Congressional Testimony

S. HRG. 116–2 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CONGRESS HEARING BEFORETHE COMMITTEE ON BANKING, HOUSING, ANDURBANAFFAIRS UNITED STATES SENATE ONE HUNDRED SIXTEENTH CONGRESS FIRST SESSION ON OVERSIGHT ON THE MONETARY POLICY REPORT TO CONGRESS PURSU- ANTTOTHEFULLEMPLOYMENTANDBALANCEDGROWTHACTOF1978 FEBUARY 26, 2019 Printed for the use of the Committee on Banking, Housing, and Urban Affairs ( Available at: https://www.govinfo.gov/ U.S. GOVERNMENT PUBLISHING OFFICE 35–838 PDF WASHINGTON : 2019 COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS MIKE CRAPO, Idaho, Chairman RICHARD C. SHELBY, Alabama SHERROD BROWN, Ohio PATRICK J. TOOMEY, Pennsylvania JACK REED, Rhode Island TIM SCOTT, South Carolina ROBERT MENENDEZ, New Jersey BEN SASSE, Nebraska JON TESTER, Montana TOM COTTON, Arkansas MARK R. WARNER, Virginia MIKE ROUNDS, South Dakota ELIZABETH WARREN, Massachusetts DAVID PERDUE, Georgia BRIAN SCHATZ, Hawaii THOM TILLIS, North Carolina CHRIS VAN HOLLEN, Maryland JOHN KENNEDY, Louisiana CATHERINE CORTEZ MASTO, Nevada MARTHA MCSALLY, Arizona DOUG JONES, Alabama JERRY MORAN, Kansas TINA SMITH, Minnesota KEVIN CRAMER, North Dakota KYRSTEN SINEMA, Arizona GREGG RICHARD, Staff Director JOE CARAPIET, Chief Counsel BRANDON BEALL, Professional Staff Member LAURA SWANSON, Democratic Deputy Staff Director ELISHA TUKU, Democratic Chief Counsel DAWN RATLIFF, Chief Clerk CAMERON RICKER, Deputy Clerk SHELVIN SIMMONS, IT Director CHARLES J. MOFFAT, Hearing Clerk JIM CROWELL, Editor (II) C O N T E N T S TUESDAY, FEBRUARY 26, 2019 Page Opening statement of Chairman Crapo ................................................................. 1 Prepared statement .......................................................................................... 47 Opening statements, comments, or prepared statements of: Senator Brown .................................................................................................. 3 Prepared statement ................................................................................... 48 WITNESS Jerome H. Powell, Chairman, Board of Governors of the Federal Reserve System ................................................................................................................... 5 Prepared statement .......................................................................................... 49 Responses to written questions of: Senator Brown ........................................................................................... 52 Senator Rounds ......................................................................................... 58 Senator Perdue .......................................................................................... 62 Senator Tillis ............................................................................................. 63 Senator Moran ........................................................................................... 67 Senator Warner ......................................................................................... 69 Senator Schatz ........................................................................................... 74 Senator Van Hollen ................................................................................... 78 Senator Cortez Masto ................................................................................ 80 Senator Smith ............................................................................................ 85 Senator Sinema ......................................................................................... 93 ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD Monetary Policy Report to the Congress dated February 22, 2019 ..................... 95 (III) THE SEMIANNUAL MONETARY POLICY REPORT TO THE CONGRESS TUESDAY, FEBRUARY 26, 2019 U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. The Committee met, at 9:49 a.m., in room SD–106, Dirksen Sen- ate Office Building, Hon. Mike Crapo, Chairman of the Committee, presiding. OPENING STATEMENT OF CHAIRMAN MIKE CRAPO Chairman CRAPO. The hearing will come to order. We welcome you, Chairman Powell, to the Committee for the Federal Reserve’s Semiannual Monetary Policy Report to Congress. This hearing provides the Committee an opportunity to examine the current state of the U.S. economy, the Fed’s implementation of monetary policy, and its supervisory and regulatory activities. In the wake of the 2008 financial crisis, the Fed entered a period of unconventional monetary policy to support the U.S. economy, in- cluding drastically cutting interest rates and expanding its balance sheet. I have long been concerned about the Fed’s quantitative easing programs and the size of its balance sheet. As economic conditions improved, the Fed began trying to nor- malize monetary policy, including by gradually reducing the size of its balance sheet. The Fed’s balance sheet grew to approximately $4.5 trillion from around $800 billion between 2007 and 2015 and now stands at around $4 trillion still. During the press conference following the FOMC’s most recent meeting, Chairman Powell provided additional clarity on the Fed’s plans to normalize monetary policy, saying, ‘‘the ultimate size of our balance sheet will be driven principally by financial institu- tions’ demand for reserves plus a buffer, so that fluctuations in re- serve demand do not require us to make frequent sizable market interventions.’’ ‘‘Estimates of the level of reserve demand are quite uncertain, but we know that this demand in the postcrisis environment is far larger than before. Higher reserve holdings are an important part of the stronger liquidity position that financial institutions must now hold.’’ ‘‘The implication is that the normalization of the size of the port- folio will be completed sooner, and with a larger balance sheet, than in previous estimates.’’ (1) 2 Banks’ reserve balances grew from $43 billion in January 2008 to a peak of $2.8 trillion in 2014 before falling to $1.6 trillion as of January 2019. During this hearing, I look forward to understanding more about: what factors the Fed may consider in determining what is the ap- propriate size of the balance sheet; what factors have affected banks’ demand for reserves, including the Fed’s postcrisis regu- latory framework; and what amount of reserves are estimated to be necessary for the Fed to achieve its monetary policy objective. The state of the U.S. economy is a key consideration in the Fed’s monetary policy decisions. The U.S. economy remains strong with robust growth and low unemployment. Despite everyone telling us prior to tax reform that annual growth would be stuck below 2 percent as far as the eye could see, the economy expanded, as we predicted, at an annualized rate of 3.4 percent in the third quarter of last year, following growth of 4.2 percent and 2.2 percent in the second and first quarters of 2018, respectively, according to the Bureau of Economic Analysis. This strong growth, which is on track to continue to exceed pre- vious expectations, will now provide our policymakers with much greater flexibility to address other fiscal challenges than if we were continuing to struggle with insufficient growth. And according to the Bureau of Labor Statistics, the unemploy- ment rate has remained low and steady around 4 percent while the U.S. economy added 223,000 jobs per month on average in 2018, as well as 304,000 jobs in the first month of this year. People continue to enter the labor force with the labor participa- tion rate increasing to 63.2 percent from 62.7 percent over the last year. Reinforcing this strong employment environment, Fed Vice Chairman Rich Clarida said in a recent speech that ‘‘the labor mar- ket remains healthy, with an unemployment rate near the lowest level recorded in 50 years and with average monthly job gains con- tinuing to outpace the increases needed over the longer run to pro- vide employment for new entrants into the labor force.’’ Major legislation passed through this Committee and enacted last Congress supported economic growth and job creation. The Economic Growth, Regulatory Relief, and Consumer Protec- tion Act passed Congress with significant bipartisan support and was enacted to right-size regulation and redirect important re- sources to local communities for homebuyers, individuals, and small businesses. I appreciate the work that the Fed has done so far to introduce proposals and finalize rules required by the law. Overseeing the full implementation of that law and the Federal banking agencies’ rules to right-size regulations will continue to be a top priority of the Committee in this Congress. In particular, the Fed and other banking regulators should con- sider whether the Community Bank Leverage Ratio should be set at 8 percent as opposed to the current 9 percent; significantly tailor regulations for banks with between $100 billion and $250 billion in total assets with a particular emphasis on tailoring the stress test- ing regime; provide meaningful relief from the Volcker Rule for all 3 institutions, including by revising the definition of ‘‘covered funds’’ and eliminating the proposed accounting test; and examine wheth- er the regulations that apply to the U.S. operations of foreign banks are tailored to the risk profile of the relevant institutions and consider the existence of home-country regulations that apply on a global basis. The Committee will also look for additional opportunities to sup- port policies that foster economic growth, capital formation, and job creation. Turning for a moment to another issue, Senator Brown and I issued a press release on February 13 inviting stakeholders to sub- mit feedback on the collection, use, and protection of sensitive in- formation by financial regulators and private companies, including third parties that share information with regulators and other pri- vate companies. Americans are rightly concerned about how their data is collected and used and how it is secured and protected. Americans need this kind of attention from this Committee and from the Fed and our other financial regulators. Given the exponential growth and use of data, and the cor- responding data breaches, it is also worth examining how the Fair Credit Reporting Act should work in a digital economy and wheth- er certain data brokers and other firms serve a function similar to the original consumer reporting agencies. The Banking Committee has plans to make this a major focus in this Congress, and we encourage our stakeholders to submit their feedback by the March 15 deadline. Last, I want to take a moment to recognize one of our staff mem- bers who is retiring this week. Dawn Ratliff is the Committee’s Chief Clerk, and she will be re- tiring, as I said, at the end of the week. She might not want me to say this, but Dawn has been in the Senate longer than most Senators. She has dedicated 27 years in these hallways and has been with the Senate Banking Committee since 2007, starting with then-Chairman Chris Dodd, and then working for Chairman Tim Johnson, then Chairman Shelby, and now myself. Dawn is a Banking Committee institution. She is incredibly knowledgeable, helpful, and professional, respected and well liked by everyone with whom she works. Dawn, your work on the Committee has truly made a lasting im- pact, and even though you will not be here following this week, you will not be forgotten anytime soon. We wish you the best of luck in your well-earned retirement. Enjoy it. [Applause.] Chairman CRAPO. Senator Brown. OPENING STATEMENT OF SENATOR SHERROD BROWN Senator BROWN. Thank you, Chairman Crapo. And, Ms. Ratliff, thank you again for your service to our country—to this Committee and to our country and to the Senate. She has been instrumental in making this Committee run smoothly for over a decade. We will miss her, and congratulations on your retirement. 4 Chairman Powell, welcome back to the Committee. It has been a great week for Wall Street. The FDIC announced that banks made a record-breaking $237.7 billion in profits in 2018, almost a quarter trillion dollars in profits. Corporations—led by the Nation’s largest banks—bought back a record $1 trillion in stocks last year, conveniently boosting CEO compensation. The President’s tax bill put $30 billion in the banks’ pockets and continues to fuel even more buybacks and CEO bo- nuses. But that is never enough for Wall Street. It continues to demand weaker rules so big banks can take bigger and more dangerous risks. And from the proposals the Fed has put out after the passage of S. 2155, it looks like the Fed and you are going along. The economy looks great from a corner office on Wall Street, but it does not look so great from a house on Main Street. Corporate profits are up. Executive compensation has exploded— all because of the productivity of American workers. But workers’ wages have barely budged. Hard work simply does not pay off for the people fueling this growth. Seven of the ten fastest-growing occupations do not pay enough to afford rent on a modest one-bedroom apartment, let alone save for a downpayment. Household debt continues to rise, taking its toll on families. At the end of 2018—think about this for a minute. At the end of 2018, 7 million Americans with auto loans were at least 90 days past due on their payments. Seven million Americans with auto loans were at least 90 days past due on their payments, even though the President brags about unemployment being at record lows. Borrowers of color have not recovered financially from the crisis. Too many Americans of all ages are saddled with mountains of stu- dent loan debt. The Trump shutdown revealed another frightening reality: Too many Americans still live paycheck to paycheck, even with stable jobs. After 35 days of no pay, of uncertainty, of hardship, those work- ers went back to their jobs and eventually received their pay. But more than a million Government contractors were not so lucky. We are talking in many cases about custodians and security guards and cafeteria workers making $12 to $15 an hour and going 35 days without pay and getting no compensation later like the 800,000 Government workers. We have heard a lot of talk about whether GDP will recover from the shutdown, not much about how workers will recover. I give special thanks to Senator Smith for her work on trying to remedy this incredible injustice that damn near anybody talks about—damn near nobody talks about. We have questioned for quite a while whether the economic re- covery—now in its tenth year—has been felt by all Americans. Stagnating wages and increasing income inequality between Wall Street CEOs and working Americans point to an obvious answer. Mr. Chairman, Chairman Powell, your comments at the Feb- ruary 6 Fed town hall, for educators confirmed this. A teacher asked about your major concerns for the economy, and your answer was: ‘‘We have some work to do more to make sure that prosperity 5 that we do achieve is widely spread . . . median and lower levels of income have grown, but much more slowly. And growth at the top has been very strong.’’ ‘‘Growth at the top has been very strong.’’ In other words, the CEOs, the folks on Wall Street, they are doing just fine in this economy. Chair Powell, the Fed has spent a decade bending over back- wards to help banks, to help big corporations that have hoarded profits for themselves rather than investing in the millions of work- ers who actually make our companies successful. We are late in this economic cycle. It is clear that record Wall Street profits will not be trickling down to workers before the next downturn. Before the last crisis, we heard over and over again from Govern- ment officials and banks that the economy was doing fine 10 years ago. Regulators and Congress continued to weaken rules for Wall Street, continued to ignore the warning signs as families struggled to make ends meet. As the severity of the financial crisis became clear, the Fed rushed to the aid of the biggest banks, but it did not devote even a fraction of that firepower to helping the rest of America. Ignoring working families was a policy failure then; it is a policy failure now. Mr. Chairman, I hope we do not make the same mistake again. I look forward to your testimony and the new ideas for making hard work pay off for everyone in our economy. Thank you. Chairman CRAPO. Thank you, Senator Brown. Chairman Powell, we welcome you here again. We appreciate your attention. We appreciate the report that you have provided to us, and you may make your statement about that report and what- ever information you would like to present to us, and then we will proceed to some questions. Thank you. Chairman Powell. STATEMENT OF JEROME H. POWELL, CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Mr. POWELL. Thank you and good morning. Chairman Crapo, Ranking Member Brown, and other Members of the Committee, I am happy to present the Federal Reserve’s semiannual Monetary Policy Report to the Congress. Let me start by saying that my colleagues and I strongly support the goals Congress has set for monetary policy—maximum employ- ment and price stability. We are committed to providing trans- parency about the Federal Reserve’s policies and programs. Con- gress has entrusted us with an important degree of independence so that we can pursue our mandate without concern for short-term political considerations. We appreciate that our independence brings with it the need to provide transparency so that Americans and their representatives in Congress understand our policy ac- tions and can hold us accountable. We are always grateful for op- portunities, such as today’s hearing, to demonstrate the Fed’s deep commitment to transparency and accountability. 6 Today I will review the current economic situation and outlook before turning to monetary policy. I will also describe several re- cent improvements to our communications practices to enhance our transparency. The economy grew at a strong pace, on balance, last year, and employment and inflation remain close to the Federal Reserve’s statutory goals of maximum employment and stable prices—our dual mandate. Based on available data, we estimate that gross domestic prod- uct, or GDP, rose a little less than 3 percent last year following a 2.5-percent increase in 2017. Last year’s growth was led by strong gains in consumer spending and increases in business investment. Growth was supported by increases in employment and wages, op- timism among households and businesses, and fiscal policy actions. In the last couple of months, some data have softened but still point to spending gains this quarter. While the partial Government shutdown created significant hardship for Government employees and many others, the negative effects on the economy are expected to be fairly modest and to largely unwind over the next several months. The job market remains strong. Monthly job gains averaged 220,000 in 2018, and payrolls increased an additional 304,000 in January. The unemployment rate stood at 4 percent in January, a very low level by historical standards, and job openings remain abundant. Moreover, the ample availability of job opportunities ap- pears to have encouraged some people to join the workforce and some who otherwise might have left to remain in it. As a result, the labor force participation rate for people in their prime working years—which is to say the share of people ages 25 to 54 who are either working or actively looking for work—has continued to in- crease over the past year. In another welcome development, we are seeing signs of stronger wage growth. The job market gains in recent years have benefited a wide range of families and individuals. Indeed, recent wage gains have been strongest for lower-skilled workers. That said, disparities persist across various groups of workers and different parts of the country. For example, unemployment rates for African Americans and His- panics are still well above the jobless rates for whites and Asians. Likewise, the percentage of the population with a job is noticeably lower in rural communities than in urban areas, and that gap has widened over the past decade. The February Monetary Policy Re- port provides additional information on employment disparities be- tween rural and urban areas. Overall consumer price inflation, as measured by the 12-month change in the price index for personal consumption expenditures, is estimated to have been 1.7 percent in December, held down by recent declines in energy prices. Core PCE inflation, which ex- cludes food and energy prices and tends to be a better indicator of future inflation, is estimated at 1.9 percent. At our January meet- ing, my colleagues and I generally expected economic activity to ex- pand at a solid pace, albeit somewhat slower than in 2018, and the job market to remain strong. Recent declines in energy prices will likely push headline inflation further below the FOMC’s longer-run 7 goal of 2 percent for a time, but aside from those transitory effects, we expect that inflation will run close to 2 percent. While we view current economic conditions as healthy and the economic outlook as favorable, over the past few months we have seen some crosscurrents and conflicting signals. Financial markets have become more volatile toward year end, and financial condi- tions are now less supportive of growth than they were earlier last year. Growth has slowed in some major foreign economies, particu- larly China and Europe. And uncertainty is elevated around some unresolved Government policy issues, including Brexit and ongoing trade negotiations. We will carefully monitor these issues as they evolve. In addition, our Nation faces important longer-term challenges. For example, productivity growth, which is what drives rising real wages and living standards over the longer term, has been low. Likewise, in contrast to 25 years ago, labor force participation among prime-age men and women is now lower in the United States than in most other advanced economies. Other longer-run trends, such as relatively stagnant incomes for many families and a lack of upward economic mobility among people with lower in- comes, also remain important challenges. And it is widely agreed that the Federal Government debt is on an unsustainable path. As a Nation, addressing these pressing issues could contribute greatly to the longer-run health and vitality of the U.S. economy. Over the second half of 2018, as the labor market kept strength- ening and economic activity continued to expand strongly, the FOMC gradually moved interest rates toward levels that are more normal for a healthy economy. Specifically, at our September and December meetings we decided to raise the target range for the Federal funds rate by 1⁄ 4 percentage point at each, putting the cur- rent range at 21⁄ 4 to 21⁄ 2 percent. At our December meeting, we stressed that the extent and tim- ing of any further rate increases would depend on incoming data and the evolving outlook. We also noted that we would be paying close attention to global economic and financial developments and assessing their implications for the outlook. In January, with infla- tion pressures muted, the FOMC determined that the cumulative effects of these developments, along with ongoing Government pol- icy uncertainty, warranted taking a patient approach with regard to future policy changes. Going forward, our policy decisions will continue to be data dependent and will take into account new infor- mation as economic conditions and the outlook evolve. For guideposts on appropriate policy, the FOMC routinely looks at monetary policy rules that recommend a level for the Federal funds rate based on measures of inflation and the cyclical position of the U.S. economy. The February Monetary Policy Report gives an update on monetary policy rules, and I continue to find these rules to be helpful benchmarks, but, of course, no simple rule can ade- quately capture the full range of factors the Committee must as- sess in conducting policy. We do, however, conduct monetary policy in a systematic manner to promote our longer-run goals of max- imum employment and stable prices. As part of this approach, we strive to communicate clearly about our monetary policy decisions. 8 We have also continued to gradually shrink the size of our bal- ance sheet by reducing our holdings of Treasury and agency securi- ties. The Federal Reserve’s total assets declined about $310 billion since the middle of last year and currently stand at close to $4 tril- lion. Relative to their peak level in 2014, banks’ reserve balances with the Federal Reserve have declined by around $1.2 trillion, a drop of more than 40 percent. In light of the substantial progress we have made in reducing re- serves, and after extensive deliberations, the Committee decided at our January meeting to continue over the longer run to implement policy with our current operating procedure. That is, we will con- tinue to use our administered rates to control the policy rate, with an ample supply of reserves so that active management of reserves is not required. Having made this decision, the Committee can now evaluate the appropriate timing and approach for the end of bal- ance sheet runoff. I would note that we are prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments. In the longer run, the size of the balance sheet will be determined by the demand for Federal Reserve liabilities such as currency and bank reserves. The Feb- ruary Monetary Policy Report describes these liabilities and reviews the factors that influence their size over the longer run. I will conclude by mentioning some further progress we have made in improving transparency. Late last year we launched two new publications: the first, the Financial Stability Report, shares our assessment of the resilience of the U.S. financial system; and the second, the Supervision and Regulation Report, provides infor- mation about our activities as a bank supervisor and regulator. Last month we began conducting press conferences after every FOMC meeting instead of every other one. This change will allow me to more fully and more frequently explain the Committee’s thinking. Last November we announced a plan to conduct a com- prehensive review of the strategies, tools, and communications practices we use to pursue our congressionally assigned goals. This review will include outreach to a broad range of stakeholders across the country. The February Monetary Policy Report provides further discussion of these initiatives. Thank you, and I will be happy to respond to your questions. Chairman CRAPO. Thank you very much, Chairman Powell. As I mentioned in my opening statement, you said that the bal- ance sheet normalization may end sooner with a larger balance than previously anticipated in the—if I understand it correctly, the ultimate size of the balance sheet will be principally driven by fi- nancial institutions’ demand for reserves plus a buffer, correct? Mr. POWELL. That is correct. Chairman CRAPO. Reserves have increased from $43 billion in early 2008 to about $2.8 trillion in 2014, if I understand correctly, before falling now down to about $1.6 trillion currently. Do you have an estimate of the amount of reserves that are estimated to be necessary to achieve the Fed’s monetary policy objective? And how does the Fed’s postcrisis regulatory policy affect this amount? Mr. POWELL. The quantity of reserves before the financial crisis, Mr. Chairman, was $20 billion, in that range, plus or minus, so a relatively small amount. 9 One of the important things we did after the financial crisis was require banking institutions, particularly the very largest ones, to hold quite large buffers of highly liquid assets. One of those assets that the banks like to hold to satisfy this requirement is bank re- serves, so the demand for reserves is going to be very substantially higher than it was before the crisis and will not go back to those lower levels in any case. We only have estimates based on market intelligence and discus- sions with financial institutions, and those estimates have actually gone up substantially just over the course of the last year or so. We do not have a precise notion, but, you know, we believe that the public estimates that are out there of around $1 trillion plus a buffer, as you mentioned in your remarks, will be, as a reason- able starting point, an estimate of where we might wind up. Chairman CRAPO. All right. Thank you. As you know, I have been a strong critic of the quantitative easing the Fed has been en- gaged in, and I appreciate your explanation of how you intend to reach the appropriate balance of what the Fed’s balance sheet should be. And I will continue to work with you on understanding how we get to the right spot as soon as we can. You mentioned in your statement and in your report that the labor force participation rate has started to grow. That has been one of the reasons we have seen such low economic performance, in my opinion, in the past years. Do you expect that the labor force participation rate growth that we have seen will stabilize and even possibly increase as we continue to move forward? Mr. POWELL. So labor force participation, if I can provide just a little bit of background, was an area where the U.S. was at least comparable to other well-off countries and in some cases at the high end as far as labor force participation by women was con- cerned. We are now at the bottom end of the league table for both men and women, and it is a very troubling concern. A big part of it, though, is driven by something that we cannot really change, and that is just demographics. As the country ages, labor force partici- pation should decline at a fairly steady level. Nonetheless, even al- lowing for that, we are lower than we need to be. So the gains we have seen over the past year have been very positive and very welcome from our standpoint. We do not know how long they can be sustained, but we hope for a long time. I would just say that I think we need a broad policy focus on how to sustain labor force participation, including not just through Fed policy but through legislative policy as well. Chairman CRAPO. And I agree. I think that that is a critical part of our ability to maintain the growth and strength of our economy. I have lots of questions for you, but just one that I will have time for in the remaining amount of time I have, and this will get to regulatory relief and implementation of Senate bill 2155. As you know, Senate bill 2155 provides smaller institutions with relief from the Volcker Rule. Regardless, there are still significant issues with the rule for institutions of all sizes, and I and six of my Bank- ing Committee colleagues wrote to our financial regulators in Octo- ber of last year urging further revisions to the rule to address out- standing issues, such as the rule’s ‘‘covered funds’’ definition and 10 its broad application to venture capital, other long-term invest- ments, and loan creation. In addition, I am concerned that the pro- posed accounting test may make the Volcker Rule more complex than is necessary. Can you commit to using your significant regulatory discretion provided by statute to promptly address these outstanding issues? Mr. POWELL. Yes, we received comments on those issues and more, and we thought some of those comments were very well taken, and we are working hard to try to address them. And I as- sure you we will do our best to do that. Chairman CRAPO. I appreciate that. Senator Brown. Senator BROWN. Thank you. Thank you again for being here, Chairman Powell. Yesterday your predecessor, Janet Yellen, said she does not think President Trump has a grasp of macroeconomic policy. Is she right? Mr. POWELL. I will not have any comment on that for you, Sen- ator. Senator BROWN. All right. I guess I am not surprised. It is troubling that the former Fed Chair, the woman that sat in your job and was very good at that job, tells the press point blank that she does not think the President of the United States under- stands the economy. I think the American people continually and more and more understand that this President—that many Ameri- cans, GM workers in Youngstown and Hamtramck, for example, believe he has betrayed workers in this country. That is becoming clearer and clearer. Let me shift to another question. Last week former Fed Chair Paul Volcker raised concerns that the culture of banking only fo- cuses on the profits of the firm and the pay of the CEO. I share this concern that we should focus on workers. Since 1979—you know these numbers, Mr. Chairman—worker productivity has grown 70 percent. Compensation for those workers has grown by just 11 percent. Meanwhile, the top one-tenth of 1 percent saw their earnings grow by 343 percent. This disparity, as you know, is even worse for women and people of color. So do you think, Mr. Chairman, the Fed’s employment mandate is just to ensure that people are employed? Or do you think full employment implies a dignity of work, that is, meaning workers earn a salary and benefits that let them fully participate in the 2019 economy in our country? Mr. POWELL. Our mandate, as you well know, is maximum em- ployment, and we try to take that to heart. And, you know, our tool for trying to achieve that is monetary policy. And I think we are at a 50-year low in unemployment. There are many other issues in the country. You have mentioned some of them. But, honestly, to achieve some of the things you are talking about, we need other tools. It is not—the Fed cannot affect every social problem, as you well know. Senator BROWN. Is that a social problem, that fewer and fewer people, even though they are employed, wages are stagnant, is that just a social problem? Mr. POWELL. Well, wages, I would say wages do go into our as- sessment of maximum employment. We do look at wages, and I am 11 happy to say that wages, while they were very sluggish in the aftermath of the crisis, have now started to move up in a way that is more consistent with past history and with inflation and produc- tivity—— Senator BROWN. But not even close to productivity, not even close to gains in productivity for most workers. Mr. POWELL. So today—I know the chart you are talking about. You are talking about over the longer run. If you look at what— wages are now going up a little better than 3 percent. Inflation is right at 2. Productivity has been running—sorry. Inflation has been at 2. Productivity has been around 1. So 3 percent is about right from that narrow standpoint. Wages have moved up. We welcome that. We do not find it trou- bling from an inflation standpoint at this point. So we do look very carefully at wages as we assess maximum employment, as we as- sess whether we are meeting our maximum employment goal. Senator BROWN. Let me put it in a bit of a historical perspective. Will Rogers during the Great Depression provided a lesson I think we could learn from today. He said that, ‘‘Unlike water, money trickles up, not down.’’ Of the Government’s response to that eco- nomic crisis of the Great Depression, he said, ‘‘The money was all appropriated for the top in the hopes that it would trickle down to the needy. . . . Give it to the people at the bottom . . . the top will have it before night anyhow. But it will at least have passed through the poor fellow’s hands. They saved the big banks but the little ones went up the flue.’’ This observation is 89 years old. It seems like the Fed still thinks, from your answer and from the behavior of the Fed, that the best way to help workers is to shore up big bank profits and hope the prosperity trickles down. Over the last decade, it has been creative in how it accomplishes this. I believe the Fed has the au- thority and the duty to be creative, to help workers share in the prosperity they create. My staff will follow up with your staff on ways of doing that. One more question. It seems like ‘‘too big to fail’’ is alive and well. We are seeing a potential merger—we are seeing growth in most of the largest money center banks. Two regional banks, as you know, SunTrust and BB&T, each with over $200 billion in as- sets, decided to merge, saying it was too difficult for them to com- pete with the money center banks’ investment in technology. What message does the Fed send to regional and community banks about their future if the Fed eventually approves this merg- er? Mr. POWELL. Well, we have a process that we go through in eval- uating any merger. It is set forth in great detail in the law and in our guidance. We will go through that process carefully, fairly, and thoroughly and with a lot of transparency when we do get an appli- cation. We do not actually have an application yet on that matter. We expect to get it sometime in the next few weeks. So we will do all of that. I would just say we have not prejudged anything, and we are going to do our work on that professionally, carefully, fairly, and transparently. Senator BROWN. OK. Chairman CRAPO. Senator Shelby. 12 Senator SHELBY. Thank you. Chairman Powell, somebody is doing something right. I do not know if it is the President or you or a combination of everything. I think this is the best economy I have seen in my lifetime at this point. Now, the question is: How do we keep it going? How do we keep it going? That is part of your job—not totally, but you are into the money. How do you gauge inflation, for example? You know, there are a lot of ways to do it. That is one. You were talking about price stability, maximum employment. Price stability, you are talking about the stability of the monetary policy, the value of our cur- rency, and everything that goes with it. How do we keep this econ- omy going, in your judgment? Mr. POWELL. So I think you said it very well. We want to use our tools to sustain this expansion and keep the labor market strong and keep inflation near 2 percent. That is exactly what we are trying to do. And so we look around and what do we see? We see a labor market that is strong and continuing to strengthen. Job creation is strong. Wages are moving up. So that is a very healthy thing. With inflation, we see muted inflation pressures. Even now with really historically low unemployment and a great recovery, an on- going recovery in the labor markets, we still see muted inflation pressures, and that gives us the ability to be patient with monetary policy, and that is what we are going to do. The Committee has de- cided that with our policy rate in the range of neutral, with muted inflation pressures and with some of the downside risks that we have talked about, this is a good time to be patient and watch and wait and see how the situation evolves. Senator SHELBY. How does the abundance of hydrocarbons that we have found in this country in recent years, which prices every- thing, how does that feed into the economy in a positive way? Mr. POWELL. Well, in a couple of ways. One, it’s a big industry. We have a very large energy industry now thanks really to shale. In addition, if you think about the—so that employs a lot of people, and that is a big thing in certain areas of the country. Five or six major areas of the country have a lot of employment and economic activity. Interesting on inflation. If you look back to the 1970s, a lot of what set off the bad inflation outcomes in the 1970s was an oil shock. What we have in our very large domestic oil industry now is, in effect, a shock absorber, because when oil prices go up, Amer- ican shale producers and other oil producers will produce more oil, and so that offsets that shock and will, you know, prevent that shock from driving inflation up here. So it has been a real positive for our economy from a number of perspectives. Senator SHELBY. Mr. Chairman, how important is the certainty of good trade agreements to our economy and to the world econ- omy? Mr. POWELL. Well, uncertainty is the enemy of business, and businesses, they want a set of rules, they want an established, transparent set of rules, and they want to play by those rules, be able to make longer-term plans, investments, and hiring and that kind of thing. 13 At the same time, we need the trade—you know, of course, we are not responsible for trade. We do not comment on trade policy at all. But we have been hearing a lot from our contacts around the country really all year, this year and all last year, about uncer- tainty, and we do sense it has been holding back some decisions, probably had some minor effect on confidence and maybe activity. But, overall, certainty around trade and other Government policies is very important. Senator SHELBY. As we look at our current account, the imbal- ance of trade with most of the world, does that concern you? And if it does, why? Mr. POWELL. You know, the overall current account is set eco- nomically by the difference between savings and investment in our country. So it is really an identity that kind of works that way. It tends to go up in good times. When Americans are, you know, at work and earning well and buying things and the economy is strong, we tend to buy things. Some of those things tend to be im- ported. The trade deficit and the current account balance can go down quickly in bad states of affairs. Of course, over time we would like to see balance both in savings and investment and in the trade balance. Senator SHELBY. I do not have much time left, but we have dis- cussed this before, cost-benefit analysis. Last year when you came before the Committee, we discussed here the formation and the pol- icy affecting this, an assessment unit to conduct cost-benefit anal- ysis on regulations. Could you provide here an update on the work of the entity here? And what have you learned and what is going on? Mr. POWELL. Yes, so that unit is up and running now, and it is a relatively new undertaking. Cost-benefit analysis is something we, of course, have done really always, and particularly in the last decade or so we have upped our game. Now we have a particular unit focused on it. We are very pleased with the progress it is mak- ing, and they are involved in the rulemakings and assessment of everything we do. So it is a positive development, and, you know, we look forward to making it ever stronger. Senator SHELBY. My last question to you, in the few seconds I have left, is: What is the health of our banking system that you regulate at the Federal Reserve, our biggest banks? Mr. POWELL. I think our banking system overall is quite strong, you know, record profits, no bank failures I think in 2018, much higher capital, much higher liquidity, better risk management; stress tests have really focused banks on understanding and man- aging their risks. We have better resolution planning overall. I think our banking system is strong and resilient. We never take it for granted. We are always looking for problems and cracks, but I would say overall our banking system is strong. Senator SHELBY. Thank you. Thank you, Mr. Chairman. Chairman CRAPO. Senator Menendez. Senator MENENDEZ. Welcome, Chairman. As the number of le- gitimate cannabis-related businesses grow across the United States, the vast majority of banks and credit unions are not offer- ing services to these enterprises for legitimate fear of legal and reg- 14 ulatory risk. My home State of New Jersey is moving toward legal- ization of recreational marijuana, and I have concern that these new businesses as well as the existing medical marijuana busi- nesses in the State will continue to find themselves shut out of the banking system. And when these businesses are forced to operate exclusively in cash, they create serious public safety risks in our communities. Do you agree that financial institutions need clarity on this issue? Mr. POWELL. I think it would be great to have clarity. Of course, financial institutions and their regulators and supervisors are in a very difficult position here with marijuana being illegal under Fed- eral law and legal under a growing number of State laws. It puts financial institutions in a very difficult place and puts the super- visors in a difficult place, too. It would be nice to have clarity on that supervisory relationship. Senator MENENDEZ. And in a corollary question, related to the provision of banking services is the ability for such businesses to secure insurance products, a necessity for those looking to secure financing. Would it be helpful for Congress to also consider the role of insurance companies as States move forward to legalization? Mr. POWELL. I believe so, yes. Senator MENENDEZ. OK. On a different question, on February 7th BB&T announced that it planned to purchase SunTrust in a deal that would result in the combined bank becoming the sixth largest commercial bank in the country with $434 billion in total assets. As you may know, in 2008 BB&T’s Community Reinvest- ment Act rating was downgraded due to substantive violations of the Equal Credit Opportunity Act and the Fair Housing Act. BB&T’s most recent CRA exam released last year also included a substantive violation of fair lending laws, a violation which likely should have resulted in another downgrade to the bank’s CRA rat- ing. I want to be sure that the Federal Reserve is not following the OCC and deemphasizing its treatment of fair lending violations when it comes time to evaluate a proposed merger. What assurance can you give us that the Federal Reserve will treat these violations with the seriousness they deserve? Mr. POWELL. We have not changed our policy on that, and we do consider—it comes in the law under convenience and needs of the communities served, and that includes consumer compliance and fair lending records and the record of performance under CRA. Those are all things that we do consider when we get a merger ap- plication. Senator MENENDEZ. And when you are considering it, can you give us a sense of what the Federal Reserve’s review of this bank’s or any other bank’s Community Reinvestment Act track record of compliance with fair lending laws will look like? Mr. POWELL. We will look thoroughly at it. We will look at the rating, of course, which I believe is—I think it is satisfactory now. Banks that have an unsatisfactory or less than satisfactory rating I think have a hard time. But we will look at that, and we will also consider public comments and a full range of information. Any in- formation that is presented to us we will consider. 