April, respondents to the Senior Loan Officer 22. Corporate bond yields, by securities rating Opinion Survey on Bank Lending Practices, or SLOOS, reported that demand for C&l loans weakened in the first quarter even as lending standards and terms on such loans eased." Respondents attributed this decline in demand in part to firms drawing on internally generated funds or using alternative sources of financing. Meanwhile, growth in commercial real estate loans has moderated some but remains strong. In addition, financing conditions for small businesses appear to have remained generally accommodative, with lending standards little changed at most banks and with most firms reporting that they arc able to obtain credit. Although small business pcnnisswn. credit growth has been subdued, survey data 23. Mortgage rates and housing affordability suggest this sluggishness is largely due to continued weak demand for credit by small Pcr>:cnt lnde;.; businesses. 205 But activity in the housing sector has JRS leveled ofl 165 Residential investment, which rose a modest 145 2\-i percent in 2017, appears to have largely 125 moved sideways over the first five months of the year. The slowing in residential investment 105 likely is partly a result of higher mortgage 85 interest rates. Although these rates are still low by historical standards, they have moved up and are near their highest levels in seven years (figure 23). In addition, higher lumber prices and tight supplies of skilled labor and developed lots reportedly have been restraining home construction. While starts of both single-family and multifamily housing 24. Private housing starts and permits units rose in the fourth quarter, single-family Millionsofumts,annualralc starts have been little changed, on net, since then, whereas multifamily starts continued 20 to climb earlier this year before flattening out (figure 24). Meanwhile, over the first five 1.6 months of this year, new home sales have held at around the rate of late last year, but sales of existing homes have eased somewhat .8 (figure 25). Despite the continued increases in house prices, the pace of construction has 12. The SLOOS is available on the Board's website at h tt ps: 1/W\\ \V. fed era ln:~cn c. gov/da tah-loos;\loo-.. ht m. 94 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00098 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 130.90513 ereh 13 oilof tesffo tresnI 22 PART 1: RECENT ECONOMIC AND FINANCIAl DEVELOPMENTS 25. New and existing horne sales not kept up with demand. As a result, the months' supply of inventories of homes for sale has remained at a relatively low level, and 75 16 the aggregate vacancy rate stands at the lowest level since 2003. Net exports had a neutral effect on GOP growth in !he first quarter After being a small drag on U.S. real GDP growth last year, net exports had a neutral effect on growth in the first quarter. Real U.S. exports increased about 3'1, percent at an annual rate, as exports of automobiles and consumer goods remained robust. Real import growth slowed sharply following a surge late last year (figure 26). Nominal trade data through May suggest that export growth picked up in the second quarter, Jed 26. Change in real imports and exports of goods by agricultural exports, while import growth and services was tepid. All told, the available data suggest ~~~ ~---~--~--~-": 'r: c~cnt annual rate that the nominal trade deficit likely narrowed Ill Imports relative to GOP in the second quarter Exports (figure 27). Fiscal policy became more expansionary this year ... Federal fiscal policy will likely provide a moderate boost to GDP growth this year. The individual and corporate tax cuts in the TCJA should lead to increased private consumption and investment, while the Bipartisan Budget 2012 2013 2014 Act of 2018 (BBA) enables increased federal &luRCE: Bureau ofEconomJC Analys1s v1a Ha·vcr Ana!ytK'S spending on goods and services. As the effects of the BBA had yet to show through, federal 27. U.S. trade and current account balances government pnrchases posted only a modest gain in the first quarter (figure 28). Pcrccntuf n"mm~l GDl' After narrowing significantly for several years, the federal unified deficit widened from about --- 2 2'/, percent of GDP in fiscal year 2015 to 3'/, percent in fiscal2017, and it is on pace to move up further in fisca120 18. Although expenditures as a share of GDP in 2017 were relatively stable at 21 percent, receipts moved lower to roughly I 7 percent of GDP and have remained at about the same level so far this year (figure 29). The ratio of federal 95 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00099 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 230.90513 ereh 23 oilof tesffo tresnI MONETARY POLICY REPORT: JULY 2018 23 debt held by the public to nominal GDP was 28. Change in real government expenditures on 76'h percent at the end of fiscal2017 and is consumption and investment quite elevated relative to historical norms l'ercent,annua!ratc (figure 30). Federal 1111 State and local ... and the fiscal of mos! state and local governments is stable The fiscal position of most state and local governments remains stable, although there is a range of experiences across these governments and some states are still struggling. After several years of slow growth. revenue gains of state governments have strengthened notably as sales and income tax collections have picked up over the past few quarters. In addition, SoLRn: Bureau of Econ()mic Analysis house price gains have continued to push up 29. Federal receipts and expenditures property tax revenues at the local level. But expenditures by state and local governments have been restrained. Employment growth 26 in this sector has been moderate, while real outlays for construction by these governments have largely been moving sideways at a relatively low level. Financial Developments The expected path of the federal funds 14 rate has moved up Market-based measures of the path of the federal funds rate continue to suggest that market participants expect further gradual increases in the federal funds rate. Relative to the end of last year, the expected policy 30. Federal government debt he!J by the public rate path has moved up, boosted in part by investors' perception of a strengthening in Pncentofno:nina!GDI' the domestic economic outlook (figure 31). so In particular, the policy path moved higher in response to incoming economic data so far 70 this year. especially the employment reports, 60 which were seen as supporting expectations for a solid pace of growth in domestic economic 50 activity. In addition, investors reportedly 40 interpreted FOMC communications in the first JO half of 2018 as signaling an upbeat economic 20 outlook and as reinforcing expectations for further gradual removal of monetary policy accommodation. 96 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00100 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 330.90513 ereh 33 oilof tesffo tresnI 2 4 PART 1: RECENT ECONOMIC AND FINANCI,\L DEVELOPMENTS 31. Market-implied federal fUnds rate Survey-based measures of the expected path of the policy rate over the next few years have Quartdy Percent also increased modestly since the end of last year. According to the results of the most 3.0 recent Survey of Primary Dealers and Survey of Market Participants, both conducted by 1.5 the Federal Reserve Bank of New York just 2.0 before the June FOMC meeting, the median Dec. 29.2017 of respondents' projections for the path of the 1.5 federal funds rate shifted up about 25 basis points for 2018 and beyond, compared with 10 the median of assessments last December.13 Market-based measures of uncertainty about the policy rate approximately one to two years al1ead increased slightly, on balance, from their levels at the end of last year. The nominal Treasury yield curve has shifted up The nominal Treasury yield curve has shifted 32. Yields on nominal Treasury securities up and flattened somewhat further during the first half of 2018 after flattening considerably Pcrccm in the second half of 2017. In particular, the yields on 2-and l 0-year nominal Treasury securities increased about 70 basis points and 45 basis points, respectively, from their levels at the end of 2017 (flgurc 32). The increase in Treasury yields seems to largely reflect investors' greater optimism about the domestic growth outlook and firming expectations for further gradual removal of monetary policy accommodation. Expectations for increases in the supply of Treasury securities following the federal budget agreement in early February also appear to have contributed to the increase in Treasury yields, while increased concerns about trade policy both domestically and abroad, political developments in Europe, and the foreign economic outlook weighed on longer-dated Treasury yields. Yields on 30-year agency mortgage-backed securities (MBS}-an important determinant of mortgage interest 13. The results of the Survey of Primary Dealers and the Survey of Market Participants are available on the Federal Reserve Bank of New York's website at https:!/wv;w.nc\\yorkfcd.org/markds/primarydeakr~ "'-Y'""'"""·"""'and nm""'""." 97 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00101 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 430.90513 ereh 43 oilof tesffo tresnI MONETARY POLICY REPORT: )UlY 2018 25 rates--increased about 60 basis points over the 33. Yield and spread on agency mortgage-backed securities first half of the year, a bit more than the rise in Percent the 10-year nominal Treasury yield, but remain low by historical standards (figure 33). Yields 300 on corporate debt securities--both investment 250 grade and high yield-rose more than Treasury yields, leaving the spreads on corporate bond 200 yields over comparable-maturity Treasury 150 yields notably wider than at the beginning of 100 the year. Broad equity indexes rose modestly amid some bouts of market volatility After surging as much as 20 percent in 2017, broad stock market indexes rose modestly, on balance, so far this year amid some bouts of heightened volatility in financial markets Sm·Rc~o: Department of the Treasury; Bardays (figure 34). The boost to equity prices from 34. Equity prices first-quarter earnings reports that generally beat analysts' expectations was reportedly offset by increased uncertainty abont trade policy, rising interest rates, and concerns about political developments abroad. While stock prices for companies in the technology and consumer discretionary sectors rose notably, those of companies in the industrial and financial sectors declined modestly. After spiking considerably in early February, the implied volatility for the S&P 500 index the VIX--declined and ended the period slightly above the low levels that prevailed in 2017. (For a discussion of financial stability issues, sec the box "Developments Related to Financial Stability.") Markets for Treasury securities, mortgage backed securities, and municipal bonds have functioned well On balance, indicators of Treasury market functioning remained broadly stable over the first half of 2018. A variety of liquidity metrics---including bid-ask spreads, bid sizes, and estimates of transaction costs--have displayed nlinimal signs of liquidity pressures overall, with the exception of a brief period of reduced liquidity in early February amid elevated financial market volatility. Liquidity conditions in the agency MBS market were 98 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00102 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 530.90513 ereh 53 oilof tesffo tresnI 26 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS Developments Related to Financial Stability The U.S. findncial system remains substantially more A. Forward price-to-earnings ratio of S&P 500 firms resilient than during the decade before the financial crisis.1 Valuations continue to be elevated for a range of assets. In the private nonfinancial sector, the ratio of total debt to gross domestic product (GDP) is about in line with an estimate of its trend, and vulnerabilities associated with debt remain moderate on balance. While borrowing among highly levered and lower rated firms is elevated and a future weakening in economic activity could amplify some vulnerabilities in the corporate sector, the ratio of household debt to disposable income has remained stable in recent years. Vulnerabilities associated with leverage in the financial sector appear low, reflecting in part strong capital positions of banks. However, some measures of hedge fund leverage have increased. Vulnerabilities associated with maturity and liquidity transformation continue to be low compared with levels that generally prevailed before 2008. Valuation pressures in various asset markets So~mrr Staff estimates based on Thomson Reuters, IllES. remain elevated by historical standards, although they have declined somewhat since the start of the year, as corporate bond prices have fallen and higher markets, commercial property valuations continue to earnings have helped rationalize equity prices. Market be stretched. Capitalization rates (computed as the ratio movements were outsized in February, around the time of net operating income relative to property values) of the previous Monetary Policy Report. Since then, remain low, and, in recent quarters, their spreads to volatility has receded, although it has ended up slightly yields on 10 -year Treasury securities have moved down above the low levels seen in 2017. Even with higher considerably. Finally, valuation pressures in residential expected earnings due in part to changes in tax law, the real estate markets increased modestly. Aggregate price forward equity price-to-earnings ratio for the S&P 500 to-rent ratios, adjusted for an estimate of their long-run remains in the upper end of its historical distribution trend and the carrying cost of housing, are approaching (figure A). Treasury term premiums have increased the cycle peaks of the early 1980s and early 1990s but modestly from the beginning of the year but remain remain well below the levels observed on the eve of low relative to historically observed values. Corporate the financial crisis. bond yields and their spreads to yields on comparable With households and businesses taken together, the maturity Treasury securities have increased notably, ratio of total debt to GOP is about in line with estimates but they continue to be low by historical standards. In of its trend, although pockets of stress are evident. !n particular, speculative-grade yields and spreads lie in the household sector, the net expansion of household the bottom fifth and bottom fourth of their respective debt has been in line with income growth and is historical distributions. In leveraged loan markets, concentrated among prime-rated borrowers. However, issuance has been robust, spreads have reached their delinquency rates for some forms of consumer credit lowest levels since the financial crisis, and the presence have moved up, suggesting rising strains among riskier of loan covenants has decreased further. In real estate borrowers even with unemployment very low. Banks are reportedly tightening standards on credit card and auto loans. In the nonfinancial business sector, leverage 1. An overview of the framework for assessing financial stability in the United States is provided in lac! Brainard of corporate businesses remains high, as indicated by (2018), "An Update on the Federal Reserve's Financial Stabl!ity a positive sectoral credit-to-GDP gap. Net issuance of Agenda,'' speech delivered at the Center for Global Economy risky debt has risen in recent quarters, mainly driven by and Business, Stern Schoo! New York the growth in leveraged loans (figure 8). While current New York, Apri I i•w•:l20 180-lOlJ.hlc (continued) 99 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00103 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 630.90513 ereh 63 oilof tesffo tresnI MONETARY POLICY REPORT: JUlY 2018 27 B. Total net issuance of risky debt a severe global recession.' The hypothetical "severely adverse'1 scenario---the most stringent scenario yet used in the Board's stress tests, with the U.S. unemployment rate rising almost 6 percentage points to 80 10 percent-projects $578 billion in total losses for the 35 participating banks during the nine quarters tested. Since 2009, these firms have added about $800 billion in common equity capital. The Board also evaluates the capital planning processes of the participating banks, including the firms' planned capital actions, such as dividend payments and share buybacks. 