15 Senator MENENDEZ. Well, I ask this question because it seems to me that, particularly at the OCC, we have—who has released a proposal without input from the Fed or FDIC contemplating sweep- ing changes to the implementation of the Community Reinvestment Act. In a speech last year, Governor Brainard said the Community Reinvestment Act was ‘‘more important than ever.’’ He stressed that branches and deposit-taking ATMs remain an important way that banks engage with a community. You also highlighted recently the importance of enforcing the CRA and other laws that help en- sure people have adequate access to financial services wherever they live. Can we get your commitment to build consensus among the Fed Governors before moving forward with proposals to change imple- mentation of the Community Reinvestment Act? Mr. POWELL. Oh, yes. Senator MENENDEZ. OK. I think it is important that you do ev- erything in your power to try to achieve a unanimous vote on this issue, should the Fed decide to move forward. Many of us find this an incredibly important part of our law and an increasingly dimin- ishing reality of financial institutions that somehow think that they do not really have to fully engage and implement the law and ultimately still get away with it. And so I think there has to be a strong message that that is not the case. I hope you will be able to deliver that message. Mr. POWELL. We are unified in our commitment to, you know, the mission of CRA, and to any revisions that we do, we are going to want to see that they preserve that mission and enable banks to serve it more effectively. Senator MENENDEZ. Thank you, Mr. Chairman. Chairman CRAPO. Senator Toomey. Senator TOOMEY. Thank you, Mr. Chairman. Chairman Powell, welcome back. Good to see you again. Let me just start by once again compliment you and your colleagues on taking us a long way toward normalizing monetary policy. In my view, this was long overdue, but you have been pursuing what strikes me as a prudent, thoughtful, and data-informed process of getting back to normal. So I want to thank you for that. A quick regulatory question, if I could. I was pleased with the interagency proposal that was released by the Fed and the other agencies dealing with S. 2155 and specifically the tailoring of cap- ital and liquidity requirements, enhanced prudential standards. I think the comment period closed in January on this proposal. Can you assure us that it is a high priority to finalize these rules? Mr. POWELL. It is a very high priority. S. 2155 implementation is probably our highest priority, and we are pushing ahead. Senator TOOMEY. Any idea of a timeframe by which we could ex- pect to see finalized rules there? Mr. POWELL. I would not want to put a date—I mean, there are so many rules. There are a dozen rules that we have comments on right now. I can come back to you with—— Senator TOOMEY. OK. But I am glad to hear it is a priority. Mr. POWELL. It is. Senator TOOMEY. We are obviously eager, and we think you are—I think you are heading in the right direction. 16 Unrelated, as you know, the private sector has set up a real-time payment system, and I think a real-time payment system is a ter- rific innovation that is very, very good for our economy. My under- standing is all depository institutions have access to it on an equal footing, as they should. To the extent that that is the case, do you believe it is necessary for the Fed to develop an alternative or com- peting real-time payment system? Mr. POWELL. That is a judgment that we have not made. We sought comment on that question, and we had a range of views, and it is something we are thinking about. We are mindful that, you know, we do not—under the Monetary Control Act, for exam- ple, we have to find that the services we provide are capable of being paid for and also not something that the private sector can adequately provide. Senator TOOMEY. Right. Mr. POWELL. So we are looking at that very question. Senator TOOMEY. I would be interested in just hearing what your thoughts are as you go forward on that. It does seem to me that the private sector is providing a perfectly viable and affordable and reasonable mechanism here. On another topic, as you know, there has been recent discussions both, I think, inside and certainly outside the Fed about whether the Fed ought to reconsider the way it thinks about inflation, and specifically, I guess the way I understand this discussion, whether the Fed ought to target a price level rather than a change in the price level, and specifically if there were an extended period of time when inflation ran below a target, would it make sense for the Fed to intentionally attempt to exceed the target modestly or by enough so that over a long period of time you would hit the average. My first reaction is to be pretty concerned about that. Inten- tionally running at an inflation rate above the target rate worries me given that historically inflation has been much harder to con- trol and high inflation has been a bigger problem than low infla- tion. But I wonder what your thoughts are about this topic. Mr. POWELL. These are questions, as you know, that are going to be the subject of careful consideration over the course of this year and beyond in our thinking. You know, the issue that we face is that rates have come down— long and short rates have come down really over the last 40 years and are now much—they are just much lower, real rates and, of course, inflation—add inflation back in, nominal rates as well, the implication of that being that in a typical downturn, the odds are much more—much higher that we will wind up back at the zero lower bound again. And in that situation, that fact there has the potential to drag inflation expectations down over time. In our thinking, inflation expectations are now the most impor- tant driver of actual inflation. So we are trying to think—and, real- ly, the economics profession has been thinking about it for 20 years, since the experience of Japan in the late 1990s, thinking of ways to make that inflation 2-percent target credible, highly cred- ible, so that inflation kind of averages around 2 percent rather than only averaging 2 percent in good times and then averaging way less than that in bad times, which would draw expectations down. 17 No decisions have been made. You raise a—there are plenty of questions and concerns to be addressed, but there is also a problem that I think we owe it to the public to try think our way through the best possible way to address that problem so that we can carry out our mandate. Senator TOOMEY. Yeah, I understand the logic. I understand the problem that you are wrestling with. I would just urge great, great caution on this for many, many reasons, not the least of which, for whatever period of time the Fed decided it would exceed the goal so that it averages the goal—first of all, during that period of time, presumably you do not have price stability. Certainly not zero. You would be intentionally running above even the goal. I have got other questions, but I see I am out of time. I just want to urge caution on that one, Mr. Chairman. Chairman CRAPO. Senator Tester. Senator TESTER. Thank you, Mr. Chairman, Ranking Member Brown. Thank you for being here, Chairman Powell. I appreciate your service, appreciate the work you are doing. I want to talk a little bit about the Government shutdown that we just came through that cost the economy $11 billion, and I think that is a conservative figure. There is at least one in this Government that wants to use Government services and public em- ployees as a pawn when they do not get their way. But what I want to ask you about is we are faced with a debt ceiling coming up March 1. Could you walk us through quickly, if you could, the economic impacts of failing to increase that debt ceil- ing? Mr. POWELL. Well, the failure to increase the debt ceiling creates a lot of uncertainty in the first instance, and then when you actu- ally get up to the point where the Government runs out of cash and does not pay its bills—we never passed that point yet. That is kind of a bright line, and I hope we never do pass it. But there is a lot of uncertainty that is generated and a lot of distraction from what is otherwise a pretty good economy. Senator TESTER. What would happen to our interest rates on $22 trillion worth of debt if we were not to do what we needed to do with the debt ceiling? Mr. POWELL. It is beyond even considering. The idea that the United States would not honor all of its obligations and pay them when due is just something that cannot even be considered. Senator TESTER. Would it double? Mr. POWELL. It would go up. But I think, you know, we have the best credit rating; you know, we borrow at very low rates, and the world believes in our full faith and credit. And I think that is not something I would—— Senator TESTER. It would have draconian effects on our economy overall. Mr. POWELL. Potentially. Very hard to predict and possibly large negative effects. Senator TESTER. But there are some in this body, quite frankly, that say it would be no big deal. Do you agree with that? Mr. POWELL. No, I do not. I think it would be a very big deal not to pay all of our bills when and as due. I think that is some- thing the U.S. Government should always do. 18 Senator TESTER. I agree. Senator Shelby talked about the cer- tainty of trade agreements. I will not ask you to grade this Admin- istration’s trade policies, but from your perspective, how is this Ad- ministration’s trade policy affecting our economy—positively or negatively? Mr. POWELL. You know, again, we do not play a role in trade ne- gotiations. I think it would be inappropriate for me to comment on their trade policy, either directly or indirectly. As I mentioned, you know, we have been hearing and everyone has been hearing from business about it, and particularly I would think in your State, hearing about trade. Senator TESTER. Exactly. And in my real job, I farm, and I can tell you, as we prepare for planting this spring, I cannot tell you any commodity or any livestock that is going to make us much money, if any. And so I believe the Minneapolis Fed came out and said that bad ag loans, we are seeing an uptick—a serious uptick, I might add— in farm foreclosures. Are you concerned about that? Do you think it is a direct result of trade, or is it something else? Mr. POWELL. I actually did see that piece. As you know far better than I, the agricultural economy has been under a lot of pressure for really 5 years now. It is just low crop prices, sustained low crop prices, and that has not changed, and that has driven up, you know, bankruptcies under Chapter 12, foreclosures, and all kinds of bad things. So, I mean, I think the bigger picture is just crop prices have been low. Obviously, the trade issues have not helped this year. Senator TESTER. OK. And the Fed also suggested that farm bankruptcies have not peaked yet, that we have not seen the poten- tial negative impact on rural America that these low commodity prices—and might I add, before that 5 years, we had some of the best ever when we had some trade going on. Do you agree with the assessment that the Federal Reserve study suggests that we have not seen the peak of farm bank- ruptcies yet? Mr. POWELL. I did read that, whatever it was, an article or a blog post, and it did say that. It sounded plausible to me. Senator TESTER. OK. We in agriculture got a bailout. It was pret- ty serious dollars overall, but it did not amount to much by the time it got to the ground, truthfully, as compared to what produc- tion ag is losing in products. But we also hear from more than just agriculture. We hear from small businesses, and the small busi- nesses are telling me that the big guys can afford to stay in busi- ness because of these trade wars, but they are going to be out of business. And we are not talking about family farms now, which is absolutely affecting—my previous question. But do you believe that the trade policies impact smaller businesses greater than the big ones? Mr. POWELL. I do not know the answer to that. It is a fair ques- tion. Senator TESTER. OK. Well, I have got some other questions I will put in for the record. I want to thank you for being here today. I will tell you that the economy is booming, but there are a lot of flags that are coming 19 up that I am seeing that are canaries in the coal mine, so to speak, and I hope—you are a smart guy. Hopefully you are able to pay attention to those to avoid any pitfalls. Thank you. Chairman CRAPO. Senator Rounds. Senator ROUNDS. Thank you, Mr. Chairman. Good morning, Chairman Powell. Mr. POWELL. Good morning. Senator ROUNDS. It is good to see you once again, and thank you very much for coming in today. Before I begin my questions, I wanted to take a moment to un- derscore the importance of the Insurance Policy Advisory Com- mittee that the Fed is required to establish pursuant to S. 2155. As you are aware, South Dakotans have a very strong interest in preserving our State-based insurance regulatory system. I look for- ward to working with you and the new Committee to find ways that we can promote the interests of our State-based system. So I appreciate that. I have got a series of questions that I think I am just going to put them in as questions for the record and ask you to respond later on. Very seldom do we get an opportunity to have the Chair- man of the Fed come in in front of literally the country and to share his thoughts about the direction of our country, in many cases the financial systems that we have here and so forth. And I got to thinking, this is probably an opportunity that we should not let go by to talk about the impact of the Federal Government and its spending with regard to monetary policy as well. In particular, it seems that Congress has a tendency to only make changes in the way it does business when there is a crisis at hand, and I would like to give you another particular to perhaps visit with us and offer if not direction, at least an observation as to what happens when Congress fails to take care of some of the safety net programs that we have in this country. And I want to begin by simply recognizing that we have $22 trillion in debt, and clearly that debt is being financed. That means there is competition for those dollars. The Federal Reserve, on the other hand, it actually manages through regular meetings and discussions—and the quantitative easing is an example of one where you as an organization have very carefully selected how you will work that through, how you will refinance and so forth. But you manage it on a regular basis. Congress has a tendency with its budget and the money that it spends to not even look at a number of the expenditures. Today with our budget, we have about 31 percent of the budget that we actually vote on. We vote on defense and nondefense discretionary spending. We do not vote on nor do we appear to manage Social Security, Medicare, Medicaid, or interest on the debt, about 70— well, close to 70 percent of all of that which we spent every single year. Every single year for as far as we can see, we are going to run significant deficits. Would you care to comment on the way that Congress manages or does not manage the safety nets—Social Se- curity, Medicare, and Medicaid—and what impact that has on our economy as a Nation? 20 Mr. POWELL. I should start by saying that we try to stay in our lane, which is monetary policy, bank regulation, financial stability, and we have no supervisory role or really role as a commentator. We do not score bills. There is JCT, there is CBO, there is OMB, and we do not do those jobs. But I will say, as I said in my statement, that the U.S. Federal Government is on an unsustainable fiscal path, by which is meant that debt as a percentage of GDP is growing and now growing sharply, growing quickly, faster, and that is unsustainable by defi- nition. We need to stabilize debt to GDP. The timing of doing that, the ways of doing it, through revenue, through spending, all of those things are not for the Fed to decide. Senator ROUNDS. But as perhaps, for lack of a better term, one of the chief economists in the Nation, to be able to give advice to the folks that are out there, to the country as a whole about the things that we have in our future and about the threats to our fu- ture, Social Security will go bankrupt unless we start managing it. Is that a fair statement, on the current trajectory? Mr. POWELL. I think if I could say it this way: I think what hap- pens over time is that we wind up spending more and more of our precious revenues to service the debt, to pay interest to people who own the debt, as opposed to investing in the things that we really need—education—all the things that we need to be investing in so that we can compete in the global economy. I think, you know, on the spending side, the thing in my personal thinking—again, this is not the Fed’s role—and I think in many people’s thinking, the thing that drives our fiscal unsustainability, the single biggest thing is just health care delivery. We deliver health care outcomes that are pretty average for a well-off country, but we spend 17 percent of GDP doing it. Everyone else spends on average 10 percent of GDP. That is a trillion-plus, way more than a trillion dollars every year that we spend in delivering health care. So if I were in your seats—and I am not—I think that is a good place to look. It is not that benefits themselves are too gen- erous. It is that we deliver them in highly inefficient ways, particu- larly health care. Senator ROUNDS. If I could—and I know I am out of time, but I will just say, in other words, what you are saying is if we actually managed—if we actually managed the resources that we had, we could probably do a better job than what we do today, where we just simply do not even include it in our regular budget that we vote on on a year-to-year basis. Mr. POWELL. Again, I cannot—I am not here to criticize Con- gress, but I do think it is a profitable thing to do. Senator ROUNDS. Thank you. Thank you, Mr. Chairman. Chairman CRAPO. Thank you. I will agree with you, Senator Rounds. Senator Smith. Senator SMITH. Thank you, and it is wonderful to see you again. I appreciated very much our conversation in my office the other day. I want to follow up a little bit on what Senator Tester was asking about regarding the economic issues in rural areas. And I appre- 21 ciate your interest in this discussion, and this was featured in the Monetary Policy Report that you put out. You know, it strikes me that if you look at the overall positive numbers in our economy, it is a good thing. But when you unbundle those strong numbers, you see inequities and gaps, as you have pointed out, around race and gender and then also around rural areas. In Minnesota, it is interesting. You know, we have some rural counties where the unemployment rate is close to 2 percent. And then we have other rural counties where the unem- ployment rate is more like 6 or 7 percent. So your Monetary Policy Report highlights the impact of what is happening with rural workers without a college degree, in par- ticular, and the impact on labor force participation and how em- ployment-to-population ratios have recovered dramatically for col- lege-educated people but less so for noncollege people. And I am really worried about this disparity that it is causing. So can you tell us, in your judgment, why is this gap widening in rural areas? Mr. POWELL. I thought the box is very interesting, and you will note that, like so many economic problems, there is no really clear or easy answer. But the way I would say it is the gap between rural and urban areas in unemployment is not so big. It really shows up in labor force participation. Senator SMITH. Right. Mr. POWELL. That is where it shows up. So when we think about low labor force participation, the first thing that comes to mind is educational levels, because people in the population, the broader population, lower educational levels tend to be associated with lower labor force participation. But even accounting for that, that does not account for much, really, of the disparity. So, you know, it can be that rural areas are more associated with manufacturing activities, which have had less recovery than the service sector, which is now much larger than the manufacturing sector. In addition, it all may be affected by people leaving rural areas, in other words, people who leave rural areas to go to an urban area where there are better job opportunities. So it is something, you know, that we are still working on understanding, but it is a fairly stark disparity, and I think we all see it. Senator SMITH. Right. Mr. POWELL. I was in Mississippi a couple of weeks ago and cer- tainly saw it there in a rural area. Senator SMITH. So when people are leaving, does that suggest then that the population that is left is older and—— Mr. POWELL. Or perhaps less able to find a job, less able to take part in the labor force. So some of the people who have job skills may have left that area, leaving the remaining population with lower labor force participation. That may be part of it. Senator SMITH. So would that not suggest that it would be smart on our part—this is not a Fed policy, but it is a policy to increase our emphasis and our investment in, you know, career and tech- nical education, the kind of training that you need in order to fill those manufacturing jobs in rural areas? Mr. POWELL. So I do think that we could use a national focus on labor force participation, and that would be certainly one piece of 22 it. We do not really have the tools. I can identify it as a problem, and it is a serious problem, but I think that is a profitable place to look. Senator SMITH. The other thing I wonder is maybe people are not coming back into the workforce because they cannot afford to. In rural Minnesota, you cannot afford child care and it is not readily available. So I wonder if that is not part of the problem, that the jobs that are there are not paying. So how come wages do not go up? If there is a demand for labor, people potentially are there, why don’t wage go up? Mr. POWELL. As I mentioned earlier, wages have moved up from their very low levels of increase earlier. I would not say that they are going up quickly now, but they are going up at a more healthy rate. There are some things in the Federal Tax Code where people lose their benefits with their first dollar of earnings, which, again, it is not our job, but that does not sound like you want people to go back to work. Senator SMITH. That is counterproductive, right. Mr. POWELL. You want them to be rewarded for going back to work, and it seems like that is something we could look at—you could look at. Senator SMITH. Right. Thank you very much, Chairman Powell. I know I am out of time. I want to just note that I appreciated the question that Senator Tester was asking about farm bankruptcies, which is a real concern in Minnesota and across the whole north- ern swath of States. I am going to follow up with a written ques- tion about how you see those farm bankruptcies potentially affect- ing the overall economic strength of the country, especially in rural areas. Mr. POWELL. Thank you. Senator SMITH. Thank you, Mr. Chair. Chairman CRAPO. Senator McSally. Senator MCSALLY. Thank you, Mr. Chairman. Chairman Powell, good to see you again. I want to continue actually on the line of discussion that you have been on. In our conversation when we met, we talked about this labor force participation issue, and everywhere I go in Arizona, in the more metropolitan areas anyway, companies are—the econ- omy is doing great, the optimism is there, but they are lacking for workers. They are just screaming for workers. And it is really up and down the skill set. It is not just in the trade craft, although that often tends to be those areas. And so what we are seeing is this labor force participation rate is going up a little bit, ticking up, but there is clearly still this gap that is maybe holding back even more economic growth because of the mismatch of not having the workers for the jobs that are there. So can you just give some additional perspective on that? And, you know, what within your power and within our power do you think that we can do in order to incentivize increasing that num- ber, get more people off the sidelines, get them the skills that they need in order to continue to provide more opportunities for people we represent? 23 Mr. POWELL. Sure. So this strong labor market and strong econ- omy that we have at the aggregate level is, as you mentioned, pull- ing people back into the labor force or encouraging them to stay in the labor force and not leave. So this is very, very positive for us. Labor force participation has gone back up above 63 percent, and to be in the labor force, by the way, you have either got to have a job or have looked for a job in the last 4 weeks. So if you have not looked for a job in the last 4 weeks and you are not employed, you are not considered unemployed. So this is very, very positive, and we hope it is sustained, but, you know, that is sort of a strong labor market, pulling people back in. Even with that, though, our labor force participation rates are lower than other countries that have anything like our level of wealth and income and economic activity. And it is not easy to say why, but I do think—and I think that the Fed’s ability to—our abil- ity to address this is really just a function of trying to keep us at maximum employment. There are plenty of people and it is young- er people, particularly younger men, particularly less well educated younger men, but also people across the gender spectrum and the income spectrum and age spectrum. We just have low labor force participation, and I think it is—you know, we want the economy to grow, and we want that prosperity to be widely spread. Labor force participation gets both of those things almost better than any- thing, and so I think it is something that ought to be a high focus for people who have different tools than ours. Senator MCSALLY. I agree with you, and not necessarily within your tools, but just based on your perspective. What do you think is holding that back? What is your perspective and what else can we do in order to remove those barriers for people to, you know, get back in the labor force, to be working to support their families, themselves, and meet their full potential? Mr. POWELL. Part of it would be probably education and skills gaps. Part of it would be the opioid crisis. You know, there just would be a range of things, and I would think that there are also— as we were discussing a minute ago, there also are some disincen- tives to go to work that are built into benefit programs. I met with a group of women in West Virginia last year who were in an ap- prenticeship program for carpentry, electrical, plumbing, steel work, and that kind of thing. And the hardest thing they had to do was to go to work in this program, which has 100 percent place- ment and which paid, you know, 9 or 10 bucks an hour, because that was less than the very meager benefits they were already get- ting. So they had to take a pay cut to go back to work. And they did it anyway. They did it anyway, which was pretty inspiring. But I think we ought to have policies that reward and support labor force participation. Again, they are not ours. I should not get into the prescriptive business, but I think it is really important for the country. Senator MCSALLY. Thank you, and I do want to follow up on the rural–urban gap. We have got a lot of rural counties. I visited many of them this week in Arizona, and we are seeing the same thing where there is that disconnect in wage growth and in labor force participation in those rural areas. Do you take that into ac- count in Fed policy? And, again, other perspectives of what else we 24 might be able to do on our side or on your side in order to not have that gap widening for those in the rural areas? Mr. POWELL. We do in the general sense that we are learning and we have learned this year that there is more slack in the labor market because people are coming back in. If people were not com- ing back in, then the unemployment rate would be substantially lower. But they are, or they are staying in. So labor force participa- tion is rising in either case, and that tells us that there is more room to grow, and that certainly has implications for monetary pol- icy. In terms of the urban and rural, we look at those disparities. We look at all different kinds of disparities. In a general way, they in- form our thinking about the state of the economy, and particularly maximum employment, which is not—there is no one number that you can look at. You have to look at a range of indicators, and that would be one of them. Senator MCSALLY. OK, great. Thank you. Chairman CRAPO. Senator Jones. Senator JONES. Thank you, Mr. Chairman. Chairman Powell, thank you for being here today. I really appreciate it. I want to stay on the urban versus rural divide a little bit. Obvi- ously, we see you have got Senators on this Committee who have a lot of urban areas, and it seems like that there is one factor that may come into play that is not quite so obvious that we have talked about, and that is health care. In 2017, the Atlanta Fed set out to study the urban–rural divide in the Southeast, and one of the factors they kept noticing was the impact on residents’ health on the economic output to simplify what is obviously a very complex issue. According to that Fed study in Atlanta, while the portion of workers who say they are too sick or disabled to work is roughly 6 percent nationally, that rises to over 12 percent and higher in the rural South. So from your perspective, what role do you think that health out- comes play in economic growth, particularly in rural America? Mr. POWELL. I think poor health outcomes are very much associ- ated with a lot of social issues, including low labor force participa- tion and lots of other economic issues, you know, low lifetime earn- ings and many, many different things. And those are obviously more prevalent now in rural areas, as you pointed out. Senator JONES. And I would assume you would agree that if health care is not accessible in those areas—for instance, in Ala- bama we have seen rural hospitals closing left and right, seven or eight in the last 7 or 8 years—with the absence of health care, it may contribute to the people leaving those rural areas and into urban areas. Would you agree with that? Mr. POWELL. It is hard to say whether—you know, people have been leaving for some time. Some of these counties, as you obvi- ously know, have lost half their population in the last four or five decades. Senator JONES. Individually, if the States were to develop poli- cies that would expand health care in these communities, give af- fordable health care, access to health care, what would you expect the economic impact to be? 25 Mr. POWELL. Well, I think people who—health care is going to— you know, in principle would allow people to remain in the labor market, would get them back in the labor market and keep them from getting sick and being out of the labor market. So that would be a positive for the economy. Senator JONES. I appreciate that. I promise you we are not going to ask you to testify in front of the HELP Committee. Senator Tester made a comment as he was finishing up that de- spite—and there is a lot of good economic news. Everybody agrees there is a lot of great economic news out there. But I think a lot of folks also, as in Senator Tester’s words, see canaries in the coal mine. Do you see any? Other than the obvious of the debt that we have, do you see any canaries in the coal mine that we need to be looking for in this Congress? Mr. POWELL. I would say that the outlook for the U.S. economy is a positive one, is a favorable one. There are always risks, and right now I would say that the predominant risks to our economy are slowing global growth, as I mentioned, particularly China and Europe. We have seen a significant slowing in growth really over the course of the past year, and it seems to be ongoing. And that can create a headwind for the United States economy. I talked about Brexit. That is an event risk which could have implications for us. Here domestically, again, I think the outlook is generally a favor- able one. Senator JONES. OK. Thank you, Mr. Chairman. And Senator Shelby asked you about the state of health of our big banks, which you gave a pretty favorable report on. But in December of this year, right as the Government was shutting down, the Secretary of the Treasury issued a press release, and he had this call with all of the big banks to discuss their liquidity and to make sure that things were OK. The next day, I think he had a call with you and some of the other regulators. And that sent some alarm bells, I think, throughout the country and folks up here. Can you kind of walk through those 2 days and what was the purpose? What did you see was the purpose of the Secretary of the Treasury 4 days into the shutdown attempting to reassure folks, I guess, that the banking system was OK? Mr. POWELL. Let me say, of course, I would not comment on the Secretary at all. But, you know, our financial system, as I men- tioned earlier, is very strong, record profits, no bank failures last year, capital is much higher, liquidity is much higher, risk manage- ment is much better. You know, we never take this for granted. We keep watching carefully and looking for problems. But I can say that what I was thinking in those days was, you know, we had sig- nificant volatility in the markets, and I was just, you know, won- dering, looking and asking the question, does that have any broad- er implications for the economy or for the financial system? And the answer I felt was no, but it is something that you are—part of the job is to ask that question, which I was. Senator JONES. All right. Thank you, Mr. Chairman. I appreciate you being here. Thank you, Mr. Chairman. Chairman CRAPO. Senator Kennedy. 26 Senator KENNEDY. Mr. Chairman, thank you for coming today. My good friend Senator Brown lamented the fact that our financial institutions are making profits now. That is a good thing, right? Mr. POWELL. We need a profitable financial system to have a well-capitalized financial system. Senator KENNEDY. Well, is it better if banks are making money or losing money from a macroeconomic standpoint? Mr. POWELL. I think we want banks to be profitable and strong and well capitalized, and they have been. Senator KENNEDY. OK. I want to talk about the Government shutdown. Tell me if I get this wrong. CBO estimates an $11 bil- lion impact to our economy. We will recover about $8 billion, so the net loss to our economy is $3 billion. Does that sound about right? Mr. POWELL. All I know about that is that is what I have read. Senator KENNEDY. OK. That is what I have read, too. You got to trust somebody. I will take CBO at their word. We have got about a $21 trillion economy. Is that right? Mr. POWELL. That sounds about right. Senator KENNEDY. OK. So as a percentage of our economy, that $3 billion loss is one-half of 1 percent. Is that about right? Mr. POWELL. You did that math very quickly, Senator. I am going to trust you on that. Senator KENNEDY. Good. OK. That is an infinitesimal impact, is it not? Mr. POWELL. That is very small. Senator KENNEDY. OK. Let us talk about the economy. Some economists said that if we passed the Tax Cuts and Jobs Act, our economy would overheat. Those economists were wrong, were they not? Mr. POWELL. The economy did not overheat, has not overheated. Senator KENNEDY. We are having growth without inflation. Is that correct? Mr. POWELL. We have inflation right at our target. Senator KENNEDY. About 2.2 percent? Mr. POWELL. Right around 2 percent, 1.9 percent. Senator KENNEDY. OK. And we have had more business invest- ment. Is that correct? Mr. POWELL. We have had solid investment, very solid in the first part of last year and reasonably good in the second half of last year, and I think the outlook is for continued reasonable levels of business investment. Senator KENNEDY. And wages are up. Is that correct? Mr. POWELL. Yes, they are. As I mentioned, you have wages now—all of our wage measures have moved up to 3 percent or a little better, which is a very good thing to see. Senator KENNEDY. I want to get your opinion on—and I am not trying to ask you to make policy, but I am asking you as the Fed Chair, what could we have done in hindsight to encourage more business investment in plants and machinery and equipment and software which would have created more jobs and hopefully in- creased productivity? Specifically, let me ask you this: There is leg- islation to prohibit share buybacks. Is that a good thing? I know share buybacks have a positive economic impact. But if you had legislation that cut business taxes but also said you cannot use 27 that money to buy back shares, you have to invest it in your com- pany or pay shareholders dividends, what would you think about legislation like that, just from an economic standpoint? Mr. POWELL. Well, I think it is—first of all, that kind of a deci- sion is really not in our hands. Senator KENNEDY. I know. Mr. POWELL. It is really for you to make. Senator KENNEDY. I am asking you as an economist. Mr. POWELL. So I would say the goal—I guess I would just say the goal of having prosperity be widely shared I think is one that we all share. I think the thing about share—when you talk about companies and what they do with their profits and how they allo- cate capital, in our system we have always left those decisions to the private sector, to private hands. Senator KENNEDY. Right. Mr. POWELL. And I would want to understand the consequences of changing that, and I would want to look at whether there are not other ways to achieve the goals that I think we all want, which is to have prosperity be widely shared. Senator KENNEDY. OK. Are there other ideas you might have to make sure prosperity is more widely shared? Mr. POWELL. I think it ties to some of the things we have been talking about here. You know, labor force participation is just a win for the overall economy. The economy will grow faster, and the people who are not taking part tend to be the ones with lower edu- cation, who are the edges of the labor force. So we are underper- forming as a Nation on this compared to our peer group. Senator KENNEDY. Why? Mr. POWELL. It is a good question. It is a problem that stands out here compared to other countries, and—— Senator KENNEDY. Is it because we pay people too much not to work, or is it because people do not have the skills, or is it because they do not have access to the jobs? This is my last one, Mr. Chair- man. Mr. POWELL. You know, I think there is a range of perspectives on this, and there is a range of—there is some wisdom in a lot of different ideas, and I think the best thing to do would be to get some proposals that would have broad support and work on those. I do think quite a bit of it is skills, education, aptitude, and also not having disincentives in the Tax Code where people lose their benefits, for example, with the first dollar of pay. That seems like a disincentive to work that—and none of this, by the way, is in the Fed’s hands, but since you ask. Senator KENNEDY. You are doing a great job. Thank you. Mr. POWELL. Thank you, Senator. Chairman CRAPO. Senator Warren. Senator WARREN. Child care. Thank you, Mr. Chairman. Thank you, Chairman Powell, for being here. Earlier this month, two giant banks, SunTrust and BB&T, an- nounced that they intended to merge. This new too-big-to-fail insti- tution would have about $450 billion in assets and become the sixth largest bank in the United States. Now, as you know, bank acquisitions and mergers do not go through on their own. They have to be approved first by the Fed. 28 So last spring I wrote you a letter asking for data on the number of merger and acquisition applications received by the Fed and the number that had been approved over the last 10 years. Chairman Powell, when you answered my letter in May of 2018, how many merger and acquisition applications from the banks had you received since 2006? Do you remember? Mr. POWELL. No, I do not have the numbers in front of me. Senator WARREN. Would 3,819 sound right? Mr. POWELL. Yes. Senator WARREN. Good. OK. And do you remember how many of those 3,819 applications you denied? Mr. POWELL. No, I do not. Senator WARREN. Would zero sound right? Mr. POWELL. If you say so. Senator WARREN. Well, you said so. It is your letter. Chairman Powell, has the Board denied any applications since you responded to my letter in May? Mr. POWELL. I would just—if I can offer a little context—— Senator WARREN. Well, let us get this part out, because that is what I am trying to do is build some context here. Mr. POWELL. I do not believe we have. I think what happens is that we—people do not apply or they withdraw their applications. Senator WARREN. That is exactly what I am going to talk about. So zero percent of the applications for mergers and acquisitions since 2006 have been denied. Now, that does not mean that all po- tential mergers and acquisitions make it through the process. Thir- teen percent of applications are withdrawn before they get a deci- sion. According to your letter, Chairman Powell, ‘‘Prospective appli- cants may discuss a proposed transaction with Federal Reserve System staff prior to filing, and applicants will be discouraged from filing applications where it is apparent that the applications would not meet all of the statutory factors required for approval.’’ So if you think that a proposed merger will not be approved, you discourage the bank from following through. Is that right? Mr. POWELL. In some cases. I think that would be in cases where it is clear that there is a statutory problem, you know, for example, in some cases—— Senator WARREN. OK, but you approve 100 percent of those that go ahead and apply, so I assume they are getting some—— Mr. POWELL. Unless they are withdrawn. Unless they are with- drawn. Senator WARREN. That is what I said. So you encourage them to withdraw if they are not going to get an approval. Mr. POWELL. But they can file and then withdraw. Senator WARREN. But the point is they withdraw if they are not going to get it because of a conversation you had that is a non- public conversation. So this is a formal process required by regulation. In order to do an approval, people who object to the merger have an opportunity to file a protest. That is how the process is supposed to work. That would include, for example, communities that are worried that local banks may close following a merger or acquisition; employees who are concerned about losing their jobs; State officials that may be concerned about decreasing competition and so on. 29 So, Chairman Powell, you have explained that consultation with a bank starts, can start before the merger is announced publicly. When is it that the public can actually file protests, before or after the merger is announced? Mr. POWELL. So I think the process is that we receive an applica- tion for a merger—which we have not received yet. We expect to receive it, I am told, sometime next month. And—— Senator WARREN. And when will the public have a chance to—— Mr. POWELL. Certainly then. Senator WARREN. And that is true in all of these, right? The pub- lic does not get a chance to comment until after the application is already filed. But the application is only filed after the banks have had a chance to have this quiet conversation with the Fed. I just want to get this straight. You and the banks get together in the back room and grease the wheels before the merger is an- nounced. And if you are not going to approve the merger, you tell the bank in advance, and then they go figure out something else. If the public wants a chance to weigh in, they have to wait until you have already made a decision. No wonder you approved 100 percent of the merger applications. Not a single no. Your approval process itself appears to be a rubber stamp, that everything is hap- pening behind closed doors. So the question I have is about the SunTrust and BB&T merger. Is this one just going to be another rubber stamp? You have al- ready made the decision behind closed doors before the public gets a chance to weigh in? Mr. POWELL. No, not at all. We are going to conduct a very fair and open, transparent process. I think, you know, our obligations under the statute are clear and they are quite broad. We will be hearing from groups of all kinds and going through our process carefully and thoroughly. Senator WARREN. So it is just that in the last 3,819 merger appli- cations, which were all approved without a single one for which you said no, this time you are going to be listening to comments from the public that might cause you to say no? You know, I just have to say I will bet that SunTrust and BB&T looked at that 100 percent merger success rate and saw what ev- eryone else sees, and that is that the Fed works for big, rich banks that want to get bigger and want to get richer, and then everyone else pays the price for diminished competition, for worse service, for higher prices, for employee layoffs, for the risk that we have yet another too-big-to-fail bank on our hands. I just think it is time that we put down the rubber stamp and that we really let the public and everyone else weigh in before we create yet another too-big-to-fail bank. Thank you, Mr. Chairman. Chairman CRAPO. Senator Cotton. Senator COTTON. Thank you, Chairman Powell, for being here. I want to start talking about stress tests for midsize banks. Reform legislation that the Congress passed to the Dodd–Frank Act last Congress increased the threshold for stress tests from $10 billion banks to $100 billion banks. Can you tell us why so many of us still hear from banks in that window, larger than $10 billion 30 but smaller than $100 billion, are still hearing from their exam- iners that they need to undergo such stress tests? Mr. POWELL. Well, let me say the law, the new law, is that banks between 10 and 100 do not have to—are exempt from the DFAST stress tests. That should be crystal clear. I think you are referring to the guidance. Senator COTTON. Yes. Mr. POWELL. Which we are in the process of looking at and revis- ing and, I would think, addressing that issue. Senator COTTON. OK. But to be perfectly clear, banks between $10 billion and $100 billion are not required to undergo Dodd– Frank stress tests. Mr. POWELL. Correct. Senator COTTON. When I was in Afghanistan and Iraq, young soldiers used to complain about the rules of engagement, and if you looked at the rules of engagement that the four-star commanders had issued, they are actually pretty flexible. That had been filtered down in a different way to the front lines, though. Do you think it is possible that your guidance that you just gave gets filtered down to examiners on the front line in a slightly different way? Mr. POWELL. I think that is something that happens, yes, and, again, we are looking at—there is this guidance that is still out- standing. Some of these banks are still going to want to do stress testing, and we are not going to discourage that. It is actually a good practice. But we are going to be looking at that guidance to make sure that there is no question that banks between $10 and $100 billion in assets are not required by law to do stress tests. Senator COTTON. OK. Thank you. These examiners, they hold a lot of power in their hands, obviously, when they are on the front lines and they are in one of these smaller community banks. And when they say something may be voluntary, you know, that is heard by the banker in a different way than they may intend it. It reminds me of my old basketball coach who used to have vol- untary shoot-arounds before school and on some afternoons. And it just so happened that the players that reported to those voluntary shoot-arounds tended to be the ones that got playing time on Tues- day and Friday night. Mr. POWELL. We try to communicate, and I think our examiners do a good job, basically, but, you know, we know we need to work hard to make sure that the message gets out clearly, and we find that our people do listen. So we are alert to that. Senator COTTON. Thank you. I want to turn now to a different question. I know there has been some talk here about the unemployment rate, which is pretty low, and the labor force participation rate, which is increasing. I want to talk about wages and wage growth. There was some recent data out from the Bureau of Labor Statistics. It was highlighted in a re- cent Wall Street Journal article that said, despite these factors, in- come to employees in the form of pay and benefits continues to de- crease. It is down to 52.7 percent of our gross domestic income. It was as high as 59 percent in the 1970s and 57 percent in 2001. By the same token, business income, profits to businesses, whether it be the biggest corporations or small businesses, have gone from 12 percent to up to 20 percent. 31 Can you give me your thoughts on why we are seeing more in- come going into the hands of owners in this country and less into the hands of workers? Mr. POWELL. Yes, so that is the labor share of income, is what you are talking about, and really, if you look back through history, it zigs and zags, but it generally zigged and zagged at a higher level. And then right around the year 2000, labor’s share went down sharply for about 10 years and then, broadly speaking, has been about flat since then. You know, it goes up and it goes down, but it is basically flat. And the question is, Why? It is a really good question, and there are a lot of different answers. Honestly, there is no clear, easy answer. As a separate matter, wages are actually growing at a level that makes sense. The problem is the level. It is not the growth rate. Wages and benefits are growing at around 3 percent, a little better. That is a healthy growth rate in an economy with 1 percent pro- ductivity increase and 2 percent inflation. The problem is there were 10 years when that did not happen, from 2000 until 2010. So, you know, it can have to do with a lot—globalization is a big an- swer there. That was right around the time of China joining the WTO. Some researchers will connect it to that. So, in any case, you know, we welcome these wage increases for this reason. Senator COTTON. Well, I do as well, and I hope that we will con- tinue to see them and see a little bit more of that growing economic pie going into the hands of our workers. Thanks. Chairman CRAPO. Senator Cortez Masto. Senator CORTEZ MASTO. Thank you. Chairman Powell, thank you for being here again. I have concerns about discrimination in lending, so I want to ask you a follow-up question to the record that I submitted last time you were here, and it involves the Federal Reserve’s responsibility to enforce the fair lending laws. I asked you how the Fed would improve its oversight of fair lend- ing rules. In your response, you mentioned that Fed examiners evaluate each financial institution for fair lending compliance. So I guess my specific question is: How would examiners evalu- ate whether a lender might steer consumers to higher-priced loans? In your written response, you mentioned credit scores, loan-to- value ratios, and lending products, but can you expand on what the examiners would consider to ensure against consumers being steered to high-priced loans? Mr. POWELL. So I think examiners who examine for that I be- lieve are trained to look for patterns of that nature. Senator CORTEZ MASTO. Specific criteria. Is there anything spe- cific that they look to that you are aware of? Mr. POWELL. You know, I have a general understanding of this, but I should come back to you with more details. Senator CORTEZ MASTO. OK, and thank you. I appreciate that. And I would also like to know, as you come back and answer this question, would examiners consider incentive pay tied to higher- priced loans as a red flag or a pattern? Would the existence of bo- nuses for bank staff that provided a loan with higher fees and in- 32 terest rates be a red flag to these examiners? So if you could ex- pand on that in writing, that would be fantastic. I appreciate that. Mr. POWELL. Happy to do that. Senator CORTEZ MASTO. Thank you. The other issue that is important for me because it is an issue in Nevada and across the country is affordable housing. In your re- sponse to my submitted questions for the record, I asked you if the rapid rise of housing costs was encouraging your consumer price models to assume a higher threat of inflation than actually existed. Do you think that the Fed’s raising interest rates was a factor in rising house costs? Mr. POWELL. Well, I think that higher interest rates certainly played into higher mortgage rates, and that will have had an effect. Senator CORTEZ MASTO. What about the costs of building that apartment or house? Mr. POWELL. Yeah, I think materials costs and—what you hear from builders is labor shortages, particularly skilled labor short- ages, and you also hear higher materials costs, some of which are affected by tariffs, of course. So you hear them under tremendous cost pressure, and I think that was flowing through into higher prices, and that was, you know, making the affordability calculus a little bit more challenging for buyers at the same time rates were going up, and I think all together that picture, you know, slowed down housing construction in the last year or so. Rates are now down a little bit, about 50 basis points, and so we are seeing a little bit—starting to see a little bit of a pickup there. Senator CORTEZ MASTO. How would you compare the impact of the higher interest rates on construction to that of the higher prices for goods that may be caused by tariffs? Mr. POWELL. You know, I think that the higher costs—it depends on—from the standpoint of the consumer, what matters is what does the house cost. I think you will find that the interest rate has an important—is a very important thing from the consumer’s standpoint. But in setting the price of the house, it is not the inter- est rates. It is really the cost of materials and labor. Senator CORTEZ MASTO. And then you talked about—— Mr. POWELL. And land. Senator CORTEZ MASTO. ——the higher cost of labor. Could that higher cost of labor also be due to curbing immigration and the lack of labor because of that? Mr. POWELL. It certainly could in construction, particularly in some regions. I visited Houston not so long ago, and I think a big part of their construction labor force was from immigration. I think they were feeling shortages there for that reason. Senator CORTEZ MASTO. Thank you. Last summer, the Federal Reserve economist noted that high lev- els of student debt was preventing Millennials from buying a home. Other studies have found that Millennials faced housing supply constraints, beginning their careers in a poor labor market, and high student loan burdens which have made it difficult for them to buy a home. What was the response to the Federal Reserve’s assertion that student debt prevented at least 400,000 Millennials from buying a home? 33 Mr. POWELL. What was the response? Senator CORTEZ MASTO. Yes. Mr. POWELL. It is just research, and I think there is a growing amount of research that shows that student loans, of course, have been growing very, very fast in the last few years, and—— Senator CORTEZ MASTO. Was that the right number, the 400,000? Mr. POWELL. I do not know that number. Senator CORTEZ MASTO. Did you get a sense was it too high, too low? Was that—— Mr. POWELL. I do not know that number. I will tell you it is a trillion and a half dollars in outstanding student loans, and there is research that shows that for students who cannot discharge— cannot service their loans or discharge them, that those loans can weigh on them over a long period of time and have real effects on their economic and personal lives over time. Senator CORTEZ MASTO. And ability at actually home ownership. Is that correct? Mr. POWELL. Yes. Senator CORTEZ MASTO. Thank you. Thank you, Chairman, for being here. Mr. POWELL. Thank you. Chairman CRAPO. Thank you. Senator Moran. Senator MORAN. Mr. Chairman, thank you very much. Mr. Chairman, thank you very much. Let me start with what I think is a straightforward question fol- lowed by a much more complicated one. Eighteen of my Senate col- leagues joined me in a letter calling on regulators to provide a more significant reduction in the reporting burden of our smallest banks in the first and third calendar quarters, as required by Sec- tion 205 of 2155. We are looking for a greater difference in those reporting requirements than what has been proposed. According to the current proposal, banks with less—those small- est assets would save only an average of 71 minutes per quarter. So not a significant change based upon the proposed rules. Can you speak to whether you think our concerns about our smallest banks and their call reports have been addressed? Mr. POWELL. Senator, as you mentioned, that rule, we put that rule out for comment. We got a lot of comments and got your letter, and we are carefully reviewing those comments. I think what we are trying to balance is—we are trying to find the right balance, and we will certainly take into account the comments that we get. Senator MORAN. Well, I appreciate that. I would want you to do that. But if the end result of 2155 is as modest as this appears to be, we have not achieved our goal. That cannot be the congres- sional intent, at least in this instance on this topic. So let me reit- erate that. Then let me talk about what I think is at least a difficult topic for me to have a conversation with you about just because of its complexity. A key goal of this legislation was to provide qualifying community banks relief from the complexities and burdens of cur- rent risk-based capital rules. But we, of course, want to ensure that they maintain a high quality of capital consistent with the current rules. 34 The recent interagency proposal for community bank leverage ratio allows certain banks with less than $10 billion in total assets to elect to use the CBLR instead of the current risk-based capital requirements if the CBLR ratio is above 9 percent, the current ratio required being 5 percent. So under the new proposed frame- work, a bank would be considered less than well capitalized if it fell below 9 percent and has not opted out of the CBLR, that would then trigger certain restrictions and requirements. As currently written, the proposal seems to dangle the incentive of reduced regulatory burden but with capital requirements 4 per- cent higher for our small banks to qualify. Would it not make sense to leave the existing PCA framework unchanged, allowing small banks to maintain well-capitalized sta- tus and begin reporting capital ratios under the current risk-based capital rules when CBLR falls below the 9 percent? Mr. POWELL. That is another rule that we have out for comment, obviously, and—Senator, can I ask, is that a comment that you have—— Senator MORAN. If we have not, we can or will. Mr. POWELL. I would encourage you to do so. You know, these are—we think these are really important tailoring proposals, and they are obviously mandated by S. 2155, and we want to get them right. So I understand your question, and, you know, we will look carefully at that. Senator MORAN. Are all of the financial institution regulators working well together in implementation of 2155? Mr. POWELL. I believe so, yes. I think we share the goal of, first of all, putting a very high priority on implementing S. 2155, but also on tailoring. For smaller banks, I think all of us feel that there is a lot we can do without undermining safety and soundness, and we want to find those things and do them. Senator MORAN. I appreciate that approach. I have had many conversations with regulators for as long as I have been on this Committee and in the Senate, and it is something that has al- ways—and I am not suggesting this at all about you, but it is al- ways something that is highlighted certainly when talking to me about its importance. But it is hard to find change that has oc- curred voluntarily by regulators to make the burdens less on our community banks, and that is why 2155 was so appealing to me, is that we had failed generally to get regulators to change their be- haviors, and 2155 seems to me to be the option, the only option that I have seen that actually might force change when it has been so reluctantly to arrive. So I care a lot about that. In the 15 seconds I have left, I would remind you that agri- culture, as you and I visited about last time we talked, is in signifi- cant—faces significant challenges. I want to make certain that our community banks, our relationship bankers do not lose the ability to consider character and history, remind you that we have generational bankers along with generational farmers whose grandfather bankers have taken care of grandfather farmers and down through the generations. That has continued, and our com- munity bankers know who has character, who has ability to pay, who has the history to demonstrate that, and we cannot tie their strings or the agricultural challenges the economy faces today, ag 35 country’s problems will be significantly exacerbated if you take away the ability to take into account those factors that are not crossing a ‘‘T’’ and dotting an ‘‘I.’’ Thank you. Mr. POWELL. Thank you. Chairman CRAPO. Senator Van Hollen. Senator VAN HOLLEN. Thank you, Mr. Chairman. And, Chairman Powell, thank you for your service. I want to focus for a moment on the impact of the tax bill, the tax bill that passed about a year ago, and especially taking a look at the banking industry, because I think in no other sector is it clearer as to what a huge giveaway this tax cut was to big financial interests. I do not know if you saw the Bloomberg analysis that was conducted earlier this month. They looked at the 23 U.S. banks that the Federal Reserve says are most important to our economy and concluded that those 23 banks got a $21 billion tax break windfall. Did you see that analysis? Mr. POWELL. I do not know that I did. Senator VAN HOLLEN. And would you be surprised to learn that they used much of that windfall for a major stock buyback? Mr. POWELL. I honestly do not know. First of all, I know that the tax cut reduced taxes for big companies that were very profitable quite substantially. Senator VAN HOLLEN. Well, they did, and, again, it was a $21 billion windfall, and a lot of it used for, you know, stock buybacks that helped a lot of the executives. What is interesting is that during that same period of time we saw a loss of 4,300 jobs among those 23 banks. Does that surprised you—big tax break, and yet a loss of jobs among the big banks? Mr. POWELL. You know, it must be several million people we are talking about, so it is—— Senator VAN HOLLEN. But, of course, it was sold on the promise that we would see all these new jobs generated. I do want to ask you about the increase in wages. Obviously, it is always good to see an increase in wages. Of course, nominal wages are only half the equation, right? You also have to look at rising costs when you look at real wages. And isn’t it the case that when you look at real wages and the rise in real wages during the last term of the Obama administration, real wages rose faster during that period of time than they have since the beginning of the Trump administra- tion, even with the tax cut? Isn’t that the case? Mr. POWELL. You know, I just do not look at it in terms of those timeframes. I would say that—the way I would say it about wages, if you look back to 2012, if you look at the four major wage and benefit increases, things that we track, it was around 2 percent. All of them were right around 2 percent. Now they are at 3 percent or a little better, and part of that is just that the labor market has continued to improve since that time. Senator VAN HOLLEN. Sure. No, of course. But as you testified, you have also seen an uptick in inflation and costs, right? So the result for a real American is how much of the increased wages that are coming in, what the purchasing power of that will be. Anyway, if you could take a look at that and get back and confirm whether or not that is true. The figures I have got suggest that you saw a 36 more rapid increase in real wages, again, during the last term of the Obama administration, which just gets to the point about, you know, there is a lot of hype about the tax cuts. Let me ask you about student loans. My colleague just asked you about that. You just testified that we have got $1.5 trillion in stu- dent loans. I think that the Fed just reported that delinquent U.S. student loans reached a record $166 billion in the fourth quarter of 2018. You indicated this is putting a lot of stress on students who were trying to get out there and buy their apartments or rent their apartments. Would you be in favor of allowing students to discharge their debts in bankruptcy just like banks can? Mr. POWELL. So I think it is important that students be in a po- sition to borrow, to invest in their education. It is important that they get proper disclosure about what the risks are and what the success rates are and that kind of thing. It is not a Fed—someone asked me in this Committee a year or so ago that question, and I did answer it directly. But I would say it is not really for the Fed—— Senator VAN HOLLEN. Well, let me ask you, is the impact of stu- dent debt in your view impacting the economy in a negative way, the fact that these students are, you know, stuck as soon as they graduate trying to pay back loans that they apparently cannot repay? Mr. POWELL. Yes, I think for students who cannot repay their loans, there is a growing amount of research that shows that those people can have, you know, longer-term negative economic effects. Of course, some people invest in their education and borrow money to do it, and it works out very well for them as well. But for those who do not, it can be quite a negative—— Senator VAN HOLLEN. Well, there are a lot of people who cannot right now. Mr. POWELL. That is right. Senator VAN HOLLEN. You just reported a record delinquency rate in the last quarter. The last thing I would say, Mr. Chairman, while I have the Chairman of the Federal Reserve here, is I am going to keep after you and your colleagues on this faster payments issue. It makes no sense to me that Mexico, South Africa, soon the entire European Union will have immediate ability to clear payments while we do not. A check cashed on Friday will not clear until the middle of next week. And millions of Americans are paying a lot more in terms of late fees and, you know, payday loan interest rates at sort of loan shark rates because of that. So I hope you will give the same attention to that issue as you are giving to some of the other issues you discussed this morning. Mr. POWELL. Thank you. We will. Chairman CRAPO. Senator Perdue. Senator PERDUE. Thank you, Mr. Chairman. And thank you, Chairman, for being here and for your perseverance. These are big committees. You have been here a long time. I have two questions for you. One, I am always amazed at the economic experts in this Com- mittee and the revisionist views of history, so let me just throw 37 some facts out in leading to a question for you. This recovery is real. We are growing about 100 basis points more than the last Ad- ministration just after 2 years. CBO says if you grow four-tenths of 1 percent, you more than pay for this tax bill. So those are two facts. The second thing is median income is at a historic high. It is the highest it has ever been in the United States. Five million new jobs have been created, lowest unemployment in 50 years, lowest Afri- can American unemployment ever measured, lowest Hispanic un- employment ever measured. My concern, though, is with labor issue, with export issues, and interest rate issues. We have nine Fed fund increases over the last 2 years or so, 21⁄ 2 years, and with our debt—and this is the ques- tion I am trying to get to, and you know where I am going here. I appreciate the time you gave me recently in a private conversa- tion. The Federal debt really bothers me, and its overhang on the economy and our ability to drive the economic wherewithal of every American. The national debt is the greatest threat to national secu- rity, according to our military experts, and yet today we just turned $22 trillion of national debt, if you include all the debt that we have as a Government. As I understand it, there is about $200 trillion of debt in the world; $60 trillion of that is sovereign. We have about a third of that. Five percent of the world’s population has about a third of all sovereign debt. So the question I have—and the projection is in the next—that increase is 21⁄ 4 percent, with our size debt technically is about $450 billion of new interest that we have loaded in there. And yet of that $60 trillion of sovereign debt in the world, about $11 trillion of that is laid out at negative interest rates. Much of that is in the euro zone. My question is: Are there carry-on contagion issues out there that could negatively impact this recovery and the continuation of this recovery independent of what we do fiscally or monetarily here in the U.S. due to these negative interest rates around the world? Mr. POWELL. I think the negative interest rates that you are see- ing are a reflection of kind of a risk-off mood and slower growth in China and Europe in particular. Europe had a good strong year in 2017 and then really slowed down over the course of 2018, and we are seeing some more of that now. So that is, I think, what you are seeing. I think it really is through slower—slower global growth for the United States can be a headwind, just as very strong—2017 was a year of synchronized strong growth really around the world. It was a very good year, and we were feeling a tailwind for that. That has now turned into a bit of a headwind for us. Our economy, though, I think the outlook for our economy is still a favorable one, still a positive one. But, nonetheless, this will be a headwind. Senator PERDUE. There is a growing debate in Congress now among some of my colleagues about advocating a change in how monetary and fiscal policy work together, and these people are ad- vocating a modern monetary theory. They want a spend-now, spend-later, spend-often policy that would use massive annual defi- 38 cits to fund these tremendously expensive policy proposals such as Medicare for All, free college for all, make every structure in the U.S. energy efficient in 10 years, and a universal basic income whether you are working or not. Under this landscape, it is proposed that the Fed would keep in- terest rates artificially low and that fiscal policy would then be driven by Congress and theoretically manage the business cycle. What obstacles do you anticipate seeing, and how successful has fiscal policy been in terms of managing either inflation or interest rates? Mr. POWELL. Let me say I have not really seen a carefully worked out, you know, description of what it meant by MMT, what you are mentioning. It may exist, but I have not seen it. I have heard some pretty extreme claims attributed to that framework, and I do not know whether that is fair or not. But I will say this: The idea that deficits do not matter for countries that can borrow in their own currency I think is just wrong. I think U.S. debt is fairly high at a level of GDP and, much more importantly than that, it is growing faster than GDP, fairly significantly faster. We are not even close to primary balance, which means, you know, the deficit before interest payments. So we are going to have to either spend less or raise more revenue. In addition, you know, to the extent people are talking about using the Fed as a—our role is not to provide support for particular policies. It is to—and that is central banks everywhere. It is to try to, you know, achieve maximum employment and stable prices. So that is really what it is, and I think decisions about spending and controlling spending and paying for it are really for you. Senator PERDUE. Thank you. Chairman CRAPO. Senator Schatz. Senator SCHATZ. Thank you, Mr. Chairman. Chairman Powell, thank you for your service. Thank you for your stewardship. PG&E, California’s largest utility, filed bankruptcy last month, partly as a result of liability costs from climate-related disasters. The damage from 2017 and 2018 wildfires exceeded $30 billion, more than PG&E’s assets and insurance coverage combined. Cli- mate risks threaten many sectors of our economy: real estate, agri- culture, fisheries, industries with extensive supply chains. They are all at risk. Take coastal real estate as just one example. The U.S. Govern- ment currently estimates that storms, floods, erosion, rising sea level now threaten approximately $1 trillion in national wealth held in coastal real estate. According to Freddie Mac, ‘‘Some of the varied impacts of climate change may not be insurable.’’ More than 300,000 coastal homes are at risk of chronic inundation by 2045, a timeframe that falls well within the timeframe of the 30-year mortgage. These properties are worth about $117 billion and con- tribute nearly $1.5 billion toward the property tax base. Banks, in- surance companies, and other financial institutions are all exposed to these risks, and that is why the Bank of England recently an- nounced that it is planning to include the impact of climate change in its bank stress tests next year. 39 So here is a simple question. It is not a ‘‘gotcha’’ question. Do you agree that climate change creates financial risks for the individual financial institutions and for our financial system as a whole? Mr. POWELL. So let me say we do not formally or directly include climate change in our supervision, but we do, actually, require fi- nancial institutions, particularly those who are more exposed to natural disasters and that kind of thing, we do require them to un- derstand and manage that particular operating risk. So, for example, if you are a bank on the southern coast of Flor- ida and you are subject to hurricanes, we definitely require you to have plans and risk management things in place to deal with those sorts of things. So you would pick up natural disasters and that kind of thing which are associated with climate change. Senator SCHATZ. Do you think your processes and your staff and your sort of approach to this, which has been built properly over many, many years and pursuant to the statute, do you think you are moving fast enough to acknowledge the accelerating risks of cli- mate change over the last 2 or 3 years? Do you think there is room for you to do a scrub of whether or not you are fulfilling your statu- tory mandate? Because I get that you are supposed to pick up any risks related to natural disasters. The question is whether you have really loaded in the latest information from the scientific com- munity to go back to these banks, to go back to REITs, to go back to lenders who have either stranded assets or assets in the coastal area or whose supply chain is particularly dependent on a certain kind of weather pattern which is not materializing anymore. Do you think you are doing enough in this space? Or let me phrase it another way. Are you confident that you are doing enough in this space? Mr. POWELL. You know, it is a little bit like cyber risk. You know, should you ever be confident that you are doing enough in that space? So I think we—you know, I think we are open—we are clear-eyed about the nature of coastal risks and natural disaster risks and that kind of thing. But it is a fair question, and, you know, we will go back and look at it again. Senator SCHATZ. Could you please respond in writing as it re- lates to this specific question? Mr. POWELL. Sure. Senator SCHATZ. The Bank of England and 29 central banks and bank supervisors from around the world are moving toward incor- porating climate risk into their supervision of financial institutions. You know that another part of the Federal Reserve’s mandate is to engage with its counterparts abroad to address systemic risk. Do you think the Federal Reserve should be engaging with its inter- national counterparts on this question? Mr. POWELL. We are in those meetings. We are involved in those bodies. As I mentioned, we do not formally take climate change into account in our risks, but I think the consequences are things that we do supervise for. Senator SCHATZ. I just think that you have been extraordinary in terms of your ability to withstand political pressure and look at the data and do what is right for the health of the economy. I do not want this to be an exception. I understand that talking about climate change is fraught with partisan peril and will attract the 40 ire of a certain category of people and institutions. But your job is to measure risk, and I would submit that you are not measuring that risk sufficiently. One final question, if you will indulge me, Chairman Crapo, and that is, has anybody either directly or indirectly communicated with you about rates from the White House? Mr. POWELL. That is kind of a broad question. Senator SCHATZ. It is a broad question. Mr. POWELL. You know, I do not really talk about—it is probably not appropriate to discuss our—my private conversations with other Government officials, any other Government officials. I would say I am completely committed to conducting monetary policy in a way that is nonpolitical and in a way that serves all of the Amer- ican public. You know, and I am very comfortable and confident that that is exactly what the Fed is going to do. Senator SCHATZ. Thank you. Chairman CRAPO. Senator Reed. Senator REED. Mr. Chairman, thank you for your distinguished service. Senator Brown brought up in his comments your February 6 town hall, where you made it clear that we have to work to make prosperity more dispersed throughout society. You also indicated that many of the policies are beyond the purview of the Federal Re- serve, but most of them are clearly in the purview of Congress. If you could, just give us your top three issues that we have to deal with or can deal with to make equality much more realized in this country. Mr. POWELL. Senator, I will go back again to labor force partici- pation, which is just—it is a big win for the overall economy, and it is also—the people who are not taking part in the labor force are by and large the less well educated and less skilled or people who may be in areas where opioids are prevalent and that kind of thing. So I think a bipartisan focus, a focus on labor force participation would bring in a lot of policies that would help deal with, you know, what I see as the problems, which are, you know, sort of rel- atively stagnant growth in incomes, in median incomes, and also relatively low mobility. Education, of course, would be at the top of every list, I think, in addressing these issues as well. Senator REED. And this could require resources that we would have to commit, and I think you are aware we are on the cusp of another debate about sequestration and the share of resources to defense and nondefense. And, in fact, we are looking at very draco- nian numbers in terms of the situation with the BCA. But you would argue that we do have an obligation to make a significant investment in domestic programs in order to provide for this equal- ity? Mr. POWELL. I think that it would be great for our country and for our economy if we could address these issues. Easy for me to say. I do not have to find the resources. Senator REED. Thank you. Let me just turn to another topic which I am very much involved with: the Military Lending Act. As you know, it puts a 36 percent cap on interest rates that are charged to men and women in the 41 uniform of the United States. The Federal Reserve is one of the independent regulators charged with its enforcement. Unfortunately, what we have seen from the CFPB particularly is a retreat. They are no longer supervising this; they are no longer using this in their supervisory activities. They will enforce a com- plaint, but the complaints are seldom made. Most young soldiers do not even realize, or sailors or marines, that they have this ability to complain. We are looking at DOD and OMB exempting an insur- ance product for auto dealers which might result in interest pay- ments far in excess of 36 percent. Can you commit your continued, strong, and persistent enforce- ment to the letter of the Military Lending Act? Mr. POWELL. Yes, it will be a priority for us. I commit to that. Senator REED. Thank you very much. There is another issue, too, that I think you have touched upon, and that is cybersecurity. It seems to be the ubiquitous complaint of everyone, not just in the financial sector but every sector. And it seems to me, too, that typically those who are going to exploit cyber look for the back door, not the front door. They look for the small institution, not the big Wall Street bank that is spending $200 million a year on cyberprotections. How are you dealing with that? How are you and your colleagues dealing with that, going out and making sure that community banks and other smaller institutions that might be more vulnerable are taking the appropriate steps? Is that part of your expected pro- cedures? Are you looking closely at cybersecurity? Mr. POWELL. Yes, we are, and it is hard because, of course, the big banks are attacked, too, but they have the resources to deal with it. And so we deal through FFIEC, you know, which is a body of the regulators to promulgate guidance. We supervise for that guidance, and with the smaller banks, it is very important, and, you know, that is a way—we see that as a real vulnerability, for example, for the payment system. But we have also got to be mind- ful of the burden on smaller banks. But it is something we are very focused on. Senator REED. Are you focused to the extent of conducting, you know, red-on-blue exercises, i.e., you know, seeing what is working out there, seeing where all the connectivity exists or does not exist? Are you doing that or getting any access to organizations that are doing that? Mr. POWELL. We do tabletop exercises, let us say, and these are led by the Treasury Department. This has been a major focus for Treasury, and appropriately so, and we take part in them. There is always the feeling with cyber that you are just not doing enough. Senator REED. Right. Well, in fact, that feeling is justified. Mr. POWELL. It probably is. Senator REED. Unfortunately. Mr. POWELL. Yeah. Senator REED. Thank you again for your service, Mr. Chairman. I appreciate it very much. Mr. POWELL. Thank you, Senator. Chairman CRAPO. Thank you, and I am not quite done yet, Mr. Chairman. I have a couple more questions. 42 I would like to go back to the issue of wages. This has been dis- cussed by a number of the Senators with you. In your testimony and in some of your answers, you indicated that wage growth is at about 3 percent, and there was some comment by one of the Sen- ators, at least, that the nominal wage growth—or that the current rate of wage growth may or may not be keeping up with inflation, if I understand the question you were asked correctly. But if I un- derstand your answers, isn’t wage growth today growing at a faster rate than inflation? Mr. POWELL. Yes. Real wages are going up at—you have to look at the average over a year or so, and you have got to look at a broad range of indicators. There is no question that wages are going up in real terms by roughly the amount of the productivity increase, which is appropriate. Chairman CRAPO. And in your use of the term ‘‘wages,’’ do you include benefits? Or is there a separate calculation on how bene- fits—— Mr. POWELL. There are four different—there are countless meas- ures of wages, of compensation, let us say. One of them that in- cludes wages and benefits is the Employee Compensation Index, and that might be our single favorite one. It is one of four major ones that we look at. So that one does include benefits, and it, too, is showing growth in excess of right around 3 percent, maybe in the low 3’s now. Chairman CRAPO. All right. Thank you. We have also—in fact, I had discussed with you earlier some as- pects of the labor force participation rate. Now, I understand that just the retirement—or the Baby Boomers retiring is one of the big- gest downward pressures in our labor force participation rate, and I started to have a discussion with you in my earlier questions about now that we have seen that labor force participation rate start to increase, whether that would be stable or not. Could you just discuss a little more with me your evaluation of what it looks like for us in terms of labor force participation in general? And I may follow up on that a little bit. Mr. POWELL. Yes. So I would say it is very gratifying to see U.S. labor force participation actually move up by 0.5 over the course of the last year as the labor market has gotten just stronger and stronger and stronger. So that has been a great thing to see. Given the level of job creation that we have had, if labor force participation had not gone up, then the unemployment rate would now be much lower than it is. So the unemployment rate has actu- ally gone up to 4 percent from 3.7 percent, but this is only a good thing because it means people are coming back into the labor force. The real thing, though, is even with these increases, we still lag other countries. We still lag other countries who have higher labor force participation. You pointed out, correctly, that the aging of the population is decreasing labor force participation at a trend rate, and that trend rate is about 0.2 or maybe 0.25 percent every year. So for us just to hold participation flat is actually a gain against a longer-run trend. And really for the last—really since 2013, since the latter part of 2013, labor force participation has been flat to slightly up, which, again, is really good to see. But, honestly, that is just a consequence of having a really good labor market. 