3 The Board did not object to the capital plans of 34 iirms. Although the recent U.S. tax legislation is expected to increase 40 banks' post-tax earnings, and hence their ability to accrete capital, it did lead to one-time losses, decreasing banks' capital ratios at the end of 2017, the jumping-off point of the stress tests. In part because of these effects, evident in text tlgure 36, two firms were required to maintain their capital distributions at the levels they paid in recent Separately, one firm will be required to address management and corporate credit conditions are favorable overall, analysis of its counterparty exposure under stress. The with low interest expenses and defaults, the elevated Board objected to the capital plan of one bank because leverage in this sector could result in higher future of qualitative concerns. default rates. In addition, weak protection from loan Vulnerabilities associated with liquidity and covenants could reduce early intervention by lenders maturity transformation----that is, the financing of and lower recovery rates for investors on default. illiquid assets or long-maturity assets with short Investors may also be exposed to significant repricing maturity debt~continue to be low, owing in part to risks because bond yields and credit risk premiums are liquidity regulations for banks and money market both low. reform. Large banks have strong liquidity positions, Vulnerabilities from financial-sector leverage because their use of core deposits as a source of continue to be relatively tow. Core financial funding and their holdings of high-quality liquid intermediaries, including large banks, insurance assets remain near historical highs, while their use of companies, and broker-dealers, appear well positioned short-term wholesale funding as a share of liabilities to weather economic stress. Regulatory capital ratios for is near historical lows. Since the money market fund the global systemically important banks have remained reforms implemented in October 2016, assets under well above the fully phased-in enhanced regulatory management at prime funds, institutions that proved requirements and are close to historical highs. Capital vulnerable to runs in the past, have remained far below levels at insurance companies and broker~dealers pre-reform levels. In addition, the growth in alternative also remain relatively robust by historical standards. short-term investment vehicles, which may have some However, some indicators of hedge fund leverage in (continued on next page) the equity market, such as the provision of total margin credit to equity investors, have risen to historically See Board of Governors of the Federal Reserve System "Federal Reserve Board RelE'ases Results of Supervisory elevated levels, and in the past few quarters dealers june 21. have reportedly eased, on net, price terms to their hedge fund clients. The results of supervisory stress tests released In June by the Federal Reserve Board confirm that the nation's largest banks are strongly capitalized and would be able to lend to households and businesses even during bcn.'g20l G0629d.htm. 100 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00104 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 730.90513 ereh 73 oilof tesffo tresnI 2 8 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS Financial Stability (continued) similar vulnerabilities, continues to be limited, as more pronounced vulnerabilities, reflecting some investors have shifted primarily from prime funds into combination of the following: subslantial corporate government funds. leverage, fiscal concerns, or excessive reliance on Risks from abroad are moderate overall. Advanced foreign funding. Globally, potential downside risks to foreign economies (AFEs), many of which have international financial markets and financial stability significant financial and real linkages to the United include political uncertainty, an intensification of trade St.1tes, continue to have notable or elevated valuations tensions, and challenges posed by rising interest rates. in some asset markets and, in a few countries, high The countercyclical capital buffer (CCyB) is a levels of household debt relative to GOP. These macroprudential tool the Federal Reserve Board can factors have contributed to some AFEs announcing usc to increase the resilience of the financial system or implementing macroprudential actions, including by raising capital requirements on the largest banks. increases in countercyclical capital buffers, over the Activating the CCyB is appropriate when systemic past couple of years. More generally, AFE financial vulnerabilities are meaningfully above normal.4 The sectors continue their slow pace of deleveraging Board is closely monitoring the level and configuration that started after the global financial and euro-area of systemic vulnerabilities described earlier. sovereign debt crises. In addition, low corporate debt spreads in the past few years have yet to translate 4. See Board of Governors of the Federal Reserve System into any marked increase in leverage in most of these (2016), "Regulatory Capital Rules: The Federal Reserve Board's Framework for Implementing the U.S. Basel Ill <..o<J<n<Xc)'U"'"' countries' nonfinancial corporate sectors. Some major Buffer," final policy statement (Docket No. emerging market economies continue to harbor vol. 81 (Septt'mbt'r 16), pp. 63682-llS. 101 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00105 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 830.90513 ereh 83 oilof tesffo tresnI MONETARY POLICY REPORT: jULY 2018 29 also generally stable. Overall, the functioning of Treasury and agency MBS markets has not been materially affected by the implementation of the Federal Reserve's balance sheet normalization program, including the accompanying reduction in reinvestment of principal payments from the Federal Reserve's securities holdings. Credit conditions in municipal bond markets have remained stable since the tnrn of the year. Over that period, yield spreads on 20-year general obligation municipal bonds over comparable-maturity Treasury securities edged up a bit. Money market rates have moved up in line with increases in the FOMC's target range Conditions in domestic short-term funding markets have also remained generally stable so far in 2018. Yields on a broad set of money market instruments moved higher in response to the FOMC's policy actions in March and June. Some money market rates rose during the first quarter more than what would normally occur with monetary tightening. For example, the spreads of certificates of deposit and term London interbank offered rates relative to overnight index swap (OIS) rates increased notably, reportedly reflecting increased issuance of Treasury bills and perhaps also the anticipated lax-induced repatriation of foreign earnings by U.S. corporations. The upward pressure on short term funding rates, beyond that driven by expected monetary policy, eased in recent months, leading to a narrowing of spreads of some money market rates to OIS rates. However, the spreads remain wider than at the beginning of the year. Bank credit continued to expand and bank nr.nllt:>lul Aggregate credit provided by commercial banks continued to increase through the first quarter of 2018 at a pace similar to the one seen in 2017. Its pace was slower than that of nominal GDP, thus leaving the ratio of total commercial bank credit to current-dollar 102 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00106 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 930.90513 ereh 93 oilof tesffo tresnI 30 PART 1: RECENT ECONOMIC AND EINANCIAL DEVELOPMENTS 35. Ratio of total commercial bank credit to nominal gross GDP slightly lower than in the previous year domestic product (figure 35). Available data for the second quarter suggest that growth in banks' core Per~cnt loans continued to be moderate. Measures of bank profitability improved in the first quarter 75 of 2018 after having experienced a temporary 70 decline in the last quarter of 2017. Weaker fourth-quarter measures of bank profitability 65 were partly driven by higher write-downs of deferred tax assets in response to the U.S. tax 60 legislation (figure 36). 55 International Developments Political developments and signs of moderating growth weighed on advanced foreign economy asset prices 36. Protitability of bank holding companies Since February, political developments in Europe and moderation in economic growth outside of the United States weighed 2.0 30 on some risky asset prices in advanced foreign economies (AFEs). Interest rates on LO sovereign bonds in several countries in the .5 t European periphery rose notably relative to 0 core countries, and European bank shares .5 10 came under pressure, as investors focused LO 20 on the formation of the ltalian government. LS Nonetheless, peripheral bond spreads remained well below their levels at the height of the euro-area crisis, and the moves partly retraced as a government was put in place. Broad stock price indexes were little changed on net (figure 37). In contrast to the United 37. Equity indexes for selected foreign economies States. long-term sovereign yields and market implied paths of policy rates in the core euro Weekly Weckcndmglanuary7,2015m J(lf) area as well as the United Kingdom declined 140 somewhat, and rates were little changed in Japan (figure 38). 130 120 Heightened investor focus on 110 vulnerabilities in emerging market economies led asset prices to come under 100 pressure 90 Investor concerns about financial 80 vulnerabilities in several emerging market economics (EMEs) intensified this spring against the backdrop of rising U.S. interest rates. Broad measures of EME sovereign 103 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00107 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 040.90513 ereh 04 oilof tesffo tresnI MONETARY POliCY REPORT JULY 2018 31 bond spreads over U.S. Treasury yields 38. Nominal 10 -year government bond yields in widened notably, and benchmark EME equity selected advanced economies indexes declined, as investors scrutinized Weekly Pen-en1 macroeconomic policy approaches in several countries. Turkey and Argentina, which faced 3.0 persistently high inflation, expansionary fiscal United States 2.5 policies, and large current account deficits, 2.0 were among the worst performers. Trade 1.5 policy developments between the United 1.0 States and its trading partners also weighed on EME asset prices, especially on stock prices in China and some emerging Asian countries. EME mutual funds saw net outnows in May and June after generally solid inllows earlier in the year (figure 39). While movements in asset prices and capital flows were notable for a number of economies, broad indicators of financial stress in EMEs remained low relative to levels seen during other periods of stress in 39. Emerging market mutual fund flows and spreads recent years. The dollar appreciated 500 60 After depreciating during 2017, the broad 450 "" exchange value of the U.S. dollar has 400 20 appreciated moderately in recent months 350 (ligure 40). Factors contributing to the appreciation of the dollar likely include 300 20 moderating growth in some foreign economies 250 ~- 40 combined with continued output strength 200 60 and ongoing policy tightening in the United States, downside risks stemming from political developments in Europe and several EMEs, and the recent developments in trade policy. Several currencies appeared particularly sensitive to trade policy developments, including the Canadian dollar and the Mexican peso, related to the North American Free Trade Agreement negotiations, as well as the Chinese renminbi, which fell notably against the dollar in June. The pace of economic activity moderated in the AFEs In the first quarter, real GOP growth decelerated in all major AFEs and turned negative in Japan, down from robust rates of activity in 2017 (figure 41 ). Part of this slowing is a result of temporary factors, though, 104 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00108 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 140.90513 ereh 14 oilof tesffo tresnI 32 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS 40. U.S. dollar exchange rate indexes including unusually cold weather in Japan and the United Kingdom, labor strikes in the Wt'£'kly -----~~-- W - e ~ e - ke - nd ~ in - g - Ja - nu - a - ry - 7, - 20 - !5 !00 euro area, and disruptions in oil production in Dollar appreciation !50 Canada. In most AFEs, economic indicators for the second quarter, including purchasing manager surveys and exports, are generally consistent with solid economic growth. Despite tight labor markets, inflation pressures remain subdued in mostAFEs ... Sustained increases in oil prices provided upward pressure on consumer price inflation across all AFEs in the first half of the year (figure 42). However, core intlation has generally remained muted in most AFEs, despite further improvement in labor market conditions. In Canada, in contrast, core intlation picked up amid solid wage growth, 41. Real gross domestic product growth in selected pushing the total intlation rate above the advanced foreign economics central bank target. IIIII United Kingdom ... prompting central banks to maintain highly accommodative monetary policies Wit Canada With underlying inflation still subdued, the Bank of Japan and the European Central Bank (ECB) kept their policy rates at historically low levels, although the ECB indicated it would again reduce the pace of its asset purchases starting in October. The Bank of England and the Bank of Canada, which both began raising interest rates last year, signaled that fnrther rate increases will be gradual, given a moderation in the pace of economic activity. In emerging Asia, growth remained solid ... Economic growth in China remained solid in the first quarter of 2018, as a rebound in steel production and strong external demand bolstered a recovery in industrial activity and overall growth (figure 43). Indicators of investment and retail sales have slowed in recent months, however, suggesting that the authorities' effort to rein in credit may have softened domestic demand. Most other 105 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00109 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 240.90513 ereh 24 oilof tesffo tresnI MONETARY POLICY REPORT: JULY 2018 33 emerging Asian economies registered strong 42. Consum.cr price inflation in selected advanced foreign growth in the tirst quarter of 2018, partly cconom1es reflecting solid external demand. \1onth!y 12-monthpcrc<:utdmngc ... while growth in some latin American economies was mixed In Mexico, real GDP surged in the first quarter as economic activity rebounded from two major earthquakes and a hurricane last year. Following a brief recovery in the first half of 2017, Brazil's economy stalled in the fourth quarter and grew tepidly in the first quarter, and a truckers' strike paralyzed economic activity in late May. 43. Real gross domestic product growth in selected emerging market economics Percent, annual rate !Ill China ![® Korea 12 • Mexico 106 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00110 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 340.90513 ereh 34 oilof tesffo tresnI 35 2 PART MoNETARY Poucy The federal Market Committee of the labor market and the accumulating continued to increase !he evidence that, after many years of runni;g federa I funds range in the first half below the Committee's 2 percent longer of the year ... run objective, inflation had moved close to 2 percent. Since December 2015, the Federal Open Market Committee (FOMC) has been ... but monetary policy continues to gradually increasing its target range for support economic growth the federal funds rate as the economy has continued to make progress toward the Even after the gradual increases in the federal Committee's congressionally mandated funds rate over the first half of the year, the objectives of maximum employment and Cormnittee judges that the stance of monetary price stability. In the first half of this year, the policy remains accommodative, thereby Committee continued this gradual process of supporting strong labor market conditions scaling back monetary policy accommodation, and a sustained return to 2 percent inflation. increasing its target range for the federal funds In particular, the federal funds rate remains rate '!4 percentage point at its meetings in both somewhat below most FOMC participants' March and June. With these increases, the estimates of its longer-run value. federal funds rate is currently in the range of 1% to 2 percent (figure 44).14 The Committee's The Committee expects that a gradual decisions reflected the continued strengthening approach to increasing the target range for the federal funds rate will be consistent with a sustained expansion of economic activity, 14. Sec Board of Governors of the Federal Reserve System (2018), "Federal Reserve Issues strong labor market conditions, and inflation FOMC Statement," press release, March 21, https:// near the Committee's symmetric 2 percent objective over the medium term. Consistent and of Governors of with this outlook, in the most recent the Federal Reserve System (2018), "Federal Reserve Summary of Economic Projections (SEP), Issues FOMC Statement.'' press release, June 13. https:/1 which was compiled at the time of the June FOMC meeting, the median of participants' 44. Selected interest rates 2008 2009 2010 JOll 2012 2013 2014 2015 2016 2017 20!8 107 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00111 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 440.90513 ereh 44 oilof tesffo tresnI 36 PART 2: MONETARY POLICY assessments for the appropriate level of the as useful benchmarks. However, the use and target range for the federal funds rate at interpretation of such prescriptions require, year-end rises gradually over the period from among other considerations, careful judgments 2018 to 2020 and stands somewhat above the about the choice and measurement of the median projection for its longer-run level by inputs to these rules such as estimates of the the end of 2019 and through 2020.1' neutral interest rate, which are highly uncertain (see the box "Complexities of Monetary future changes in the federal funds rate Policy Rules"). will depend on the economic outlook as informed by incoming data The FOMC has continued to implement its program to gradually reduce the The FOMC has continued to emphasize Federal Reserve's balance sheet that, in determining the timing and size of future adjustments to the target range for The Committee has continued to implement the federal funds rate, it will assess realized the balance sheet normalization program and expected economic conditions relative described in the June 2017 Addendum to the to its maximum-employment objective and Policy Normalization Principles and Plans." its symmetric 2 percent inflation objective. This program is gradually and predictably This assessment will take into account a wide reducing the Federal Reserve's securities range of information, including measures holdings by decreasing the reinvestment of the of labor market conditions, indicators of principal payments it receives from securities inflation pressures and inflation expectations, held in the System Open Market Account. and readings on financial and international Since the initiation of the balance sheet developments. normalization program in October of last year, such payments have been reinvested to the In evaluating the stance of monetary policy, extent that they exceeded gradually rising caps policymakers routinely consult prescriptions (figure 45). from a variety of policy rules, which can serve l5. See the June SEP, which appeared as an addendum to the minutes of the June 12~13, 2018, meeting of the FOMC and is presented in Part 3 of this report. 45. Principal payments on SOMA securities ·rreasury securities Agency debt and mortgage-backed securities Mo11thly Btlhon\ufdullars Monthly Redemptions Ill Redemptions Reinvestments 80 Reinvestments 80 - Monthly cap 70 Monthly cap 70 60 60 50 50 40 40 30 30 20 20 10 NOTE: Reinvestment and redemption amounts of agency mortgage~backed securities are projections starting in June 2018. The data extend through December 2019. SOURCE: Federal Reserve Bank of New York; Federal Reserve Board staff calculations. 