43 I think if you are going to have that be sustained through good times and bad and put us on a more competitive footing with other countries, it is going to need more than a good labor market. It is going to need policies that reach out and, you know, give people the skills and aptitudes to be able to be sustainably in the labor mar- ket. Chairman CRAPO. All right. Thank you. I cannot remember where I read this, but someone commented recently that today, the way our labor market is working, if a person wants to work, there is a job for them. Do you tend to agree with that observation? Mr. POWELL. Generally speaking, although, you know, if you are in some regions, for example, there are regions of the country which are very poor and do not have job creation. I will tell you where that comes from. The level of job openings is now at or above the level of unemployed people. So you can say in a sense if you are looking for a job, there is at least numerically one job. But there are lots of people who—you know, probably millions of people who are out of the labor force and in a perfect world, in a better world, would be in the labor force. They are in their prime working years, and they are not in the labor force because of some kind of a problem or issue, and I think those are the people we want to get back. Chairman CRAPO. All right. Thank you. Just to switch topics for a minute, we have seen, I think you in- dicated, a little bit under 3 percent growth in our GDP in the last year. I guess on Thursday we are going to get some economic anal- ysis that will give us some statistics on that. One of my colleagues indicated today that, with regard to the tax bill that was passed, there was a lot said—I am not going to ask you to comment on this. I am just putting some facts out there. There was a lot said about how the tax bill would generate a $1.4 trillion deficit. That projection assumed somewhere in the neigh- borhood of 1.9 or 2 percent growth in the economy. And it was indi- cated at the time from all of the analysis we got that, if we just had four-tenths of a percentage rate of growth above that, there would not be any deficit involved with the tax legislation. And, of course, we have seen far more than four-tenths of growth so far in terms of the performance of the economy. So that leads to my question, and I know that you do not have a crystal ball, but you do analyze what it looks like for the econ- omy. And my question relates to given what we have seen, we have seen a growth of about almost a percentage point in the GDP over the last 12 months, or previous growth rates, if I understand it right. Do you have a projection or do you have anything that you can share with us about what you see moving forward as to wheth- er the economy will continue to perform? I know you said that it may slow down a little bit this year. But do you have a projection as to what it would likely look like over the next few years in terms of GDP growth? Mr. POWELL. I think a good place to start with that question is what makes up growth, and it really boils down to more hours worked and then more output per hour. That is really all there is. And more hours worked is really a function of population growth. Population growth has slowed—or let us say it this way: The trend 44 growth in the labor force, given aging and given immigration and everything we have, is only about five-tenths right now. And, actu- ally, if immigration is going to be even lower, then it is going to be below five-tenths. Immigration has made up, you know, half of that five-tenths. So that is one piece of it. It is 0.5 percent trend labor force growth. The rest is just productivity. No one can fore- cast productivity growth with any confidence. All we can really do is create policies that will, you know, encourage investment, en- courage innovation, and all those sorts of things, and let produc- tivity happen as it will. It is something that just happens. But if you look at longer-term averages, it has been very difficult to predict. But you would have to have sustained high produc- tivity—if you are going to have five-tenths labor force growth, you would have to have, you know, very high sustained productivity, higher than we have seen, frankly, to get really high levels of growth. That is why I think it is so important to focus on both of those two things—labor force participation and also productivity. That is the closest to anything we can focus on to raise our poten- tial growth rate. Chairman CRAPO. Well, thank you. And in terms of increasing labor force participation, I know there are a lot of factors. One that has been brought up here today already is to perhaps change our policy at the policy level so that a person who takes a job, who is not currently employed, a person who is willing to go take one of those jobs and become productive in the labor force does not actu- ally economically suffer from that decision based on the safety net program support that the Government is already providing. I am not going to ask you to comment on policy, but is it correct that if we were to eliminate or reduce the incentive to stay unem- ployed because of the disadvantage economically of relying on wages rather than benefits, we would increase labor force partici- pation? Mr. POWELL. I think incentives do matter, and I think—I mean, I would think if you go back to work, your pay should only go up, in my perfect-world thinking. Again, easy for me to say, but that is how I would say it. Chairman CRAPO. All right. Thank you. Switching gears one more time, and then I will wrap it up. Hous- ing finance reform. As I am sure you have seen, there is a very sig- nificantly increased emphasis on housing finance reform, both on this Committee and I think in Congress in general, as well as at the level of the Administration. In 2017, you gave a speech in which you outlined a few principles that you saw for how we should approach housing finance reform, and I am just going to quote what you said: ‘‘Do whatever we can to make the possibility of future housing bailouts as remote as possible; to change the sys- tem to attract large amounts of private capital, and that any guar- antee should be explicit and transparent and should apply to secu- rities, not to institutions; and to identify and build upon areas of bipartisan agreement.’’ Do you still agree with those principles and how to approach it? Mr. POWELL. I sure do. Chairman CRAPO. Good. I agree with them, too. Strongly. And we are going to be very aggressively trying to put together a bipartisan 45 solution to this here on this Committee and in Congress in general. And I just would like to ask you, first of all, if you will commit to work with this Committee in our efforts to build the right solution to this issue; and then, second, any other comments you might want to make about how our Nation should approach housing fi- nance reform. And I would ask you also to discuss how getting this fixed could impact our economy and could impact growth. Mr. POWELL. So I do think—and I said this in those remarks. I think that this is one of the big unfinished pieces of business in kind of the postcrisis reform period. Fannie and Freddie had to be taken over by the Government fairly early on in the financial crisis. It was a big part of the financial crisis. And I think we have—I think the proposals that you have had in the past and I am sure the one you will have this year, I think they all have the right ele- ments there. It is just a question of getting something done. And I think it would be really good for the economy to get this off the Fed’s—sorry, off the Federal Government’s balance sheet and get a lot of private capital between the taxpayer and the housing risk, if you will. So I think it would be a very positive thing for the economy, and, of course, we will be delighted to work with you. I think we have some very strong, experienced staffers in the housing area, and we would be happy to provide whatever expert help we can. Chairman CRAPO. All right. Thank you. And I know I said that was the last one, but this is really the last one. Again, shifting sub- jects, you have testified today that there are some pretty positive things going on in our economy right now and that we are in a rel- atively good position on a lot of factors. In terms of risks to our economy, could you just tell me what you think are some of the bigger risks we should keep in mind? Mr. POWELL. I do think that the baseline outlook is a good one, favorable one. There are always risks, though, and as I mentioned, I do see the foreign risks as particularly relevant right now. So global growth has slowed. It has slowed in China. It has slowed particularly in the advanced economies and particularly in Europe. When growth is booming around the world, we feel that as a tail- wind. When growth is slowing, we feel it as a headwind. And I think we are feeling some of that now, and we may feel more of it. So that is a risk. Brexit is an event risk, which should not in the end have much of an effect on our economy, but it is something we are monitoring very carefully. You know, domestically, I think we are in good shape. Unemploy- ment is low. Confidence is still at positive levels. So I feel like, you know, we have the makings of a good outlook, and as I said, our Committee is really monitoring the crosscurrents, we call them, which are really the risks. And for now we are going to be patient with our policy and allow things to take time to clarify. Chairman CRAPO. All right. Well, thank you. And I know I speak on behalf of the Committee. We appreciate the dedication of you and the other Governors at the Federal Reserve. We all want to have this economy stay strong and grow stronger, and we look for- ward to making sure that we can achieve the right policies and help together to make that happen. 46 My last closing comment would be I echo the concerns—or not the concerns, really, but the issues raised by some of my colleagues about the implementation of S. 2155. I know you are working very—you just said it was the highest priority maybe at the Fed right now on the oversight level. But I would just encourage you to move ahead expeditiously on those issues. A number have been raised already. I will reiterate our concern that we move as quickly as we can on the implementation of the requirements and the prin- ciples of S. 2155 with regard to those financial facilities, banks under $100 billion, and getting the stress testing levels for them at the right point. If you want to comment on that, you are welcome to. If not, I will wrap up the hearing. Mr. POWELL. I might add one thing to my last comment, if I could. Chairman CRAPO. Sure. Mr. POWELL. I would want to leave you with the thought that when I say we are going to be patient, what that really means is that we are in no rush to make a judgment about changes in policy. We are going to be patient. We are going to allow the situation to evolve, and also the balance of risks and allow the data to come in. And I think we are in a very good place to do that. Chairman CRAPO. All right. Thank you. I appreciate that per- spective, and once again, thank you for being here with us today. That does conclude the questioning for today’s hearing, and for Senators who wish to submit questions for the record, those ques- tions are due on March 5th, Tuesday. Chairman Powell, we ask that you respond to those questions as promptly as you can. Once again, thank you for being here, and this hearing is adjourned. Mr. POWELL. Thank you, Senator. [Whereupon, at 12:15 p.m., the hearing was adjourned.] [Prepared statements, responses to written questions, and addi- tional material supplied for the record follow:] 47 PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO We welcome Chairman Powell to the Committee for the Federal Reserve’s Semi- annual Monetary Policy Report to Congress. This hearing provides the Committee an opportunity to examine the current state of the U.S. economy, the Fed’s implementation of monetary policy, and its super- visory and regulatory activities. In the wake of the 2008 financial crisis, the Fed entered a period of unconven- tional monetary policy to support the U.S. economy, including drastically cutting in- terest rates and expanding its balance sheet. I have long been concerned about the Fed’s quantitative easing programs and the size of its balance sheet. As economic conditions improved, the Fed began trying to normalize monetary policy, including by gradually reducing the size of its balance sheet. The Fed’s balance sheet grew to $4.5 trillion from around $800 billion between 2007 and 2015, and now stands at around $4 trillion. During the press conference following the FOMC’s most recent meeting, Chairman Powell provided additional clarity on the Fed’s plans to normalize monetary policy, saying ‘‘ . . . the ultimate size of our balance sheet will be driven principally by financial institutions’ demand for reserves, plus a buffer so that fluctuations in re- serve demand do not require us to make frequent sizeable market interventions.’’ Estimates of the level of reserve demand are quite uncertain, but we know that this demand in the postcrisis environment is far larger than before. High reserve holdings are an important part of the stronger liquidity posi- tion that financial institutions must now hold . . . . . . The implication is that the normalization of the size of the portfolio will be completed sooner, and with a larger balance sheet, than in previous estimates. Banks’ reserve balances grew from $43 billion in January 2008 to a peak of $2.8 trillion in 2014 before falling to $1.6 trillion as of January 2019. During this hearing, I look forward to understanding more about: what factors the Fed may consider in determining what is the appropriate size of the balance sheet; what factors have affected banks’ demand for reserves, including the Fed’s postcrisis regulatory framework; and what amount of reserves are estimated to be necessary for the Fed to achieve its monetary policy objective. The state of the U.S. economy is a key consideration in the Fed’s monetary policy decisions. The U.S. economy remains strong with robust growth and low unemployment. Despite everyone telling us prior to tax reform that annual growth would be stuck below 2 percent as far as the eye could see, the economy expanded at an annualized rate of 3.4 percent in the third quarter of last year, following growth of 4.2 percent and 2.2 percent in the second and first quarters of 2018, respectively, according to the Bureau of Economic Analysis. This strong growth, which is on track to continue to exceed previous expectations, will now provide our policymakers with much greater flexibility to address other fis- cal challenges than if we were continuing to struggle with insufficient growth. And, according to the Bureau of Labor Statistics, the unemployment rate has re- mained low and steady around 4 percent while the U.S. economy added 223,000 jobs per month on average in 2018, as well as 304,000 jobs in the first month of this year. People continue to enter the labor force with the labor participation rate increas- ing to 63.2 percent from 62.7 percent over the last year. Reinforcing this strong employment environment, Fed Vice Chairman Rich Clarida said in a recent speech that ‘‘the labor market remains healthy, with an un- employment rate near the lowest level recorded in 50 years and with average monthly job gains continuing to outpace the increases needed over the longer run to provide employment for new entrants to the labor force.’’ Major legislation passed through this Committee and enacted last Congress sup- ported economic growth and job creation. The Economic Growth, Regulatory Relief and Consumer Protection Act passed Congress with significant bipartisan support and was enacted to right-size regula- tion and redirect important resources to local communities for homebuyers, individ- uals, and smaller businesses. I appreciate the work the Fed has done so far to introduce proposals and finalize rules required by the law. 48 Overseeing the full implementation of that law and the Federal banking agencies’ rules to right-size regulations will continue to be a top priority of the Committee this Congress. In particular, the Fed and other banking regulators should consider whether the Community Bank Leverage Ratio should be set at 8 percent as opposed to the pro- posed 9 percent; significantly tailor regulations for banks with between $100 billion and $250 billion in total assets with a particular emphasis on tailoring the stress testing regime; provide meaningful relief from the Volcker Rule for all institutions, including by revising the definition of ‘‘covered funds’’ and eliminating the proposed accounting test; and examine whether the regulations that apply to the U.S. oper- ations of foreign banks are tailored to the risk profile of the relevant institutions and consider the existence of home country regulations that apply on a global basis. The Committee will also look for additional opportunities to support policies that foster economic growth, capital formation, and job creation. Turning for a moment to another issue, Senator Brown and I issued a press re- lease on February 13 inviting stakeholders to submit feedback on the collection, use, and protection of sensitive information by financial regulators and private compa- nies, including third parties that share information with regulators and other pri- vate companies. Americans are rightly concerned about how their data is collected and used, and how it is secured and protected. Given the exponential growth and use of data, and corresponding data breaches, it is also worth examining how the Fair Credit Reporting Act should work in a dig- ital economy, and whether certain data brokers and other firms serve a function similar to the original consumer reporting agencies. The Banking Committee plans to make this a major focus this Congress, and we encourage stakeholders to submit feedback by our March 15 deadline. Lastly, I want to take a moment to recognize one of our staff members who is retiring this week. Dawn Ratliff is the Committee’s Chief Clerk, and she will be retiring at the end of the week. She has dedicated 27 years in these hallways, and has been with the Senate Banking Committee since 2007, starting with then-Chairman Chris Dodd, and then working for Chairman Tim Johnson, Chairman Shelby, and now myself. Dawn is a Banking Committee institution—she is incredibly knowledgeable, help- ful, and professional, respected and well-liked by everyone with whom she works. Dawn, your work on the Committee has truly made a lasting impact, and even though you will be gone, you will not be forgotten anytime soon. We wish you the best of luck in your well-earned retirement. Enjoy it. PREPARED STATEMENT OF SENATOR SHERROD BROWN Thank you, Chairman Crapo. I also want to thank our Chief Clerk Dawn Ratliff for her service to this Com- mittee and the public. She has been instrumental in making the Committee run smoothly for over a decade. Dawn, we will miss you, and congratulations on your retirement. Chairman Powell, welcome back to the Committee. It has been a great week for Wall Street. The FDIC announced that banks made a record-breaking $237.7 billion in profits in 2018, almost a quarter trillion dollars. Corporations—led by the Nation’s largest banks—bought back a record $1 trillion in stocks last year, conveniently boosting their CEOs compensation. The President’s tax bill put $30 billion in the banks’ pockets, and continues to fuel even more buybacks and CEO bonuses. But that’s never enough for Wall Street—it continues to demand weaker rules, so big banks can take bigger and more dangerous risks. And from the proposals the Fed has put out after the passage of S. 2155, it looks like you are going along. The economy looks great from a corporate headquarters on Wall Street, but it doesn’t look so good from a house on Main Street. Corporate profits are up. Executive compensation has soared. And that’s all be- cause of the productivity of American workers. But workers’ wages have barely budged. Hard work isn’t paying off for the people fueling all this growth. Seven of the 10 fastest growing occupations don’t pay enough to afford rent on a modest one-bedroom apartment, let alone save for a downpayment. 49 Household debt continues to rise, taking its toll on families. At the end of 2018, seven million Americans with auto loans were 90 or more days past due on their payments—a record, even though unemployment is at decade lows. Borrowers of color have not recovered financially from the crisis. And too many Americans of all ages are saddled with a mountain of student loan debt. The President’s Government shutdown also revealed another frightening reality— too many Americans, still live paycheck to paycheck, even those with stable jobs. After 35 days of uncertainty and hardship, those workers went back to their jobs and eventually received their pay. But more than a million Government contractors weren’t so lucky. We’re talking in many cases about custodians and security guards and cafeteria workers making $12 or $15 an hour. We have heard a lot of talk about whether GDP will recover from the shutdown, and not enough about how workers will recover. We have questioned for quite a while whether the economic recovery—now in its 10th year—has been felt by all Americans. Stagnating wages and increasing income inequality between Wall Street CEOs and working Americans point to an obvious answer. Chair Powell, your comments at the February 6th Fed town hall for educators confirmed this. A teacher asked about your major concerns for the U.S. economy, and you answered: We have some work to do more to make sure that prosperity that we do achieve is widely spread. ( . . . ) median and lower levels of income have grown, but much more slowly. And growth at the top has been very strong. ‘‘Growth at the top has been very strong.’’ In other words, the CEOs, the folks on Wall Street, they’re all doing just fine. Chair Powell, the Fed has spent a decade bending over backwards to help banks and big corporations that have hoarded profits for themselves rather than investing in the millions of workers who actually make our companies successful. We are late in this economic cycle, and it is clear that record Wall Street profits won’t be trickling down to workers before the next downturn. Before the last crisis, we heard over and over again from Government officials and banks that the economy was doing fine. Regulators and Congress continued to weak- en rules for Wall Street, and ignored the warning signs as families struggled to make ends meet. As the severity of the financial crisis became clear, the Fed rushed to the aid of the biggest banks, but it did not devote even a fraction of that firepower to helping the rest of America. Ignoring working families was a policy failure then, and it is a policy failure now. Chair Powell, I hope we don’t make the same mistake again. I look forward to your testimony and new ideas for making hard work pay off for everyone in our economy. PREPARED STATEMENT OF JEROME H. POWELL CHAIRMAN, BOARDOFGOVERNORSOFTHEFEDERALRESERVESYSTEM FEBRUARY26, 2019 Good morning. Chairman Crapo, Ranking Member Brown, and other Members of the Committee, I am happy to present the Federal Reserve’s Semiannual Monetary Policy Report to the Congress. Let me start by saying that my colleagues and I strongly support the goals Con- gress has set for monetary policy—maximum employment and price stability. We are committed to providing transparency about the Federal Reserve’s policies and programs. Congress has entrusted us with an important degree of independence so that we can pursue our mandate without concern for short-term political consider- ations. We appreciate that our independence brings with it the need to provide transparency so that Americans and their representatives in Congress understand our policy actions and can hold us accountable. We are always grateful for opportu- nities, such as today’s hearing, to demonstrate the Fed’s deep commitment to trans- parency and accountability. Today I will review the current economic situation and outlook before turning to monetary policy. I will also describe several recent improvements to our communica- tions practices to enhance our transparency. 50 Current Economic Situation and Outlook The economy grew at a strong pace, on balance, last year, and employment and inflation remain close to the Federal Reserve’s statutory goals of maximum employ- ment and stable prices—our dual mandate. Based on the available data, we estimate that gross domestic product (GDP) rose a little less than 3 percent last year following a 2.5 percent increase in 2017. Last year’s growth was led by strong gains in consumer spending and increases in busi- ness investment. Growth was supported by increases in employment and wages, op- timism among households and businesses, and fiscal policy actions. In the last cou- ple of months, some data have softened but still point to spending gains this quar- ter. While the partial Government shutdown created significant hardship for Gov- ernment workers and many others, the negative effects on the economy are expected to be fairly modest and to largely unwind over the next several months. The job market remains strong. Monthly job gains averaged 223,000 in 2018, and payrolls increased an additional 304,000 in January. The unemployment rate stood at 4 percent in January, a very low level by historical standards, and job openings remain abundant. Moreover, the ample availability of job opportunities appears to have encouraged some people to join the workforce and some who otherwise might have left to remain in it. As a result, the labor force participation rate for people in their prime working years—the share of people ages 25 to 54 who are either working or looking for work—has continued to increase over the past year. In an- other welcome development, we are seeing signs of stronger wage growth. The job market gains in recent years have benefited a wide range of families and individuals. Indeed, recent wage gains have been strongest for lower-skilled work- ers. That said, disparities persist across various groups of workers and different parts of the country. For example, unemployment rates for African Americans and Hispanics are still well above the jobless rates for whites and Asians. Likewise, the percentage of the population with a job is noticeably lower in rural communities than in urban areas, and that gap has widened over the past decade. The February Monetary Policy Report provides additional information on employment disparities between rural and urban areas. Overall consumer price inflation, as measured by the 12-month change in the price index for personal consumption expenditures (PCE), is estimated to have been 1.7 percent in December, held down by recent declines in energy prices. Core PCE inflation, which excludes food and energy prices and tends to be a better indicator of future inflation, is estimated at 1.9 percent. At our January meeting, my col- leagues and I generally expected economic activity to expand at a solid pace, albeit somewhat slower than in 2018, and the job market to remain strong. Recent de- clines in energy prices will likely push headline inflation further below the Federal Open Market Committee’s (FOMC) longer-run goal of 2 percent for a time, but aside from those transitory effects, we expect that inflation will run close to 2 percent. While we view current economic conditions as healthy and the economic outlook as favorable, over the past few months we have seen some crosscurrents and con- flicting signals. Financial markets became more volatile toward year end, and finan- cial conditions are now less supportive of growth than they were earlier last year. Growth has slowed in some major foreign economies, particularly China and Eu- rope. And uncertainty is elevated around several unresolved Government policy issues, including Brexit and ongoing trade negotiations. We will carefully monitor these issues as they evolve. In addition, our Nation faces important longer-run challenges. For example, pro- ductivity growth, which is what drives rising real wages and living standards over the longer term, has been too low. Likewise, in contrast to 25 years ago, labor force participation among prime-age men and women is now lower in the United States than in most other advanced economies. Other longer-run trends, such as relatively stagnant incomes for many families and a lack of upward economic mobility among people with lower incomes, also remain important challenges. And it is widely agreed that Federal Government debt is on an unsustainable path. As a Nation, ad- dressing these pressing issues could contribute greatly to the longer-run health and vitality of the U.S. economy. Monetary Policy Over the second half of 2018, as the labor market kept strengthening and eco- nomic activity continued to expand strongly, the FOMC gradually moved interest rates toward levels that are more normal for a healthy economy. Specifically, at our September and December meetings we decided to raise the target range for the Fed- eral funds rate by 1⁄4 percentage point at each, putting the current range at 21⁄4 to 21⁄2percent. 51 At our December meeting, we stressed that the extent and timing of any further rate increases would depend on incoming data and the evolving outlook. We also noted that we would be paying close attention to global economic and financial de- velopments and assessing their implications for the outlook. In January, with infla- tion pressures muted, the FOMC determined that the cumulative effects of these de- velopments, along with ongoing Government policy uncertainty, warranted taking a patient approach with regard to future policy changes. Going forward, our policy de- cisions will continue to be data dependent and will take into account new informa- tion as economic conditions and the outlook evolve. For guideposts on appropriate policy, the FOMC routinely looks at monetary pol- icy rules that recommend a level for the Federal funds rate based on measures of inflation and the cyclical position of the U.S. economy. The February Monetary Pol- icy Report gives an update on monetary policy rules. I continue to find these rules to be helpful benchmarks, but, of course, no simple rule can adequately capture the full range of factors the Committee must assess in conducting policy. We do, how- ever, conduct monetary policy in a systematic manner to promote our long-run goals of maximum employment and stable prices. As part of this approach, we strive to communicate clearly about our monetary policy decisions. We have also continued to gradually shrink the size of our balance sheet by reduc- ing our holdings of Treasury and agency securities. The Federal Reserve’s total as- sets declined about $310 billion since the middle of last year and currently stand at close to $4.0 trillion. Relative to their peak level in 2014, banks’ reserve balances with the Federal Reserve have declined by around $1.2 trillion, a drop of more than 40 percent. In light of the substantial progress we have made in reducing reserves, and after extensive deliberations, the Committee decided at our January meeting to continue over the longer run to implement policy with our current operating procedure. That is, we will continue to use our administered rates to control the policy rate, with an ample supply of reserves so that active management of reserves is not required. Having made this decision, the Committee can now evaluate the appropriate timing and approach for the end of balance sheet runoff. I would note that we are prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments. In the longer run, the size of the balance sheet will be determined by the demand for Federal Reserve liabilities such as cur- rency and bank reserves. The February Monetary Policy Report describes these li- abilities and reviews the factors that influence their size over the longer run. I will conclude by mentioning some further progress we have made in improving transparency. Late last year we launched two new publications: The first, Financial Stability Report, shares our assessment of the resilience of the U.S. financial sys- tem, and the second, Supervision and Regulation Report, provides information about our activities as a bank supervisor and regulator. Last month we began conducting press conferences after every FOMC meeting instead of every other one. The change will allow me to more fully and more frequently explain the Committee’s thinking. Last November we announced a plan to conduct a comprehensive review of the strategies, tools, and communications practices we use to pursue our congressionally assigned goals for monetary policy. This review will include outreach to a broad range of stakeholders across the country. The February Monetary Policy Report pro- vides further discussion of these initiatives. Thank you. I am happy to respond to questions. 52 RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM JEROME H. POWELL Q.1. Last month I sent the Board of Governors a letter asking it to reevaluate the countercyclical capital buffer, currently set at zero. Banks are doing well, but there are certainly growing risks in the economy. Now is the time to ensure that the banks have enough capital for those eventual bad times, and many of your col- leagues on the Board and at the Reserve Banks agree. I have not received a response. When will the Fed raise the buffer? A.1. As stated in the Federal Reserve Board’s (Board) policy state- ment, we will raise the countercyclical capital buffer when systemic vulnerabilities are meaningfully above normal.1 At this time, the Board assesses the resilience of the financial system overall to be strong. Our forward-looking stress tests indicate that the institu- tions at the core of the financial system—the Nation’s largest banks—will be able to continue to support lending and economic activity during severe macroeconomic and stressed market sce- narios. The Board recently voted to maintain the level of the coun- tercyclical capital buffer at zero.2 Q.2. Earlier this month the Board suspended stress testing for bank holding companies between $100 billion and $250 billion in total assets. Meanwhile you have not finalized rules for how this same group of banks will be regulated after passage of S. 2155. Will you commit to me that these institutions will be required to participate in the 2020 stress testing cycle? A.2. As noted in the October 31, 2018, Notice of Proposed Rule- making, domestic bank holding companies subject to Category IV standards (those with total assets between $100–$250 billion and less than $75 billion in cross-jurisdictional activity, nonbank assets, weighted short-term wholesale funding, and off-balance sheet expo- sure) would be subject to supervisory stress testing on a 2-year cycle. The exemption from the 2019 stress test cycle for domestic bank holding companies with assets of between $100 and $250 bil- lion with a limited risk profile was intended to provide these banks with immediate burden relief, consistent with the requirement in S. 2155 that they be subject to periodic rather than annual stress tests. Under the Board’s current rules, these banks will be subject to stress tests in 2020. Q.3. Related, in the form letters to each of the firms exempted from the stress tests, the Board indicated that in assessing the com- pany’s risk profile, the Board takes into consideration the com- pany’s size, scope of operations, activities, and systemic impor- tance. Yet, these factors vary greatly between all of the exempted firms—for example: nonbank assets range from $0.2 billion to $65.6 billion; off balance sheet exposures range from $4.7 billion to $45.8 billion, and cross-jurisdictional activity range from $0.1 billion to 1Regulatory Capital Rules; The Federal Reserve Board’s Framework for Implementing the U.S. Basel III Countercyclical Capital Buffer, 12 CFR Part 217, Appendix A. 2Minutes of the Federal Open Market Committee, November 7–8, 2018, p.8. For additional detail on the Federal Reserve’s framework for assessing vulnerabilities in the U.S. financial sys- tem, see Board (2018), Financial Stability Report, November 28, https:// www.federalreserve.gov/publications/files/financial-stability-repmt-201811.pdf. 53 $48.1 billion. It looks like the Board categorically exempted compa- nies within a certain asset threshold without considering each firm’s particular risk profile. How does the Board explain why all of these firms, which range in complexity, have received the same treatment when it comes to 2019 stress testing? A.3. On February 5, 2019, the Board provided certain domestic bank holding companies with assets of between $100 billion and $250 billion and certain U.S. intermediate holding company sub- sidiaries of foreign banking organizations with assets of less than $250 billion relief from all regulatory requirements related to an- nual supervisory and company-run stress testing for the 2019 stress test cycle and from the requirement to submit a capital plan to the Board on April 5, 2019. In providing this relief, the Board considered each firm’s asset size, cross-jurisdictional activity, reli- ance on short-term wholesale funding, nonbank assets, and off-bal- ance sheet exposure. These factors may, individually or in combina- tion, reflect greater complexity and risk to a banking organization and can, depending on the firm, result in greater risk to the finan- cial system. The Board also considered reports of examination and other supervisory information, including a 2018 review of each film’s Comprehensive Capital Analysis and Review (CCAR) capital plan and capital planning processes, and the results of the Board’s 2018 Dodd–Frank Annual Stress Testing (DFAST) supervisory stress test, as well as other publicly reported information. Each of these firms received notice in 2018 that the Federal Reserve did not object to its capital plan or planned capital actions. Our anal- ysis suggested that the 2018 DFAST stress tests remained an ade- quate assessment of the risks of each of these firms and that no firm had risks that would warrant an additional DFAST stress test in 2019. Q.4. The Fed has recently finalized proposals to make stress test- ing more transparent, providing more information to the financial institutions in advance. Why is the Fed making it easier for the largest, most complex banks to pass their stress tests, which are one of the most impor- tant tools enacted after the crisis to ensure that institutions have enough capital to withstand a severe economic shock? A.4. The model disclosure enhancements increase the transparency of the stress test, but do not make the stress test exercise easier for firms. The stress test is one of our most important and effective tools. The high level of credibility of the stress test has been built over the years, in part, through careful and regular efforts to im- prove the transparency of the test. We believe that our new disclosures would further enhance the public’s understanding of the DFAST and CCAR supervisory stress test models without undermining the effectiveness of the tool. The new model disclosures include more detail about these supervisory models and methodologies, which may help the public understand and interpret the results of the stress test and thereby improve public and market confidence in the financial system. These disclosures may facilitate public comments on the models, including those from academic experts, which could lead to data 54 improvements and a better understanding of the risks of particular loan types. They also may help financial institutions better under- stand the capital implications of changes to their business activities by providing general information about how the Federal Reserve’s models treat broad classes of assets. We carefully designed the new model disclosures to avoid allow- ing firms to see the full models. In particular, the amount of detail we provide in the model disclosures would not facilitate a firm making incremental modifications to its business practices that have little effect on its risk profile, but could materially change its DFAST and CCAR supervisory stress test results. The information in the model disclosures also is not detailed enough to enable a firm to minimize stress test losses by opti- mizing credit allocations across geographies or industries, as that type of regulatory arbitrage could have unintended consequences for credit availability. We will continue to seek feedback on our DFAST and CCAR stress test from a wide range of stakeholders. The Board recently announced that it will host a stress testing conference in July that will be open to the public. During the conference, we expect that a number of stakeholders, including academics, public interest rep- resentatives, and financial sector representatives, will share their thoughts on certain aspects of the stress test program, including our current level of transparency. Q.5. In response to my question related to maximum employment, you replied that wages are considered as part of the maximum em- ployment mandate. Does the Fed consider the level of wages and benefits and wheth- er those levels allow the employee to fully participate in the econ- omy? A.5. The Federal Open Market Committee considers a wide variety of economic indicators in assessing the level of maximum employ- ment, including information on wages and benefits. The appro- priate level of wages and benefits for any given type of work is best left to the interactions between firms demanding and workers sup- plying that type of work under the regulations and institutions that govern behavior in the labor market. Average increases in wages and benefits in the economy provide, in conjunction with many other macroeconomic indicators, information about the bal- ance between the overall demand and supply of labor and the pres- ence, or absence, of inflationary pressures. The increase in the pace of wage gains over the past few years has been a welcome develop- ment that has signaled a strengthening in the labor market and helped move inflation toward our 2 percent objective. Q.6. In your testimony, you describe that real wages are slightly rising, but indicate that some of the longer-term challenges to our economy are stagnant incomes and lack of upward economic mobil- ity. Do you expect wages to continue to rise in ways that are mean- ingful to address concerns about stagnant incomes and lack of eco- nomic mobility? How much will wages need to rise to reverse this trend? 55 A.6. In the aggregate, the pace of wage gains has been gradually improving. With wages now rising at a rate of roughly 3 percent per year, and with inflation near 2 percent, we should see real wage gains of about 1 percent per year. That is slightly better than the pace we saw through most of the current expansion, and cumu- lated over time, such gains are meaningful. One important reason we have not seen larger real wage increases is that productivity growth has been relatively weak during this economic recovery. I would emphasize that those are aggregate wage figures, which apply to Americans as a whole, but do not speak to issues of in- come distribution or of economic mobility. As you know, I believe those issues are of central importance to the well-being of Amer- ican families; together with productivity, they determine living standards for the bulk of our population. I encourage policymakers to devote attention to policies to help strengthen productivity growth as well as improve mobility and income distribution. Such policies are largely beyond the scope of monetary policy, but the Federal Reserve is committed to fulfilling the maximum employ- ment element of our congressional mandate. Q.7. As inflation hovers near the Fed’s target, a recent San Fran- cisco Fed report noted that one component of that, ‘‘acyclical’’ infla- tion, had large effects. The report indicated cellular telephone serv- ices and financial services charges and fees including ‘‘charges for deposit accounts, credit card services, and ATMs . . . ’’ made up about half of the increase in that component.1 Financial services fees rose by 10 percent in the year prior to this report, and likely disproportionately affected lower income workers and their fami- lies. Are you concerned that financial services fees make up a signifi- cant portion of inflation? If financial services fees are a significant contributor to inflation, and the Fed is responsible both for mone- tary policy and regulation of financial services, how is the Fed co- ordinating its efforts to ensure that inflation is not disproportion- ately borne by workers whose incomes have been stagnant for years? A.7. The measure of financial service charges and fees that was noted in the Federal Reserve Bank of San Francisco report encom- passes charges and fees associated with deposit accounts and credit cards (e.g., overdraft and ATM fees, membership fees), as well as some other items such as postal money orders. The price index for this expenditure category posted large increases in late 2017 and early 2018, contributing noticeably to inflation over the 12-month period noted in the report. Notably, that increase followed a period of smaller price increases. Considering the 5-year period ending December 2018, increases in this category of prices averaged 3.1 percent per year, which is above overall inflation, but not enor- mously so. We recognize that bank fees can be a burden on low-income Americans. In 2017, according to an FDIC survey, about one-quar- ter of unbanked households indicated that high bank account fees were among the reasons they did not have an account. Other more commonly cited reasons were not having enough money to keep in 1https://www.frbsf.org/economic-research/files/el2018-26.pdf 56 an account and a lack of trust in banks. Federal financial regula- tions require specific disclosure of fees and terms for bank deposits, as well as for other financial products like credit cards and prepaid cards, but these regulations generally do not limit the size of those fees.3 Q.8. Following up on the numerous questions related to the BB&T and SunTrust merger, the Bank Holding Company Act requires that the Fed evaluate the competitive effects of mergers, acquisi- tions, and other transactions when determining whether to approve these applications. The factors for consideration include the effect of the acquisition or merger to lessen competition in any section of the country. How has the Fed considered this factor in the past, and what cri- teria does the Fed use to evaluate the effect of a merger on the competition in any section of the country? A.8. The Bank Holding Company Act requires the Board to analyze any application by a company seeking to control a bank or bank holding company, including through merger or acquisition, to deter- mine whether the proposal would substantially lessen competition in any section of the country. A similar analysis is required under the Home Owners’ Loan Act regarding applications by companies to control savings and loan holding companies or thrifts. Courts have held that the antitrust standards embodied in the banking laws were intended to incorporate the antitrust standards of the Clayton Act. The Board analyzes the competitive effects of the proposal in the context of local geographic banking markets where the applicant and the target compete. In order to perform the required competi- tive analysis, the Board performs an initial screen similar to the screen used by the U.S. Department of Justice (DOJ), in which de- posits of the institutions are used to calculate market shares and market concentration. In applications in which consummation of the proposal would result in market shares or concentration levels below certain specified thresholds, a Reserve Bank may approve the transaction under authority delegated by the Board. However, if the structural effects exceed the initial screening thresholds, the Board further analyzes the proposal and determines whether the transaction can be approved. In its analysis of market concentration under the Bank Holding Company Act, the Board’s review includes a close examination of the behavior of commercial banks, thrift institutions, and credit unions in the local banking market to determine the extent to which they compete with each other. The review also includes fac- tors that might mitigate the structural effects of a proposed merger or acquisition, including the number of institutions remaining in the market, the likelihood of entry into the market, the financial viability of the target institution, any proposed branch divestiture that the applicant offers to reduce the potential anticompetitive ef- 3See Regulation DD (Truth in Savings Act) at https://www.ecfr.gov/cgi-bin/text- idx?c=ecfr&tpl=/ecfrbrowse/Titlel2/12cfr1030lmainl02.tpl. See Regulation Z (Truth in Lend- ing Act) at https://www.ecfr.gov/cgi-bin/text-idx?c=ecfr&tpl=/ecfrbrowse/Titlel2/ l2cfr1026lmainl02.tpl. 57 fect of the merger or acquisition in affected markets, and other fac- tors. In order to advance transparency concerning competitive analysis of banking mergers and acquisitions, the Board and DOJ, in 2014, jointly released a set of Frequently Asked Questions and re- sponses,4 which are posted on the Board’s public website. Q.9. At the hearing you stated that, ‘‘S. 2155 implementation is probably our highest priority, and we are pushing ahead.’’ The Fed appears to have ceased work completely on several rule proposals that would have increased regulation of large Wall Street banks. These include proposed rules on bonus payments for top executives and on capital for merchant banking and commodities activities. Why did the Board shift away from finalizing rules that would strengthen regulation, even apparently abandoning proposed rules, and instead prioritize activity on rules that would weaken regula- tion? Is the Fed currently considering any rulemakings that would strengthen regulation? A.9. The Board, along with the other Federal banking agencies, has spent almost a decade building the postcrisis regulatory regime. The regulatory policies implemented since the financial crisis have improved the safety and soundness of the financial system. The U.S. banking system is significantly better capitalized as a result of postcrisis regulatory capital requirements and stress testing. At this point, the agencies have completed the bulk of the work of postcrisis regulation; however, the agencies are still in the process of implementing a small number of important measures to strengthen the regulatory framework. Recently, the Board has examined the regulations put into place in light of our supervisory experience. We, at the Federal Reserve, intend to maintain the core elements of the postcrisis framework to protect the financial system’s strength and resiliency, while also seeking ways to enhance effectiveness of our regulations. The Fed- eral Reserve is committed to continuing to evaluate the effects of regulation on financial stability and on the broader economy and to making appropriate adjustments. The Board also is committed to enhancing the transparency and efficiency with which the Fed- eral Reserve supervises and regulates firms under our jurisdiction. In order to enhance the strength and resiliency of the U.S. finan- cial system, the Board has requested comment on the following pro- posed rulemakings: the Reduction of Interconnectedness and Con- tagion Risks of G–SIBs and the Net Stable Funding Ratio. When the comment periods on these proposals close, staff will consider the comments received and work towards the final proposed rules, as appropriate. Other actions the Board has recently taken to strengthen the regulatory framework for financial organizations it regulates in- clude finalizing a number of rulemakings such as Single- Counterparty Credit Limits and the Large Financial Institution Rating system. 4See https://www.federalreserve.gov/newsevents/pressreleases/bcreg20141009a.htm. 58 RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS FROM JEROME H. POWELL Q.1. I’m concerned that the community bank leverage ratio created pursuant to S. 2155, as drafted, does little to provide actual relief for community banks. The Fed, OCC, and FDIC established the leverage ratio at the very upper end of the threshold allowed under S. 2155. The 9 per- cent capital level that the regulators settled on is well above the status quo for well-capitalized banks and would do little to help any institution with assets under $10 billion. It’s hard for me to understand why any bank would jump through the new hoops es- tablished by the regulators when the trade-off is a much higher threshold for Prompt Corrective Action. I’m concerned that the regulators did not do a sufficient job of consulting with our State banking supervisors as required under 2155. You are likely aware that the Conference of State Banking Supervisors sent you a letter on February 14th laying out its con- cerns in great detail. How are you working with State regulators on the implementa- tion of the community bank leverage ratio? A.1. Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) directs the Federal banking agencies (agencies) to establish a community bank leverage ratio (CBLR) of not less than 8 percent and no more than 10 percent for community banking organizations with less than $10 billion in total consolidated assets that also meet certain qualifying criteria. Under the CBLR proposed rule,1 a firm with a CBLR above 9 per- cent would be considered to have met the capital ratio require- ments for purposes of the agencies’ capital rule and for purposes of being well capitalized under the agencies’ prompt corrective ac- tion (PCA) rules of section 38 of the Federal Deposit Insurance Act. The proposed 9 percent calibration of the CBLR, in conjunction with the qualifying criteria and simplified definitions, seeks to strike a balance among the following objectives: maintaining strong capital levels in the banking system, ensuring safety and sound- ness, and providing appropriate regulatory burden relief to as many banking organizations as possible. For example, an 8 percent CBLR would allow more banking organizations to opt into the CBLR framework but could allow a large number of banking orga- nizations to hold less regulatory capital than they do today. The proposal is not expected to require a material change to the amount of capital held by qualifying firms that opt into the commu- nity bank leverage ratio framework because these firms generally hold capital well in excess of the minimum requirements. The agencies are currently reviewing all public comments on the pro- posal, including those related to the proposed calibration, and will consider them before finalizing the CBLR. Before issuing the proposal, the agencies consulted on several oc- casions with State bank regulators, as well as the Conference of State Bank Supervisors, to ensure their views were considered. The agencies very much appreciate the perspectives provided by the 1See 84 FR 3062 (February 8, 2019). 59 State bank regulators and plan to continue consulting with them before finalizing the CBLR. Q.2. Why are the agencies applying a new prompt-corrective-action framework to banks that fall below the 9 percent community bank leverage ratio threshold instead of simply requiring them to report risk-based capital? A.2. The CBLR proposal seeks to provide material burden relief, in the form of significantly simpler capital requirements and shorter reporting schedules, while maintaining safety and soundness in the banking system. The agencies believe that one way of achieving this outcome is by giving a community banking organization the flexibility to opt-in to and opt-out of the CBLR when the firm deems it appropriate. Consistent with section 201 of EORRCPA, the proposal establishes procedures for a CBLR firm that falls below 9 percent to be assigned a ‘‘proxy’’ PCA category based on the level of its CBLR. If we were to require a firm that has opted- in to the CBLR framework but that falls below the 9 percent CBLR to immediately revert to the current capital rule’s requirements (in- cluding the substantially longer and more complex reporting re- quirements), we would be reducing the firm’s flexibility by not al- lowing it to remain in the simpler regime. Under the proposal, a firm can opt-out of the CBLR framework and revert to the current capital rule at any time and for any rea- son. The agencies provided this optionality because they believed a CBLR firm would appreciate the flexibility to either revert to the current capital rule or remain subject to the CBLR as opposed to immediately being required to revert to the capital rule and associ- ated regulatory reporting if the firm’s CBLR drops below 9 percent. Without this flexibility, firms may feel compelled to maintain their current regulatory capital and reporting apparatus in case their CBLR drops below 9 percent. The comment period for the CBLR proposal ended on April 9, 2019. The agencies are currently reviewing comments from the public on all aspects of the proposed rule, including the optionality embedded in the proposal, and will consider them before finalizing the rule. Q.3. Why is the Federal Reserve Board lowering capital standards for the largest U.S. banking organizations while at the same time increasing leverage capital requirements for community banking organizations? A.3. The agencies have proposed changes to prudential require- ments that would better align regulations with a firm’s size, risk profile, and systemic footprint, consistent with EGRRCPA. Under the proposals, the largest firms, such as U.S. OSIBs, would con- tinue to be subject to the most stringent requirements. The CBLR proposal is an optional framework designed to reduce compliance burden for qualifying community banking organiza- tions. The CBLR proposal is not intended to materially change the amount of capital currently required to be held under the risk- based and leverage-based capital requirements. Q.4. You may recall that I’ve had a longstanding dialogue with the Fed regarding the rule on the standardized approach for measuring 60 counterparty credit risk, or SA–CCR. I first raised this issue at Vice Chairman Quarles’ confirmation hearing in July 2017, going on 2 years ago, and have written to you about it as well as asked about it in open hearings since that time. Because I believe it’s easier to establish rules making our finan- cial system safer outside of a crisis, I was glad to see that a draft SA–CCR rule was published last October. The draft, however, falls short. It failed to include initial margin exposure, a point that Vice Chairman Quarles ignored when responding to my previous ques- tions for the record. The draft rule was also overbearing in several key areas, such as how it treats hedging risk for commodities. Can you please share your thoughts on where the SA–CCR rule currently stands and tell us whether or not the rule is ever going to be finalized? A.4. With respect to initial margin in the supplementary leverage ratio (SLR), the Standardized Approach to Counterparty Credit Risk (SA–CCR) proposal requests comment on an alternative ap- proach that would permit greater recognition of initial margin for cleared transactions under the SLR. The comment period on the SA–CCR proposal ended on March 18, and the Board of Governors (Board), the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) are now review- ing the comments, including with respect to the treatment of com- modities and the treatment of initial margin under the SLR. Q.5. Last August, a number of my colleagues and I sent you a let- ter about the G–SIB surcharge. Our letter said in part that we hoped you would examine excessive capital requirements in the U.S. given the successful implementation of postcrisis reforms. In response, you wrote back saying, ‘‘The Board is conducting a comprehensive review of the regulations in the core areas of postcrisis 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 sys- tem, including improvements in the resolvability of banking organi- zations, and on credit availability and economic growth.’’ In addition, when responding to a question from Senator Shelby during our recent hearing, you said that our banking system over- all is quite strong, there have been no banking failures in 2018, and that the system has much higher capital, liquidity, and risk management than in years past. Can you please provide an update on the comprehensive review from your earlier letter? Will there be an output—such as a report—as the result of this review? When will it conclude, and will the public have the opportunity to comment? A.5. In connection with postcrisis reforms and recent statutory de- velopments, the Board has been evaluating its regulations for sim- plicity, efficiency, and transparency. Board staff are in the process of reviewing core elements of the Board’s regulatory framework. The Board will consider this analysis when developing future regu- latory proposals. In addition, on October 31, 2018, the Board issued the proposals to tailor requirements for certain banking organiza- 61 tions while also ensuring the continued safety and soundness of their operations.2 These proposed rulemakings seek public com- ment on separate proposals for tailoring enhanced prudential standards, tailoring of capital and liquidity requirements, and modifying stress testing requirements for certain banking organiza- tions. In developing these proposals, the Board considered the ex- pected impact of the rulemakings and sought comment from the public on this question and all other aspects of the proposals. Q.6. We all recognize that the Federal Reserve plays a critical role in ensuring the safety and soundness of the U.S. financial system and that you are constantly evolving your thinking on potential risks. Last year, I asked how you are considering evaluating bank practices in areas that are beyond the scope of the traditional su- pervision process. You responded that there a variety of ways the Federal Reserve ensures it understands what best practices should look like at the firms you supervise. That said, it remains unclear how decisions concerning tech- nology, HR management, and general corporate strategy present clear safety and soundness issues. At some level, it seems the Fed- eral Reserve’s view is that anything could create risk and therefore you are able to dictate practices to firms. Consider, for instance, use of new cloud technologies to store cus- tomer data. Such a decision by bank management is no different than those made by other private companies—retailers, credit card companies, or even a local utility. These are private companies, with very engaged boards and investors, and well-informed senior management teams. As you develop expectations for firms in these types of areas, will you make certain that there is sufficient stakeholder engagement and that you are appropriately deferring to the judgments of pri- vate entities and not dictating what such entities must do on mat- ters outside your traditional areas of expertise? A.6. As emerging and evolving risks become more relevant to safe- ty and soundness supervision, the Federal Reserve incorporates a broad range of views into shaping potential policy. This engage- ment happens during the research and development phase, where outreach and information gathering is conducted, and also through public comment periods when proposed rules are published. Q.7. I was pleased to see that S. 2155 included Section 402, which would exempt cash that custody banks store at the Fed from their leverage ratio calculation. Shortly before S. 2155 was signed into law, however, the Fed released a new rule changing that same cal- culation. In response to a question from the record from last November, Vice Chairman Quarles said, ‘‘staff is evaluating the April 2018 proposal in light of the statutory change.’’ Can you elaborate on Vice Chairman Quarles’ response? A.7. The Board, along with the OCC and FDIC, plan to issue a joint proposal in April 2019, to implement Section 402(b) of the EGRRCPA. The comment period on the proposal would end 60 days after publication in the Federal Register. 2See 83 FR 61408 (Nov. 29, 2018); 83 FR 66024 (Dec. 21, 2018); 84 FR 4002 (Feb. 14, 2019). 62 The April 2018 proposal to recalibrate the enhanced supple- mentary leverage ratio (eSLR) standards was calibrated based on the definition of the existing denominator of that ratio. At that time, the denominator included central bank deposits for all firms. The April 2018 proposal noted that any subsequent and significant changes to the SLR would likely necessitate the Board to recon- sider the proposal recalibration, as it was not intended to materi- ally change the aggregate amount of capital in the banking system. As you note, section 402(b) directs the agencies to allow custodial banking organizations to exclude qualifying central bank deposits from the SLR, and therefore, would meaningfully modify the SLR as applied to these firms. Accordingly, as the Board weighs any re- calibration of the eSLR, the Board will consider the potential changes to capital levels at custodial banking organizations result- ing from the implementation of section 402, as well as the expected impact on the aggregate level of capital in the banking system. Q.8. Are instructions for the latest Comprehensive Capital Analysis and Review tests forthcoming? When will they be released and why have they been held up this year? A.8. The instructions for the 2019 Comprehensive Capital Analysis and Review (CCAR) were released on March 6, 2019. While the CCAR instructions have been released in prior years on or around the beginning of February, the release of this year’s instructions was postponed to incorporate into them the Board’s final rule lim- iting the use of CCAR’s qualitative objection. Q.9. In a recent press conference, you mentioned that the Fed would make an announcement on changes to the countercyclical capital buffer ‘‘in early 2019’’. The Fed has yet to take further ac- tion. When will you make your announcement on the countercyclical capital buffer? A.9. The Board recently voted to maintain the level of the counter- cyclical capital buffer (CCyB) at zero.3 RESPONSES TO WRITTEN QUESTIONS OF SENATOR PURDUE FROM JEROME H. POWELL Q.1. In April 2017, at the Global Financial Forum, you commented that capital rules should not disincentivize derivatives clearing or serve as an impediment to end users hedging risk. These products are critical risk management tools for farmers, ranchers, and other businesses in Georgia and across the country. Unfortunately, the supplementary leverage ratio (SLR) is lim- iting access to derivatives risk management opportunities for the agricultural community in my State and discouraging the central clearing of standardized swap products by futures commission mer- chants (FCMs) registered with the CFTC. Since 2008, according to the CFTC, the number of firms providing clearing services has de- clined from 88 to 55 in 2018. 3The Board voted 4–1 to maintain the level of the CCyB at zero. See https:// www.federalreserve.gov/newsevents/pressreleases/bcreg20190306c. 63 In December 2018, I introduced legislation to correct this unin- tended consequence, and to ensure regulators properly recognize the risk-reducing nature of client initial margin for a cleared deriv- ative transaction. Ultimately, this will provide much-needed relief to farmers and other consumers and free up capital for our main street economy. As you also know, the Fed, along with the FDIC and OCC are currently soliciting comments as they seek to imple- ment a new approach for calculating the exposure amount of de- rivatives contracts under the agencies’ regulatory capital rules. The CFTC Commissioners recently submitted a joint comment that raises my very concerns. Do you share my concerns about SLR and what steps can you take to address the concerns above into consideration as you move through the joint-comment process? Will you commit to taking the concerns above into consideration as you move through the joint-comment process? A.1. The Federal Reserve Board (Board) is reviewing a number of its rules and regulations to address any unintended consequences and undue regulatory burden, including for the provision of central clearing services. In this regard, on October 30, 2018, the Board, along with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation (the agencies), issued a joint notice of proposed rulemaking to implement the standardized approach for counterparty credit risk (SA–CCR), to determine the exposure amount of a derivative contract. SA–CCR introduces a new methodology for calculating exposure amount in both the risk- based capital rules and the supplementary leverage ratio (SLR) rule. The proposal specifically requests comment on whether the agencies should permit greater recognition of margin for purposes of the SLR. The comment period closed March 18. We will take your concerns into account as we review comments on the rule. RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS FROM JEROME H. POWELL Q.1. In October of last year, the Federal Reserve (Fed) issued a re- quest for public comment on ‘‘actions the Federal Reserve could take to support faster payments in the United States.’’ We under- stand the Fed has been working collaboratively with the banks and other private-sector stakeholders for years on how best to facilitate faster payments. As you noted at a recent press conference, the Fed has thus far been ‘‘more of a convener, bringing industry and the public and public interest groups . . . around the table and . . . playing a constructive role’’ in encouraging the private sector in this area. In October, however, the Fed issued a request for public comment indicating that it could instead decide to enter the market for faster payments as a direct competitor of the private sector so- lutions with its own Real-Time Gross Settlement’’ (RTGS) system. Is it possible the Fed’s proposal could hamper and delay, rather than facilitate, the arrival of real-time payments? A.1. In its October 2018 Federal Register Notice requesting public comment (2018 FRN), the Board of Governors of the Federal Re- serve System (Board) specifically sought feedback on whether po- tential Federal Reserve action(s) in faster payments settlement 64 would hasten or inhibit financial services industry adoption of fast- er payment services. The potential actions, which would facilitate real-time interbank settlement of faster payments, build on collabo- rative work with the payment industry through the Federal Re- serve System’s Strategies for Improving the U.S. Payment System initiative. Real-time settlement avoids interbank credit risk by aligning the speed of interbank settlement with the speed of under- lying payments. As a result, broad use of real-time settlement for faster payments could enhance the overall safety of the faster pay- ments market in the United States. Development of a nationwide real-time interbank settlement infrastructure by the Federal Re- serve could encourage more banks to develop faster payment serv- ices, creating more choice for consumers, households, and busi- nesses. The 2018 FRN sought feedback on what operational and tech- nical adjustments the private sector would need to make in order to operate in a 24x7x365 settlement environment and potential challenges and related costs the industry could face in the process of transitioning to such an environment. As part of its central mission, the Federal Reserve has a funda- mental responsibility to ensure that there is a flexible and robust infrastructure supporting the U.S. payment system on which the private sector can develop innovative payment services that serve the broadest public interests. The Federal Reserve is committed to working together with the private sector to achieve nationwide access to faster payments and will continue to explore collaborative efforts to promote the safety and efficiency of faster payments and to support the modernization of the financial services sector’s provision of payment services. Q.2. Please explain why the Fed is proposing the creation of a Gov- ernment-run real-time payments system when the private sector has already created one that is up and running? A.2. The potential actions outlined in the 2018 FRN are intended to promote the safety and efficiency of faster payments in the United States and to support the modernization of the financial services sector’s provision of payment services. The Federal Re- serve has long supported these objectives in its existing services, which provide nationwide access to check, Automated Clearing House (ACH), and wire services to banks of all sizes. The Federal Reserve has provided services (check, ACH, wire) alongside private- sector service providers since its inception, and the Board has es- tablished policies and processes to avoid conflicts of interest across the various roles played by the Federal Reserve.1 Q.3. The Fed’s own policy statement on ‘‘The Federal Reserve in the Payments System’’ requires that the Fed satisfy three condi- tions before proposing a new service. Among those is a finding that the private sector ‘‘cannot be expected to provide such service with reasonable effectiveness, scope, and equity.’’ Has the Fed made this finding, and, if so, on what grounds was it made? A.3. In response to the 2018 FRN, the Board received over 400 comment letters from a broad range of market participants and in- 1See https://www.federalreserve.gov/paymentsystems/pfslstandards.htm. 65 terest groups, including consumer groups. The Board is carefully considering all of the comments received before determining wheth- er any potential action is appropriate, as well as the timing of such potential action. Any resulting action would be pursued in align- ment with the provisions of the Federal Reserve Act, the Monetary Control Act, and longstanding Federal Reserve principles and cri- teria for the provision of payment services. The criteria specify that the Federal Reserve must expect to (1) achieve full cost recovery over the long run, (2) provide services that yield a public benefit, and (3) provide services that other providers alone cannot be ex- pected to provide with reasonable effectiveness, scope, and equity. Q.4. How long would it take for the Fed to create its real-time sys- tem? A.4. The Federal Reserve is not committing to any specific actions at this time, and there are several potential approaches that could help achieve the objective of safe, efficient, and ubiquitous faster payments. Any implementation period will depend on what actions, if any, the Board decides to take. Q.5. Would the Fed’s proposed RTGS and the existing private sec- tor real-time payments network be interoperable and, if so, why— specifically—do you believe that will be the case? A.5. The 2018 FRN asked for feedback on specific areas, including interoperability with existing or potentially new Real-Time Gross Settlement (RTGS) service providers. The Board received responses to such questions and is assessing the comments. The Federal Re- serve recognizes that a decision to undertake a 24x7x365 RTGS settlement service will require close partnership and collaboration with a wide range of industry stakeholders. Q.6. If you believe the systems would interoperate, would such interoperability require the private sector system to significantly alter its current design? A.6. As noted, the Board recognizes that a decision to undertake the proposed actions, in particular the development of a 24x7x365 RTGS settlement service, will require close partnership and col- laboration with industry stakeholders. Based on the comments re- ceived, the Board is assessing the implications for various industry stakeholders including banks, service providers, merchants, and fi- nancial technology providers. One important consideration relates to interoperability, which can involve different layers of a payment message (e.g., rules, standards, processing). The Board is assessing the options for interoperability between a Federal Reserve RTGS settlement service and existing or potentially new RTGS service providers across these layers for achieving nationwide access to faster payments in the United States. Q.7. As currently structured, CECL presents major capital vola- tility risk, affecting pricing and availability of lending for 30-year mortgages and to borrowers of lower credit quality, especially dur- ing downturns. It is highly procyclical. There have been proposals made that before implementing this major accounting change, there should be a quantitative impact study (QIS) conducted to look into these concerns. The 3-year phase in that the Fed recently finalized does not address this underlying procyclicality issue. 66 Do you see any harm in conducting such a QIS? A.7. We recognize the importance of evaluating the quantitative impact of a policy change. Prior to finalizing the current expected credit loss (CECL) accounting standard, the Financial Accounting Standards Board followed its established process, which included cost-benefit analysis and extensive outreach with all stakeholders, including users, preparers, auditors, and regulators. Furthermore, various economists, institutions, and independent organizations have produced impact analyses of CECL with varying conclusions. We have reviewed these analyses and performed additional inter- nal studies to support the 3-year phase-in referenced in your ques- tion as well as the Board’s announcement that it will maintain the current modeling framework for loan allowances in its supervisory stress test through 2021. Institutions subject to the Board’s Com- prehensive Capital Analysis and Review (CCAR) will be required to incorporate CECL into their own stress tests starting in the 2020 cycle. However, the Board will not issue supervisory findings on those institutions’ allowance estimations in the CCAR exercise through 2021. Given the importance of the CECL accounting standard to the in- stitutions we supervise and the banking industry as a whole, we are committed to closely monitoring implementation and studying the effect of the accounting standard on the banking system to de- termine if further changes to the regulatory framework are appro- priate. Q.8. The Fed has not undertaken any effort to update its rules to provide a pathway to margin eligibility for companies traded over- the-counter (OTC) since NASDAQ became an exchange in 2006. Margin eligibility of OTC-traded stocks can be an important part of the growth of small and emerging companies, as it helps to im- prove the market quality of those securities, impacts an investor’s willingness to purchase those securities, and as a result, has a di- rect impact on capital formation. U.S. investors in the ADRs for Roche and other large, international OTC traded firms are also negatively impacted by the Fed’s inaction on this issue. Will you commit to following up with me on the actions the Fed will take to revive the margin list for certain OTC securities—those that have similar characteristics to those traded on NASDAQ be- fore it became an exchange? A.8. As you note, the List of Over-the-Counter Margin Stocks (OTC List) is no longer published by the Federal Reserve Board (Board), and, in fact, the OTC List’s publication ceased in 1998. Board staff have continued to monitor OTC market developments in the years since. Any expansion of the types of securities that are margin-eli- gible would require the Board’s careful consideration of the benefits of such an approach, weighed against the potential increase in bur- dens on banks and other lenders. We will be sure to take your concerns into account as we look into potential approaches that may be considered, while ensuring any changes would not pose additional regulatory burden. 67 RESPONSES TO WRITTEN QUESTIONS OF SENATOR MORAN FROM JEROME H. POWELL Q.1. With cash flow dwindling in the farm sector amid ongoing trade disputes, the volume of non–real estate farm debt continues to increase at a rapid pace, driven by the growth in operating loans which have reached a historically large average size. Bankruptcies across the Farm Belt are rising past the highest level in at least 10 years. Lower farm incomes, the uncertainties about ag trade, and the growth of lending volumes has interest rates on ag loans trending ever higher. The rapidly increasing combination of higher leverage and rising rates continue to put pressure on operations across the Farm Belt. With financial performance at agricultural banks remaining rel- atively strong and the value of farm real estate continuing to pro- vide ongoing support, what actions are you and regulators consid- ering to help alleviate mounting pressure on the farm sector expe- riencing difficulties beyond their control? A.1. The agricultural industry is experiencing uncertainty, as com- modity prices were suppressed in 2018 and trade issues continue to put pressure on economic growth. Some producers may be well- positioned to withstand the prolonged challenges facing today’s ag- ricultural sector, but others are more susceptible to financial stress. As regulators, it is essential to ensure that banks have appropriate processes to effectively measure and mitigate risks while maintain- ing safe and sound operations and serving the needs of the agricul- tural communities in which they operate. In 2011, the Federal Reserve issued guidance to the industry on ‘‘Supervisory Expectations for Risk Management of Agriculture Credit Risk’’. This guidance applies in all economic environments, but is especially helpful to banks during periods of economic stress. It reminds bankers that ‘‘the identification of a troubled borrower does not [prohibit] a banker from working with the borrower,’’ and it provides a road map for lenders to work prudently with troubled borrowers in a way that serves the long-term interests of all stake- holders. With respect to the Community Reinvestment Act (CRA), the current regulations consider bank activities in their assessment areas, including bank activities in the assessment areas that are responsive to the needs of those that have been affected by disas- ters. In acknowledgement of the concerns and uncertainties sur- rounding the outlook of agricultural conditions, the Federal Re- serve has taken measures to maintain an ongoing dialogue between regulators, bankers, and agricultural communities. On a quarterly basis, we conduct Agricultural Credit Conditions Surveys that gather comments from bankers located in various Reserve Bank Districts1 with significant agricultural exposure. Our FedLinks and Community Banking Connections website2 and publications, which could be useful to all banks, aim to improve the understanding of supervisory expectations and provide tools to help community 1Our survey is aimed at areas of the country with high concentrations of agricultural lending by community banks, located primarily in Chicago, St. Louis, Minneapolis, Kansas City, and Dallas. 2See, https://communitybankingconnections.org/fedlinks. 68 banks across the United States. Additionally, we invite bankers and agriculture industry professionals to the annual National Agri- cultural Credit Conference, hosted by the Federal Reserve Bank of Kansas City, which provides a forum for those in the industry to discuss current developments. The most recent conference was held at the Board of Governors of the Federal Reserve System on March 25, 2019. All of these outreach efforts allow the Federal Reserve to hear diverse perspectives and receive feedback from both the indus- try and public. They also enable the Federal Reserve to have a bet- ter understanding of credit conditions and challenges in agricul- tural markets so that supervisory reviews can be tailored, as ap- propriate. In addition to the supervisory process, the Federal Reserve Sys- tem strives to incorporate perspectives from all regions of the coun- try and from a broad range of industries, including agriculture, into its regular monetary policy deliberations and its assessments of the U.S. economy. We receive input on agricultural conditions from business contacts across the country through our boards of direc- tors at regional Reserve Banks, various advisory councils, and sur- veys, in addition to reports from staff who track developments in U.S. agriculture. Q.2. One parallel I suggest you and regulators explore and consider for lenders is the regulatory relief granted to financial institutions in areas affected by natural disasters, such as favorable Commu- nity Reinvestment Act consideration, extension of repayment terms, restructuring existing loans, and easing terms for new loans. Would you and your staff be willing to work with my staff and I to develop the legislation necessary to provide regulators with this authority? A.2. As always, we are available to provide technical assistance to Members of Congress and their staffs. For this particular issue, our staff can inform you and your staff about past initiatives that the Board and the other Federal banking agencies (agencies) have taken to provide regulatory assistance to our supervised institu- tions affected by a major natural disaster. On an interagency basis, the agencies issue statements to encourage institutions operating in a disaster area to meet the financial services needs of their com- munities. For example, on October 10, 2018, the agencies and the Conference of State Bank Supervisors issued a statement that pro- vides an overview of supervisory practices for institutions affected by Hurricane Michael.3 More recently, the agencies and relevant State regulators issued interagency statements on supervisory practices regarding financial institutions and their customers re- lated to the flooding in the Midwest and wildfires in California.4 3See, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181010a.htm. 4See, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20190325a.htm, and https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181115b.htm. 69 RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER FROM JEROME H. POWELL Q.1. Community Reinvestment Act—As you noted in a speech a cou- ple weeks ago at the HBCU Mississippi Valley State University, the loss of a branch often means ‘‘more than the loss of access to financial services; it also meant the loss of financial advice, local civic leadership, and an institution that brought needed customers to nearby businesses.’’ I couldn’t agree more. You rightly mention the Community Reinvestment Act as an important tool to encour- age banking services in underserved areas. As regulators consider updates to the regulations implementing the Community Reinvestment Act, how can we make sure we that we protect the folks most likely to be significantly affected by branch closures—low income families, families of color, rural fami- lies? A.1. Public comment and the Federal Reserve’s outreach to banks and community stakeholders have clearly conveyed that bank branches are an important venue for banks to engage with their communities. Commenters have emphasized the high value that bank branches have for retail customers, small business owners, local leaders, and community developers, especially in underserved communities. One opportunity in modernizing the Community Reinvestment Act (CRA) regulations is to better define the area in which the agencies evaluate a bank’s CRA activities, while retaining a focus on the credit needs of local communities. There is a complex bal- ance between the profitability of branches and the needs of local communities to interact with bank personnel needs to be kept in mind as revisions to the regulations are considered. Additionally, it would be useful to find ways to recognize how technology offers meaningful and cost-efficient opportunities to serve consumers and communities.1 As the Federal Reserve works with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation (the Agencies) to develop a notice of proposed rulemaking, it is im- portant to ensure that any modernization of assessment areas keeps in focus the goal of encouraging banks to seek out opportuni- ties to create incentives for CRA capital to effectively meet the credit and banking needs of underserved communities and con- sumers. Q.2. Beyond the Community Reinvestment Act, what other tools do you as a regulator have to promote access to bank branches? A.2. The Federal Reserve has dedicated staff in each Reserve Bank throughout the country who work collaboratively to engage rel- evant stakeholders; to understand issues and challenges in low- and moderate-income (LMI) communities; and to provide research, insights, and technical assistance to support community and eco- nomic development programs. 1The Agencies have been aware of the impact of technology on the delivery of banking serv- ices for many years now. In 2016, the Agencies provided guidance on how examiners will evalu- ate the availability and effectiveness of alternative (nonbranch) product and service deliver mechanisms. That guidance can be found at in the Interagency and Answer Guidance on Com- munity Reinvestment (Q&A §l.24(d)(3), https://www.govinfo.gov/content/pkg/FR-2016-07-25/ pdf/2016-16693.pdf. 70 For example, staff facilitate roundtable discussions between banks, nonprofit organizations, and Government officials to support awareness of community needs and CRA-eligible activities, and to provide information on possible policy options and practices that may help serve the banking needs in LMI communities. In addi- tion, staff work to advance Federal Reserve policymakers’ under- standing of labor markets, housing markets, and other economic and financial conditions across populations and geographies. By en- gaging a broad range of stakeholders, staff obtain diverse views on issues affecting the economy and financial markets. This informa- tion helps banks identify opportunities to serve the credit and fi- nancial services needs of their communities. Q.3. Cybersecurity Harmonization—Many financial institutions are subject to cybersecurity supervision from a number of State and Federal regulators. Not only are these institutions subject to, at times, differing requirements from these regulators, there is often not even a shared lexicon among regulators, so that when one regu- lator says ‘‘effective data security,’’ they actually mean something different from what another regulator means by the same phrase. Are there efforts underway to harmonize the cybersecurity lexi- con used by State and Federal regulators? How is that effort pro- gressing? A.3. The Federal Reserve, in collaboration with other regulatory agencies, continues to identify opportunities to harmonize the cy- bersecurity lexicon used by State and Federal regulators. Specifi- cally, the Federal Reserve chairs a working group of the Financial and Banking Information Infrastructure Committee (FBIIC)2 that is working to harmonize the cybersecurity lexicon by using the Na- tional Institute of Standards and Technology (NIST) as the primary source of cyberterms and definitions going forward. Q.4. What about an effort to harmonize standards? A.4. The FBIIC provides a forum for member agencies to discuss regulatory and supervisory practices, including opportunities for harmonization and to leverage existing standards, such as the NIST Cybersecurity Framework. As discussed above, the Federal Reserve chairs a FBIIC working group that is engaged in identi- fying opportunities to further harmonize cyber-related standards and supervisory activities for firms subject to the authority of mul- tiple regulators. In addition, the agencies, with supervisory responsibility for the banking sector, collectively engage in efforts to promote uniformity in the supervision of those financial institutions through the Fed- eral Financial Institutions Examination Council (FFIEC). The FFIEC, established in 1979, includes the Board of Governors of the Federal Reserve System (Board), Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), National Credit Union Administration, Consumer Financial Protec- tion Bureau and the State Liaison Committee. The FFIEC pro- motes uniformity in the supervision of financial institutions 2The FBIIC consists of 18 Federal and State member organizations that collectively engage in supervisory activities for the banking, investment, and insurance sectors. 