108 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00112 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 540.90513 ereh 54 oilof tesffo tresnI MONETARY POLICY REPORT: JULY 2018 3 7 Complexities of Monetary Policy Rules Overview reflect the three key principles of good monetary policy noted earlier. Each rule takes into account estimates Monetary policy rules Jre mathematical formulas of how far the economy is from achieving the Federal that relate a policy interest rate, such as the federal Reserve's dual-mandate goals of maximum employment funds rate, to a small number of other economic and price stability. variables-typically including the deviation of inflation Four of the five rules include the difference from its target value along with an estimate of resource between the rate of unemployment that is sustainable slack in the economy. Policy rules can provide helpful in the longer run and the current unemployment guidance for policymakers. Indeed, since 2004, rate (the unemployment rate the first-difference prescriptions from policy rules have been included rule includes the change in unemployment gap in written materials that are routinely sent to the rather than its leveL' In addition, four of the five rules Federal Open Market Committee (FOMC). However, include the difference between recent inflation and the interpretation of the prescriptions of policy rules FOMC's longer-run objective (2 percent as measured requires careful judgment about the measurement of by the annual change in the price index for personal the inputs to the rules and the implications of the many consumption expenditures, or PCE), while the price considerations that the rules do not take into account. level rule includes the gap between the level of prices Policy rules can incorporate key principles of good today and the level of prices that would be observed monetary policy.1 One key principle is that monetary if inflation had been constant at 2 percent from a policy should respond in a predictable way to changes specified starting year (Plgap,).' The price-level rule in economic conditions. A second key principle is thereby tak<'s account of the deviation of inflation from that monetary policy should be accommodative when (continued on next page) inflation is below the desired level and emp!oymE'nt is below its maximum sustainable level; conversely, monetary policy should be restrictive when the Policy, proceedings of a symposium sponsored by the Federdl Reserve Bank of Kansas City, held in Jackson Hole, Wyo., opposite holds. A third key principle is that, to stabilize (Kansas Federal Reserve Bank of Kansas inflation, the policy rate should be adjustC'd by more 137~59, ll[[[JSJ""·"·'''"''''" than one~for-one in response to persistent increases or Finally, r;,_,_d;lfNenceru!e was decreases in inflation. by Athanasios Orphanides (2003), "Historical Monetary Po !Icy Analysis and the Taylor Rule," JournJI Economists have analyzed many monetary policy of Monetary Economics, vol. 50 Ou!y), pp. 983-1022. A rules, including the well-known Taylor (1993) rule. comprehensive review of policy rules is in John B, Taylor Other rules include the "balanced approach" rule, the and John C. Williams (2011), "Simple and Robust Rules for "adjusted Taylor (1993)" rule, the "price level" rule, and Monetary Policy," in Benjamin M. Friedman and Michael the "first difference" rule (figure A).' These policy rules Woodford, eds., I iandbook of Monetary Economics, vol. JB (Amsterdam: North~Holland), pp. 829-59. The same volume of the Handbook of Monetary Economics also discusses 1. For discussion regarding principles for the conduct of approaches other than policy rules for deriving policy rate monetary policy and monetary policy rules, see Board of prescriptions. Governors of the Federal Reserve System (2018), The Taylor (1993) rule represented slack in resource and Practice," Board of Governors, using an output gap (the difference between the current !eve! of real gross domestic product (GOP) and what GOP would be if the economy was operating at maximum in John ('mployrnent). The rules in figure A represent slack in resource in Practice," uti!izatlon using the unemployment gap instead, because that Rochester Conference Series on vaL 39 gap better captures the FOMC's statu~ory goal to pro~ote (December), pp. 195-214. The balanced-approach maximum employment. Movements m these a!ternat1ve analvzed in John B. Taylor (1999), "A Historical measures of resource utilization are highly correlated. For Mon'etary Policy Rules," in John B. Taylor, ed., more information, see the note below figure A Rules {Chicago: University of Chicago Press), pp. 4. Calculating the prescriptions of the price-level rule adjusted Taylor (1993) rule was studied in David Reifschneider requires selecting a starting year for the price level from which and John C Williams (2000), "Three lessons for Monetary to cumulate the 2 percent annual inflation. Figure Buses 1998 a Low-Inflation l::ra," Journal of Money_, Credit and as the starting year. Around that time, the underfying trend vo!. 32 (November), pp. 936-66. A price-!eve! rule of inflation and longer-term inflation expectations stabilized in Robert E. Hall (1984), "Monet.1ry at a level consistent with PCE price inflation being close to with an Elastic Price Standi!rd," in 2 percent. 109 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00113 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 640.90513 ereh 64 oilof tesffo tresnI 38 PART 2: MONETARY POLICY Monetary Policy Rules (continued! A. Monetary policy rules Taylor (1993) rule Balanced-approach rule Taylor (1993) rule, adjusted Price-level rule R[L = maximum {rt"R + rr, + (uiR-u,) + 05(PLgap,), 0} First-difference rule NOTE: R/"J, R,8A, R/wwf.', R/z·, and R/0 represent the values of the nominal federal funds rate prescribed by the Taylor ( !993), balanced-approach. adjusted Taylor (1993). price-leveL and iirst-diJTerence rules. respectively. R 1 denotes the actual nominal federal funds rate for quarter t, n, is four-quarter price inflation for quarter t, u, is the unemployment rate in quarter!, and r/" is the level of the neutral real federal funds rate in the longer run that, on average, is expected to be consistent with sustaining maximum employment and inflation at the FOMCs 2 percent Jong:er~run o[:jective. n.u. In addition, u/R is the rate of unemployment in the longer run. Z is the cumulative sum of past deviations of the federal funds rate from the prescriptions of the Taylor (1993) rule when that rule prescribes settjng the federal funds rate below zero. PLgap1 is the percent deviation of the actual level of prices from a price level that rises 2 percent per year from its level in a specified starting period. The Taylor (1993) rule and other poJjcy rules are generally written in terms of the deviation of real output from its full capacity level. In these equations, the output gap has been replaced with the gap between the rate of unemployment in the longer run and its actual level (using a relationship known as Ohm's law) in order to represent the rules in terms of the FOMCs statutory goals. Historically, movements in the output and unemployment gaps have been highly correlated. Box note 2 provides references for the policy rules. lhe long-run objective in earlier periods as well as also recognizes that the federal funds rate cannot be the current period. Thus, if inflation had been running reduced materially below zero. If inflation runs below persistently above 2 percent, the price-level rule would the 2 percent objective during periods when the rule prescribe a higher level for the federal funds rate than prescribes setting the federal funds rate well below rules that use the current inflation gap. Likewise, zero, the price-level rule wilt over time, provide if inflation had been running persistently below accommodation to make up for the past inflation 2 percent, the price-level rule would prescribe setting shortfalL the policy rate lower than rules that use the current The U.S. economy is complex, and the monetary inflation gap. policy rules shown in figure A do not capture many The adjusted Taylor (1993) rule recognizes that elements that are relevant to the conduct of monetary the federal funds rate cannot be reduced materially policy. Moreover, as shown in figure B, different below zero, and that following the prescriptions monetary policy rules often offer quite different of the standard Taylor (1993) rule after a recession prescriptions for the federal funds rate. s In practice, during which interest rates have fallen to their lower there is no unique criterion for favoring one rule over bound may, for a time, not provide enough policy another. In recent years, almost all of the policy rules accommodation. To make up for the cumulative (continued) shortfall in accommodation (Z), the adjusted rule prescribes only a gradual return of the policy rate to 5. These prescriptions are calculated using (1) published the (positive) levels prescribed by the standard Taylor data for inflation and the unemployment rate and (2l survey-based estimates of the longer-run value of the (1993) rule after the economy begins to recover. neutral real interest rate and the longer-run value of the The particular price-level rule specified in figure A unemployment rate. 110 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00114 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 740.90513 ereh 74 oilof tesffo tresnI MONETARY POLICY REPORT: JULY 2018 39 R Historical federal funds rate prescriptions from simple policy rules Quarterly vc.ar Sot:RtT Federal Reserve Rank of Philadelphia; Wolters Kluwcr, R!ue Chip Economic Indicators; Federal Reserve Board staff estimate~ shown have called for rising values of the federal funds growth, changing demographics, and other shifts in the rate, but the pace of tightening that the rules prescribe structure of the economy. As a result, estimates of the has varied widely. neutral rea! interest rate in the longer run made today may differ substantially from estimates made later. Uncertainty about the neutral interest rate Academic studies have estimated the longer- in the longer run run value of the neutral real interest rate using statistical techniques to capture the variations among The Taylor (1993), balanced-approach, adjusted inflation, interest rates, real gross domestic product, Taylor (1993), and price-level rules provide unemployment, and other data series. The range of prescriptions for the level of the federal funds rate; estimates is wide but suggests that the neutral real rate all require an estimate of the neutral real interest rate has declined since the turn of the century (figure C).' in the longer run (r,")-that is, the level of the real There is substantial statistical uncertainty surrounding federal funds rate that is expected to be consistent, in each estimate of the longer-run value of the neutral the longer run, with maximum employment and stable rea! rate, as evidenced by the width of the 95 percent inflation.6The neutral real interest rate in the longer (continued on next page) run is determined by structural features of the economy and is not observable. In addition, its value may vary over time because of fluctuations in trend productivity 6. The first-difference rule shown in figure A does not require an estimate of the neutral real interest rate in the longer run. However, this rule has its own shortcomings. For suggests that this sort of rule wi!! result in in employment and inflation rdative to what be under the Taylor {1993) and balanced- journal of lnternalional Economics, supp. 1, vo!. 108 approach rules unless the estimates of the neutral real federal (May), pp. Benjamin K. Johannsen and E!mar funds rate In the longer run and the rate of unemployment in Mertens (2016), Expected Rea! Interest Rate in the the longer run thJ.t are included in those rules J.re sufficiently long Run: Time Series Evidence with the Effective lower far from their true values. Bound," FEDS Notes (Washington: Board of Governors 111 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00115 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 840.90513 ereh 84 oilof tesffo tresnI 40 PART 2; MONETARY POLICY Monetary Policy Rules !continued! uncertainty bands for the estimated values in the first C. Range of selected estimates for the neutral real federal quarter of 2018 (figure D). funds rate in the longer run The longer-run normal level of the federal funds rate under appropriate monetary policy--equal to the sum of the neutral real interest rate in the longer run and the FOMC's 2 percent inflation objective-is one benchmark for evaluating the current stance of monetary policy. Uncertainty about the longer- run value of the neutral real interest rate leads to uncertainty about how far the current federal funds rate is from its !onger~run normal level. For the Taylor (1993), balanced-approach, adjusted Taylor (19931, and price-level rules, different estimates of the neutral real interest rate in the longer run translate one-for-one to differences in the prescribed setting of the federal funds rate. As a result, the substantial statistical uncertainty accompanying estimates of the neutral rate in the longer run implies substantial uncertainty surrounding the prescriptions of each policy rule. Following the prescriptions of a policy rule with an incorrect value of the neutral rate could lead to poor economic outcomes. If the longer-run value of the neutral real interest rate then monetary policy is more likely to be constrained is currently at the low end of the range of estimates, by the lower bound on nominal interest rates in the future. Historically, the FOMC has cut the federal funds rate by 5 percentage points, on average, during downturns in the economy. Cutting the federal funds rate by this much in response to a future economic downturn may not be feasible if the neutral federal funds rate is as low as most of the estimates suggest. (continued) 112 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00116 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 940.90513 ereh 94 oilof tesffo tresnI MONETARY POLICY REPORT: JULY 2018 41 D. Point estimates and uncertainty bands for neutral real rate in the longer run as of 2018:QI Point estimate band Del Negro and others (20 17) 1.3 Holston and others .6 Johannsen and Mertens (20 I 6) .7 (-1.3,2.5) Kiley (2015) .4 (-.6. 1.6) Laubach and Williams (2015) .I (-5.4, 5.6) Lewis and Vazquez-Grande (20 17) 1.8 (.5, 3.1) Lubik and Matthes (2015) 1.0 (-2.3, 4.5) SouRcE: Federal Reserve Board staff calculations, along with references listed in box note 7. As a result, it may not be feasible to provide the levels In the years following the financial crisis, with the of accommodation prescribed by many policy rules, federal funds rate close to zero, the FOMC recognized potentially leading to elevated unemployment and that it would have limited scope to respond to an inflation averaging below the Committee's 2 pE>rcE'nt unexpected weakening in the economy by lowering objective.' Rules that try to offset the cumulative short-term interest rates. This risk has, in recent years, shortfall of accommodation posed by the !ower bound provided a sound rationale for following a more on nominal interest rates, such as the adjusted Taylor gradual path of rate increases than that prescribed by (1993) rule, or make up the cumulative shortfall in some policy rules. In these circumstances, increasing the level of prices, such as the price-level rule, are the policy rate quickly in order to have room to intended to mitigate the effects of the lower bound cut rates during an economic downturn could be on the economy by providing more accommodation counterproductive because it might make a downturn than prescribed by rules that do not have these more likely to happen. makeup features. 9 8. For further discussion of these issues, see Michael T. Kiley and John M. Roberts in a low Interest 113 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00117 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 050.90513 ereh 05 oilof tesffo tresnI 42 PART 2: MONETARY POliCY In the first quarter, the Open Market Desk The implementation of the program has at the Federal Reserve Bank of New York, proceeded smoothly without causing disruptive as directed by the Committee, reinvested price movements in Treasury and MBS principal payments from the Federal Reserve's markets. As the caps have increased gradually holdings of Treasury securities maturing and predictably, the Federal Reserve's total during each calendar month in excess of assets have started to decrease, from about S12 billion. The Desk also reinvested in agency $4.4 trillion last October to about $4.3 trillion mortgage-backed securities (MBS) the amount at present, with holdings of Treasury securities of principal payments from the Federal at approximately $2.4 trillion and holdings Reserve's holdings of agency debt and agency of agency and agency MBS at approximately MBS received during each calendar month in $1.7 trillion (figure 46). excess of $8 billion. Over the second quarter, payments of principal from maturing Treasury The Federal Reserve's implementation of securities and from the Federal Reserve's monetary policy has continued smoothly holdings of agency debt and agency MBS were reinvested to the extent that they exceeded To implement the FOMC's decisions to raise S 18 billion and $12 billion, respectively. At the target range for the federal funds rate in its meeting in June, the FOMC increased the March and June of 2018, the Federal Reserve cap for Treasury securities to $24 billion and increased the rate of interest on excess reserves the cap for agency debt and agency MBS (IOER) along with the interest rate offered to $16 billion, both effective in July. The on overnight reverse repurchase agreements Conunittee has indicated that the caps for (ON RRPs). Specifically, the federal Reserve Treasury securities and for agency securities increased the IOER rate to 1Y . percent and will increase to $30 billion and $20 billion per the ON RRP offering rate to 1' h percent in month, respectively, in October. These terminal March. In June, the Federal Reserve increased caps will remain in place until the Committee the IOER rate to 1.95 percent-5 basis points judges that the Federal Reserve is holding no below the top of the target range--and the more securities than necessary to implement ON RRP offering rate to 1Y . percent. In monetary policy eflicicntly and effectively. addition, the Board of Governors approved 46. Federal Reserve assets and liabilities Weekly Tnlhonsordollar5 --Assets =Liabilities and capital D__"L_L_L..l_.i.......L.....---.L-L. . L..L._LJ'-.l_L--LJ_L-L.l--L_ 2008 2009 20!0 201 t 2012 20\3 2014 2015 2016 2017 2018 NoTE: ''Credit and liquidity facilities" consists: of primary, secondary, and seasonal credit; tenn auction credit; central hank liquidity swaps; support for Maiden Lane, Bear Stearns, and AIG; and other credit facilities, including the Primary Dealer Credit Facility, the Asset~ Backed Commercial Paper Money Market Mutual Fund Liquidity Facility. the Commercial Paper Funding and the Tenn Asset-Backed Securities Loan Facility, "Other assets" includes unamortized premiums and discounts on securities held outright. reverse repurchase agreements, the US Treasury General Account, and the U.S. Treasury Supplementary Financing Account. SocRno: Federal Rescn'e Board, Statistical Release H.4.1, "Factors Affecting Reserve Balances." 