71 through the development of joint examination procedures, prin- ciples, standards, and report forms. Q.5. Real Time Payments—I fully support the adoption in the United States of a real time payments (RTP) system. Such a sys- tem brings with it terrific promise for innovation in financial serv- ices that meet customer demands to make payments cheaply and instantly. In its 2013 Strategies for Improving the U.S. Payment System, the Federal Reserve said that it ‘‘would not consider expanding its service provider role unless it determines that doing so is necessary to bring about significant improvements to the payment system and that actions of the private sector alone will likely not achieve the desired outcomes for speed, efficiency, and safety in a timely manner’’ and unless ‘‘other providers alone could not be expected to provide this capability with reasonable effectiveness, scope, and equity’’—phrases that the Federal Reserve has repeated elsewhere. I can understand how the provision by the Federal Reserve of a 24/7/365 real time liquidity management tool that would support a private sector RTP solution—as contemplated in the Federal Re- serve’s recent proposal—would meet the test that the Federal Re- serve has consistently outlined for its operational involvement. A 24/7/365 liquidity management tool would help alleviate otherwise potentially destabilizing liquidity demands that overnight RTPs could generate. The development of a real time gross settlement (RTGS) system, however, seems to be a different matter in terms of meeting the re- quirements the Fed set forth in its 2013 Strategies for Improving the U.S. Payment System and the requirements of the Monetary Control Act. With regard to the possible development of an RTGS system, has the Federal Reserve made a determination that Federal Reserve provision of RTGS services meets this test? If so, on what basis? A.5. The potential actions outlined in the Board’s October 2018 Federal Register Notice request for comment (2018 FRN) are in- tended to promote the safety and efficiency of faster payments in the United States and to support the modernization of the financial services sector’s provision of payment services. The Federal Re- serve has provided services alongside the private-sector service pro- viders since its inception that have supported both objectives while providing nationwide access to check, Automated Clearing House (ACH), and wire services to banks of all sizes. The Board has received over 400 comment letters from a broad range of market participants and interest groups, including con- sumer groups in response to the 2018 FRN seeking public input on potential actions the Federal Reserve might take in regard to sup- porting faster payments in the United States. The Board is care- fully considering all of the comments received before determining whether any action is appropriate or the timing of such potential action. Any resulting action the Board decides to take would be pursued in alignment with the provisions of the Federal Reserve Act, the Monetary Control Act, and longstanding Federal Reserve policies and processes created to avoid conflicts of interest across the various roles of the Federal Reserve. 72 In particular, the Congress, in part motivated to encourage and ensure fair competition between the Federal Reserve and the pri- vate sector, passed in 1980, the MCA, requiring that the Federal Reserve fully recover costs in providing payment services over the long run and adopt pricing principles to avoid unfair competition with the private sector. The Board also has established additional criteria for the provision of new or enhanced payment services that specify the Federal Reserve must expect to (1) achieve full cost re- covery over the long run, (2) provide services that yield public ben- efit, and (3) provide services that other providers alone cannot be expected to provide with reasonable effectiveness, scope, and eq- uity. In addition to these criteria, for new services or service en- hancements, the Board also conducts a competitive impact analysis to determine whether there will be a direct and material adverse effect on the ability of other service providers to compete effectively in providing similar services.3 Q.6. The Federal Reserve has also consistently supported the im- plementation of RTP system by 2020. I understand there is a fully operational private sector clearing and settlement solution that has significant adoption by depository institutions. Would a Federal Re- serve-provided RTGS infrastructure be implemented by 2020? If not, how long would such an infrastructure take to become fully operational? A.6. The Federal Reserve is not committing to any specific actions at this time, and there are several potential approaches that could help achieve the objective of safe, efficient, and ubiquitous faster payments. Any implementation period will depend on what actions, if any, the Board decides to take. Analysis of the input received in response to the Board’s 2018 FRN is currently underway. The Board is in the process of carefully considering all of the comments received before the determining whether any action is appropriate or the timing of such potential action(s). Q.7. Given the Fed’s long-held goal of getting to real-time pay- ments by 2020, is there a risk that the Fed’s suggestion that it might, at some time in the future, enter the real-time payments market—as a direct competitor of existing private-sector alter- natives—delay, rather than facilitate, adoption of real-time pay- ments? A.7. In its 2018 FRN request for public comment on actions the Board specifically sought feedback on whether potential Federal Reserve action(s) in faster payments settlement would hasten or in- hibit financial services industry adoption of faster payment serv- ices. The potential actions, which would facilitate real-time inter- bank settlement of faster payments, build on collaborative work with the payment industry through the Federal Reserve System’s Strategies for Improving the U.S. Payment System (SIPS) initia- tive. Real-time settlement avoids interbank credit risk by aligning the speed of interbank settlement with the speed of underlying payments. As a result, broad use of real-time settlement for faster payments could enhance the overall safety of the faster payments 3See ‘‘The Federal Reserve in the Payments System’’ (issued 1984; revised 1990), Federal Re- serve Regulatory Service 9-1558. 73 market in the United States. Development of a nationwide, real- time interbank settlement infrastructure by the Federal Reserve could encourage more banks to develop faster payment services, creating more choice for consumers, households, and businesses. The 2018 FRN sought feedback on what operational and tech- nical adjustments the private sector would be required to make to operate a 24x7x365 settlement environment and potential chal- lenges and related costs the industry could face in the process of transitioning to such an environment. As part of its central mission, the Federal Reserve has a funda- mental responsibility to ensure that there is a flexible and robust infrastructure supporting the U.S. payment system on which the private sector can develop innovative payment services that serve the broadest public interests. The Federal Reserve is committed to working together with the private sector to achieve nationwide access to faster payments and will continue to explore collaborative efforts to promote the safety and efficiency of faster payments and to support the modernization of the financial services sector’s provision of payment services. Q.8. Brexit: Financial Stability Monitoring—I’m glad to see the news that the Federal Reserve is now publishing semiannual finan- cial stability reports. I think it’s critical that the Federal Reserve, and the other financial regulators and FSOC, continue to monitor for new and emerging threats to financial stability. One of the items the Fed has highlighted in its financial stability report is Brexit. What are the key economic and financial risks associated with the possibility that Britain crashes out of the EU? A.8. European Union (EU) leaders agreed at their April 10 summit to grant the United Kingdom (U.K.) a Brexit extension until Octo- ber 31, 2019. Although this extension reduced uncertainty in the near term, it is unclear how Brexit will play out. The EU and the U.K. Governments reached a deal last November that would set the terms of U.K. withdrawal from the EU, and introduce a basis for new relations, but the U.K. Parliament has not ratified this agreement. The possibility remains that the U.K. could leave the EU without a ratified agreement. U.K. authorities have warned that, under such a no-deal scenario, there likely would be logistical issues as the two economies jump from a seamless trading environ- ment to one involving tariffs, rules of origin of products, and border inspections. Planned measures to address such issues likely would not eliminate all such disruptions, which might have a significant near-term effect on the U.K. economy and on some of the EU economies that trade most heavily with the U.K. The direct trade impacts on the United States likely would be minimal. A no-deal scenario could generate some European finan- cial stresses that could spill over to global financial markets, in- cluding in the United States. However, U.S. financial institutions have had a long time to prepare, with oversight from U.S., U.K., and EU regulators, for potential spillovers resulting from Brexit. More generally, U.S. banks currently are well capitalized, and their exposures to Europe are fairly small relative to their capital levels. Q.9. What is the Fed doing to prepare for such an event? 74 A.9. Board staff has monitored and analyzed the U.K. expected withdrawal from the EU, including the possibility of a no-deal sce- nario. As part of these efforts, staff has discussed preparedness for a variety of scenarios with financial institutions and closely mon- itored political, economic, and financial sector developments. Staff has also coordinated with other domestic financial regulatory agen- cies and the U.S. Department of the Treasury as well as engaged with relevant authorities in the U.K. and EU, as appropriate. In particular, Board staff has consulted regularly with the Bank of England and its Prudential Regulation Authority. Q.10. With which Federal agencies is the Fed working in prepara- tion? A.10. As mentioned in response above, Board staff has coordinated and consulted with colleagues at several Federal agencies, includ- ing the U.S. Department of the Treasury, Commodity Futures Trading Commission, Securities and Exchange Commission, OCC, and FDIC. RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCHATZ FROM JEROME H. POWELL Q.1. The U.S. Government’s Fourth National Climate Assessment says climate change will ‘‘cause substantial net damage to the U.S. economy throughout this century,’’ with annual losses in some sec- tors projected to exceed the current GDP of many U.S. States. Cli- mate-related extreme weather will ‘‘increasingly affect our trade and economy, including import and export prices.’’ It will also dis- rupt operations and supply chains, and ‘‘lead to large-scale shifts in the availability and prices of many agricultural products across the world.’’ Has the Federal Reserve specifically examined data in the Na- tional Climate Assessment on the economic impact of different cli- mate change scenarios? A.1. The longer-term predicted impacts of climate change are gen- erally beyond the scope of monetary policy. Although it is impor- tant for us to understand how weather is affecting the economy in real time and respond accordingly, monetary policy is not well suit- ed to address longer-term economic disruptions associated with se- vere weather events. Longer-term predictions such as those in the Fourth National Climate Change Assessment report are an issue for Congress and the Administration to consider. Q.2. Has the Federal Reserve examined any data, produced by the U.S. Government or by others, on the economic impact of increas- ingly severe weather and climate events, such as flooding, sea level rise, drought, wildfires, and deadly storms? A.2. The Federal Reserve takes into account the severity of weath- er events in assessing current economic conditions as part of our deliberations about the appropriate stance of monetary policy. For example, our staff has relied on data from the Federal Emergency Management Agency and the Department of Energy to gauge the disruptions to oil and gas extraction, petroleum refining, and petro- chemical and plastic resin production in the wake of hurricanes that affected the Gulf region. Our staff regularly uses daily meas- 75 ures of temperatures and snowfall from National Oceanic and At- mospheric Administration (NOAA) weather stations to understand better, how severe weather may be affecting economic activity in specific areas. In addition, our staff recently has begun to use cred- it and debit card transaction data to gauge how specific types of se- vere weather events might affect consumer spending in areas af- fected by those events. Q.3. Have you considered how different climate change scenarios would impact the Federal Reserve’s statutory mandate to stabilize prices, maximize employment, and moderate long-term interest rates? A.3. As I have noted previously, while Congress has entrusted the matter of addressing climate change to other agencies, the Federal Reserve uses its authorities and tools to prepare financial institu- tions for vulnerabilities, including severe weather events. Over the short-term, severe weather events have the potential to inflict seri- ous damage to the lives of individuals and families, to devastate local economies and even temporarily affect national economic out- put and employment. The Federal Reserve, in its conduct of mone- tary policy and related decision making, is concerned with short- and medium-term developments that may change materially over quarters and a relatively small number of years, rather than the decades associated with longer-term changes. Q.4. Have you considered how different climate change scenarios would impact the Federal Reserve’s statutory mandate to promote the safety and soundness of supervised institutions and the sta- bility of the overall financial system? A.4. The Federal Reserve Board (Board) has supervisory and regu- latory authority over a variety of financial institutions and activi- ties, with the goal of promoting a safe, sound, efficient, and acces- sible financial system that supports the growth and stability of the U.S. economy. In carrying out the responsibility to promote the safety and soundness of individual financial institutions that we supervise, we assess, among other things, supervised firms’ ability to identify, measure, monitor, and control risks, including those re- lated to severe weather events. The Federal Reserve has particular tools and mechanisms for monitoring the financial system. One of the most critical elements of safety and soundness is a fi- nancial institution’s ability to absorb substantial unexpected losses and continue to lend to households and businesses. Severe weather events are one potential source of such losses, especially for firms with exposures concentrated in regions that are likely to experience those events. We routinely examine banks’ management of con- centration risk and recommend or, if necessary, enforce, enhance- ments, including additional capital, where warranted. For example, our supervisors consider any evidence of a rising incidence of se- vere weather events, including coastal flooding, in those areas where it is a factor. To that end, the Board issued supervisory guidance in 1996, to ensure that bank management takes into account all relevant risks in their underwriting and review practices. Our guidance with re- spect to credit underwriting and asset quality provides supervisors the flexibility necessary to address risks from severe weather 76 events.1 In addition, our guidance also specifically addresses lend- ing to sectors where assessments of these risks are critical for due diligence and underwriting.2 The Board also ensures that financial institutions that are core clearing and settlement organizations, or play significant roles in critical financial markets maintain sound practices to ensure that they can recover and resume their activities supporting these mar- kets following a severe weather event. In addition, the Board has provided guidance to banking institutions directly affected by an event that results in a Presidential declaration of a major disaster. The supervisory approach described in the guidance provides exam- iners flexibility to conduct supervisory activities and formulate su- pervisory responses that take into account the issues confronting institutions impacted by such events. Q.5. Does the Federal Reserve coordinate with other central banks and bank supervisors around the world to discuss best practices for managing emerging risks? If no, why not? If yes, have climate risks to financial institutions been discussed? A.5. In its role promoting financial stability, the Federal Reserve cooperates and coordinates with many other central banks and bank supervisors and regulators, both bilaterally and through international standard setting bodies, such as the Basel Committee on Banking Supervision and the Financial Stability Board (FSB). We discuss climate risks frequently with our international central bank colleagues. Our engagement is intended to help identify and address vulnerabilities in the global financial system and to de- velop stronger regulatory and supervisory policies in order to help ensure a more stable and resilient global financial system. Additionally, the Federal Reserve Board is an active participant in the proceedings of the FSB, which was established after the fi- nancial crisis to strengthen financial systems and increase the sta- bility of international financial markets, and has undertaken rel- evant work in this area. Of particular interest are efforts to pro- mote enhanced risk management disclosure by financial institu- tions. In this regard, the FSB established in 2015 the Task Force on Climate-related Financial Disclosures (TCFD), a global, indus- try-led effort to develop recommendations for consistent climate-re- lated financial disclosures, for use by companies in providing infor- mation to investors, lenders, insurers, and others. The TCFD con- siders the physical, liability, and transition risks associated with climate change and what constitutes effective financial disclosures across industries. Q.6. Your counterpart in the United Kingdom, Mark Carney, re- cently announced that the Bank of England is planning to include the impact of climate change in its bank stress tests as early as 1See, e.g., 12 CFR Part 208, App. D-1 to Part 208 (‘‘Interagency Guidelines Establishing Standards for Safety and Soundness’’); Board of Governors of the Federal Reserve System, ‘‘SR 96-36: Guidance on Evaluating Activities Under the Responsibility of U.S. Branches, Agencies, and Nonbank Subsidiaries of Foreign Banking Organizations (FBOs)’’ (Dec. 19, 1996), https:// www.federalreserve.gov/boarddocs/srletters/l996/sr9636.htm; Federal Deposit Insurance Cor- poration, ‘‘Uniform Financial Institutions Rating System’’, 62 FR 752 (Jan. 6, 1997). 2See, e.g., Board of Governors of the Federal Reserve System, ‘‘Commercial Bank Examina- tion Manual’’, §§2142.1 (‘‘Agricultural Credit Risk Management’’), 2150.1 (‘‘Energy Lending—Re- serve-Based Loans’’) (rev. Oct. 2018), https://www.federalreserve.gov/publications/files/ cbem.pdf. 77 next year. The Bank of England is taking this step because it be- lieves that responding to climate-related financial risks ‘‘helps en- sure the Bank can fulfil its mission to maintain monetary and fi- nancial stability.’’ Are you aware of the Bank of England’s plans to incorporate cli- mate risk into bank stress testing? A.6. The Board is aware of the Bank of England’s (BOE) plans to incorporate severe weather risk into bank stress testing. The BOE has said it will conduct this analysis as part of its exploratory sce- nario either next year or 3 years hence. As we understand, banks cannot pass or fail these exploratory scenarios; instead, the sce- narios are designed to increase transparency and to focus on spe- cific issues. Q.7. Do you think it would be productive for the Federal Reserve to learn more about the Bank of England’s efforts to incorporate climate risks into bank stress testing? If not, please explain why the Federal Reserve does not think it is worth learning more about how climate risks could impact the safety and soundness of financial institutions or the stability of the financial system. A.7. Federal Reserve staff meet regularly to exchange views with our counterparts at the BOE and other global regulators. We look forward to seeing the structure of and results of the exercise, should the BOE ultimately decide to conduct these tests. Q.8. In his September 2010 testimony before the Financial Crisis Inquiry Commission, former Federal Reserve Chairman Ben Bernanke said the most prominent trigger of the 2007–08 global fi- nancial crisis ‘‘was the prospect of significant losses on residential mortgage loans.’’ Chairman Bernanke explained, ‘‘When house prices declined, the equity of those homeowners was quickly wiped out; in turn, ‘underwater’ borrowers who owed more than their houses were worth were much more likely to default on their mort- gage payments.’’ The National Climate Assessment found it is likely that ‘‘be- tween $66 billion and $106 billion worth of real estate will be below sea level by 2050; and $238 billion to $507 billion, by 2100.’’ It is reasonable to expect that frequent and intense coastal prop- erty damage under such scenarios will drastically reduce property values. We do not need to wait to 2050 to see the impact of climate change on property values. Coastal flooding from sea level rise is already eroding property values. A recent analysis by First Street Foundation estimated that property value losses from coastal flood- ing in 17 States totaled almost $16 billion from 2005 to 2017.3 Has the Federal Reserve assessed the risks that extreme weather events pose to the U.S. housing market? A.8. The Board conducts an active research program on a broad array of topics in economics and finance. As part of this broader re- search mission, research staff write working papers and publish ar- 3First Street Foundation, ‘‘Rising Seas Erode $15.8 billion in Home Value From Maine to Mississippi’’, February 27, 2019, available at: https://assets.floodiq.com/2019/02/ 9ddfda5c3f7295fd97d60332bb14c042-firststreet-floodiq-mid-atlantc-release.pdf. 78 ticles in peer-reviewed journals. This research includes studies on a number of topics that pertain to modeling the economic effects of severe weather events, modeling uncertainty and risks from such events in financial markets, and estimating the effects of these events on consumer and business activity, as well as on local and aggregate real estate markets. In recent years, Board economists have authored more than 30 papers on the impact of climate change on the financial sector and undertaken research on the eco- nomics of weather, natural disasters, climate policy, and related risks. Q.9. How does the Federal Reserve assess the risk of natural disas- ters that are increasing in frequency and severity on the loan port- folios of supervised financial institutions and the financial system as a whole? A.9. The Board’s framework for monitoring the stability of the U.S. financial system distinguishes between shocks to and vulnerabilities of the financial system.4 Shocks are typically sur- prises and are inherently difficult to predict. Vulnerabilities tend to build up over time and are the aspects of the financial system that are most expected to cause widespread problems in times of stress. Thus, in our framework, severe weather events are treated as shocks to the system. For example, the possibility of large losses to property and casualty insurers from historically atypical timing, intensity, or frequency of hurricane damages represents one such potential shock. If that shock led to significant strains on capital positions of affected firms, those losses could expose or exacerbate other vulnerabilities, such as funding risks, through the firms’ con- nections to the broader financial system. While the Board’s framework provides a systematic way to assess financial stability, some potential risks do not fit neatly into that framework. Some potential risks are difficult to quantify, especially if they materialize over such a long horizon that methods beyond near-term analysis and monitoring are appropriate. Accordingly, we rely on ongoing research by academics, our staff, and other ex- perts to improve our understanding and measurement of such longer-run or difficult-to-quantify risks. RESPONSES TO WRITTEN QUESTIONS OF SENATOR VAN HOLLEN FROM JEROME H. POWELL Q.1. One of the fundamental economic challenges of our times is to make sure that America families actually benefit from economic growth. There is a growing gap between skyrocketing corporate profits and CEO salaries on one side, and stagnant pay for typical workers on the other side. At the same time, President Trump is implementing policies that make the situation even worse, such as huge tax cuts for millionaires and big corporations, while taking credit for economic trends that predate his Administration. During the hearing, I asked you about data showing that for the typical American worker, weekly earnings are growing slower under President Trump than they were during President Obama’s 4See Board of Governors of the Federal Reserve System, ‘‘Financial Stability Report’’ (May 2019), https://www.federalreserve.gov/publications/files/financial-stability-report-201905.pdf. 79 second term, after adjusting for inflation. According to the Bureau of Labor Statistics, the median usual weekly earnings for full-time wage and salary workers was $333 in the 4th quarter of 2012, just before President Obama’s second term began. At the end of Presi- dent Obama’s second-term, in the 4th quarter of 2016, this figure was $349. Two years into President Trump’s term, in the 4th quar- ter of 2018, it is $355. All of these figures are 1982–1984 constant dollars. Is it correct that median usual weekly earnings for workers were increasing at an average rate of 1.18 percent per year during Presi- dent Obama’s second term, compared to 0.86 percent since Presi- dent Trump took office? A.1. It is correct that, according to both of the measures you report, inflation-adjusted labor compensation, in the aggregate, increased a little more rapidly from 2012:Q4 to 2016:Q4 than from 2016:Q4 to 2018:Q4. I would emphasize that the result you describe—faster real wage gains during the 2012–2016 period—depends importantly on the fact that oil prices fell between 2014 and 2016 and partially re- bounded after that. That 2014–2016 drop in oil prices fed through to prices of gasoline and other energy products, and so boosted households’ purchasing power at that time. Because energy prices can be so variable, it is useful to look at real wage gains over some- what longer periods, to help avoid having transitory energy price movements dominate the calculations. Q.2. During the hearing, you identified the Employment Cost Index (ECI) as your single favorite source for compensation data that in- cludes both wages and benefits. The Employment Cost Index for total compensation of all civilian workers was 117.8 in the 4th quarter of 2012, 128.0 in the 4th quarter of 2016, and 135.2 in the 4th quarter of 2018, when indexed to a base of 100 for December of 2005. At the same time, inflation measured by the Consumer Price Index for All Urban Consumers (CPI–U), was 231.369 in the 4th quarter of 2012, 242.164 in the 4th quarter of 2016, and 252.759 in the 4th quarter of 2018, when indexed to a base of 100 for 1982– 1984 dollars. Is it correct that ECI was increasing at an average annual rate of 2.10 percent during President Obama’s second term, with CPI– U increasing at an average annual rate of 1.15 percent during this period, meaning that 0.94 percent of the average annual increase in ECI could be attributed to real compensation growth? A.2. See response to Question 1. Q.3. Is it also correct that ECI has increased at an average annual rate of 2.77 percent since President Trump took office, with CPI– U increasing at an average annual rate of 2.16 percent during this period, meaning that 0.60 percent of the increase in ECI can be at- tributed to real compensation growth? A.3. See response to Question 1. 80 RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM JEROME H. POWELL Q.1. Inequality—A few weeks ago, you told a group of teachers you were concerned that income growth for middle- and working-class Americans ‘‘has really decreased,’’ while ‘‘growth at the top has been very strong. We want prosperity to be widely shared. We need policies to make that happen.’’ If Congress were able to pass policies that would increase the paychecks and bank accounts of working families—raise the min- imum wage, invest in infrastructure, subsidize housing and child care for low-wage workers, support for unions, and make health care and college more affordable—what would the impact on the economy be? Would you see higher economic growth? Greater work- force participation? Changes to unemployment? Inflation increases? Are there Nations that have better fiscal policies that lead to higher wages you would recommend we consider? Which countries and which policies lead to higher wages do you think? A.1. Specific fiscal policy or labor market policy proposals that are most appropriate for the United States are best decided by Con- gress. Generally speaking, however, policies aimed at increasing workforce participation and raising productivity have the best chance at boosting economic growth and raising living standards for Americans across the economic spectrum. We at the Federal Reserve can play a role by conducting mone- tary policy so as to fulfill our dual mandate of maximum employ- ment and stable prices. In this way, we can ensure that the condi- tions are in place to keep labor demand high and stable for as many workers as possible, which in turn allows workers to find jobs that best match their abilities and that provide them with the greatest opportunity to increase their skills, productivity, and earn- ings more easily. Q.2. Economic Mobility—Earlier this month in your speech to teachers, you pointed out that the United States used to be a global leader in mobility—the ability of people born into poverty to move up to the middle class or even the wealthiest echelons of society. You said that is no longer true. You said ‘‘The U.S. lags now in mo- bility. And that’s not our self-image as a country, nor is it where we want to be.’’ Are there Nations that have better fiscal policies that lead to more economic mobility you would recommend we consider? Which countries and which policies lead to greater economic mobility? A.2. Research by a number of economists suggests that intergen- erational economic mobility in the United States lags that of many other advanced economies. The reasons behind this are complex and not well understood. The Federal Reserve can do its part by working to achieve its dual mandate of maximum employment and price stability, as full employment improves the resources available to lower income households. Q.3. During the hearing, you mentioned a carpentry program for women that paid more in benefits than they would receive from the job for which they were training. Please provide details on this pro- gram: where it was located, for which jobs and which types of pro- 81 grams through which the recipients received benefits that provided and income of more than ‘‘$9 or $10 an hour.’’ A.3. Last year, I visited West Virginia Women Work, a nonprofit in Morgantown, West Virginia, founded in 2000 to help women ex- plore, train, and secure employment in nontraditional occupations, especially the skilled trades. The organization developed the Step Up for Women Construction Pre-Apprenticeship, a program de- signed to prepare women for entry-level construction jobs and ap- prenticeships. Additional information on this program is available on the West Virginia Women Work’s website at: http:// wvwomenwork.org/stepup. Q.4. Bank Profits—Banks and other financial firms made more than $500 billion in profits in the first three quarters of 2018. Banks made a record $237 billion in the fourth quarter of 2018. These are record profits. It seems that finance (banks, insurance, and real estate) earned more than 26 percent of all domestic corporate profits during those first three quarters of last year. Only about 6 percent of the private sector workforce is employed in finance but their share of corporate profits is about $1 in every $4 dollars. Are those figures correct? How much profits did the finance sec- tor earn in 2018? What did finance earn compared to other private sectors such as manufacturing and real estate? What percent of corporate profits did finance earn? What share of people are em- ployed in finance compared to other sectors? What is the impact on the economy when financial firms earn such an outsized percentage of corporate profits? The Federal Reserve tracks a number of indicators of our Na- tion’s economic prosperity. If you were to prioritize the top five in- dicators of economic prosperity, would bank profitability be in the top five? A.4. Data from the Bureau of Economic Analysis (BEA) indicates that, in the first three quarters of 2018, the corporate financial sec- tor (including finance, insurance, bank, and other holding compa- nies, but excluding Federal Reserve Banks) reported profits of $387 billion at an annual rate of 1.9 percent of U.S. gross domestic prod- uct (GDP), on average.1 Data from the Federal Deposit Insurance Corporation (FDIC) indicates that FDIC-insured commercial banks and savings institutions earned profits of $237 billion in all of 2018. During the first three quarters of 2018, the corporate financial sector accounted on average for 24.8 percent of profits generated by the domestic corporate sector, according to data from the BEA. During the postrecession period, there has been no discernible in- creasing or decreasing trend in the fraction of corporate domestic profits generated by the financial sector or in other domestic sec- tors. For example, the manufacturing sector has been responsible, on average, for 22 percent of the domestic corporate sector’s profits. The manufacturing sector’s share was 14.9 percent in the first quarter after the last recession (2009 Q3). Its share then reached 1On March 28, 2019, the BEA reported the profits for the fourth quarter of $372 billion at an annual rate of 1.8 percent of GDP. 82 a peak value of 28.l percent in the last quarter of 2013, and in the third quarter of 2018, its share was 18.4 percent. Data from the Bureau of Labor Statistics (BLS) indicate that the financial corporate sector’s share of total private employment has declined slightly since the financial crisis, from 5.4 percent in 2009 to 4.9 percent in 2018. Over the same period, the share of manufac- turing sector employment also has declined a bit, from 10.8 percent to 10 percent. By contrast, the professional, scientific, and technical services sector’s share of total private employment has increased from 15.3 percent to 16.6 percent. Total profits relative to the number of total employees in the cor- porate financial sector was $62,250 per employee in the third quar- ter of 2018. This relatively high profitability per worker is typical of sectors that rely on intangible assets to create value. Intangible assets include, but are not limited to, reputational and institutional capital, brand value, and patents. As an example, in the third quarter of 2018, the profit-to-employees ratio for information tech- nology and chemicals (dominated by pharmaceuticals)—two intan- gible-intensive sectors—were $57,619 per employee and $56,915 per employee, respectively. It is difficult to assess the range of economic consequences de- rived from the degree of profitability of the financial sector, par- ticularly because the size and profitability of the corporate sector are themselves the result of other economic forces. For example, the corporate financial sector has increased in importance in the U.S. economy during the postwar period. Academic research sug- gests that this rise is itself a consequence of the increase in the vol- ume of intermediation to support economic activity, especially busi- ness credit, equity, and household credit.2 In general, profits in the banking sector are important to the ex- tent that they contribute to building and maintaining the capital adequacy of the financial system. We view the resilience of bank capital as a fundamental element of financial stability and the health of the credit markets that support the U.S. economy. More generally, in the Federal Open Market Committee’s (FOMC) con- duct of monetary policy, to best achieve its maximum employment objective and its symmetric 2-percent inflation objective, the Com- mittee takes into account a wide range of information, including measures of labor market conditions, indicators of inflation pres- sures and inflation expectations, and financial and international developments. Bank profitability is only one of numerous factors that influence the FOMC’s assessment of overall economic condi- tions. Q.5. Buybacks—We need investments that help families prosper. Instead, the majority of the Trump and GOP tax bill has gone to share buybacks—$171 billion worth have been announced so far in 2018—more than double 2017’s total. This keeps stock markets high. Financial Times’ columnist, Rana Foroohar, refers to the buybacks as a ‘‘financial shell game of issuing their own [corporate] debt at very cheap rates and handing the money back to their in- vestors as buybacks and dividends, while also buying up the high- 2See Thomas Philippon, ‘‘Has the U.S. Finance Industry Become Less Efficient?’’ American Economic Review, 105(4), 2015. 83 er-yielding bonds of riskier companies at a favorable spread and holding those assets offshore.’’ What happens when the buybacks stop? A.5. While it is too early to conclude the overall effects of the 2017 tax legislation on firm investment and share repurchase decisions, it is likely that companies allocated at least some portion of earn- ings repatriated from abroad to share buybacks following changes in the tax treatment of foreign earnings. In dollar volume, share buybacks in 2018 were up substantially from 2017 and are at their highest annual level on record since 1983. However, when meas- ured relative to operating earnings, share buybacks appear some- what closer to their historical range. For the first three quarters of 2018, buybacks for nonfinancial companies averaged about 22 percent of companies’ operating income, and we estimate, based on partial data available to date, that buybacks were 26 percent of op- erating income in the fourth quarter. By comparison, share buybacks also averaged 22 percent of operating income from 2014 to 2016, but buybacks fell to 16 percent of operating income in 2017. Companies generally repurchase shares when they deem these repurchases to be the highest value use of those particular funds for the company. U.S. companies have been quite profitable in re- cent decades and those profits have allowed companies to accumu- late cash, pay dividends, and repurchase shares, in addition to in- vesting and hiring. A reduction in share repurchases would not, however, necessarily translate into an increase in investment. For example, in lieu of share buybacks, a given company may choose to distribute funds to shareholders by other means (e.g., regular or special dividends) or retain a larger share of the funds by accumulating cash or other liquid assets. Q.6. Discrimination in Lending—These questions follow up on our discussion during the hearing about how Fed examiners evaluate financial institution for fair lending compliance. Please expand on the type of indicators or red flags examiners look for in determining compliance with the Equal Credit Oppor- tunity Act or the Fair Lending Act? It’s not just credit scores and loan-to-value ratios. What types of lending products? Would exam- iners consider incentive pay tied to higher-priced loans? Would the existence of bonuses for bank staff that provided a loan with higher fees and interest rates be a red flag? Please be specific and com- prehensive in your response. A.6. The Federal Reserve’s fair lending supervisory program re- flects our commitment to promoting financial inclusion and ensur- ing that the financial institutions under our supervision fully com- ply with applicable Federal consumer protection laws and regula- tions. For all State member banks, we enforce the Fair Housing Act which provides us authority to review all Federal Reserve regu- lated institutions for potential discrimination with respect to mort- gages, including potential redlining, pricing, and underwriting dis- crimination. For State member banks of $10 billion dollars or less in assets, we also enforce the Equal Credit Opportunity Act (ECOA), which provides us authority to review these State member 84 banks for potential discrimination concerning any credit product. Together, these laws prohibit discrimination on the basis of race, color, national origin, sex, religion, marital status, familial status, age, handicap/disability, receipt of public assistance, and the good faith exercise of rights under the Consumer Credit Protection Act (collectively, the ‘‘prohibited basis’’). We evaluate fair lending risk at every consumer compliance exam based on the risk factors set forth in the Federal Financial Institutions Examination Council’s interagency fair lending exam- ination procedures.3 These procedures include risk factors related to potential discrimination in pricing, underwriting, redlining, and steering. Our examiners commonly review mortgage products and consumer products reportable under the Home Mortgage Disclosure Act for fair lending risk, although a State member bank’s lending record will determine the loan products that are reviewed in a par- ticular exam. The presence of any financial incentives, including incentive pay tied to higher-price loans or bonuses for staff originating such loans, is a risk factor that the Federal Reserve considers, consistent with the interagency fair lending procedures. Since April 2011, Regulation Z’s mortgage loan originator compensation rule has pro- hibited banks from providing financial incentives based on the terms or conditions of a loan, including the price. Although this rule has decreased the risk of financial incentives influencing mort- gage pricing, it has not eliminated such risk. In our outreach ef- forts to State member banks and the public, including in our publi- cation, Consumer Compliance Supervision Bulletin,4 we have been clear in explaining how fair lending risk may be increased by finan- cial incentives. During our consumer compliance exams, we con- tinue to evaluate any financial incentives in place at a State mem- ber bank for compliance with both Regulation Z and the fair lend- ing laws by reviewing the bank’s compensation structure along with any other existing fair lending risk factors. Q.7. Climate Change—Chapter 3 of the Monetary Report includes a section on Uncertainty and Risks. It includes uncertainty about the funds rate and the impact of trade and tariffs but nothing about climate change. A recent paper by V.V. Chari of the Federal Reserve of Minneapolis5 urged social scientists to take the findings of climate scientists about the effects of global warming on the at- mosphere, climate, land, and oceans and understand and commu- nicate the consequences of these physical changes on the economic, social, and political well-being of humanity. Central Banks and economists have a role to play to guide policy recommendations to respond to climate change. Last year, William Nordhaus and Paul Romer received the Nobel Memorial Prize in Economic Sciences for pioneering the analysis of the economic ef- fects of climate change. 