114 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00118 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 150.90513 ereh 15 oilof tesffo tresnI MONETARY POliCY REPORT: JUlY 2018 43 a'!. percentage point increase in the discount was trading near the top of the target range. rate (the primary credit rate) in hoth March At its June meeting, the Committee made a and June. Yields on a broad set of money small technical adjustment in its approach market instruments moved higher, roughly in to implementing monetary policy by setting line with the federal funds rate, in response the IOER rate modestly below the top of the to the FOMC's policy decisions in March target range for the federal funds rate. This and June. Usage of the ON RRP facility adjustment resulted in the effective federal has declined, on net, since the turn of the funds rate running closer to the middle of the year, reflecting relatively attractive yields on target range since mid-June. In an environment alternative investments. of large reserve balances, the I 0 ER rate has been an essential policy tool for keeping the The effective federal funds rate moved up federal funds rate within the target range set by toward the IOER rate in the months before the FOMC (see the box "Interest on Reserves the June FOMC meeting and, therefore, and Its Importance for Monetary Policy"). 115 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00119 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 250.90513 ereh 25 oilof tesffo tresnI 44 PART 2: MONETARY POLICY Interest on Reserves and Its Importance for Monetary Policy The financial crisis that began in 2007 triggered the As the economic expansion continued and deepest recession in the United States since the Great unemployment declined-and with labor market Depression. In response, the Federal Open Market conditions projected to continue improving·-·-the Committee (FOMC) cut its target for the federal funds FOMC decided that it would scale back policy rate to nearly zero by late 2008. Other short-term support by increasing the level of short-term interest interest rates declined roughly in line with the federal rates and by reducing the Federal Reserve's securities funds rate. Additional monetary stimulus was necessary holdings. To that end, the Committee began gradually to address the significant economic downturn and raising its target range for the federal funds rate in the associated downward pressure on inflation. The December 2015. Later, in October 2017, it began FOMC undertook other monetary policy actions to gradually reducing holdings of Treasury and agency put downward pressure on longer-term interest rates, securities; this gradual reduction results in a decline in including large-scale purchases of longer-term Treasury the supply of reserve balances. The FOMC judged that securities and agency-guaranteed mortgage-backed removing monetary policy stimulus through this mix of securities. first raising the federal funds rate and then beginning These policy actions made financial conditions more to shrink the balance sheet would best contribute to accommodative and helped spur an economic recovery achieving and maintaining maximum employment and that has become a long-lasting economic expansion. price stability without causing dislocations in financial The unemployment rate has declined from 10 percent markets or institutions that could put the economic to less than 4 percent over the course of the recovery expansion at risk. and expansion, and inflation has been low and fJirly Interest on reserves-the payment of interest on stable. The FOMC's actions were critical to fostering balances held by banks in their accounts at the Federal progress toward maximum employment and stable Reserve-has been an essential policy tool that has prices-the statutory goals for the conduct of monetary permitted the FOMC to achieve a gradual increase in policy established by the Congress. the federal funds rate in combination with a gradual The Federal Reserve's large-scale asset purchases reduction in the Fed's securities holdings and in the had the side effect of generating a sizable increase in supply of reserve balances.' Interest on reserves is a the supply of reserve balances, which are the balances monetary policy tool used by all of the world's major that banks maintain in their accounts at the Federal central hanks. Reserve,1 From the onset of the financial crisis in Interest on reserves is the principal tool the FOMC August 2007 until October 2014, when the FOMC uses to anchor the federal funds rate in the target range. ended the last of its asset purchase programs, the The federal funds rate, in turn, establishes an important supply of reserve balances rose from about $15 billion benchmark for the borrowing and lending decisions to about $21fl trl1lion.1 Reserve balances rose well in the banking sector (figure A). When the Federal above the level necessary to meet reserve requirements, Reserve increases the target range for the federal funds thus swelling the quantity of excess reserves held by the rate and the interest rate it pays on reserve balances, banking system. banks bid up the rates in short-term funding markets to levels consistent with those increases; rates in other short-term funding markets-such as commercial paper rates, Treasury bill rates, and rates on repurchase 1. A!! depository institutions (commercial banks, savings (continued) banks, thrift institutions, credit unions, and most U.S. branches and agencies of foreign banks) that maintain reserve balances are eligible to earn interest on those balances. We refer to 3. The Financial Services Regulatory Relief Act of 2006 these institutions as "banks." authorized the Federal Reserve Banks to pay interest on 2. For a detailed discussion of how the changes in Federal balances held by or on behalf of depository institutions at Reserve securities holdings affect the Federal Reserve's Federal Reserve Banks, subject to of the Board of balance sheet and sectors of the U.S. economy, see Jane Governors, effective October 1, date of this Ihrig, lawrence Mize, and Gretchen C. Weinbach (2017), authority was changed to October 1, 2008, by the Emergency "How Does the Fed Adjust Its Securities Holdings and Who Is Economic Stabilization Act of 2008. The Congress authorized Affected?" Finance and Economics Discussion Series 2017- the payment of interest on reserves to help minimize the 099 Board of Governors of the Federal Reserve incentives for costly reserve avoidance schemes and 1o provide '1-\'\'> \v.fedt:r ,l:re:;('rve .gov/ecnnr es/ the Federal Reserve with a policy tool that could be useful for monetary policy implementation more broadly. 116 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00120 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 350.90513 ereh 35 oilof tesffo tresnI MONETARY POLICY REPORTo JULY 2018 45 A. Overnight money market rates B. Term money market rates Target range 250 150 225 125 200 200 !75 175 !50 150 125 l2:'i 100 100 75 75 50 50 25 25 agreements-all tend to move higher as well (figure B), is higher than the interest it pays on reserve balances. This increase in the general level of short-term rates, Each the Federal Reserve remits its earnings- together with the expected future path of short-term that its income net of expenses-to the Treasury rates, then influences the level of other financial asset Department; in 2017, remittances totaled more than prices and overall financial conditions in the economy. $80 billion. Thus, changing the interest rate on reserves has proven Had the Federal Reserve not been able to pay to be an effective tool for transmitting changes in the interest on reserve balances at the same time that FOMC's target range for the federal funds rate to other excess reserves in the banking system were large, it interest rates in the economy. would not have been able to gradually raise the federal The rate of interest the Federal Reserve pays on funds rate and other short-term interest rates while banks' reserve balances is far lower than the rate that reserve balances were abundant; the FOMC would banks can earn on alternative safe assets, including have had to take a different approach to scaling back most U.S. government or agency securities, municipal monetary policy accommodation. This approach likely securities, and loans to businesses and consumers.4 would have involved a rJpid and sizable reduction Indeed, the bank prime rate---the base rate that banks in the Federal Reserve's securities holdings in order use for loans to many of their customers-is currently to put sufficient upward pressure on interest rates. around 300 basis points above the level of interest on (continued on next page) reserves. Banks continue to find !ending attractive, and bank lending has been expanding at a solid pace Reguldtion D defines short-term interest rdtcs fur tht• since 2012. Households have begun to see interest of this authority as "rates on obligations with rates on retail deposits rising as well. Moreover, the no more than one year, such as the primary configuration of interest rates implies that the return rates on term federal funds, term repurchase agreements, the Federal Reserve earns on its holdings of securities commercial paper, term Eurodollar deposits, and other simifar instruments." The rate of interest on reserves has been well within a of :.hort-term interest rates as defined in Board 4. The Congress's authorization allows the Federal regulations. rJtes on a numbf'r of short-term money Reserve to pay interest on deposits maintained by depository market instruments, see Board of Governors of the Federal institutions at a rate not to exceed the "general !eve! of Reserve Statistical Release "Selected Interest short~term interest rates." The Federal Reserve Board's Rates," ;:current. 117 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00121 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 450.90513 ereh 45 oilof tesffo tresnI 46 PART 2c MONETARY POliCY Interest on Reserves (continued) Getting the pace of asset sales just right for achieving yet known, that level is likely to be much lower than it the Federal Reserve's objectives would have been is today, though appreciably higher than it was before extremely challenging. Such an approach to removing the crisis.6 In addition, the amount of U.S. currency~ accommodation would have run the risk of disrupting Federal Reserve notes~that people in the United States financial markets, with adverse effects on the economy. and elsewhere want to hold has increased substantially Indeed, as observed during the early summer of since the crisis. If banks want to hold more reserve 2013, market reactions to changes in the outlook for balances and the public wants to hold more U.S. the Federal Reserve's holdings of long-term securities currency than before the crisis, the Federal Reserve will can have outsized effects in bond markets. At that time, need to supply the reserves and currency, so the Federal FOMC communications that pointed to the eventual Reserve's securities holdings also will have to be larger cessation of asset purchases seemed to alarm investors than before the financial crisis.7 and reportedly contributed to a rise in longer-term rates Interest on reserves will remain an important policy of 1 SO basis points over just a few months. That rise in tool for keeping the federal funds rate within the target rates quickly pushed up the cost of mortgage credit and range set by the FOMC and thus managing the level of rates on other forms of borrowing for households and short-term interest rates, even as the ongoing reduction businesses. in the Federal Reserve's securities holdings generates a Thus, Federal Reserve policymakers judged that gradual decline in the amount of reserve balances on the best strategy for adjusting the stance of monetary which the Federal Reserve pays interest. In June 2018, policy would be gradual increases in the target range the Federal Reserve made a small technical adjustment for the federal funds rate, supplemented later on by to de-link the rate of interest on reserves from the top gradual reductions in the Federal Reserve's securities of the Committee's target range for the federal funds holdings. The ongoing, gradual reduction in the Federal rate. At the june 2018 FOMC meeting. the Committee Reserve's securities holdings that the FOMC set in increased the federal funds target range by 25 basis motion in 2017 will bring the !eve! of reserve balances points, while the rate of interest on reserve balances down substantially over the next few years. The size was increased by 20 basis points. This change is of reserves that banks eventually want to hold will intended to ensure that the federal funds rate continues reflect balances held to meet reserve requirements and to trade well within the Committee's target range. The payments needs as well as balances held to address spread between the effective federal funds rate and the regulatory and structural changes in the banking system rate of interest on reserves could continue to narrow since the financial crisis.5 Although the level of reserve over time as the Federal Reserve's securities holdings balances that banks will eventually want to hold is not and the supply of reserve balances gradually decline. 6. Uncertainty about the eventual level of reserve balances is another reason that the FOMC has been reducing the Federal Reserve's holdings of securities, and the supply of reserve balances, gradually. 7. Currency grows roughly in fine with nominal domestic product. ln December 2008, currency in WJS around $850 billion, compared with $1.6 trillion at end of June 2018. 118 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00122 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 550.90513 ereh 55 oilof tesffo tresnI 47 3 PART SuMMARY OF EcoNOMIC PROJECTIONS The following material appeared as an addendum to the minutes of the june 12-13,2018, meeting of the Federal Open Market Committee. In conjunction with the Federal Open All participants who submitted longer-run Market Committee (FOMC) meeting held projections expected that, throughout the on June 12··13, 2018, meeting participants projection period, the unemployment rate submitted their projections of the most likely would run below their estimates of its longer outcomes for real gross domestic product run level. All participants projected that (GDP) growth, the unemployment rate, and inflation, as measured by the four-q uartcr inflation for each year from 2018 to 2020 percentage change in the price index for and over the longer run.17 Each participant's personal consumption expenditures (PCE), projections were based on information would run at or slightly above the Committee's available at the time of the meeting, together 2 percent objective by the end of 2018 and with his or her assessment of appropriate remain roughly flat through 2020. Compared monetary policy-including a path for the with the Summary of Economic Projections federal funds rate and its longer-run value (SEP) from March, most participants slightly and assumptions about other factors likely marked up their projections of real GDP to affect economic outcomes. The longer- growth in 2018 and somewhat lowered their run projections represent each participant's projections for the unemployment rate from assessment of the value to which each variable 2018 through 2020; participants indicated would be expected to converge, over time, that these revisions reflected, in large part, under appropriate monetary policy and in the strength in incoming data. A large majority of absence of further shocks to the economy.'' participants made slight upward adjustments "Appropriate monetary policy" is defined as to their projections of inflation in 2018. the future path of policy that each participant Table 1 and figure 1 provide summary statistics deems most likely to foster outcomes for for the projections. economic activity and inflation that best satisfy his or her individual interpretation of As shown in figure 2, participants generally the statutory mandate to promote maximum continued to expect that the evolution of employment and price stability. the economy relative to their objectives of maximum employment and 2 percent All participants who submitted longer-run inflation would likely warrant further gradual projections expected that, in 2018, real GDP increases in the federal funds rate. The central would expand at a pace exceeding their tendencies of participants' projections of the individual estimates of the longer-run growth federal funds rate for both 2018 and 2019 rate of real GDP Participants generally saw were roughly unchanged, but the medians real GDP growth moderating somewhat in for both years were 25 basis points higher each of the following two years but remaining relative to March. Nearly all participants who above their estimates of the longer-run rate. submitted longer-run projections expected that, during part of the projection period, 17. Three members of the Board of Governors were in evolving economic conditions would make it office at the time of the June 2018 meeting. appropriate for the federal funds rate to move 18. One participant did not submit longer-run projections for real GDP growth, the unemployment rate, somewhat above their estimates of its longer or the federal funds rate, run level. 119 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00123 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 650.90513 ereh 65 oilof tesffo tresnI 48 PART 3: SUMMARY OF ECONOMIC PROJECTIONS Table l. Economic projections of Federa1 Reserve Board members and Federal Reserve Bank presidents, under their individual assessments of projected appropriate monetary policy, June 2018 Percent 3.4-3.7 4.3-4.6 3.5-3.8 3.3~3.8 .1.3--4.0 4.1-4.7 4.3--4.7 3.6-4.0 3.3--4.2 3.3--4.4 4.2~4.8 2.1 2.1 2.0 2.0.·2.2 1.9-2.3 2.0.·2.3 2.0 2.0 2J 2.0 1.8 2.1 1.9-2.3 2.0-·2.3 2.0 2.1 2.1 1.9-2.1 2.0--2.3 2.0-2.3 2.1 2.1 1.8-2.1 1.9-2.3 2.0-2.3 3.1 3.4 In general, participants continued to view mentioned accommodative monetary policy the uncertainty attached to their economic and financial conditions, strength in the global projections as broadly similar to the outlook, continued momentum in the labor average of the past 20 years. As in March, market, or positive readings on business and most participants judged the risks around consumer sentiment as important factors their projections for real GDP growth, the shaping the economic outlook. Compared with unemployment rate, and inflation to be the March SEP, the median of participants' broadly balanced. projections for the rate of real GDP growth was 0.1 percentage point higher for this year The Outlook for Economic Activity and unchanged for the next two years. The median of participants' projections for Almost all participants expected the the growth rate of real GDP, conditional on unemployment rate to decline somewhat their individual assessments of appropriate further over the projection period. The monetary policy, was 2.8 percent for this year median of participants' projections for the and 2.4 percent for next year. The median unemployment rate was 3.6 percent for the was 2.0 percent for 2020, a touch above the final quarter of this year and 3.5 percent median projection of longer-run growth. Most for the final quarters of 2019 and 2020. The participants con tinned to cite fiscal policy as median of participants' estimates of the a driver of strong economic activity over the longer-run unemployment rate was unchanged next couple of years. Many participants also at 4.5 percent. 