3See https://www.ffiec.gov/pdf/fairlend.pdf. 4See www.federalreserve.gov/publications/2018-july-consumer-compliance-supervision-bul- letin.htm. 5Chari, V.V., ‘‘The Role of Uncertainty and Risk in Climate Change Economics’’. The Federal Reserve Bank of Minneapolis: Research Division. December 2018. Available at: https:// www.minneapolisfed.org/research/sr/sr576.pdf. 85 Do you agree with Janet Yellen who, along with 3,300 econo- mists, signed a statement supporting a carbon tax to prevent dev- astating droughts, fires, and hurricanes?6 A.7. I think that it is appropriate for the details of fiscal policy de- cisions to be left to Congress and the Administration. Q.8. What role will the Federal Reserve play in communicating the effects of alternative policies aimed at addressing climate change? Will the Fed include economic models to respond? A.8. Addressing climate change is a responsibility that Congress has entrusted to other agencies. That said, the Federal Reserve uses its authorities and tools to prepare financial institutions for severe weather events. Over the short term, these events have the potential to inflict serious damage on the lives of individuals and families, devastate local economies (including financial institu- tions), and even temporarily affect national economic output and employment. As such, these events may affect economic conditions, which we take into account in our assessment of the outlook for the economy. RESPONSES TO WRITTEN QUESTIONS OF SENATOR SMITH FROM JEROME H. POWELL Q.1. In November, the Minneapolis Fed reported that the number of farms filing for Chapter 12 bankruptcy has doubled in Ninth District States over the past 4 years. We have watched this prob- lem evolve for years. The overproduction of certain commodities like grains and dairy has led to low prices which, combined with recent trade disputes, has made it nearly impossible for family farms to turn a profit. In the years following the Great Recession, low interest rates made it easier for farmers to take on debt, up- grade equipment and facilities, and buy new land. Steadily rising interest rates in the last 3 years have made it more difficult for farmers with already small margins to pay off their debts. The Beige Book put out by the Minneapolis Fed in the fourth quarter of 2018 says that approximately three in five lenders reported see- ing a decrease in farm incomes and in capital spending. It is clear that downturns in the farm economy can have big impacts on con- sumer spending and regional economic prosperity. How do you expect the rise in farm bankruptcies to impact the state of our economy, both regionally and nationally? A.1. The U.S. farm economy has remained in a prolonged downturn for the past several years, alongside persistently low agricultural commodity prices. Nationally, farm income is expected to rise in 2019 due, in part, to Government support programs announced in recent months. Some agricultural prices have also increased signifi- cantly due to widespread weather disruptions that affected plant- ing in May and June. Looking ahead, however, agricultural com- modity prices and farm incomes are generally expected to remain low beyond 2019. 6Jackson, Hugh, ‘‘Did AOC Nudge Economists (Including 12 From Nevada) To Back a Carbon Tax?’’ Nevada Current. February 20, 2019. Available at: https://www.nevadacurrent.com/2019/ 02/20/did-aoc-nudge-economists-including-12-from-nevada-to-back-a-carbon-tax. 86 Amid reduced incomes, financial stress in the agricultural sector has continued to build at a gradual pace. At commercial banks, de- linquencies on farm loans have increased slightly in recent years, but remain less than in 2010, and well below those of the 1980s, a period often referred to as the U.S. farm crisis, which included a number of bank failures and other significant challenges in rural communities. Similar to the uptick in delinquencies on farm loans, farm bank- ruptcies also have edged higher since 2014. Nationally, Chapter 12 bankruptcy filings have increased from 360 in 2014 to 498 in 2018. The increase in bankruptcies appears to be most pronounced in States with a high concentration of dairies, as well as States fo- cused on corn and soybean production. In Minnesota, for example, there were an average of thirteen Chapter 12 filings per year from 2014 to 2017, increasing to twenty-six in 2018. Despite the ongoing challenges of low farm incomes and an up- tick in farm bankruptcies, measures of solvency have generally re- mained strong, and the increase in bankruptcies appears to be hav- ing a limited effect on broader economic conditions. The debt-to- asset ratio for the U.S. farm sector is expected to rise only slightly in 2019 to 13.9 percent, as farm real estate values remain rel- atively stable. Although the severe planting delays this spring may affect financial conditions for some producers, Government pay- ments will provide some support and, thus far, there appears to be limited impacts on broader regional economies. Moreover, unem- ployment has remained historically low, even in rural areas focused on agriculture, where job growth has been weaker in recent years. As these conditions evolve, the Board of Governors of the Federal Reserve System (Board) will continue to monitor developments in agriculture and the potential for implications in other segments of the national or regional economy. Q.2. Can you speak to how future changes in the Federal funds rate may impact the agricultural economy? A.2. While it cannot be said with certainty what actions will be taken in response to the future state of the economy, the Federal Reserve System strives to incorporate perspectives from all regions of the country and from a broad range of industries, including agri- culture, into its regular monetary policy deliberations and its as- sessments of the U.S. economy. We receive input on agricultural conditions from business contacts across the country through our boards of directors at the Federal Reserve Banks, various advisory councils, and surveys, in addition to reports from staff who track developments in U.S. agriculture. Although interest rates on farm loans are typically not indexed or explicitly tied to the Federal funds rate, the rates on these loans have increased in recent years. The increases have been relatively modest, and some financial stress has been mitigated by the rel- ative strength of farm real estate values. Since the end of 2015, the average interest rate on farm operating loans at commercial banks has increased about 1.9 percent, but still remains less than pre- vailing interest rates on these farm loans as recently as 2012. Interest expenses on farm debt also account for a relatively small share of overall expenses in the U.S. farm sector. Moreover, despite 87 the modest increase in interest rates, farm real estate values have remained relatively strong and have supported farm borrower bal- ance sheets. Q.3. Wage growth has been stagnant for many Americans over the last decade or longer. One of the causes of this concerning slow- down has been a decline in worker productivity growth—only about 1 percent annually over the last decade. This figure is well below historic norms and is not, in my estimation, sustainable if we want strong, long-term wage growth. Why is there slower growth in productivity? A.3. The reasons for the slowing in productivity growth over the last decade or so are not clear. Some explanations assign a large role to the Great Recession and its aftermath, which dramatically reduced the level of investment in equipment, software, and re- search and development, and which also likely reduced credit avail- able for business startups. Other research suggests, instead, that the slowing occurred prior to the Great Recession and may be due to a relative scarcity of new, general-purpose, high-impact tech- nologies. If the slowdown has been due largely to factors associated with the Great Recession, then as the expansion continues, produc- tivity growth should pick up. Last year, productivity did rise at a relatively robust rate of nearly 2 percent, but we would need to see this higher rate of growth persist before concluding that the period of low growth was behind us. Q.4. To what extent, if any, is this slowdown affected—either now or potentially in the future—by high levels of stock buybacks crowding out investment in workforce, technology and capital im- provements? A.4. Companies generally repurchase shares when they deem these repurchases to be the highest value use of those particular funds for the company. U.S. companies have been quite profitable in re- cent decades, and those profits have allowed companies to accumu- late cash, pay dividends, and repurchase shares, in addition to in- vesting and hiring. Businesses without profitable investment op- portunities are more likely to return income to shareholders than invest. Shareholders are then free to invest the funds in businesses that have profitable investment opportunities. Q.5. Around the world, countries have begun shifting to nearly in- stantaneous, 24/7 payment systems. But while consumers can send money in pseudo–real time using apps like Venmo, those trans- actions are only instantaneous for the consumer—they’re usually not fully settled for the bank or retailer until days later. Two years ago, the Fed’s Faster Payments Task Force embraced a goal of hav- ing a true, ubiquitous, 24/7 real-time payment system in the United States by 2020—which is necessary to keep pace with for- eign countries that are developing or already implementing similar systems. Last year, the Fed sought comments on how to implement a faster payments system, and asked what role, if any, the Fed should play in developing it. Do you think the United States is on track to meet the Task Force’s goal of having a ubiquitous real-time payment system in place by 2020? 88 A.5. The Faster Payments Task Force (FPTF), an industry work group established by the Federal Reserve in 2015, called on all stakeholders in its 2017 final report to facilitate a vision of ‘‘a pay- ment system in the United States that is faster, ubiquitous, broad- ly inclusive, safe, highly secure, and efficient by 2020.’’ The Federal Reserve continues to applaud the FPTF’s aspirational goal and the industry’s progress to date. Also as part of that final report, the FPTF requested that ‘‘the Federal Reserve develop a 24x7x365 set- tlement service’’ and to assess other operational roles ‘‘to support ubiquity, competition, and equitable access to faster payments.’’ The Federal Reserve agreed to consider both requests of the FPTF, and the Board sought, in an October 2018 Federal Register Notice, public input on potential actions the Federal Reserve might take in regard to supporting faster payments in the United States. While those requests focused on infrastructure needs in the United States to support faster payments, the FPTF also identified a need for ongoing industry collaboration to build the foundation for a highly functioning faster payments ecosystem and asked the Federal Reserve to facilitate an industry group to establish a gov- ernance framework. Late last year, the industry announced the for- mation of the U.S. Faster Payments Council to develop collabo- rative approaches to accelerate U.S. adoption of faster payments. All of these efforts by the Federal Reserve and industry are in- tended to create a strong foundation for collective efforts to pro- mote the safety and efficiency of faster payments in the United States and to support the modernization of the financial services sector’s provision of payment services. Q.6. With the 2020 deadline quickly approaching, when do you ex- pect the Fed to take next steps on this issue? A.6. The Board has received over 400 comment letters from a broad range of market participants and interest groups, including con- sumer groups, in response to the October 2018 Federal Register No- tice. The Board is carefully considering all of the comments re- ceived before determining whether any action is appropriate or the timing of such potential action. Any resulting action the Board de- cides to take would be pursued in alignment with existing, long- standing Federal Reserve principles and criteria for the provision of payment services. Q.7. Are you monitoring actions of foreign countries to develop real-time payment systems, and if so, how are those developments informing your decision making? A.7. Globally, the Federal Reserve is not unique in considering set- tlement infrastructure to support faster payments—several juris- dictions around the world have undertaken similar processes and implemented settlement infrastructures to support real-time pay- ments in their jurisdictions. The Federal Reserve has been actively monitoring these efforts and considering the models for faster pay- ment settlement in other countries, including real-time gross settle- ment (RTGS) and deferred net settlement (DNS), as part of its analysis. Q.8. You remarked recently that income inequality is our country’s biggest economic challenge in the next decade—and said that: ‘‘We 89 want prosperity to be widely shared,’’ and, ‘‘We need policies to make that happen.’’ I agree with this assessment. Many have pointed to the recent strength in both the U.S. stock market and overall GDP growth as evidence that Americans are doing better. But I’m not sure these are the right indicators to be looking at to assess how the average American family is faring these days. The recent stock market highs and tax cut legislation do not benefit the average American household to nearly the same extent as it bene- fits the very wealthiest households. In 2016, the top 10 percent of American households owned 84 percent of all stocks, and the top 20 percent received about 70 percent the benefits of the 2017 tax bill. Banks have done well in this economy too—with last years’ profits up 44 percent from 2017, including $29 billion in profits at- tributable to the Trump tax cuts alone. But instead of steering these profits and tax windfalls toward new investment in jobs and technology, banks and corporations have instead rewarded wealthy investors with record stock buybacks—over $1 trillion worth in 2018. Would you say that the 2017 tax bill, on balance, has increased or decreased income and wealth inequality in the U.S., and would you consider it an example of a policy that creates the ‘‘widely shared prosperity’’ that you called for recently? A.8. For a number of reasons, estimates of the distributional effects of the Tax Cuts and Jobs Act of 2017 are subject to considerable uncertainty. For example, the changes in the personal income tax laws were very complicated and have affected different families in various ways, in part reflecting the new limits on deductibility of State and local income taxes and the end of personal exemptions. Similarly, the distributional effects of corporate income taxes are very complex. A corporate income tax cut may benefit working peo- ple if the tax cut induces more investment that results in higher productivity and real wages. But estimating the magnitude of these effects from tax cuts is highly uncertain. More generally, policies to reduce economic inequality, including tax policies, are appro- priate for Congress to decide. Q.9. How committed is the Fed to studying the macroeconomic ef- fects of our record-high levels of inequality, and how are the find- ings being incorporating into the Fed’s policymaking and its assess- ment of the economic outlook? A.9. The Federal Reserve tries to understand the root causes and economy-wide implications of the uneven distribution of income and wealth. For example, we support two household surveys, the annual Survey of Household Economics and Decision Making (SHED) and the triennial Survey of Consumer Finances (SCF), to study household finances. In addition, we recently released the Dis- tributional Financial Accounts, which we also hope will add to our understanding of changes in the income and wealth distributions. And, we have included analyses of various forms of economic dis- parities in several recent issues of the Federal Reserve’s Monetary Policy Report. With regard to monetary policy, the Federal Reserve is limited in the extent to which its tools can specifically address inequality. However, our dual mandate includes maximum employ- ment, which has a direct impact on the most vulnerable families 90 who depend on their labor income. More generally, and regardless of its effects on growth, inequality is an important and complicated issue that is appropriately addressed by Congress. Q.10. Recent Bureau of Labor Statistics data has shown unemploy- ment rates to be approaching record lows—hovering around 4 per- cent. But the headline picture obscures key compositional effects. When these numbers are broken down by race, we see significant disparities, with notably higher unemployment rates for African Americans and other traditionally marginalized communities. Com- pared to white unemployment, which remains below 4 percent, black and hispanic workers face 6.8 percent and 4.9 percent unem- ployment rates, respectively. These disparities reflect structural barriers but also demonstrate that there is some slack in the labor market with the potential to reintegrate traditionally marginalized individuals into the labor force. The Fed has suggested previously that as a whole, the economy is at or near full employment. Are communities of color at full employment as well? A.10. The unemployment rate has fallen sharply in recent years for all major racial and ethnic groups. In particular, the unemploy- ment rate of African Americans recently reached its lowest level on record (data began being collected in the early 1970s). Despite these encouraging developments, as you note, the unemployment rate of black workers remains well above that of whites. This trou- bling differential in unemployment rates is not new; it has per- sisted for several decades, regardless of the state of the business cycle. Indeed, one relevant study1 prepared by Federal Reserve staff made two important findings. First, the black–white unem- ployment rate gap is highly cyclical, widening in recessions and narrowing in expansions. That said, beyond the cyclical variation, there has been very little secular improvement in this gap in the past four decades. Second, the black–white unemployment rate gap—as well as its cyclicality—is primarily driven by large and persistent differences in the rate of job loss (rather than in the rate of job finding) between black and white workers. In particular, in economic downturns, black workers lose their jobs at a much high- er rate than white workers, perpetuating large gaps in unemploy- ment rates. One important implication is that the Federal Reserve can be most helpful by focusing on our dual mandate of fostering full em- ployment and price stability. Setting monetary policy that is not consistent with the dual mandate could lead to high price inflation or financial imbalances, and thereby set the stage for an economic downturn, which would appear to be especially harmful to African American workers. Meanwhile, progress to further narrow the dif- ferentials in unemployment rates by race and ethnicity is more likely to be found in structural policies aimed at addressing longer- run disparities. This is an important issue that is appropriately ad- dressed by Congress. 1Cajner, Tomaz, Tyler Radler, David Ratner, and Ivan Vidangos (2017), ‘‘Racial Gaps in Labor Market Outcomes in the Last Four Decades and Over the Business Cycle’’, Finance and Economics Discussion Series 2017-071. Washington: Board of Governors of the Federal Reserve System, https://www.federalreserve.gov/econres/feds/files/2017071pap.pdf. 91 Q.11. How does the Federal Reserve and the FOMC consider dis- parities in the headline unemployment data when it comes to ful- filling its maximum employment mandate? A.11. In setting monetary policy to be consistent with the dual mandate of maximum employment and price stability for the econ- omy as a whole, the Federal Open Market Committee (FOMC) con- siders a range of experiences and economic outcomes across the country. For example, at every FOMC meeting, Reserve Bank presidents describe economic conditions in their Districts, and the Committee reviews a wide range of information on the strength of the labor market, including data on the labor market conditions ex- perienced by different demographic groups. Similarly, in advance of every FOMC meeting, Federal Reserve staff provide to the Com- mittee their review of labor market developments, including anal- yses of labor market conditions across groups defined by age, gen- der, race, and ethnicity. Finally, Federal Reserve staff regularly conduct research aimed at better understanding differences in eco- nomic outcomes across demographic groups; the study cited pre- viously is one example. Q.12. One of most important powers given to FSOC in Dodd–Frank was the ability to subject nonbank financial institutions to the same enhanced regulatory scrutiny as the largest banks. This power is crucial for keeping our financial system safe. Large nonbank firms like AIG played a major role in crashing our econ- omy in 2008 through their risky bets and excessive leverage, and they were able to do so largely beyond the reach of the existing reg- ulatory regime. Despite the importance of this regulatory power, as of October 2018, all four nonbank SIFIs have been dedesignated— leaving no nonbank institution, no matter how large or how risky, under higher scrutiny from regulators to protect our Nation’s finan- cial stability. Most recently, both MetLife and Prudential have suc- cessfully fought to shed their enhanced SIFI oversight—but not by significantly deleveraging and radically changing their business models like GE Capital and AIG did. The Treasury Department under Secretary Mnuchin proposed in a 2017 report that FSOC’s systemic risk oversight of nonbanks should shift to an activities- based approach rather than an entity-based approach, which would make it more difficult and time-consuming to place SIFI status on a nonbank entity. Former Chair Yellen, however, argued in a Brookings interview last month that individual nonbank entities do pose systemic risks, and when they do so it is important to super- vise and regulate them. Do you today believe that no nonbank financial institution cur- rently warrants SIFI-level enhanced supervision, and do you agree with the 2017 Treasury report proposing to make it more difficult for FSOC to impose SIFI designations on nonbank entities? A.12. Maintaining stability of the U.S. financial system remains a top priority for the Federal Reserve. The Federal Reserve actively monitors potential risks to U.S. financial stability in a variety of ways, including reviewing the resilience of key financial inter- mediaries. As noted in the Federal Reserve’s Financial Stability Report, the largest U.S. banks remain strongly capitalized; the le- verage of broker-dealers is substantially below precrisis levels; in- 92 surance companies appear to be in relatively strong financial posi- tions; and hedge fund leverage appears to have declined.2 In terms of nonbank designations, the Financial Stability Over- sight Council’s (FSOC’s) October 2018 decision to rescind the des- ignation of Prudential Financial, Inc. (Prudential) was based upon its reevaluation of the risks posed by the firm. This reevaluation determined that the original designation likely overstated the neg- ative consequences of potential asset liquidation should Prudential experience material financial distress. For MetLife, Inc., in March 2016, the U.S. District Court overturned FSOC’s determination that MetLife poses a threat to U.S. financial stability. It should be noted that, in the summer of 2017, MetLife shrank substantially by spinning off a portion of its U.S. retail life insurance and annu- ity segment into Brighthouse Financial. The FSOC published proposed amendments to its guidance on nonbank financial company determinations for public comment on March 6, 2019. The proposed guidance, which was drafted following the 2017 Treasury report, promotes an activities-based approach for identifying and mitigating risks to financial stability. However, FSOC also maintains the important tool of designating individual entities as systemically important in cases where the activities- based approach cannot address the potential risks or threats. The proposed guidance represents a disciplined framework that can more effectively identify and address underlying sources of risk to financial stability. Still, individual nonbank entities can pose systemic risks, and therefore it is critical that FSOC maintains the option to designate these firms when appropriate. The activities-based approach de- scribed in the proposed guidance is intended to enhance the FSOC’s process for evaluating individual nonbank financial compa- nies for designation by increasing transparency, analytical rigor, and public engagement. It is viewed as a valuable complement to entity designations, rather than a substitute for the current entity- based approach of managing systemic risk. Q.13. In the same Brookings interview, former Chair Yellen stated that the Trump administration’s support for the SIFI designation standards from the MetLife court would, ‘‘all but eliminate the chances of future designations’’—do you agree with this assess- ment, and is it a concern for you? A.13. As I noted in my response above, we continue to believe that individual nonbank entities can pose systemic risks. The proposed activities-based is viewed as a valuable complement to entity des- ignations, rather than as a replacement for the current entity- based approach of managing systemic risk. Q.14. In your testimony, you said ‘‘there are some things in the Federal tax code where people lose their benefits with their first dollar of earnings,’’ and you noted this effect could cause individ- uals to avoid entering the labor market. Specifically, which tax credits were you referring to? 2See ‘‘Federal Reserve Board Financial Stability Report’’ (April 2019), https:// www.federalreserve.gov/publications/files/financial-stability-report-201905.pdf. 93 A.14. In general, safety-net programs are typically designed so that benefits fall as incomes rise. As a consequence, for low- and mod- erate-income households, any improvement to household finances from increased work is partially offset by the loss of benefits that occurs as household income rises. Researchers have found that pro- grams with a rapid phase-out of benefits and the interaction among various safety-net programs sometimes leads to relatively high ef- fective marginal tax rates. This, in turn, may discourage work, par- ticularly for potential second earners. Researchers have found that programs where the phase-out range is relatively long reduce po- tential disincentive effects. It is up to Congress to determine how best to ensure safety-net programs provide the lowest work disincentives as possible while still achieving the social goals of the programs. For our part, the Federal Reserve is focused on pursuing our congressionally man- dated goals of maximum employment and price stability, and mak- ing the best decisions we can in the interest of the public. RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA FROM JEROME H. POWELL Q.1. Arizonans continue to be concerned about the Administration’s trade policy. This unnecessary trade war hurts Arizona farmers and businesses, stifling job creation. On February 17th, the Com- merce Department submitted its national security report to the President under Section 232 of the Trade Expansion Act. While the details of this report aren’t public and the President is not necessarily bound by the report’s recommendations, it is pos- sible that this report recommends additional tariffs on automobiles and automobile parts, levied as high as 25 percent. What is your assessment on the effect these additional tariffs would have on investment, the labor market, and the economy overall—both in Arizona and nationally? Modeling all but certain retaliatory tariffs from impacted Na- tions, which have historically targeted American farmers and agri- culture. What is your assessment on the collective effect this decision to escalate the trade war would have on investment, the labor mar- ket, and the economy overall—both in Arizona and nationally? A.1. In response to both of your questions, it is important to note that the Federal Reserve Board is responsible for formulating mon- etary policy to achieve price stability and maximum sustainable employment. Matters of trade policy are the responsibility of Con- gress and the Administration. In pursuit of our mandated objectives, we monitor the effects of various developments, including trade policy, on the economy. Tar- iff increases, by both the United States and other countries, al- ready have affected individual businesses and industries. As indi- cated in the Federal Open Market Committee minutes and the Beige Book, our business contacts report that trade policy develop- ments are increasing input costs and creating policy uncertainty, causing some firms to delay investments. Similarly, potential tariffs on the auto industry could raise input costs and could cause some firms to delay plans for investment or 94 hiring. Such tariffs also may disrupt the extensive supply chains that link the auto industries in the United States, Canada, and Mexico. Consumers could face higher prices for new automobiles. However, the particular effects would depend on the precise imple- mentation of tariffs and may be mitigated by certain types of agreements with Canada and Mexico. Retaliatory tariffs by other countries have impacted certain U.S. industries, most notably agriculture, with farmers facing lower de- mand and prices for their crops, such as soybeans. Additional retal- iatory tariffs could put further strain on farmers and other affected businesses. The overall process of trade negotiations is ongoing, and it is un- clear how it will play out. If the end result is a world with higher tariffs in many countries, then experience suggests there will be negative effects for the U.S. economy as we miss out on some of the benefits of trade. However, if the end result is a world with lower trade barriers and a more level playing field, then the U.S. economy should benefit. 95 ADDITIONALMATERIALSUPPLIEDFORTHERECORD For use at 11 :00 a.m., EST ftbnwy 22, 2019 MoNETARY Poucv REPORT February 22, 2019 Board of Governors of the Federal Reserve System 96 T LETIER OF RANSMITIAL BOARD Of GOVER~ORS Of TilE FEDERAL RE SI:RVE Sl'STEM Washington, O.C, February 22,2019 THE PREStO£~• Of TilE SeN,m THE SPEAKER OF THE HollSE OF REPRESENTATIVES The Board of Governors is pleased to submit its Monet(lr)' Policy Repqtt pursuant to section 28 of the Federal Resen·e Act. Sincerely, Jerome H. Powell, Chairman 97 STATEMENT ON n.oNGER·RUN GOALS AND MONETARY POLICY STRATEGY Adopted ~ffectiv~ January 24, 2012; as amended effeclile /anuary 29,2019 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 !Oe xplain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decisionmaking by households and businesses, r.'duces economic and financialuncertaint)', incre~ses the elfectil'eness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society. Inflation. employment, and long-term interest rate$ fluctuate o1·er time in response to economic and financial disturbances Moreover, monetary policya ctions tend to influence economic activity and prices with a Jag. Therefore. the Committee's policy decisions reflect its longer-run goals, its medium termo utlook, 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 01·er 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 Committeereaftirms 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 o1·er the longer run 11~th the Federal Reserve's Statutory mandate. The Committee would be concerned if inflation were nmning persistently above or below this objective. Communicating this symmetric inflation goal clearly to the public helps keep longer-term inflatione xpectations 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 significant economic disturbances Tile maximum level of employment is largely determined by nonmonetary factors that aft'ectthc structure and dynamics of the labor market. These factors may change OI'Cr time and may not be dir<>ctly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment: rather. the Committee's policy decisions must be informed by assessments of the maximum lerel 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 rmnt projections, the median of FOMC participants' estimates of the longer-run normal rate of unemployment was 4.4 percent. In setting monetary policy. the Committee ~ks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committees assessments of its maximum level. TI!ese objectives are generallyc omplementary. However, under circumstances in which the Committee judges that the objeetiloes are not complementary. it follo11~ a balanced approach in promoting them. taking into account the magnitude of the deviations and the potentially dift'erent time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate. The Committee intends to reaftirm these principles and to make adjustments as appropriate at its annual organizational meeting each January. 98 CONTENTS Summary ...•.••.•.....•...........•..•........•.......•..•• 1 Economic and Financial Developments ......................................... 1 Monetary Policy . .. ................... 2 Special Topics.. .. . . .. . . .. ............. 3 Part 1: Recent Economic and Financial Developments ................. 5 Domestic Developments. . . . . . . . . . . . . . . 5 Financial Developments...... . ........................................ 22 International Developments ................................................. 29 Part 2: Monetary Policy ............•..•......................• 33 Part 3: Summary of Economic Projections ......................... 47 The Outlook for Economic Activity.. . .. • . .. .. .. .. . • . .. . • .. . .. . . . . 48 The Outlook for Inflation ................................................... 50 Appropriate Monetary Policy ................................................ 51 Uncertainty and Risk~.. . ........................................... 51 Abbreviations .............................................. 65 List of Boxes EmpiO)'ment Disparities between Rural and Urban Areas .....•..........•.......... 10 Developments Related to Financial Slability ..................................... 26 Monetary Policy Rules and Systematic Monetary Policy . . . ........................ 36 The Role of liabilities in Determining the Size of the Federal Reserve's Balance Sheet ..... 41 Federal Reserve Transparency: Rationale and New Initiatives ........................ 45 Forecast Uncertainty. .. .. .. .. . . .. . .. ............ 62 Nou: This rtporl retlecls information thai was publicly available as of noon EST on ftbruary 21,2019. Unl& o:henvise <Llted, the tio>e !efie< in the figures eXIend throogfl, for d.lily d.lta, februa~· 20, 2019; lor monthly d.lta, J.Jnwl)' 2019; and, forquaner~· d.lta, 2018:Q4.1n bar charts. except as OO(t\l, the change ior a gi1-en periorl is me.! so red to its fin.1l qu.rter from the final quarte< of the preceding period. FOIIigutts16~l-4,Mtl~lhts.t.PSOO~_,rdtfltf)).o.·~8.ltllcl~~ptO(tuasofS&PI:Jo«~ltld'1«iUCaod'or~afrili~t~.·urd ~~~licensediortMbythebd.Cop)riiC02'019S..\PIJowlonn~tlC.•£61onoi'S&P~XId~ib..&ii~A!I~I'nCI'Wii ~io!\tq:roduclion..nd'Of~P'Jif1iRv.hole-Ofirtpatt~e-proh~ .... lthoucv.li::Dmpmnis6ionolS..'\PbP'ltsll'lllimllC.FOIIflOn!' itliolnu6ononMI\-olS..\P()w:),·totultMfictstl0itdiotsp!Nse'isit"""'"'if'3ji~S&I\liit;olr~tt~d~d&J'tlor')fiNr'IC~I Senitcsll(.~l}o.\efones'ti5.~f!1¥i<o:t;'Ccd~of[)ow~TrademMit~tLC.~S..~P0owJoneo;lndic:e$tlC.Ooo.·~Tt~ ~UC.IbN.ffili.l:tsfiOfchN!b¥dp.lrtyl~~~·rep~oc'ol<ltf~.~or~itd.~">!bt~~d~·~~ X<UI~r~lbt~&ss~fNil;ttS«1oriN~fi'Uq>OI\S~~~.tndtiiSthttS&Pl»A~lndiccsllC.():).,·toflesTr~Hokling5 llC.IhfY•~rnthNI.IW<IJ)al!)·lictn:l(':nltl.tll~~a"'fl~lityforMI)'tn~O'IIi!6ions,orine('fn.p:ioni;of¥Jy~orthe-d.iu~therM 99 SuMMARY Economic activity in the United Stales year to an eslimated 1.1 percelll in December. appears to have increased at a solid pace, on restrnined by recent dedines in consumer balance, over the S<'COnd half of 2018, and the energy prices Tile 12·month measure of labor market strength~ncd further. Inflation inflation Ih at excludes food and energy items has been near the Federnl Open Market (so-<:alled core inflation), which historically Commillee"s (FOMC) longer· run objective has been a bcuer indicator of where overall of 2 percent aside from the transitory eft"ccts infla1ion will be in the future than the headline of n.>tenl energy price movement& In this measure thai includes those items, is estimaled environment the FOMC judged that on 10 have been 1.9 percem in December- up balance, current and prospective economic \1, percentage point from a year ago. Survey· conditions called for a further gradual removal based measures of longer·run inflation of policy accommodation. In particular. the expectations haw genernlly been stable, FOMC rnised the target range for the federal though market·based measures of inflation funds rnte twice in the second half of 2018, compensalion have moved down some since pulling its level at 2Y. to 2'h percent following the first half of 2018. the December meeting.ln light of softer global economic and financial conditions late Economic gro11th. A1-ailable indicators suggest in the year and muted inflation pressures, the 1ha1 real gross domestic product (GDP) FOMC indicated at its January meeting that increased al a solid rnle. on balance, in 1he it will be patient as it determines what future second half of last year and rose a lillie under adjustments to the federnl funds rnte may 3 percent for the year as a whole- a no1iceable be appropriate to support the Commi11ee's pickup from the pace in recent years. congre$Sionally mandated objectives of Consumer spending expanded at a strong maximum employment and price stability. rntc for mosl of the second half. supported by robust job gains, past increases in household Economic and Financial wealth, and higher disposable income due in Developments partlo the Tax Cuts and Jobs Act, though spending appears to ha1>e weakened toward The labor market. The labor market has yeaHnd. Business investment grew as well. cominued to strengthen since the middle of though growth seems 10 have slowed somewhat last year. Payroll employment growth has from a sizable gain in I he first half. However, remained strong, averaging 224,000 per month housing market actil•ity declined last year since June 2018. The unemployment rate amid rising mortgage interest rntes and higher has been about unchanged over this period. material and labor cosls. Indicators of both avernging a lillie under 4 percent- a low le1-el consumer and business senliment remain by historical standards.-while the labor force at fa1'0rable levels, but some measui\.'S have participation rnte has moved up despite 1he sofiened since the fall, likelya reflection of ongoing downward influence from an aging financial market volatilily and increased population. Wage grol\1h has also picked concems about the global oUllook. up recently. Financial condilions. Domestic financial Inflation. Consumer price inflation, as conditions for businesses and households have measured by lhe 12·month change in the price become less supponive of economic growth index for perwnal consumption expenditure& since July. Financial market panicipants' moved down from a little abo1-e the FOMC"s appelite for risk deteriorated markedly in the objectil•e of 2 percent un the middle of las1 laner part of last year amid investor concems 100 2 SUMI\1\RY about do1171side risks tot he growth outlook International Derelopments. Foreign economic and rising trade tensions between the United growth stepped down significantlyl ast year States and China. As a result. Treasury );elds from the brisk pace in 2017. Aggregate growth and risl.)' asset prices declined substantially in the advanced foreign economies slowed between early October and late December in marked!)', especially in the euro area, and the midst of heightened volatility, although several Latin American economies continued those moves partially retraced early this year. to underperform. The pace of eccnomic On balance since July, the expected path of the activity in China slowed noticeably in the federal funds rate over the next several years second half of 2018. lnHation pressures in shitied do11n, long-term Treasury yields and major advanced foreign economies remain mortgage rates mo1·ed lower, broad measures subdued, prompting central banks to maintain of U.S. equity prices increased somewhat, accommodative monetary policies. and spreads of yields on corporate bonds over those on comparable-maturity Treasury Financial conditions abroad tightened in the securities widened modestly. Credit to large second half of 2018, in pan reHecting political nonfinancial firms remained solid in the second uncertainty in Europe and Latin America, half of 2018; corporate bond issuance slowed trade policy developments in the United States considerably toward the end of the year but and its trading partners. as well as concerns has rebounded since then. Despite increases about moderating global growth. Although in interest rates for consumer loans, consumer financial conditions abroad impro1·ed in recent credit expanded at a solid pace, and financing weeks, alongside those in the United States. on conditions for consumers largely remain balance since July 2018, global equity prices supportive of growth in ilousehold spending. were lower, sovereign yields in many economies The foreign exchange value of the U.S dollar declined, and sovereign credit spreads in the strengthened slightly against the currencies of European periphery and the most vulnerable the U.S. economy's trading partners. emerging market economies increased somewhat. Market-implied paths of policy rates in ad1-anced foreigu economies generally Financial stabilit)'· The U.S. financial system edged down. remains substantially more resilient than in the decade preceding the financial crisis. Monetary Policy Pressures associated with asset valuations eased compared with July 2018. particularly Interest rate policy. i\s the labor market in the equit)', corporate bond, and leveraged continued to strengthen and economic loan market& Regulatory capital and liquidity acti1•ity expanded at a strong rate, the FOMC ratios of key financial inS1itution& including increased the target range for the federal large bank~ are at historically high level& funds rate gradually over the second half of Funding risks in the financial system are 2018. Specifically, the FOMC decided to raise low relative to the period leading up to the the federal funds rate in September and in crisi~ Borrowing by households has risen December. bringing it to the current range of roughly in line with household incomes and 2V. to 2\1, percent. is concentrated among prime borrowers. While debt owed by businesses is high and In December, against the backdrop of credit standard~pecially within segments increased concerns about global growth, of the loan market focused on lower-rated or trade tensions, and volatility in financial unrated firms- deteriorated in the second half markets, the Committee indicated it would of 2018, issuance of these loans has slowed monitor global economic and financial more recently. de1•elopments and assess their implications for 101 M(N.lAR\ POtlCY ll(I'ORT: fE6RUAAY 2019 3 the economic outlook. In Jan~I '). the FOMC required. In addition. the Committee noted stated that it continued to ,;ew sustained that it is prepared to adjust any of the details expansion of economic acti\ it)'. strong labor for completing balance sheet normalization in market conditions. and in"ation near the light of economic and financial derelopment~ Committee's 2 percxnt objeeti,·e as the most likely outcomes. Nonelheless in light of Special Topics global economic and financial dc\'elopments and muted inflation pressures. the Committe~: labor markets in urban 1mus rur.ll areas. noted that it "ill be palient as it determines The f<'OO\'tl') in the U.S. labor marltet since "hat future adjustments to the target range the end of the I'CC'CS>ion has been une>-en for the federal funds rate may be appropriate across the countl')·. \\ith rural areas shO\\ing to support these outcomes. FOMC markedly less impro,-ement than cities and communications continued to emphasize their surrounding metropolitan area& In that the Committee's approach to setting the particular. the employment-to-population stance of policy should be importantly guided ratio and labor force participation rnte in rural by the implications of incoming data for the areas remain wdl below their pre-recession economic outlook. In particular. the timing le>-els. \\hile the n:tO\CI')' in urban areas has and sile of future adjustments to the target been more complete. Differences in the mi.' of ran~ for the federal funds rate-. ill depend industries in ruraJ and urban artaS-alargn on the Committee's assessment of rtalized sbare of manufacturing in rural areas and a and expected economic conditions relatire to grtater concentration of fast-gro\\ing serrices its maximum-employment objectht and its industries in urban areas- ha\'e contributed to symmetric 2 percent inflation objecti,·e. the stronger rebound in urban area& (See the box "Employment OiSI>arities between Rural Balance sheet policy. The FOM C continued and Urban Areas" in Part 1.) to implement the balanct sheet normalization program that has been under wa) since )lonttal} polk) rules. In Mluating the October 2017. Specifically. tbe FO~IC stance of mon<tal') policy. polic)makers reduced its holdings ofTr taSUI') and agency consider a \\ide range of information on the securities in a gradual and predictable manner current economic conditions and the outlook. by rtin\'esting only principal pa) ments it Policymakers also consult prescriptions for the recci\'ed from these securities that exceeded policy interest rate deri'td from a rariety of grndually rising caps. Consequently, the policy rules for guidance, without mechanically Federal Reserve's total assets declined by about follo"ing the prescriptions of any specific S260 billion sinct the middle of last year, rule. The FO~IC's approach for conducting ending the period close to~ trillion. S)>tematic moneta I')' policy pfO\ides sufficient tle.libilit)to address the intrinsic complexities T~ther \\ith the January postmeeting and uncertainties in the economy \\nile statement. the Commiuee released an keeping monetary policy predictable and updated Statement Regarding Moneta I')' transparent. (See the box "Monetal')' Polic)' l'olicy lmplementatio111 and Balanct Sheet Rules and S)stematic Monetary Policy" in Normali1.ation to pro~ide additional Part2.) information about its plans to implement monetary policy orer the longer run. In Balance sheet normali1ation and monetar)· particular, the FO~IC stated that it intends policy implrmeotalion. Since the financial to continue to implement monetal') policy crisis. the sQ( of the Federal Reserw·s balance in a regime "ith an ample suppl) of resents sheet has been determined in large part so thatacti'~ management of resentS is not by its decisions about aSStt purchases for 102 4 SU.I\1\o\RY economic stimulus, with gro111h in total assets Transparency also enhances the effectiveness primarily matched by hig)ler reserve balances of monetary policy and a central bank· s of depository institutions. However, liabilities eftorts to promote financial stability. For other than reserves have grown significantly these reason~ 1h e Federal Reserve uses a owr the past decade. In t~e longer run, the wide variety of communications to explain size of the balance sheet will be importantly its policymaking approach and decisions determined by the variottS factors affecting the as clearly as possible. Through se1<eral new demand for Federal Reserve liabilities (See the initiatives including a review of its monetary box '"The Role of Liabilities in Determining policy framework that 11ill include outreach the Size of the Federal Reserve's Balance to a broad range of stakeholders, the Federal Sheet"" in Part 2.) Reserve seeks to enhance transparency and accountability regarding how it pursues Federal Resme transpare;ncy and its statutory responsibilities (See the box acoountability. For central bank~ transparency '·Federal Reserre Transparency: Rationale provides an essential basis for accountability. and New Initiatives·· in Part 2.) 