120 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00124 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 750.90513 ereh 75 oilof tesffo tresnI MONETARY POLICY REPORT: IULY 2018 49 Figure 1. Medians, central tendencies, and ranges of economic projections, 2018 · 20 and over the longer run l\.'1"\:eut Change in real GDP - Median of projections Central tendency of projections Range of projections ~ .LJ 2013 2014 2015 2016 2017 2018 2019 2020 Longer run Percent Unemployment rate - 7 - 6 - 5 - 4 - 3 2013 2014 2015 2016 2017 2018 2019 2020 Longer run Percent PCE inflation - 3 2013 2014 2015 2016 2017 2018 2019 2020 Longer run Percent Core PCE inflation -- 3 a;a ~ - I 2013 2014 2015 2016 2017 2018 2019 2020 Longer run NOTE: Ddinitions of variables and other explanations arc in the notes to table l. The data for the actual vaJu~s of the variables arc annual. 121 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00125 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 850.90513 ereh 85 oilof tesffo tresnI 50 PART 3o SUMMARY OF ECONOMIC PROJECTIONS Figure 2. FOMC participants' assessments of appropriate monetary policy: Midpoint of target range or target level for the federal funds rate Percent 5.0 4.5 ·····~··· 40 3.5 3.0 ............... _ 2.5 ............... J .............. -~" •• 2.0 .. ·········~·· 1.5 1.0 ......... ···- 0.5 0.0 2018 2019 2020 Longer run Non:: Each shaded circle indicates the value (rounded to the nearest 118 percentage point) of an individual participant's judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run. One participant did not submit longer-run projections for the federal funds rate. Figures 3.A and 3.B show the distributions of The Outlook for Inflation participants' projections for real GDP growth and the unemployment rate from 2018 to 2020 The medians of participants' projections for and over the longer run. The distribution of total and core PCE price inflation in 2018 were individual projections for real GDP growth 2.1 percent and 2.0 percent, respectively, and this year shifted up noticeably from that in the the median for each measure was 2.1 percent March SEP. By contrast, the distributions of in 2019 and 2020. Compared with the March projected real GDP growth in 2019 and 2020 SEP, the medians of participants' projections and over the longer run were little changed. for total PCE price inflation for this year and The distributions of individual projections for next were revised up slightly. Some participants the unemployment rate in 2018 to 2020 pointed to incoming data on energy prices shifted down relative to the distributions as a reason for their upward revisions. The in March, while the downward shift in the median of participants' forecasts for core PCE distribution of longer-run projections was price inflation was up a touch for this year and very modest. unchanged for subsequent years. 122 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00126 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 950.90513 ereh 95 oilof tesffo tresnI MONETARY POLICY REPORT: jULY 2018 51 Figures 3.C and 3.0 provide information on funds rate over the next few years would the distributions of participants' views about likely involve gradual increases. This view the outlook for inflation. The distributions was predicated on several factors, including a of both total and core PCE price inf1ation judgment that a gradual path of policy firming for 2018 shifted to the right relative to the likely would appropriately balance the risks distributions in March. The distributions of associated with, among other considerations, projected inf1ation in 2019, 2020, and over the possibilities that U.S. liscal policy could the longer run were roughly unchanged. have larger or more persistent positive effects Participants generally expected each measure on real activity and that shifts in trade policy to be at or slightly above 2 percent in or developments abroad could weigh on 2019 and 2020. the expansion. As always, the appropriate path of the federal funds rate would depend Appropriate Monetary Policy on evolving economic conditions and their implications for participants' economic Figure 3.E provides the distribution of outlooks and assessments of risks. participants' judgments regarding the appropriate target--or midpoint of the target Uncertainty and Risks range-for the federal funds rate at the end of each year from 2018 to 2020 and over the In assessing the path for the federal funds rate longer run. The distributions of projected that, in their view, is likely to be appropriate, policy rates through 2020 shifted modestly FOMC participants take account of the range higher, consistent with the revisions to of possible economic outcomes, the likelihood participants' projections of real GOP growth, of those outcomes, and the potential benefits the unemployment rate, and inf1ation. As and costs should they occur. As a reference. in their March projections, a large majority table 2 provides measures of forecast of participants anticipated that evolving uncertainty, based on the forecast errors of economic conditions would likely warrant various private and government forecasts the equivalent of a total of either three or over the past 20 years, for real GOP growth, fonr increases of 25 basis points in the target the unemployment rate, and total PCE price range for the federal funds rate over 2018. inflation. Those measures are represented There was a slight reduction in the dispersion of participants' views. with no participant Table 2. Average historical projection error ranges regarding the appropriate target at the end of Percentage points the year to be below 1.88 percent. For each subsequent year. the dispersion of participants' year-end projections was somewhat smaller than that in the March SEP. The medians of participants' projections of the federal funds rate rose gradually to 2.4 percent at the end of this year, 3.1 percent at the end of 2019, and 3.4 percent at the end of 2020. The median of participants' longer run estimates, at 2. 9 percent, was unchanged relative to the March SEP. In discussing their projections, many participants continued to express the view that the appropriate trajectory of the federal 123 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00127 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 060.90513 ereh 06 oilof tesffo tresnI 52 PART 3: SUMMARY OF ECONOMIC PROJECTIONS Figure 3.A. Distribution of participants' projections for the change in real GDP, 2018--20 and over the longer run :-.lumber of participants 2018 [J -IS -16 14 12 -l() -4 1.4 1.6 1.8 !.5 1.7 1.9 Percent range ~umhcrofparticipants 2019 -18 16 -14 12 -10 !.4- 1.6- 1.8·· 3.0 !.5 1.7 19 2.3 1.5 }_1 Percent range Number of participants 2020 -IS -16 -14 -12 JO 8 -6 -4 14-· 2.4- " 3.0 1.5 2.3 2.5 2.7 3.1 Percent ran~.: l\'umbcrofpmticipants Longer run -18 -16 -14 -12 -10 -8 2.2- 1_4~ 2.6- 2.8- 23 2.5 2.7 2.9 Percent range NoTE: Definitions of variables and other explanations are in the notes to table 1. 124 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00128 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 160.90513 ereh 16 oilof tesffo tresnI MONETARY POliCY REPORT: jUlY 2018 53 Figure 3.B. Distribution of participants' projections for the unemployment rate, 2018-20 and over the longer run 1\'umberofpartJdpants 2018 D 18 16 -14 -12 -10 '- 3.(}.. 4.(~ 4.2- 4.+- 4.6· 4.8 5.0~ 3.1 4.1 4.3 4.5 4.7 4.9 5.1 Percent range !\"umber of participants 2019 18 -16 -14 12 -10 - 4 : 3 u 0 ~ " H 4 4 . . 6 7 " " 4.8 ~ 5 5 . 1 (~ Percent range Number of participants 2020 18 -16 -14 -12 -10 8 6 - 4 44 4.6 4.8· 5.(} 4.5 4.7 4.9 5.1 Pt.!rccnt range ;.:umber of participants. Longer run 18 -16 -14 12 -10 8 6 Percent range NoTE: Definitions of variables and other explanations arc in the notes to table 1. 125 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00129 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 260.90513 ereh 26 oilof tesffo tresnI 54 PART 3: SUMMARY OF ECONOMIC PROJECTIONS Figure 3.C. Distribution of participants' projections for PCE inflation, 2018·--20 and OYer the longer run Numberofpart!dpants 2018 0 IK 16 -14 -12 r -10 - 4 1.7 L9~ 2,3- 18 2.0 24 Percent range Number nf partk!pant~ 2019 18 16 -14 -12 -10 - 6 1.7 2.3 18 24 Percent range Numhcrorp;<rtidp,mts 2020 -IS -16 -14 -12 -10 8 - 6 :1::..9n 2.2 2 2 3 4 1'\umhcrt>fparticipants. Longer run 18 -16 -14 -12 10 21- 23- 24 Percent range NOTE: Definitions of variables and other explanations arc in the notes to table 1. 126 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00130 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 360.90513 ereh 36 oilof tesffo tresnI MONETARY POLICY REPORT: JULY 2018 55 Figure 3.D. Distribution of participants' projections for core PCE infia1ion. 2018-20 Numbcrotpart!cipants 2018 -18 16 14 12 r 10 -8 -4 1.7-- 2.1-- 2.:'1---- 1! 2.0 24 Percent range :-\umbcrnfparticip;mts 2019 18 16 -14 -12 10 U l! :.n Percent range Number 0f partidpanL~ 2020 18 16 -14 12 10 1.9· 2U Percent range Non-e: Definitions of variables and other explanations arc in the notes to table I. 127 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00131 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 460.90513 ereh 46 oilof tesffo tresnI 56 PART 3: SUMMARY OF ECONOMIC PROJECTIONS Figure 3.E. Distribution of participants' judgments of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate, 2018-20 and over the longer run Numbcrofp<~rticlpants 2018 -18 16 14 -12 -10 4.~8·· 4.63. 4.83· 4.62 4.87 5.12 Percent range Numhi:rofpnrticipants 2019 -18 -10 -14 12 -10 8 2020 18 16 14 Percent range Number of participants Longer run -18 -·-16 -14 -12 10 8 6 -4 !.63--. !.88- 2.13- :us- 4.38- 187 212 2.:n 2.62 5.12 Percent range NOTE: Definitions of variables and other explanations are in the notes to table !. 128 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00132 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 560.90513 ereh 56 oilof tesffo tresnI MONETARY POLICY REPORT: JULY 2018 57 graphically in the "fan charts" shown in participants saw the risks to their projections the top panels of figures 4.A, 4.B, and 4.C. as broadly balanced. Specifically, for GDP The fan charts display the median SEP growth, only one participant viewed the risks projections for the three variables surrounded as tilted to the downside, and the number of by symmetric confidence intervals derived participants who viewed the risks as tilted from the forecast errors reported in table 2. to the upside dropped from four to two. If the degree of uncertainty attending these For the unemployment rate, the number of projections is similar to the typical magnitude participants who saw the risks as tilted toward of past forecast errors and the risks around the low readings dropped from four to two. For projections are broadly balanced, then future inflation, all but one participant judged the outcomes of these variables would have about risks to either total or core PCE price inflation a 70 percent probability of being within these as broadly balanced. confidence intervals. ror all three variables, this measure of uncertainty is substantial and In discussing the uncertainty and risks generally increases as the forecast horizon surrounding their projections, several lengthens. participants continued to point to tlscal developments as a source of upside risk, Participants' assessments of the level of many participants cited developments related uncertainty surrounding their individual to trade policy as posing downside risks to economic projections are shown in the their growth forecasts, and a few participants bottom-left panels of flgures 4.A, 4.B, also pointed to political developments in and 4.C. Nearly all participants viewed Europe or the global outlook more generally the degree of uncertainty attached to their as downside-risk factors. A few participants economic projections for real GDP growth, noted that the appreciation of the dollar the unemployment rate, and inflation as posed downside risks to the inflation outlook. broadly similar to the average of the past A few participants also noted the risk of 20 years, a view that was essentially unchanged inflation moving higher than anticipated as the from March.19 unemployment rate falls. Because the fan charts are constructed to be Participants' assessments of the appropriate symmetric around the median projections, future path of the federal funds rate were also they do not reflect any asymmetries in the subject to considerable uncertainty. Because balance of risks that participants may see the Committee adjusts the federal funds in their economic projections. Participants' rate in response to actual and prospective assessments of the balance of risks to their developments over time in real GOP growth, economic projections are shown in the the unemployment rate, and inflation, bottom-right panels of figures 4.A, 4.B, and uncertainty surrounding the projected path 4.C. Most participants judged the risks to for the federal funds rate importantly reflects their projections of real GDP growth, the the uncertainties about the paths for those unemployment rate, total inflation, and core key economic variables. Figure 5 provides a inflation as broadly balanced-in other words, graphical representation of this uncertainty, as broadly consistent with a symmetric fan plotting the median SEP projection for the chart. Compared with March, even more federal funds rate surrounded by confidence intervals derived from the results presented 19. At the end of this summary. the box "Forecast in table 2. As with the macroeconomic Uncertainty" discusses the sources and interpretation variables, forecast uncertainty surrounding the of uncertainty surrounding the economic forecasts and explains the approach used to assess the uncertainty and appropriate path of the federal funds rate is risks attending the participants' projections. substantial and increases for longer horizons. 129 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00133 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 660.90513 ereh 66 oilof tesffo tresnI 58 PART 3o SUMMARY OF ECONOMIC PROJECTIONS Figure 4.A. Uncertainty and risks in projections of GDP growth Median projection and confidence interval based on historical forecast errors -3 -I 2013 2014 2015 201fi 2017 2018 2019 2020 FOMC participants' assessments of uncertainty and risks around their economic projections Numbcrofpar1K1pan1~ Numhcrofparticipant~ Uncertainty about GDP growth 0 18 16 14 12 10 Lower Broadly Higher Weighted to Broadly Weighted to Similar downside hal anced upside NOTE: The blue and red Jines in the top panel show actual values and median projected values.. rcspcctivc!y, of the percent change in real (GOP) from the fourth quarter of the previous year to the fourth quarter of the year indicated. The the median projected values is assumed to be symmetric and is based on ront mean squared errors of various private and government forecasts made over the previous :20 years: more information about these data is available in table 2. Because current conditions may dilfer from those that prevailed, on average. over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC participants' current assessments of the uncertainty and risks around their projections: these current assessments are «ummarized in tbe lower panels. Generally speaking. participants who judge the uncertainty about their projections as .. broadly similar .. to the average levels of the past 20 years would view the width of the confidence interval shown in the historical fan chart as largely consistent with their assessments or the uncertainty about their projections. Likewise. participants who judge the risks to their projections as "broadly balanced .. would view the conHdence interval around their projections as approximately symmetric. For definitions of uncertainty and risks in economic projections, sec the box "Forecast Uncertainty." 130 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00134 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 760.90513 ereh 76 oilof tesffo tresnI MONETARY POLICY REPORTo JULY 2018 59 Figure 4.B. Uncertainty and risks in projections of the unemployment rate Median projection and confidence interval based on historical forecast errors Percent 10 -9 -8 -6 -4 20!3 2014 2015 2016 2017 2018 2019 2020 FOMC participants' assessments of uncertainty and risks around their economic projections Numlxr of partinpanl~ Numhernrparticipants Uncertainty about the unemployment rate EJ 18 18 16 -16 -14 14 12 10 8 - 6 Lower Broadly Higher Weighted to Broadly Weighted to Similar downside balanced upside NoTE: The blue and red lines in the top panel show actual values and median projected values. of the average um:m.,1oymcJtlt rate in the fourth the year indicated. The confidence interval the median projected root mean squared errors of various private and government forecasts made more information about these data is available in table 2. Because current conditions those on average, over the previous 20 years. the width and on the basis of the historical forecast errors may not reflect fOMC participants' current assessments of the uncertainty and risks around their projections; these current assessments arc summarized in the lower panels. Generally speaking, participants who judge the uncertainty about their projections as "broadly similar" to the average levels of the past 20 years would v1ew the width of the confidence interval shown in the historical fan chart as largely consistent with their assessments of the uncertainty about their projections. Likewise, participants who judge the risks to their projections as "broadly balanced .. would view the confidence interval around their projections as approximately symmetric. For definitions of uncertainty and risks in economic projections. see the box '·Forecast Uncertainty."' 131 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00135 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 860.90513 ereh 86 oilof tesffo tresnI 60 PART 3o SUMMARY OF ECONOMIC PROJECTIONS Figure 4.C. Uncertainty and risks in projections of PCE inflation Median pwjection and confidence interval based on historical forecast errors Percent PCE inflation - 0 2013 2014 2015 2016 2017 2018 FOMC participants' assessments of uncertainty and risks around their economic projections Number of pari!C!pants NumhcrofpaliKipants Uncertainty about PCE inflation Risks to PCE inflation G:l -18 0 -18 16 16 14 14 12 12 -10 10 - 8 6 Lower Broadly Higher Weighted to Broadly Weighted to Similar downside balanced uPside Numbcrrli'p<~rticipants Number of panldpanL> Uncertainty about core PCE inflation Risks to core PCE inflation 0 IS 0 -18 -16 -16 14 -14 - 12 -12 -10 10 - 8 8 - 6 Lower Broadly Higher Similar Non: The blue and red lines in the top panel show actual values and median projected values., respectively, of the percent change in the price index for personal consumption expenditures (PCE) from the fourth quarter of the previous year to the fourth quarter of the year indicated. The confidence interval around the median projected \'alues is assumed to be symmetric and is based on root mean squared errors of various private and government forecasts made over the previous 20 years; more information about these data is available in table 2. Because current conditions may differ from those that prevailed, on average, over the previous 20 years, the \vidth and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FO:MC participants' current assessments of the uncertainty and risks around their projt->ctions; these current assessments are summarized in the lower panels. Generally speaking, participants who judge the uncertainty about their projections as ''broadly similar'' to the average levels of the past 20 years would view the width of the confidence interval shown in the historical fan chart as largely consistent with their assessments of the uncertainty about their projections. Likewise. participants who judge the risks to their projections as ''broadly balanced" would view the confidence interval around their projections as approximately symmetric. For definitions of uncertainty and risks in economic projections, sec the box ·'Forecast Uncertainty. . , 132 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00136 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 960.90513 ereh 96 oilof tesffo tresnI MONETARY POLICY REPORT: )LILY 2018 61 Figure 5. Uncertainty in projections of the federal funds rate Median projection and confidence interval based on historical forecast errors ------------------------------------------------------------------------~Pe~r~nt Federal funds rate -6 -5 -3 20D 2014 2015 2016 2017 2018 2019 2020 NoTE: The blue and red lines are based on actual values and median projected values, respectively, of the Committee's target for the federal funds rate at the end of the year indicated. The actual values are the midpoint of the target range; the median projected values are based on either the midpoint of the target range or the target level. The confidence interval around the median projected values is based on root mean squared errors of various private and government forecasts made over the previous 20 years. The confidence interval is not strictly consistent with the projections for the federal funds rate. primarily because these projections are not forecasts of the likeliest outcomes for the federal fllllds rate. but rather projections of participants' individual assessments of appropriate monetary policy. StilL historical forecast errors provide a broad sense of the uncertainty around the future path of the federal funds rate generated by the uncertainty about the macroeconomic variables as well as additional adjustments to monetary policy that may be appropriate to offset the effects of shocks to the economy. The confidence interval is assumed to be symmetric except vJ1en it is truncated at zero-,the bottom of the lowest target range for the federal funds rate that has been adopted in the past by the Committee This truncation would not be intended to indicate the likelihood of the use of negative interest rates to provide additiona1 monetary policy accommodation if doing so was judged appropriate. In such situations, the Committee could also employ other tools, including forward guidance and largc~scale asset purchases. to provide additional accommodation. Because current conditions may differ from those that prevailed, on average. over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC participants· current assessments of the uncertainty and risks around their projections. *The cnnfidencc interval is derived of short-rerm interest rates in the fourth quarter of the year indicated: more information about these data The shaded area cncPmpasscs less than a 70 percent confidence interval if the confidence interval has been truncated at zero. 133 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00137 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 070.90513 ereh 07 oilof tesffo tresnI 62 PART 3: SUMMARY OF ECONOMIC PROJECTIONS Forecast Uncertainty The economic projections provided by the members of in the bottom-left panels of those figures. 1'-articipants the Board of Governors and the presidents of the Federal also provide judgments as to whether the risks to their Reserve Banks inform discussions of monetary policy projections are weighted to the upside, are weighted to among policymakers and can aid public understanding the downside, or are broadly balanced. That is, while the of the basis for policy actions. Considerable uncertainty symmetric historical fan charts shown in the top panels of attends these projections, however. The economic and figures 4.A through 4.C imply that the risks to participants' statistical models and relationships used to help produce projections are balanced, participants may judge that economic forecasts are necessarily imperfect descriptions there is a greater risk that a given variable will be above of the real world, and the future path of the economy rather than below their projections. These judgments can be affected by myriad unforeseen developments and are summarized in the lower-right panels of figures 4./\ events. Thus, in setting the stance of monetary policy, through 4.C. participants consider not only what appears to be the As with real activity and inflation, the outlook for most likely economic outcome as embodied in their the future path of the federal funds rate is subject to projections, but also the range of alternative possibilities, considerable uncertainty. This uncertainty arises primarily the likelihood of their occurring, and the potential costs to because each participant's assessment of the appropriate the economy should they occur. stance of monetary policy depends importantly on Table 2 summarizes the average historical accuracy the evolution of real activity and inflation over time. If of a range of forecasts, including those reported in past economic conditions evolve in an unexpected manner, Monetary Policy Reports and those prepared by the then assessments of the appropriate setting of the federal Federal Reserve Board's staff in advance of meetings of the funds rate would change from that point forward. The Federal Open Market Committee (FOMC). The projection final line in table 2 shows the error ranges for forecasts of error ranges shown in the table illustrate the considerable short-term interest rates. They suggest that the historical uncertainty associated with economic forecasts. For confidence intervals associated with projections of the example, suppose a participant projects that real gross federal funds rate are quite wide. It should be noted, domestic product (GDP) and total consumer prices will however, that these confidence intervals are not strictly rise steadily at annual rJtes of, respectively, 3 percent and consistent with the projections for the federal funds 2 percent. If the uncertJinty attending those projections rate, as these projections are not forecasts of the most is similar to that experienced in the past and the risks likely quarterly outcomes but rather are projections around the projections are broadly balanced, the numbers of participants' individual assessments of appropriate reported in table 2 would imply a probability of about monetary policy and are on an end-of-year basis. 70 percent that actual GOP woutd expand within a range However, the forecast errors should provide a sense of the of 1.7 to 4.3 percent in the current year, 1.0 to 5.0 percent uncertainty around the future path of the federal funds rate in the second year, and 0.9 to 5.1 percent in the third generated by the uncertainty about the macroeconomic year. Tiu.~ corresponding 70 percent confidence intervals variables as well as additional adjustments to monetary for overall inflation would be 1.3 to 2.7 percent in the policy that would be appropriate to offset the effects of current year and 1.0 to 3.0 percent in the second and third shocks to the economy. years. Figures 4.A through 4.C illustrate these confidence If at some point in the future the confidence interval bounds in "fan charts" that are symmetric and centered on around the federal funds rate were to extend below zero, the medians of FOMC participants' projections for GDP it would be truncated at zero for purposes of the fan chart growth, the unemployment rate, and inflation. However, shown in figure 5; zero is the bottom of the lowest target in some instances, the risks around the projections may range for the federal funds rate that has been adopted not be symmetric. In particular, the unemployment rate by the Committee in the past. This approach to the cannot be negative; furthermore, the risks around a construction of the federal funds rate fan chart would be particular projection might be tilted to either the upside or merely a convention; it would not have any implications the downside, in which case the corresponding fan chart for possible future policy decisions regarding the use of would be asymmetrically positioned around the median negative interest rates to provide additional monetary projection. policy accommodation if doing so were appropriate. In Because current conditions may differ from those that such situations, the Committee could also employ other prevailed, on average, over history, participants provide tools, including forward guidance and asset purchases, to judgments as to whether the uncertainty attached to provide additional accommodation. their projections of each economic variable is greater White figures 4.A through 4.C provide information on than, smaller than, or broadly similar to typical levels the uncertainty around the economic projections, figure 1 of forecast uncertainty seen in the past 20 years, as provides information on the range of views across FOMC presented in table 2 and reflected in the widths of the participants. A comparison of figure 1 with figures 4.A confidence intervals shown in the top panels of figures through 4.C shows that the dispersion of the projections 4.A through 4.C. Participants' current assessments of the across participants is much smaller than the average uncertainty surrounding their projections are summarized forecast errors over the past 20 years. 134 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00138 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 170.90513 ereh 17 oilof tesffo tresnI 63 ABBREVIATIONS AFE advanced foreign economy BBA Bipartisan Budget Act of 2018 BLS Bureau of Labor Statistics C&I commercial and industrial Desk Open Market Desk at the Federal Reserve Bank of New York DPI disposable personal income ECB European Central Bank EME emerging market economy FOMC Federal Open Market Committee; also, the Committee GDP gross domestic product IOER interest on excess reserves JOLTS Job Openings and Labor Turnover Survey LFPR labor force participation rate MBS mortgage-backed securities Michigan survey University of Michigan Surveys of Consumers OIS overnight index swap ONRRP overnight reverse repurchase agreement PCE personal consumption expenditures SEP Summary of Economic Projections SLOOS Senior Loan Olliccr Opinion Survey on Bank Lending Practices S&P Standard & Poor's TCJA Tax Cuts and Jobs Act TIPS Treasury Inflation-Protected Securities VIX implied volatility for the S&P 500 index 135 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00139 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 270.90513 ereh 27 oilof tesffo tresnI 136 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00140 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 370.90513 ereh 37 oilof tesffo tresnI -1 - Questions for The Honorable Jerome H. Powell, Chairman, Board of Govemors of the Federal Reserve System, from Representative Beatty: 1. Title III of the Dodd-Frank Wall Stt·eet Reform and Consumer Protection Act, P.L. 111- 203, ("Dodd-Frank") transferred to the Board of Governors of the Federal Reserve System supervisory and examination authority of savings and loan holding companies and their non-depository subsidiaries in 2011. This included supervisory and examination authority of savings and loan holding companies primarily engaged in insurance underwriting activities. According to the 1 04th Annual Report of the Board of Governors of the Federal Reserve System, the Fed supervised 11 insurance savings and loan holding companies in 2017, including two Ohio-based companies. Please describe the Fed's history of regulating insurance companies. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) gave the Federal Reserve supervisory and regulatory responsibilities for insurance companies that either own a federally insured thrift as pmt of a savings and loan holding company (SLHC) or are designated as systemically important by the Financial Stability Oversight Council (FSOC). This responsibility extends to the functionally regulated subsidiaries of these companies. Prior to the Dodd-Frank Act, the Federal Reserve supervised insurance companies that were part of a bank holding company stmcture. In developing its regulatory framework for supervised insurance companies, the Federal Reserve Board (Board) has sought to adapt and tailor its overall statutory responsibility for supervised institutions and to appropriately incorporate considerations for the different material characteristics of insurance companies. While the Board has developed rules specifically for supervised insurance companies, the Federal Reserve does not regulate the business of insurance, including for its supervised institutions. As patt of the Dodd-Frank Act's authorization to develop a regulatory and supervisory framework for its supervised insurance companies, the Federal Reserve has pursued several initiatives. These initiatives include the establishment of capital requirements for supervised insurance companies and the establishment of enhanced prudential standards for institutions that have been desit;;nated as systemically important. On June 3, 2016, the Board approved and invited comment on an advance notice of proposed rulemaldng (ANPR) on two tailored conceptual frameworks for capital stm1daxds for supervised insurance companies. One of the proposed frameworks was tailored for insurance companies designated as systemically important, while the other was tailored for insurance companies that own a depository institution. The Federal Reserve is continuing to develop consolidated capital requirements for supervised insurance companies. The Board also approved a proposed 1ule on June 3, 2016, to apply enhanced prudential standards to systemically important insurance companies designated by the FSOC. These rulemakings would apply consistent liquidity, corporate governance, and risk management standards to these firms. In addition, the Board regularly reviews new and existing guidance and regulations to determine the appropriate applicability for insurance savings and loan holding companies (ISLHCs) while continuing to develop appropriate regulations. 137 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00141 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 470.90513 ereh 47 oilof tesffo tresnI -2 2. Currently, how many insurance savings and loan holding companies does the Fed supervise? The Federal Reserve currently supervises 11 ISLIICs. 3. Do you believe that you have the authority to tailor supervisory regulations with regards to insurance savings and loan holding companies? If so: a. Can you provide a complete list and short description of every instance where the Fed has explicitly tailored supervisory and examination regulations, guidance or supervisory letters to insurance savings and loan holding companies since July 21, 2011? The Home Owners' Loan Act of 1933 (via the Dodd-Frank Act) provides the Federal Reserve the flexibility to tailor appropriately its regulations and guidance for ISLHCs, to ensure each firm's safety and soundness without imposing bank-centric standards. As part of the general supervisory process, the Federal Reserve tailors the application of supervisory letters (i.e., guidance) and regulations to ISLHCs based on the finn's size, risk profile, structure, and business model. Federal Reserve supervisors work closely with state insurance regulators and other relevant functional regulators of material business lines to ensure the Federal Reserve's supervisory expectations are appropriately aligned with eaeh firm's business and risk profiles. Below is a sample list and summary of significant supervisory guidance and regulations that the Federal Reserve has tailored or exempted ISLHCs from since July 21, 2011. Exemption from Dodd-J:<'rank Act Capital, Stress Testing, and Liquidity Requirements: The expectations in Supervision and Regulation (SR) Letter 12-7, "Supervisory Guidance on Stress Testing tor Banking Organizations with More Than $10 Billion in Total Consolidated Assets," and in the Comprehensive Capital Analysis and Review/Dodd-Frank Aruma! Stress Testing have not been applied to ISLHCs to date but do apply to bank holding companies that meet the same asset thresholds. In addition, the Federal Reserve did not apply Dodd-Frank Act bank liquidity requirements (e.g., liquidity coverage ratio) and Basel III regulatory capital standards to ISLHCs, as those specific capital and liquidity standards are too bank-centric. Applicability of the Federal Reserve's Holding Company Rating System: In 2016, the Board issued a Notice for Public Comment regarding the view that the petmanent application of the RFI Rating System (Risk Management, Financial Condition, and Impact) to SLHCs would not apply to ISLHCs. This notice stated the Board's intent to review "whether a modified version of the lU'l rating system or some other supervisory rating system is appropriate for these firms on a permanent basis." Similarly, in a 2017 Notice of Proposed Rulemaking, the proposed Large Financial Institution (LFf) Rating System to be used at large firms supervised by the Federal Reserve would not apply to large ISLHCs. If the LFI Rating System is implemented, the Board intends to review the potential application and/or modification for ISLHCs. ISLHCs will continue to be rated uoder the RFI rating system on an indicative basis while the Board considers rating system options. 138 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00142 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 570.90513 ereh 57 oilof tesffo tresnI -3 - The Federal Reserve has tailored the application of indicative RFI ratings to ISLHCs through intcmal guidance, which are called Advisory Letters. Intemal guidance provides Federal Reserve examiners direction on how to tailor their analysis of the financial conditions ofiSLHCs to reflect the differences associated with the business of insurance. It also directs examiners to rely, to the fullest extent possible, on the work of an ISLHC's state insnrance regulator(s) when assessing the risk management of insurance-specific activities at an ISLHC. Internal guidance requires Federal Reserve examiners to incorporate an ISLHC's Own Risk Solvency Assessments (ORSAs), a state insurance regulator requirement, in their evaluations and to discuss results from the ORSA with the appropriate state insurance regulator(s). Supervisory Guidance Applicable to SLHCs prior to July 21,2011: SR Letter 14-9, "Incorporation of Federal Reserve Policies into the Savings and Loan Holding Company Supervision Program," lists guidance that was applicable to SLHCs prior to the transfer of supervisory authority from the Office of1nrift Supervision to the Federal Reserve. Internal guidance issued on general supervision allows for tailoring for ISLHCs, if necessary. For example, SR Letter 12-17, "Consolidated Supervision for Large Financial Institutions," is applicable to ISLHCs with $50 billion or more in assets (now $100 billion following enactment of S. 2155), and addresses generally the supervision program for large firms. Guidance issued on specific topics addressed in SR Letter 12-17, however, will have insurance-specific tailoring. The Board is in the process of developing guidance that outlines the Federal Reserve's supervisory framework for ISLHCs. This guidance will also discuss how supervisory guidance is applied and tailored, as well as the Federal Reserve's interagency coordination activities with state insurance regulators and other functional regulators of ISLHCs. h. Does the Fed have any additional plans to tailor new and/or existing regulations, guidance, or supervisory letters to insurance savings and loan holding companies in the future? If so: i. Please describe those plans with specificity to the fullest extent possible. ii. When does the Fed expect to undertal<e these actions? Board staff is emTently developing guidance that provides an overview of its supervisory framework for ISLHCs. This guidance will clarify the Federal Reserve's supervisory objectives and approach; articulate the Federal Reserves's process for applying and tailoring supervisory guidance; and demonstrate how the Federal Reserve relies on, and coordinates with, tl1e primary functional regulators (i.e., state insurance regulators, federal and state banking regulators, and any other domestic or foreign supervisors) ofiSLHCs and their regulated subsidiaries. In addition, this guidance will describe the Board's process for reviewing the applicability of guidance and regulations to ISLHCs and its oversight duties ofiSLHC supervisory activities. The Board expects to issue this guidance in the near future. The Board will continue to assess new guidance and regulations for applicability to ISLHCs and tailor applicable guidance, when appropriate. 139 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00143 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 670.90513 ereh 67 oilof tesffo tresnI -1 - Questions for The Honorable Jerome H. Powell, Chairman, Board of Governors of the Federal Reserve System, from Representative Gottheimer: 1. In the 2015 rulemaking for the risk-based capital surcharges for Global Systemically Important Bank Holding Companies (GSIBs), the Federal Reserve Board (FRB) notes the need to periodically review the coefficients to update its GSIB Method 2 in relation to economic growth. The FRB rule states, "To ensure changes in economic growth do not unduly affect firms' systemic risk scores, the Board will periodically review the coefficients and make adjustments as appropriate." Are there any discussions or plans to update or re-examine the GSIB coefficients, particularly given recent economic growth? Docs the FRB plan to periodically review coefficient or are there economic factors that will trigger such a review? If periodically, how frequently will the reviews be conducted? How has recent economic growth impacted scores under the GSIB methodology? The Federal Reserve Board's (Board) capital rules have been designed to significantly reduce the likelihood and severity of future financial crises by reducing both the probability of failure of a large banking organization and the consequences of such a failure were it to occur. Capital rules and other prudential requirements for large banking organizations should be set at a level that protects financial stability and maximizes long-term, through-the-cycle, credit availability and economic growth: Consistent with these principles, the Board originally calibrated the GSIB surcharge so that-given the circumstances of the financial system--each GSIB would hold enough capital to lower its probability of failure so that the expected impact of its failure on the fmancial system would be approximately equal to that of a large non-GSIB. The bulk of post-crisis regulation is largely complete, with the important exception of the U.S. implementation of the recently concluded Basel Committee agreement on bank capital standards. It is therefore a natural and appropriate time to step back and assess those efforts. The Board is conducting a comprehensive review of the regulations in the core areas of post-crisis reform, including capital, stress testing, liquidity, and resolution. The objective of this review is to consider the effect of those regulatory frameworks on the resiliency of the financial system, including improvements in the resolvability of banking organizations, and on credit availability and economic growth. In general, I believe overall capital for our largest banking organizations is at about the right level. Critical elements of onr capital structure for these organizations include stress testing, the stress capital buffer, and the enhanced supplementary ratio. Work is underway to finalize the calibration of these fundamental building blocks, all of which form part of the system in which the GSIB surcharge has an effect. In this regard, I would note that the GSIB surcharge rule does not take full effect until January 2019. 140 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00144 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 770.90513 ereh 77 oilof tesffo tresnI - I - Questions for The Honorable Jerome H. Powell, Chairman, Board of Governors of the Federal Reserve System, from Representative Huizenga: 1. When the GSIB surcharge was finalized in 2015, the FRB recognized that the GSIB surcharge "may be affected by economic growth that docs not represent an increase in systemic risk." Accordingly, the FRB committed, "[t)o ensure changes in economic growth do not unduly affect firms' systemic risk scores, the Board will periodically review the coefficients and make adjustments as appropriate." Do you continue to believe, as you have testified, that the United States has experienced significant economic growth in recent years? Accordingly, is the FRB monitoring and prepared to update the requirement accordingly? The Federal Reserve Board's (Board) capitalmles have been designed to significantly reduce the likelihood and severity of future financial crises by reducing both the probability of failure of a large banking organization and the consequences of such a failure were it to occur. Capitalmles and other pmdential requirements for large banking organizations should be set at a level that protects financial stability and maximizes long-term, through-the-cycle, credit availability and economic growth. Consistent with these principles, the Board originally calibrated the GSIB surcharge so that-given the circumstances of the financial system--each GSIB would hold enough capital to lower its probability of failure so that the expected impact of its failure on the financial system would be approximately equal to that of a large non-GSIB. The bulk of post-crisis regulation is largely complete, with the important exception of the U.S. implementation of the recently concluded Basel Committee agreement on bank capital standards. It is therefore a natural and appropriate time to step back and assess those efforts. The Board is conducting a comprehensive review of the regulations in the core areas of post-crisis reform, including capital, stress testing, liquidity, and resolution. The objective of this review is to consider the effect of those regulatory frameworks on the resiliency of the financial system, including improvements in the resolvability of banking organizations, and on credit availability and economic growth. In general, I believe overall capital for our largest banking organizations is at about the right level. Critical elements of our capital structure for these organizations include stress testing, the stress capital buffer, and the enhanced supplementary ratio. Work is underway to finalize the calibration of these fundamental building blocks, all of which form pati of the system in which the GSIB surcharge has an effect. In this regard, I would note that the GSIB surcharge mle does not take full effect until January 2019. 141 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00145 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 870.90513 ereh 87 oilof tesffo tresnI -1 - Questions for The Honorable Jerome H. Powell, Chairman, Board of Governors of the Federal Reserve System, from Representative Messer: 1. Chairman Powell, thank you for testifying before the House Financial Services Committee on July 18, 2018. On May 24, 2018, President Trump signed S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act, into law. I am concerned about the implementation of Section 403 of the Act, which is entitled "Treatment of Certain Municipal Obligations." Specifically, subsection (b) of that section states: Not later than 90 days after the date of the enactment of this Act, the Federal Deposit Insurance Corporation, the Board of Governot·s of the Federal Reserve System, and the Comptroller ofthe Currency shall amend the final rule entitled "Liquidity Coverage Ratio: Liquidity Risk Measurement Standards" (79 Fed. Reg. 61439 (October 10, 2014)) and the final rule entitled "Liquidity Coverage Ratio: Treatment of U.S. Municipal Securities as High-Quality Liquid Assets" (81 Fed. Reg. 21223 (Aprilll, 2016)) to implement the amendments made by this section. Can you detail the steps the Federal Reserve has taken to work with the FDIC and OCC to amend the relevant rules relating to the Liquidity Coverage Ratio to meet the August 22, 2018, deadline as established by the Act? Following the enactment of S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), stafffrom the f'ederal Reserve, FDIC, and OCC (the agencies) took action to comply with the requirements of the statute. Section 403 of the EGRRCPA required the agencies, within 90 days of enactment, to treat municipal obligations as high-quality liquid assets (HQLA) under their liquidity coverage ratio (LCR) mles if the municipal obligations are investment grade and considered liquid and readily marketable. On August 22, 2018, the agencies jointly issued an interim final rule (IFR) to treat eligible municipal obligations as HQLA. The IFR took effect upon publication in the Federal Register on August 31,2018, and public comments on the IFR were accepted by the agencies until October 1, 2018. 142 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00146 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 970.90513 ereh 97 oilof tesffo tresnI Questions for The Honorable Jerome J>owell, Chairman, Board of Governors of the Federal Reserve System from Representative Sherman: 1. Home price and rent growth are driving inflation. Are there measures the Federal Reserve could take to stimulate single family and apartment construction and thereby ease inflation? The Federal Open Market Committee (FOMC or Committee) monitors the housing market carefully as it is an important sector of the economy. However, monetary policy affects the economy as a whole and carroot be used to stimulate single family and apat1ment construction in isolation. To the extent that there are supply constraints in the housing sector, addressing them is well beyond the responsibility of the Federal Reserve. Rather, the Federal Reserve aims to promote an economic environment with stable inflation and sustainable economic growth, which helps support investment in all sectors of the economy, including housing. 2. With low unemployment, how does the Federal Reserve plan to curb inflation? The Federal Reserve conducts monetary policy in order to promote maximum employment and low and stable inflation at the rate of2 percent per year. While there exists an economic relationship between slack in the labor market and inflation, this relationship appears to be much weaker than in previous decades. In the latest Summary of Economic Projections, the median projection ofFOMC pm1icipants indicates that, under appropriate monetary policy, the unemployment rate will remain low and inflation will stay close to 2 percent. That said, the Committee is always monitoring inflation developments carefully and is ready to adjust the course of monetary policy to achieve its objectives. 3. To the extent the Federal Reserve decides to continue to raise interest rates to combat signs of increasing inflation, are you concerned that these steps could lead to a slower economy, or possibly a recession? As I discussed in remarks I gave at a symposium hosted by the Federal Reserve Bank of Kansas City in Jackson Hole in August, there are two main risks confronting policymakers currently: moving too fast and needlessly shortening the expansion, versus moving too slowly and risking a destabilizing overheating. Minutes ofFOMC meetings and other Federal Reserve communications infonn the general public that our discussions focus keenly on the relative salience of these risks. I see the emrent path of gradually raising interest rates as the FOMC's approach to taking seriously both of these risks. While the unemployment rate is below the Committee's estimate of the longer-run natural rate, estimates of this rate are quite unce11ain. The same is true of estimates of the neutral interest rate. We therefore refer to many indicators when judging the degree of slack in the economy or the degree of accommodation in the current policy stance. We are also aware that, over time, inflation has become much less responsive to changes in resource utilization. 143 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00147 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 080.90513 ereh 08 oilof tesffo tresnI -2- While inflation has recently moved up near 2 percent, we have seen no clear sign of an acceleration above 2 percent, and there does not seem to be an elevated risk of overheating. This is good news, and we believe that this good news results in part from the ongoing nmmalization process, which has moved the stance of policy gradually closer to the FOMC's rough assessment of neutral as the expansion has continued. As the most recent FOMC statement indicates, if the strong grov.th in income and jobs continues, further gradual increases in the target range for the federal funds rate will likely be appropriate. My colleagues and I are carefully monitoring incoming data, and we are setting policy to do what monetary policy can do to support continued growth, a strong labor market, and inflation near 2 percent. 4. Are you concerned at all about the possibility of "stagflation"? In addition, are you concerned that with interest rates still being relatively low, you would have limited tools to combat a recession when one occurs? "Stagflation" is typically defined as involving a combination of substandard growth or above normal unemployment, and higher-than-desired inflation. There are many risks in the macroeconomy at any given time, and the future course of the economy is always difficult to discern. My colleagues and I are carefully monitoring incoming data, and are on alert for unforeseen developments of any kind. However, at present, the risk of stagflation appears to be quite low. 6. How concerned are you about the risks of an inverted yield curve, which historically leads to a recession? Will you let the yield curve invert? The Federal Reserve does not control or target the Treasury yield curve. The shape of the yield curve is one of many financial and economic indicators that we consider in assessing the economic outlook and the appropriate course of monetary. policy. It is normal for the yield curve to flatten over the course of an economic expansion as the FOMC scales back monetary policy accommodation. The FOMC's policies reflect the strong performance of the U.S. economy and are intended to help make sure that this trend continues. Currently, the risks to the economic outlook appear roughly balanced. In other words, when weighing a wide range of relevant infonnation, it does not appear that there is an elevated risk of a recession. The FOMC will continue to make its monetary policy decisions to best promote its maximum employment and price stability objectives. Based on historical data, there is a statistical relationship between an inverted yield curve and the probability of a subsequent recession. However, research is not conclusive as to whether an inverted yield curve causes recessions. Since the financial crisis, longer-term yields have been held down by many factors other than policy rate expectations, so it is uncertain whether the historical predictive relationship is still a reliable guide. 9. What is your goal for the 10-year Treasury note by the end of2019? 144 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00148 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 180.90513 ereh 18 oilof tesffo tresnI -3- The Federal Reserve does not control or target the yield on the ten-yeaT Treasury note. To fulfill its congressional mandate of maximum employment and price stability, the FOMC adjusts the stance of monetary policy primarily by changing the target range for the federal funds rate. The yield on the ten-year Treasury note is one of many indicators that the Committee considers in its policy deliberations. 10. Do you see the economy staying strong for the next 2 years or do yon see a possible recession in 2019 or 2020? As I noted in remarks in Jackson Hole, over the course of a long recovery, the U.S. economy has strengthened substantially. The unemployment rate has declined steadily for almost nine years and, at 3.9 percent, is now near a 20-year low. Most people who want jobs can find them. Inflation has moved up and is now ncar the FOMC's objective of2 percent after rum1ing generally below that level for six years. With solid household and business confidence, healthy levels of job creation, rising incomes, and fiscal stimulus arriving, there is good reason to expect that this strong performance will continue. 11. What are you going to do to keep stimulating business growth, which ultimately stimulates the economy for individuals? To support the ongoing growth of the economy, my colleagues and I will focus intently on pursing the dual mandate given to us by the Congress --to promote price stability and maximum employment. We strongly believe that pursuing that dual mandate is the best means available to us to set a positive backdrop for decision-making by businesses and households, consistent with their long-term wellbeing. 145 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00149 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 280.90513 ereh 28 oilof tesffo tresnI Questions for The Honorable Jerome H. Powell, Chairman, Board of Governors of the Federal Reserve System, from Representative Sherman: 5. What effect do you think the President's trade policies will have on the economy? As you know, trade policy is the responsibility of Congress and the Administration. The Federal Reserve's statutory mandate is to formulate monetary policy to achieve price stability and maximum sustainable employment. In general, trade and access to global markets provide many benefits for businesses and the people they employ, including larger and deeper markets for their products and a wider selection of inputs for production. Consumers also benefit through a greater variety of goods and more competitive prices. That said, the benefits of trade are not shared equally by all people and all sectors ofthe economy. Policymakers and economists alike are increasingly cognizant of the need to design policies to support workers and families so that the benefits of trade can be more widely shared. In pursuit of our statutory objectives, we monitor the effects of various developments, including trade policy, on the economy. Tariff increases, by both the United States and other countries, have already affected individual businesses and industries. Although the direct effects of announced measures on the overall U.S. economy are likely to be fairly modest, there is a possibility that trade tensions could disrupt supply chains and undermine business confidence. As indicated in the Federal Open Market Committee's (FOMC or Committee) minutes and the Beige Book, our business contacts increasingly report that trade policy developments are raising input costs and creating policy uncertainty, which is causing some fi1ms to delay investments. The Administration's current trade policy process is still ongoing. If the end result is a world with higher tariffs in many countries, then experience suggests there will be significant negative effects for the U.S. economy. On the other hand, if the end result is a world with lower trade barriers and a more level playing field, then the U.S. economy will benefit. 7. How concerned are yon about the danger of a crisis in emerging market economies with their currencies losing value and with the ·Federal Open Market Committee raising rates? How concerned are you about risks of contagion to the United States if there is a crisis in emerging market economies? Emerging market countries are an important part of the global economy, accounting for about half of U.S. trade and over half of global economic growth. Accordingly, developments in emerging markets matter for the U.S. economy. The Federal Reserve adjusts its policy to achieve its congressionally mandated objectives of price stability and maximum employment in the United States. Rising U.S. interest rates largely reflect the strength of the U.S. economy, which is good news for the rest of the world, and emerging markets arc no exception. 146 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00150 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 380.90513 ereh 38 oilof tesffo tresnI -2- Higher U.S. interest rates and a rising dollar may exert some financial pressure on emerging markets, especially those that have borrowed considerably in U.S. dollars. Only a few emerging market economies have faced substantial financial distress this year, and those are countries with particular vulnerabilities, such as high debt, CU!Tent account deficits, and inflation. Still, we continue to monitor emerging market developments, as more-widespread economic difficulties could lead to heightened volatility in global financial markets and reduce demand for U.S. exports. The Federal Reserve strives to communicate its thinking about monetary policy as clearly and transparently as possible, which should limit the likelihood of market ove!Teaction to its decisions. We have signaled for some time that we expect to raise interest rates only gradually as the U.S. economy strengthens. Ultimately, sustaining the economic expansion and domestic financial stability will help suppmt prosperity and growth abroad as well. 8. How will diverging rate paths between the United States and the European Union play out? Is there anything in the data that suggests rising inflation will become a significant issue? The Federal Reserve's monetary policy is focused on our congressionally mandated objectives of maximum employment and price stability in the United States. In pursuing those objectives, we monitor developments abroad, which can affect U.S. economic activity and inflation through a number of channels. For instance, if the path of foreign interest rates falls shmt of expectations, that will likely put some upward pressure on the dollar and also could weigh on U.S. long-te1m bond yields. With those effects offsetting each other to some extent, lower foreign interest rates should have only a marginal impact on the U.S. economy. Economies vary in terms of their inflation perfmmance and the degree of labor market slack. It should be expected that monetary policy will also vary across economies in response to local conditions. Currently, the U.S. labor market is very strong and U.S. inflation has moved to near 2 percent. In the euro area, the economic recovery continues to be sluggish compared to the United States, and inflation has persisted well below their 2 percent target, so the European Cenu·al Bank has only recently begun to signal a gradual reduction in monetary accommodation. The divergence between U.S. and euro-area interest rates has contributed the U.S. dollar's appreciation against the euro. An appreciating dollar makes our exports more expensive abroad and makes imports more competitive relative to domestic production. All else equal, that circumstance would reduce net exports and be a drag on U.S. economic growth. That said, the underlying strength of demand in the United States, supported by healthy growth in consumption and investment, seems to be sufficiently robust to overcome the drag from a higher dollar. A strong dollar, which lowers prices for U.S. impmts, also tends to restrain U.S. price inflation, whereas tightening resource slack tends to push up inflation. In the United States, inflation has recently moved up to near 2 percent, but, as noted earlier, we have not seen a clear sign of an acceleration above 2 percent, and there does not seem to be an elevated risk of overheating. That 147 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00151 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 480.90513 ereh 48 oilof tesffo tresnI 3- said, the Committee monitors inflation developments carefully and sets monetary poliey accordingly. 148 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00152 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 580.90513 ereh 58 oilof tesffo tresnI -I- Questions for The Honorable Jerome H. Powell, Chairman, Board of Governors of the Federal Reserve System, from Representative Sinema: 1. The Arizona Chamber of Commerce notes that a trade war immediately threatens over 250 million dollars in Arizona exports and 772,800 Arizona jobs supported by global trade. Eighty-eight percent of Arizona exporters are small or medium-sized businesses, making the effects of trade war particularly acute for Arizona entrepreneurs and family-run businesses. Job-killing tariffs will target Arizona-made agricultural goods like apples and cotton, imperiling the livelihoods of Arizona family farmers. Tariffs also impose costs directly passed on to consumers, forcing Arizona families to pay more for their everyday purchases. One of the functions of the Federal Reserve System is to strengthen U.S. standing in the world economy. How do you anticipate the Administration's tariff policies affecting that work? As you know, Congress has entrusted the Federal Reserve with the statutory dual mandate of achieving price stability and maximum employment. Trade policy is the responsibility of Congress and the Administration. In general, trade and access to global markets provide many benefits for businesses and the people they employ, including larger and deeper markets for their products and a wider selection of inputs for production. Consumers also benefit through a greater variety of goods and more competitive prices. Because of these and other benefits, more open and globalized economies generally have been faster growing, more productive, and more dynamic. That said, the benefits of trade are not shared equally by all people and all sectors of the economy. Policymakers and economists alike are increasingly cognizant of the need to design policies to support workers and families so that the benefits of trade can be more widely shared. Since World War II, the United States has been a global leader in building a rules-based trading system, which has resulted in, over time, the consistent lowering of tariffs and growth in trade. The Administration's current trade policy process is still ongoing. If the end result is a world with higher tariffs in many countries, then experience suggests there will be significant negative effects for the U.S. economy. On the other hand, if the end result is a world with lower trade baniers and a more level playing field, then the U.S. economy will benefit. To date, tariff increases, both by the United States and other countries, have already affected individual businesses and industries, in pmiicular the agricultural sector. Moreover, our business contacts increasingly repoti that trade developments are creating policy uncetiainty, which is causing some firms to delay investments. Although the direct effects of announced measures on the overall U.S. economy are likely to be fairly modest, there is a possibility that trade tensions could disrupt supply chains and undermine business confidence. We continue to monitor trade developments and their effects on U.S. employment and inflation. 149 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00153 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 680.90513 ereh 68 oilof tesffo tresnI -1- Questions for The Honorable Jerome H. Powell, Chairman, Board of Governors of the Federal Reserve System, from Representative Sinema: 2. I was pleased to see economic growth in Q2 that is considerably stronger than that of Ql. Yet too many Arizona families aren't seeing wages rise in a commensurate manner. For many Arizonans, wages have stagnated or even declined when factoring in inflation. At the same time, the cost of health care and other essential goods and services continues to rise, causing many families to feel the pinch. What explanation can you offer fo1· wages failing to trend upward with economic growth? Although most indicators suggest that the labor market is quite strong, wage growth has remained moderate. Generalizing across various measures, average annual wage gains have picked up a little in recent years, from about 2 percent a few years ago to about 2 Y2 to 3 percent now. Even taking into account relatively low inflation, the gains in inflation-adjusted wages have averaged less than were seen prior to the recession. And of course, those figures are averages. Some people have seen larger gains than that and unfortunately some have seen less. One impotiant factor for the disappointing pace of overall wage gains, in the face of a strong labor market, is that productivity has increased relatively slowly over the past several years. Over time, productivity gains arc necessary to support rising living standards. Many other factors influence wages as well. There is no consensus about their relative importance, but some of the other factors cited by economists include globalization, demographic changes (e.g., the retirement of higher paid older workers) which affect measmed average wage gro\>ih, hidden labor market slack (e.g., the low labor force patiicipation rate), declines in unionization, rising employer concentration, atJd an increase in the use of non-compete agreements and non poaching agreements. 1 3. Congress passed the Volcker Rule as part of Dodd-Frank to reduce risky activities, such as high-risk proprietary trading, at banks. We share the goal of reducing systemic risk in our financial system to ensure another crisis does not happen. At the same time, we also want to help companies grow and innovate by ensuring they have sufficient access to capital. The current definition of "covered fund" in the Volcker Rule permits banks to pt·ovide capital and credit to businesses but prohibits doing so via a fund structure. I'm incredibly proud of Arizona's public universities, which create opportunities for Arizonans to turn good ideas into great startups-creating jobs and growing the economy. These startup incubators are placed at risk if the startup structures itself as a covered fund. This is perplexing because fund structures allow banks to diversify risl>, which would appear to be consistent with the goal of the Volcker Rule. 1 See Alan B. Krueger, Reflections on Dwindling Worker Bargaining Power and Monetmy Policy, Luncheon Address at the Jackson Hole Economic Symposium (Aug. 24, 20 18), available at h!!Rs://www.kansascityfcd.org/-/media/filesipublicat/sympos/20 18/papersandfLandouts/824180824kruegerremark~ .pdf/la=en; see also Ernie Tedeschi, Unemployment Looks Like 2000Again. But Wage Growth Doesn't, The New York Times, Oct. 22, 2018, available at https://wv,_w.nytimes.com/20 18/10/22/upshot/mystery-slow-wage erowth-econony.btmJ. 150 VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00154 Fmt 6601 Sfmt 6601 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 780.90513 ereh 78 oilof tesffo tresnI -2- What are your thoughts ou this? Is there intention to address aspects of the definition of covered fund so that banks are not discouraged from diversifying dsk? The Board, along with the Office of the Comptroller of the CutTency, Federal Deposit Insurance Corporation, Commodity Futures Trading Commission, and Securities and Exchange Commission (the "agencies") adopted regulations to implement section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. § 1851) (the "Volcker Rule") in 2013. These regulations included a definition of"covered fund" that, in the agencies' view, was consistent with the statutory purpose of the Volcker Rule to limit certain investment activities of banking entities. Subsequently, and based on experience with the Volcker Rule regulations, the agencies identified opportunities for improvement and proposed amendments to the Volcker Rule regulations in May 2018.2 The proposal requests comment on how to tailor the regulations governing a banking entity's covered fund activities. For example, the proposal asks whether a different definition of "covered fund" would be appropriate. In addition, the proposal requests comment on potential exemptions for particular types of funds, or funds with pa1iicular characteristics. Since proposing the amendments in May, the agencies have held meetings with and received comments from interested parties regarding the treatment of covered funds. The agencies expect to meet with and receive comments from interested parties throughout the comment period, and will carefully consider each comment to determine whether any changes to the covered fund regulations would be appropriate. 2 83 Fed. Reg. 33,432 (July 17, 2018). 151 Æ VerDate Mar 15 2010 10:38 Dec 04, 2018 Jkt 000000 PO 00000 Frm 00155 Fmt 6601 Sfmt 6011 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-07-18 FC SEMI A RELLITSID htiw 134RSF no llorracm 880.90513 ereh 88 oilof tesffo tresnI -1 - Questions for The Honorable Jerome H. Powell. Chairman. Board of Governors of the Federal Reserve System from Representative Stivers: 1. Chairman Powell: As you know, the U.S. Method 2 G-SIB framework created fixed coefficients that apply to each indicator used in the surcharge calculation. This incentivizes firms to reduce their risk. However, despite recognizing the need to update these rules to account for normal economic growth, these coefficients have remained unchanged since the finalization of the U.S. G-SIB rule in 2015. Since that time, the U.S. economy has experienced significant economic growth. Does the Fed monitor the impact of economic growth on the GSIB coefficients? Additionally, when will the FRB update the coefficients to address the economic growth? The Federal Reserve Board's (Board) capital rules have been designed to significantly reduce the likelihood and severity of future financial crises by reducing both the probability of failure of a large banking organization and the consequences of such a failure were it to occur. Capital rules and other prudential requirements for large banking organizations should be set at a level that protects financial stability and maximizes long-term, through-the-cycle, credit availability and economic growth. Consistent with these principles, the Board originally calibrated the GSIB surcharge so that-given the circumstances of the financial system--each GSIB would hold enough capital to lower its probability of failure so that the expected impact of its failure on the financial system would be approximately equal to that of a large non-GSIB. The bulk of post-crisis regulation is largely complete, with the important exception of the U.S. implementation of the recently concluded Basel Committee agreement on bank capital standards. It is therefore a natural and appropriate time to step back and assess those efforts. The Board is conducting a comprehensive review of the regulations in the core areas of post-crisis reform, including capital, stress testing, liquidity, and resolution. The objective of this review is to consider the effect of those regulatory frameworks on the resiliency of the financial system, including improvements in the resolvability of banking organizations, and on credit availability and economic growth. In general, I believe overall capital for our largest banking organizations is at about the right level. Critical elements of our capital structure for these organizations include stress testing, the stress capital buffer, and the enhanced supplementary ratio. Work is underway to finalize the calibration of these fundamental building blocks, all of which form part of the system in which the GSIB surcharge has an effect. In this regard, I would note that the GSIB surcharge rule does not take full effect until January 2019.

Jerome H. Powell (2018, July 17). Congressional Testimony. Testimony, Federal Reserve. https://whenthefedspeaks.com/doc/testimony_20180718_chair_monetary_policy_and_the_state_of_the

@misc{wtfs_testimony_20180718_chair_monetary_policy_and_the_state_of_the,
  author = {Jerome H. Powell},
  title = {Congressional Testimony},
  year = {2018},
  month = {Jul},
  howpublished = {Testimony, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/testimony_20180718_chair_monetary_policy_and_the_state_of_the},
  note = {Retrieved via When the Fed Speaks corpus}
}