103 1 PART RECENT ECONOMIC AND fiNANCIAL DEVELOPMENTS Domestic Developments The labor market strengthened further - during the second half of 2018 and early this )ear ... ... ..... -~ Pa) roll empiO)ment gains h;nc remaiool strong. amagjng 224.000 per month sinct June 2018( figure 1). This pact is similar to the pace in the first half of last year. and it is faster than thca1-erage pace of job gains in 2016 -'!00 and 2017. -_...10,1) Thes trong pace of job gains 0\tr this ptriod _.,. has primarily been manifest in a rising labor forte participation rate (lFPR}-the share of the population that is either working or acthely looking for work rather than \cYrl: ....., .... ..: a,~ a da:lining unemplo)ment rate' Since bn lkmlotl.lboc~\.al:t.,ttAU)'b.":t. June 2018. the lFPR has mol'ed up about Y. percentage point and was 63.2 percent in 2. Lobo< fOR'C p311kipotion rates 311<1 Januar)'- a bit higher than the narrow range it -tmpi0)111<11H01"'PUIJiioo raa;. - has maintained in recent )'ears (figure 2). The impro1ement is especial~· notable because the aging of the population-and. in particular. the m01ement of members of the bab)· boomc ohort into their retirement )ears--has othel'l,ise imparted a downward in8uence on the LFPR. Indeed. the LFPR for individuals be!II'CCn 25 and 54 year.; old 11 hich is much less sensitive to population aging has I. Th< obstmd pact of poyroY job pm> •ould 1111' so- --~ -~ b<to IU.'Iici<nl 10 pu.b lllt uii<Oipio)..., 121< loot1 bod , tfl·ll"ll If I IW LfPR"'" rbn.IDdMI. 1110111111) l'l)rollpmin ~l ),IJ& X ~tt ))I} =:t:6 )J(t 1 I 1 n 1< u f n li . J c 1 h it a o n C g . I ' ! d S ~ . W OO ~ O D i p o l i o ~ y 5 m .1 t X ~ X t l • Il J l I > t Il a ' r 2 o r u < l ' l 0 d 8 a>bl < j f )l t l l l' < •i ll l l h · ~ · : ~ n o c. l ,._ l _ k .. ~ , n . t .. , ! . l . iO .. l ~ l M lb w o ,. to .. ll . < . r . l . m .• and on unchang<d LFPR around 61.9 P,'l\'<lll l•hid> ! ' J * fd * l6 " d0 = f e ltr q &>)~~lll»l/l't~cfllc~ '"' Ih e Jun< 20ih!.lu<S of'""' r.JI<S). If in!l•'ad ~tn: I!Wtalolt...bor$&111\o!J('Ioi!IKl'oftANI)'I.Ics.. 1he LFPR ,..,. d«:lining0.2 pe~"""I!C poinc per ym rouiJ>l)' th< inftu<n« of popul3liona~n& 1he "IIi< ofj ob gains needed tolll3intain an und!ang<d u~~tmplo)lntnl rat< •~uld be ahoul .W.IXXI per month looer 1bt1t ~-ui!Ctfla-m•lh) ario)u od 111<1t tiiii!YI<\ 1> abed~"""'"' P'Yroll pins aod..,plo)m<DI<il>o!l<'frocalll<Cormu 1\lpolatioo Sun<) (Ill<""'""o C 11>< untmplo)lll<lll r.Jit 10d LFPRI an b:quilc \obtik 0\'(1' ~on p:riod~ 104 6 PART 1: R£aNTECOKO.\liCA-'OflNAKCW.0MlOf'MENTS 3. Mcasuf'I.'S of labor undmrlil izatioo _,, - 16 - ·~ - u -. -10 - ' I, I I ll)ll ZOIJ ro1s wn !(119 I I :«11£: L'~~o.~m.:tllllk~ lo)U]-.:n~"Ntia~otlbe~~.IJ..4~Wuo..-q4.1)~pm~"d•'Od:m.asa ~oflho:bOOrfi:Jttt~~·od"ttS..V!stol.r.l~~·octtn:wcaSlbdofm:.tpflll.l)•lllllr.."h..~•llrl:ftS•tlo~t r..'tcmmllyb:ting.bv.«<l ~~·lle!IC\tr.oj..~arc,'libb«korth.-m.U-.S~esi<GII:D.'ftl9~\'d~allupar~~t31h:bbof~.asap.T~of~bbcf fotttP:usp.'I'«<Srwpal':tWt."MliOdltbb«f«~.!I~·~. .' Orl.'tt$wno~iftth.:-tlborkm.•-at~~:•t•hua\'li~b•'M:.ai'Jdh.twb*C'd ror,jobin~~l211*llbs.U.Cnx-~k'al~mcq~ytdplustll~~·a~tt.-bc-oJ•'OI't...~pl\b~~-coJ~af«~r.:-"-ICiCJ.)!;~ p.'f~oflb:bbortom-~all~ll)lllldt.'oi"''(lltco.TbcWcS.'IJI>M~'S*P."fK'dOI'busirbH~as~:ofuxd~·IM~!8ur.;a~;(J( [(oo)mic Rccsc-JI'd\. Sc..Wf: ~otutuSIII!SbC5,Utbw•Aaai)m. improved considerably more !han !he overall LFPR, including a '1: percenlage PQinl rise since June 2018.' AI the same lime, 1he uncmploymem r.lle has remained linle changed and has gene rail)' ~~~ running a linle under 4 percent.' Nevenheless.lhe unemployment rate remains al a hislorically low level and is \1, percemage PQinl below I he median of the Federal Open Markel Comminee (FOMC) participants' estimates of ils longer·run normal level (figure 3).' Combining the mo,•ements in both unemploymem and labor force panicipation. 1. Since 1015. 111< incr<asc in 111< prime•a!JC LFPRf or women w~ nearly l peR:tntagc points. while the iocre.as.e forTilfn was only about I peKtntagc point.lnJ anuary. !lie LFPRf or primo-3!1< ·-•' ""s lighrly abo\~ \\heft it Stood in 2007. 1\'herea~ ror own it \l'lSStill about 2 pertentage points betow. 3. The uotmploymtl'lt rate in J3nua~' was 4.0 pcm.'tlt. boosted somewhat by the P'utial g\)\l:rnrntnl shutdown. "somc furloug)l«< f«<ml•wk<rs and rtmpornrily laid· oft' feckrnl contrnctors are treated as-unemployed inl lle houSI:'hold employment sun' e): 4. Set tile Summary of Economic Projections in Part 3 of 1his r<pon. 105 ,\\ON !TAR\' POliCY REI'ORT: HBRUARI' 2019 7 the emplo)~ncnHo-population ratio for indi1~duals 16 and Oltr- the share of that segment of the population 11110 are working was 60.7 perrent in January and has bren gradually increasing since 2011. Other indicators are also consistent 11ith a strong labor market. As reported in the Job Openings and Labor Turnover Survey (JOLTS), the job openings rate has moved higher since the first half of 2018. and in December, it was at its highest Jerel since the data began in 2000. The quits rate in the JOLTS is also near the top of its historical range, an indication that workers have become more confident that they can successfully switch jobs when they wish tO. In addition, the JOLTS layoff rate has remained low. and the number of people filing initial claims for unemplo)'ment insurance benefits has also remained low. Sun·e)' evidence indicates that households perceive jobs as plentiful and that businesses sre vacancies as hard to fill . . . . and unemployment rates have fallen for all major demographic groups over the past several years The flauening in unemployment since mid- 2018 has bren evident across racial and ethnic groups (figure 4). E1~11 so, 01-er the past several years. the decline in the unemployment rates for blacks or African Americans and for Hispanics has bren particularly notable, and the unemplo)~nent rates for these groups are near their lowest readings since these series began in the earl)' 1970s. Dillerences in unemplo)'ment rates across ethnic and racial groups have narrowed in m-cm y~ars, as they typically do during economic expansions. after having widened during the recession; on net, unemployment rates for African Americans and Hispanics remain substantially above those for whites and Asians. 11~th differentials generally a bit below pre-recession levels. The rise in LFPRs for prime-age indi1iduals over the past few years has also bren apparent in each of these racial and ethnic groups. Nonetheless. the LFPR for whites remains 106 8 PART 1: R£aNTECOKO.\liCA-'OflNAKCW.0MlOf'MENTS 4. Unanplo)'mrnl ra!c by r.lCC' and cthnidty - 18 -16 - 1.: - 12 - 10 - 6 I I 2019 Noll:: l:~Do.-nii)I(D.~.:'$r.obluntmpbj\'dtilJ'tl\"CW~olthtblx"'b~.~"'""'*~""Yasi&atifi(!JasH~«~IN)·b.:o( ~D.'C'.lhtM:dN'iN..'».':S;apMOOc,fbusiixs:sla.~as&~b)·lk K~Ba~o(ErunomkRtstat\.il &l.ltt: Burtalo(Llbx~\l.atb\'l't'Miat)'tics. higher lhan lhal forolher groups(figure 5). lmportanl differences in oconomic ou1comes S. Prim<->s<b bor foo:<p 311~ip31ion <11< by r.lCt 3lld persisl across olher charac1eris1ics as well etllntcity (see, for example.lhe box "Employmenl Disparilies belw een Rural and Urban Areas," which highlighls 1ha11here has been less - &I improvemenl since 2010 in1he LFPR and -_.8,1 cmploymeni·IO·populalion ra1io for prime-age individuals in rural areas compared 'vilh -_I,I. urban areas). - 19 Increases in labor compensation have -11 picked up recently but remain moderate " by historical standards ... - j6 Mosl available indicalors sugges11ha1 gro111h of hourly compensa1ion has s1epped up fun her Sorelb:~bb«f<oc«p!i."'ipxi)nr.;:cis~r-~orw since June 2018 afler having firmed somewhal l ~ x a m p iD i I) l 'N :S cl 1 lll 0 )·r ~ J O P t ~ .1 • b b :d - m ~ c · t i ) s ( i ' d ~ t ~ t N l b l ) i6 ' .. B ~ N as r H d ~ w. « ff over 1he pasl few years: however. gro\\1h ra1es D ~" S J - .: i ~ . t . a J u . . . t c ~ D =B o a o o s t : b & < . I 1 . ' l . ! . D l i l . l l g \ o ! 1 ft b \ . ) ~ a t " b h o . S :- r N . ~ a l t k ic U ~ B N wta ' ao1 E ~ «<.' ' 'IIIi p i: c ~ 0 i 0 l J . o . ( r p e r m ev a a i i n le m d o in d e Ih ra e l e d o c c o a m d p e a b n. e > f d o r 1 e 1~ I 1 h h e I h r e o c s e e s s I i h o a n l . Compensalion per hour in Ih e business seclor-a broad-based measure of wages and benefi1~ btll one 1ha1 is qui1e ''olalile-rose 2'4 perren1o ver Ih e four quar1crs ending in 2018:Q3, abou11he same as Ih e average annual increase O\'tr Ih e pasl seven years or so (figure 6). The employmenl cos1i ndex. a less ,·olalile measure of both "'ages and 1he cos1 107 IIO,!lA!tY POliCY R£1'0RT: fEBRUARY 1019 9 to emplo)ers of p101iding bendits. inerwcd 3 perrent 01er the same period, 11hile a1-erage hourlyearnings- whkh do not take account of benefits- increased 3.2 perrent over the 12 momhs ending in January of this year. the annual increases in both of these measures \\CCC thesuongest in nearly 10 )tal'S. The measure of wage gro11'!b computed b) the Federal Resme Bank of Allanta that tracks median 12-rnomb wage p1h of indhiduals reponing to the Curren! Population Sui'\ e) sho\\ed an increase of 3.7 perrem in January. near the upper end of its readings in the past three years and well aboo1•e the average increase in the preceding few years.l ~t:~~~tf.OCII~~~ Nstsandt\~-.!OIS~-' l«lkpmi~Ma.UtatbJWIIIroll lldrt.rhlllt•ll'crdtl!_.a*c•lbrll!tlb."ldiofr~o.ioq~~Wr. ... and have likely been restrained by ~ *pci\' . IS t M t tt \ .. 1 -p 0 . 1 • 1 \ ' t ' t - l \i f l ' ~ ll ~ o . l t f t tf ) ~ l . i . r - e ~ ~ u r . ot - s . u· . • p cm:aa.~.• slowg rowth of labor producti1 ity 01er "T"ta".i".c. r.,6.t.6.1 a11t .... ,,....._.. ." CfVcllkl!--' much of the expansion Soltet: llrcafi'*~'·Hn:t.~fo&r11~ Bd:fiU....'&·C...·T'*-"..7 Th<Se moderate rates of compensation gains likely reflect the offsetting inHuencn of a strong labor market and productivity growth that has been weak through much of the expansion. From 2008to 2017.1abor productility increased a little more than -· I perrent per year, on average. well beiOII' the 111era~e putt fR)!Il 1996to 2007o f nearly 3 perrent and also below the 111mge gain - I in the 1974-95 period (figure 7). Although _, considerable debate remains about the reasons for the slowdown over this period, 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 rcco1ery that follo11'td. More rttent~' h0111!1"er.labor producti1ityi s .. " , - . = ,. ,~. -.-.O .'tohl""a'-O',_'. t..1., .6,..t..~,..",,.C ..a : '0 ' ,• . ~ ., ~ ... 1$1imated to h111-e increased almost 2 perrent pa. ...! tt~~ ......: O!\C)l••. .... ._ at an annual rate in the first three quaners of 51);11(1; ...t ii,.N-.,,• .,..11'~ 2018 still moderate relatire to earlier period~ but its fastest three-quarter gain since 2010. While it is uncenain whether this faster rate of growth 11ill persist, a sustained pickup in producti1ity gto\\1h, as well as additional labor market strengthening. would likely support stronger gains in labor compensation. 5. Tilt AlbDia r. .r . 111<:15111tdJJfm (1\1111 othm on 1h:1111 mc.Jlu~<>lhc:•>g<gro.th on~ of•orl.m•bo """< mpiO)<d bolh in oh< cumn1 SUM) monoh and 12 monlhHa~i<r. 108 Employment Disparities between Rural and Urban Areas The U.S. labo< mark('( has tOCOI'efed subslanlially A. EmploymcnHo-popul::nion rntios since 2010. For people in their prime llllding rears (ages 2> 10 541, the unemployment rare has ,.,..o down Slea<fily ro le~~ls below the previous business _., cycle peak in 2007, the labor force participation rate (lFPR) has r('(r.IC<d much oi i~ decline, and the share of the population who are empiO)td-known as the - $0 emplorment.ro.popularion rAtio, or EPOI' rati<>- - 1'! has rtlurned to ab oot its 1.,..~1 bdore the recession. Howe>'«, the labo< mar~ teCO\~ has been une~w - 7~ aaoss the counlly, 1\ith •rvral" (or nonme';o) areas mowing mar~edly less imptO\-ement than cities llnd - 74 their surroundings (metro arm}.' The extent of the init~l decline and subsequent •'11'111~'7,,,,,,-,?l imprO\oement in the EPOP ratio \'<lried by metropolitan I 11.1 S!Jtus. The gap bolween the El'OP ratios in rural and am :.'001 zros 2«1t zoto rou I»l~ ~'' larger urban area~ is now noticeably \\ider than it was ~~~: D&t.~ttforpmcGS.-dlS~s.&.~~lbll~ before the recessioo, and the q~lical rec""')' st.lrted X".::~S(MS.\s)~~fWJ.OOO~"'\l'k«~DlSINII«MSAi~!t later in rural areas. Specifoc•ll)\ as shown in figure A. o t f l\ i . O ~ O ; i l f 5& h f ~ r q t ! M ( !\ O I . b ( r ( r O ! P w: N N P a k o . o ' . l w ' a b & r i : m ~ u Nl ~ : f )~p ~ .o r rh t .' ~ \ ' b t o b. S ~ the pri...,.;ge EPOP is 1101• slightly above its pre S«tn:~tnt."l:$li:I6N.Ixa.DCCtl. recession fevel in larget urban areas, \\~eas it is just below its pre-recessioo .,..,.~ in Stn.1ller urb>n areas and much below its pre-recession !4:\-el in rural arcas.1 The El'OP ratio can u~ully be viei1.C ;s ..... summarizing both the LFPR---1hat is, the share of . the populatioo that either has a job or is aoti1~ly looking for 111ld-ond the unetllplormenr rate. 11llich - 10 m. .s utt<s the shate of the labo< force without a job and - adivel}• se.uching.1 The di\'f'fgenct" in rural and urbdn EPOP r,uios during the ecooomic expansion. afmost. . entirely refleas di\'<fgences in LFPRs rather than in unempiO)'mer>t rates (figures 8 and Q. In p;rti<ular, the - rural and urban unemp\O)'Metlt rates hal-e tracked ea<h (coounuedi 1. Folcom"enieocf, we relet lomtttopolitancoun=iEs with _, $trOrl8 CUim"~t.llillg t*s lo ,m Ufbilnilt'd c~ as "urb.lrt" .'lnd not'M'I'Ie««;lpp/~iln counties th.lt bdSIJCh tie> !lS 'f'Uroll.. . 2. Follllfi&urt'Sinthisdiscwioo.lber;r..,•d.Jta.uefrom tho U5. (.....,8 omo, C..r.,..il>pu!Jl;on Sun<r, th.lt the Burt.!u oi l.tbcx' SUtisfiCS is in\d\td in the StU\ty p<e>C<'SS for ill< C..r.,.ll>pu!at;on Som"). Cakubt;on, ol U th O t I ~ n!J 'l > > < b I o , < , M ·na a r rf t o a < l O d . ! .. l :o « m i1 e J s o i ! ii d .W in .< A r i o i p ! o o li n ta W n ~ a < n d d ! n re ·" .K " ( " M S D . l \ o s < ) c ~ f ot « ' - S o O p O . , ~ O ! » ) ~ ~ or ) m l. . " .' " IK ' .J ' O! ~ ~M ' S " . '" . " U ' ~ " H Noo D -I > ' J N 'l c ( < l < ( S f( 1 l \V p( o ) \ ~ S n I I A in re g < ; J o s o : o S B ig o n . s lr d d o C l G ro o w i' i O ng !t O « i S ~ o r l i t t h i e e fs.:. ,.,. I o 1\ C ' S \ I . C ' « t O ." m a O. .W : W O : # ' l - & k 'X f ~t l l O l ' l l . t r O d r b i' : < y O " t ' " ! lr ' l " i . \ l : ' o f . N P ! k • D . T m ~ h i ts ~ B \ u: a c d - ! a N . u N o r t s ~ ~p ~ .'t'it'dsof ~ Restf\1!' System, Sepctmber 2St w\\\1 .ftdef;alt'I.OSM't. p·t'(()IW~notes.1«h-~1,abor.f!U;flet-<JUI~in­ ft'lt'tt0pollt.\n-.lnd-1'101"1-ll'-'t'ltcl!)Cilir..an~~Hig:ns--oi·~I'(J'.vlng· 3 cr \ : '0 ~p ! .u Ig i < lt lo t l s il · l 2 em 01 o 7 n ~ : 2 h H l t )' m t . 'Th - e f ; ~ , t _ e s ~ 12·monthn)()'lo~ng """"~""'-'"" tht ,nomp~q,_, ''";,del'...," .. ,..,.,. 3. Spe<if>eali),' ill< EI'OPratio"!"lkltfi'I(J x(l unemp/o)rolabot fot(t: n... """""''" roohipl;ed by ~ment r-ite), where LFf'R isdelined.ts 'Llbcw fotcd 100 for pr~tloo putposes in the ftg'lres. 109 MONETARY POLICY REPORT: fi8RUARYIOt9 11 othe< Llirly closely in this e'J)<lnsion, thoogh they hal'e C. labor ron.-e p.micipation r.l!CS <f•~ a linle in the pa~ few )~•IS. in conua11, the diffe<ence be~'~" rural and utban Lff>Rs has wioo..d signifoc,.tly """ rhe past <i«.lde. On average, people in rural areas tend to ha'•e iewe< years of ~hooling !han people in utban are.11, and because ihe EPOP «tio tends to be lower for indi,·iduals with leis edUCJtion, this demographic diffe<ence has CO!ltributed to ihe pe<>i~<fll rurai-<Jtban dil'ide. Howe'"'· these educatiO!lal differences do not appear responsible for ihe fact that ihe g•p between ruroland utban EPOP ratios ha'~ wid<>ned. Fogore 0 shows 1h..:t~ in recent )'eil~, rur.al.and u!ban EPOP ratios divefged subs.tanli.a11)1 e'\'en within educaliooal categories, similar to lhe di\-etgence in EPOPs I'AOfe generally. The left panel of frgur< 0 s""-" that ihe EPOP ratio of non-coll~ucated adul~ age< 25 to 54 ~ been muc;h 'ower in rurJI areolS than in urban ones beginning in 2012. The right p.1nel of figure 0 SO'n: 0.wtbpmt'C11>~2-SDS.l.lqr~IIM~ s""-'' that ihe EPOP ratio of collegt-educated adults IIC&S(}I$..\.s)c..~ol$00.0:0pt~.'<pk«m«t.-.Ji0111lcr.\IS}.~~ used to be highef in rur,11 areas than in urban ones, ott(l).<>OO~m<>OO~.n."""'~""'"'""'~""">.r""""' but that is no longer so.lhus, tbe receot wid<>ning oi r~ S • o « i. f V 6 I : ; ' R d t b f ) « Q t i c c o ~ .~ ' I f N t N l • t b . o 1 . 8 t 1 D R O l C u t o l f EotoxtUcRNaldl. tbe ruraklrb.ln disparity in EPOP ratios ha. not beeo plimarily dri,·en br differences in )ear< of education. Newrtheless, because ihe rec"'~' in the EPOP ratio i01 non-coii~UCJted adults in rural areas (CO<ltinued on ne.<t page) D. Employm..,Ho-popul>tion "tios Nooroli<ge adult$ scm: [)Jt.aafct~~~l5toS4.MSA is.mt<ropoliua~Ra.. Thrsludtdtws~pcm.korhNxs:5r~as&liMdb)'tb: --.r-..... .t. Soi,'JlCt:Rtf~&<dii:l'bo.tfiQC.:l 110 Employment Disparities (coorinuedl h.ls been particulorly w. .k . it islikelr lh.lr brooder !""'ranee ISSDIJ beneti~. and, in fac~ t.1k. .u p macroeconomic trends-including the oogoing shift in increased a little more in rur.J;I ar~ than ild id in urban !abo< dem.nd lh.lt has ii!\<>red individuals with more ones 0\'tl the pa~ deade.' education-ha\e h.ld mo<e ad\erse <OO<eGuen<e< When ~tgions are faced \\ith ad\-erse ch.lnges ior the popuLttioos in rural are.1s than in urban areas. in labor dem.nd. some residen11 mar respond by fo< example, manufa<turing. \\l>e<e empfO)~lent has migrJting to more prosperous ar. .s . The more out· ltilgnate<l, accounts for a la.ger sh.lre oi employm<nt migration that occurs from areas with rel3th-elr fe\\tf in tut.al ar~Ms than in urban areas, wbile fast-gtzy.\·ing labor matlret oppo<tunities, the smaller should be the sen•ices industries. such as hea!th-<:are and professional obsened decline in loc•l·area EPOPs.' Hal,~..,. son>e services th.lt tend to employ"""'"'w ith mo<e research suggescs that the a'l'erage migration response educ.ation, are more concentrated in urban areCJs. to adl'elst dem.nd shocks h'l decreased in recent Indeed, empto,ment in manufacturing has not l'tt dec•des. "~ich could ampliiy the \abo< marl:et elfec~ fully "'«•~red from the recession. And, despite of loc.JI shod< and le.d to pe<si<tent disparities in the ~rength in the past ~'" years, the share of tOial EPOP r~tios across areas.• employmenl in m.muic1e1uring h.ls remained near irs pos.t·recession lew. 4. This incre;se cou\d retl ea growing publk ~alth The fact lh.lt most of the EPOP do'tlgence is seen problems (\>~i<h "'J"nds the pool cl indiv;ru,k "ilo qwl;!y in \abo< force participation rathe< than unen1ployment lot SSOI) and ~ugg;.h bbot dooland in rural arm (\\~idl incrt.lS<StheP<CJ900Si<yclind,~lsooapplyic<SSOI rates "'ggests lh.lt """l' "'"' """'"' "ilo e>perienced bettefits\ a permanent job loss, perhaps due to a factory closing. S. Although a high«"" cl "'"I oot-migration """ld help decided to eventuallr exit (he labor f01ce rather lh.ln close the I POl' w. depopobOOII mighl t.\aCe<batt rxooom~ cootinue their job search. Some individuals "ilo h.ld d"d't'iculties fOt those \,ho ttmain in rurAl olteds, been \\O<king. despite ongoing health problen~, may l.o 6 o . n g S a e n e i , a i" o ' i " 7J, ' ·R ~ eg; M o.a ai l O ub ao o , t \ • R la I; l d k e et F Ad . j - us i t , m an en d t P in r a th la e . h "''" responded to job loss ""od poor renmployment United St.lte" Trend and C)<f<; II.Mewol£cooomicsand oppoounities by applying for Social Stcurity Dis.lbility Sllliflicos. '"'· 99 ~\tayl. pp. W-57. 111 MONETARY POLICY REPORT: fi8RUAAYI019 13 Price inflation is close to 2 percent Consumer price inflation has ftucwated around the FOMC's objectire of2 percent, largely reflecting movements in energy prices As measun;d by the 12-momh change in 8. Cb>nge in Ill< price index for pe,..,..l roliSUmplion expendittm.':S the price index for personal consumption expenditures (PCE). inflation is estimated to hare been 1.7 percent in December after being above 2 percent for much of 2018 - J..O (figure8).'Core PCE inflation- that is, inflation excluding c01~sumer food and energy prices- is estimated to have been 1.9 percent in December. Because food and energy prices are often quite I'Oiatile, core inflation typically provides a bener indication than the total measure of 1111ere Ol-er.all inflation will be in the future. Total inflation was below core inflation for the year as a whole not only because of softness in energy prices. but also x.n:~jjo,C«wool""-'io;roodo>d=rt<>J<OI"""'P because food price inflation has remained l)•.((c:;..\:t ):11$: (ll'li1J,·.ab.'$ltl:suf'f~imalc$. Tk~'\ldal:l C\~ relatirely low. tl S l ot t .t o o u : P f N « v ~ t e ~ . ~ '* l l S , . Ft\i.'ftlRr<tf\eB.cloiDalbl;:b'd~ Elur'Nuof~A~~·\QHal.·tt.w!)~ Core inflation has moi'Cd up since 2017. when inflation was held dow11 by some unusually large price declines in a few relatirely small categories of spending, such as mobile phone services. The trimmed mean PCE price index, produced by the Federal Rese11-e Bank of Dallas, pro1~des an altern at ire way to purge inflation of transitory influences. and it may be less sensitire than the core index to idiosyncratic price movements such as those noted earlier. The 12-month change in this measure did not decline as much as core PCE inflation in 2017, and it was 2.0 percent in Nowmber.'lnftation likely has been increasingly supported by the strong labor market in an em~ronment of stable inflation expectations: inflation last ymwas 6. The panial gO\·tmlll<ol shuldO\m has delarro publicalion of 1he 8umu o( Economic Anai)>iss t$1imate for PCE prict inRa1ion in IA'X'«nbe:r. and 111< numbers "'pon<d """' ""'"'ima1es baS«! on 1he Ot.\.<tmber consumera nd producw ~ indt.'<I.'S. 7. The trimmed mean indt'\: exdudl.'$ whiche\'er poo.-s showtd 111< larges1 in<~.,ses orde<~.,ses in a gh•n month. Note that on~r the past 20 }t.ars. changes: in lhe uimrnOO m~n index haw ao.-e-rng4.'d about %~ 1\"'!'nlil&¢ point abowoore PCE inRation and 0.1 ptl'l"tnlagt poin1 abo\'C total PCE in"ation. 112 also boosted slightly by the tariffs that were imposed throughout 2018. Oil prices have dropped markedly in recent months ... As noted. the slower pace of total inflation 9. Spound fulun'S prim for <1\Jdo oil in late 2018 relative to core inflation largely reflected softening in consumer energy prices toward the end of the year. After peaking - IJO at about $86 per barrel in earlyO ctober, the - IN price of crude oil subsequentlr fell sharply -- ,1,1.0 and has al'eraged around S60 per barrel this !I) year (figure 9). The retent decline in oil prices - "' has led to moderate reductions in the cost .. 10 of gasoline and heating oil. Supply factors. including surging oil production in Saudi "' .&0 Arabia. Russia. and the United States. appear JO to be most responsible for the recent price N decline~ but concerns about weaker global growth likely also played a role. ... while prices of imports other than energy have also declined After climbing steadily since their early 20161ows, nonfuel import prices peaked in 10. Nonfucl impoo prim >J1<I ind•orialm<13~ indc<<S May 2018 and declined for much of the rest of 2018 in response to dollar appreciation, 110-\;2: lower foreig11 inflation, and declines in ,. _,., commodity prices. In particular, metal prioes fell markedly in the second half of 2018. partly ,,._ ,,. reflecting concems about prospects for the - global economy (figure 10). Nonfuel import w- prices, before accounting lor the effects of - 9S tariffs on the price of imported goods, had 10- 10- \<c:fid~ ~ . . - - - . 9 . 6 i r n o f u l g at h io ly n a i n n e 2 u 0 t 1 r 8 a . l influence on U.S. price 10- Survey-based measures of inflation expectations have been stable ... ~l ~ !l r r &l ( b ( : J d ; : b l a af : o c r ~ o.-c ~ .~"' · l J l , l ~ lpa o t f FO d >~a » l' l l: ) ~ ·da . u T l bC' m ~ i~ b ~ Expectations of inflation likely influence f~lUlll. actual inflation by affecting wage· and price A ~ f S ll o l l : . ,, t l( u $. : m F cs « 4 Q . ) S. I .U l G f S l C X I t I~ ~pO. x ~~ t ~ .~ o%(«L b it h i O,ur ~ lh t ·o « tt setting decision~ Survey-based measures of inflation expectations at medium· and longer· term horizons ha'-e remained generallys table O\'er the second half of 2018. In the Sur,~y 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 Ol'er the 113 .110\EIARYPOI.ICYRII'ORI: FIBRUAA\'2019 15 - nt't 10 )ears has been 1ery dOSt to 2 perttnt for the paSI screral years (figure II ).In the Uni1ersily of Michigan Sune)S of Consumers. the median value for inflation expectations over the next 5t o 10 years has been around 21-S percent since the end of 2016. though this Jerel is about'/. percentage poin1l011er than had pre~- ailed through 2014.1n contrast. in tht Survey of Consumer E'p«tations. conducted b) the Fedenl Resene Bank of New York. the median of - I respondents' exp«ted inflation Tale thn.'C )~rs hence-while rclatiwly stable around 3 percent since early 201 S-is none1 he less at the top of the range it has occupied over the past couple of)ears. ... 11hile market-based measure.> of inOation compensation ha1-e come do\\0 since the first half of 2018 Inflation e.,pectations can also be gauged by market-based measures of inflation compensation. However, the inference is not straightforward. because market· based mmures can be importantly affected by changes in premiums 1hat p101 ide compensation for bearing inflation and liquidit) risks. Measure; of longer-term inflation compensation-denied ei1her from differences bem-een yields on nominal Treasury . - socurities and 1hose on comparable-maturity .., Treasury Inflation-Protected Securities (TIPS) or from inflation swaps-moved down in the fall and are below lerels that prerailcd •• earlier in 2018 (figure 12).' The TIPS-based measure of 5-to-10-ycar-forn-ard inflation compensation and the analogous measure " from inflation 511-aps are 110\1 about I'i percent _, _,. 8. lnfi31ionrompcnsation impli.:d by1hcTIPS bn:ake\.tn infla1ion rate is b:lsed on lh<ddfcrtnt\~, at dqt!pdl \"'mparablc maturities. betv..ttn }ields on nominal 1<117 1<119 T 10 r " 11 W 1< 1 I 0 J' 1 " a " l r 'r o i n li s < ur s n a < n r d p r y ic ie e l d in s d o e n x T ( I C P P & t) . w l h n ~ Ba h ~ i , o , n . " in ' d 'P t<. ' : d .f~ \ S .o i ' U A J: l ,. ] ( . t ! l ; _' \ f 8 c' 1 ~ d 4 l T l ~ ! t P l i , l • l 1 t . r • . . ~ . . , f ~ l I · ~ ' ' ~ < l ' f w ' ~ \'a o S t \ 4 . . W ~ : y F. d . f l . d u c ~ d n C l ' ~ \~ a . . . .l . '"r onlra<li iu11icli on< pan) nW.<$ p.1)lll<tlb of C tl < u f l b a l r< l l ll l ld lt tW dii t O o O c l u i a o :u a b iJ li I w I I C O P U 1 i . l .a bi .1 o~ ., " . ' 0 < 1 » « >l .. l , l ., o . o > llonzon.lnlblioaromp<n131ioto dnilro fflllllonl!.ooa i'A~PII)~) r<«<ds TIJ'S.b3>«1 romp:n>11ion. bul 'o\1.\"i.·tO."A<'Ck MO\'tiTh."'ts ill tbt t\\0 m._'3SUI'tS 3ft h1ghf} comb1ro. 114 and 2V. percenl. respeclil'ely. wilh both measures below their respec1i1'e ranges 1ha1 persisoed for moll of ohe 10 years before the slart of Ih e notablededines in mid-2014.' Real gross domestic product growth was solid, on balance, in the second half of 2018 Real gross domeslic produc1 (GOP) rose al an annual ra1e of 3~ percen1 in Ih e 1hird quaner. 13. Chong¢ in r<:~l gro<s dom<Sii< p<OdiiOt and gro<s and available indicators point to a moderate do~i<iDCOrnt gain in the founh quarler.r o For I he year, GOP growth appears 10 hare been a lillie less 1han 3 percen1, up from the 2~ percent pace in 2017 - ' and I he 2 percent pace in 1he preceding 1wo QJ _, years (figure 13). Lasl year's growth reflect~ in pan. solid growoh in household and business HI spending. on balance, as well as an increase - ; in goremmen1 purehascs of goods and - I sen~ces: by conlrasl, housing-seclor actirity turned down lasl year. Privaoe domeslic - I final purehases-1ha1 i~ final purchases by households and busin~ which lend 10 provide a beucr indica! ion of fu1ure GOP growth than mosl other componen1s of overall spending- likely posled a mong gain for the year. Some measures of consumer and business 14. Clnng.e inr eal ~rsooal consumptioo e.xp. - .'"ndit - ures sen1iment hal'c recenlly softened- likely and disposabk"""""" inoome reftecoing concerns abou1 financial market ... I'Oiaoility, the global economic outlook, 1 · ' ~ - p. " .' " I " 'S ' ( - Q ' i " ji " D.~ " -_,6 s tr h a u d o e d o p w ol n ic - y a t n e d ns c i o o n n s ~ u a m nd e r 1 s h p e e g n o d 1 i •e n r g n a m p e p o e u a rs to hare weakened a11he end of 1he year. HIQ)_ ' - ) Neverthel~ I he economic expansion _- I, continues 10 be supporled by steady job gain~ paso increases in household wealth. expansionary fiscal policy, and still·favorable -_,I domestic financial condilion~ including - ) 9. As thest mcasum:arc:-based on CPI inflation. one should probal>lr subora<1 abouo Y. i>"«nl3gc point-the awrn:se differential \\ith PCE inflation owr the pa$t 11\'0 d«:~des-to infer in8aoion rompcnsation ona PCE basi>. 10. The init~l esoimaoe of GOP by the Bureou of Eoonom~ Analysis for oh< founh quarter""'d elayed b«ouS< of 111< panial gowrnm<nt shutdown ond 11ill nowb < ..Oeas<d on Februal)' 2S. 115 MONETARYP OLICY REPORT: fi8RUAAYIOt9 17 moderJte borrowing costs and easy access to credit for many households and businesses. '""" Ongoing improvements in the labor market continue to support household - II income and consumer spending ... - 10 Real consumer spending picked up after some - * transitory weakness in the first half of 2018, rising at a strong annual rate of 3\', percent in the third quarter and increasing robustly through November (figure 14). However, - l de>pite anecdotal reports of favorable holiday sales. retail sales were reported to ha11: declined sharply in Doccmber. Real disposable - Dm<IICOJ"""'"""""""lOtl personal income-that is, income after taxes Sot,1.0; iJut~aoiEcwomi.:"A::la~~\iatlll~i\IW)'t.lcf. and adjusted for price changes- looks to t6. Prie<s ofc .<isting sing!<-family houses have increased around 3 percent over the year, boosted b)' ongoing improvements in the labor market and the reduction in income ,U'.Ca'<'$f'-JI"' - IS taxes due to the implementation of the Tax m!Wino.X'< Cuts and Jobs Act (TCJA). With consumer - 10 - ' spending rising at about the same rate as gains in disposable income in 2018through the third quarter (the latest data a1-ailable), the personal - ' saving rate was rough!)' unchanged. on net. - t,o, om this period (figure 15). - ... although wealth gains have moderated and consumer confidence has 1009 2011 10B ~u :oon m1t recently softened ~! Th:&liiOr~stPClsc..sslkri:.i~C-1.1Cnd~~~ 1'01lTh:4a&af«thcC«d.Olit:in&1t'l:ltOd~~201&. While increases in household wealth have likely SOI.:t('f: («~ Hill'llt ~ II'Ab: Zil~; S.II:P('~lkr U.S. continued to support c·onsumer spending. ( ~ ).)o K ro o l m x t lt r s n l~ .-t l U n . d . a C T D l i x « S.t:: l P lS C ll w 'li - l S ir b .e i s l . b (F b « hl ~ u:p · t J ' o l l . 't ' r~ b .l to n. fs k . a tP . gains in net worth slowed last year. House ~~~«tb.'~~rt.con0:C~~.• prirescontinued to move up in 2018, boosting the wealth of homeowners, but the pace of growth moderated (figure 16). U.S. equity prires are. on net, similar to their levels at _,. the end of2017. Still, the level of equity and housing wealth relative to income remains very - ., .. high by historical standards (figure !7)-" - - S.l II. Jnd•"«f. iRihethirdquan<roflOtS-themost - s.o n."'nt period for whicll data are ''~ilabl<-houscllold net "unh was Sl.'\'tn times I he '~ueof disposabk income. l!!!!dlll·l!!lll !Ill 1111 the hi!)l<sl-<wr m~ding for that ratio. 11hi<h dates bock 1997 2000 lm l006 2009 !Oil lOIS l(IIS to 1947. HO\\\.'Wr. rollO\\ing thedtdine in stoc-k pffi.'tS '-011: Om.a.l.'Od~101&.Q3. Th:scn:$Kib:~o(~ since the summer. this r.ui~ has likel)' rallens omewhat n.rtli'OCihCO~p.TS«W~ Sc:ure I'« 0r.1 ""'OM t~ Rtil.T>'C bd. ~~ ~ Z.l. "'f"~~Qflb:t;:dcd~-:forin."lXI'Ire,&mclol£®.-e:i: ~jiJ,itlb\tr~tir.-:ol. 116 IS. Indexes of C005tlmct'SI.'"flli!llCfll Consumer sentiment as measured by the Michigan surve)' Hattened out at a high lel'el through much of 2018. and the sentiment 170- - 110 measure from the Conference .Board survey climbed through most of the year, 11~th both ~-;:: measures posting their highest annual averages ::-N since 2000 (figure IS). However, consumer 9:1- t ' J ... - 80 sentiment has IUrned down since around 71)- year-end, on net. with the declines primarily !0- l M reHeeting consumers' expectations for future JO- 10 conditions rather than their assessment of to- "~*'"C) !0 current condition& Consumer altitudes about '' 2'00 1 1 1 Z 1 O O& '2'0 0? 1 :0 1 01(1 " ' 20 ' 1 1 3 1 201 1 6 1 .:0019 c th a e r s b e u i ) n ~ d n ic g a h t a o 1 r •e s o al f s o co w n e s a u k m en e e rs d ' . o N ut e l v o e o r k th r e e l m es a s, i n lt ~ io;f < t 'bn k .u ~ tyd ~ at ~ a•e . ~· ~ . l T . b . :C . ¢ . .t c f b «< : C w 'C l 8 m oa d r ~ d@ & I; b W ~ ti ! o 0 dt ' \ 9 ~I : O at generally favorable level~ likely reHeeting IOOiD 19S5.1bc-,lkttipn~()daum~C'd., IOOD 1966. rising income, job gain& and low inHation. SOtl(l: U'lli\~ of Mltbip ~'t")l ofC~ Coaftt.:t~~."t """'- Borrowing conditions for consumers remain generally favorable despite interest rates being near the high end of their post·recession range · a ~ c ~ ~ ~ a\.' dil - 11)00 - Sa !0) Despite increases in interest rates for consumer IIJJ loans and some reported further tightening "" in credit card lending standard~ financing lll) conditions for consumers largely remain supportive of gro111h in household spending. lll) and consumer credit growth in 2018 expanded @ further at a solid pace (figure 19). Mortgage IIJJ credit has cominued to be readily a1'ailable for households with solid credit profile& For borrowers 11ith low credit score& mortgage ~n~ C'b::;d ~ ~kdt<'d fr«n 'Qt<'!l4 » yde<O.I <"C\.111 MilS underwriting standards have eased somewhat ~•'hl.:h:~t~:~fromZIOI~~~l(ll~l Sol.m.: F<&:tal RNf\'C &t-d. ~ R~ tl, -fi:nwi.ll since the first half of 2018 but remain ~(l(lJxol.'aib!Sblts.. noticeably tighter than before the recession. Financing conditions in the studemloan market remain stable. with over 90 percent of such credit being extended by the federal -10 governmem. Delinquencies on such loans. Ill _ tl though staying elevated, continued to improve gradually on net. Business investment growth has moderated after strong gains early in 2018 ... ln1•es1ment spending by businesses rose rapidly in the first half of last year, and the available data are consistent with gr0111h having slowed in the second half (figure 20). 117 MONETARYPOLICYRIPORT: fi8RUAAYI019 19 The apparent slowd01vn reflect~ in part. more moderate growth in investment in equipment and intangibles as well as a likely decline in investment in nonresidential structures after strong gains earlier in the year. Forward looking indicators of business spending such as business sentiment, eapital spending plan~ and profit expeetations from industry analysts- hal'e softenoo T<-ocently but remain positil'e orerall. And while new orders of capital goods flattened out toward the end of last year. the backlog of unfilled orders for this equipment has continued to rise. ... as corporate financing conditions tightened somewhat but remained accommodative overall Spreads of yields on nonfinancial corporate bonds over those on comparable-maturity Treasury securities wiclened modestly, on balance, since the middle of 2018 as in\'estors' risk appetite appeared to recede some. 21. S<l«:l<d<OOijJOII<fl~Ofn<l<kblfin3Jl(ingfor Nonetheless, a net decrease in Treasury nonfii131K'ial busin~ yields 01-er the past several months has left interest rates on corporate bonds still low by historical standards. and financing conditions - 10 appear to hal'e remained accommodative - 60 overall. Aggregate net flows of credit to large nonfinancial firms remained solid in the third quarter (figure 21). The gross issuance of corporate bonds and new issuance of lew raged loans both fell considerably toward the end of the year but have since rebounded, mirroring _., movements in financial market volatility. Respondents to the January Senior Loan Officer Opinion Surrey on Bank Lending Sot:l(t! r(l$cnl RtKtW ~ ~ Rtbst Z.l. -r-lfiii'INl Practic~ or SLOOS. reported that lending A«oon!Softki.'~Sa:ts.- standards for commercial and indumial (C&I) loans remained basically unchanged in the fourth quarter after having reported easing standards over the pasl se1·eral quarters. However, banks reported tightening lending standards on all categories of commercial real estate(CRE) loans in the fourth quarter on net. Meanwhile. financing conditions for small businesses ha,•e remained generally 118 accommodative. lending volumes to small businesses rebounded a bit in recent month~ and indicators of recent loan performance stayed strong. Activity in the housing sector has been declining Residential im-estment declined in 2018, as housing starts held about ftat and sales of existing homes mo,·ed lower (figures 22 and 23). The drop in residential investment reflects rising mortgage rates-which remain I' ! I I I I I I I ! ' I higher than in 2017 despite coming down some ~ 201(1 ZCII2 101" ZCII6 ~18 recently-as well as higher material and labor - lko!>a""""""""""""""20't SOI.tn: U.S.C~~\UIU\\'II'Atll~tltl.. building costs, which have likely restrained new 23. Newa nd t":\iS1iD$ OOmc sa I-'.S home construction. Consumers· perceptions of homebuying conditions deteriorated sharply O\'er 2018, consistent with the decline in the alfordability of housing associated with both -I~ - " higher mortgage rates and still·rising house prices (figure 24). - IJ -I~ Net exports likely subtracted from GOP growth in 2018 ,u. _ Aller a strong performance in the first half J.S of last year supported by robust exports of HI - - 2 agricultural products. re~l exports dedined I I 1 I I I 1 I I I I I I It I in the third quarter, and available indicators 2lll6 100S !010 !all 201: !016 MIS suggest only a partial rebound in the fourth . C D. l . ~ . d ".' i .t r m d b : .l e d ~ f c l a ' s O c I : S d c y 1 ~ . 6! i . -nc f l . ~ u ~ c $ b N l s . k q · ) ~ k . - i ra £ a t . ' n .l \ c ~ . u ly, b ~ t .l c 3 t e& Q m I t I . t ~ ) ~ I a h b . . r o . o ~ m u t p . ~ a ~ o " ~ i f t ! o O -0 I 9 ~ q in u r a e r a te l r im (fi p g o u r r t e s s 2 e 5 e ) m . A s t t o th h e a s v a e m p e ic t k im ed e , u g p r o in w th SOI.wt; F« llt."ffllomr ~u.s. ('(INIS ~ b-~11om.: the second half of 2018. As a result, real net ~.\"J::KcaJA.~oi~~·\Utb\ft'~~ exports- which lifted U.S. real GDP gro"1h 2-t. ~lortg3gc r.ne-s 300 Rowing 3ffo'rdability during the first half of 2018- appear to ha\'e ,_ ..... subtracted from growth in the second half. For the year as a whole. net exports likel)' R..v;insa~Cido. - w subtracted a little from real GDP growth, 1!0 similar to 2016 and 2017. The nominal trade ;~ - m deficit and the current account deficit in 2018 were little changed as a percent of GDP from -11/J 2017 (figure 26). - I~S Federal fiscal policy actions boosted - IJO l- - m economic growth in 2018 ... Fiscal policy at the federal level boosted GDP gro\\1h in 2018, both because of lower ~n..: ~ ~rr~ in1_.,_ oxa a:c ~ ~ income and business taxes from the TCJA and l).wrr~201S.IN6:mMA.'tn:cdm~c•\'\i.1y~f~·l•. Z019.Aiam,.,.~I)(!OO,:a~~ll=i2).·._nxdy~ IIX«<Ic'OOq.#lif> b:am..~hom;fll(WI~.~~~IIt) • ......w~od~l)·lleo>l ..... $ol..t(1: F'«~~\lt\bbilgyit~k'-~~l'.fkelhM.': b~r~fttd!io!~lx~·~~MlfkrtSW\"ey. 119 MONETARYPOUCYRIPORT: fi8RUAAYIOI9 21 because federal purchases appear to have risen 1S. Clungdn real imports and "ponsor goods significantly faster than in 2017 as a result of aO.O.smi( \"S the Bipartisan Sudg et Act of2018 (figure 27)-" ··- The panial go1·ernmcn t shutdo1111, which _. . was in elfect from D~mber 22 through Ql - " January 25, likely held down GDP growth in HI - the fi~t quarter of this year somewhat largely because of the lost work of furloughed federal government workers and temporarily atl'ected federal contractors. . - The federal unified deficit widened in fiscal year 2018to 3Y. percent of nominal GDP because receipts moved lower. to rougltly J6Y, percent of GDP (figure 28). Expenditures edged down, 10 20Y. percent of GDP, but remain above the Je,·els that prevailed in the decade before the start of the 2007-09 recession. The ratio of federal debt held by the public 10 nominal GDP equaled 78 perce111 -v F-l at the end of fisca12018 and remains quite _, elevated relative 10 historical nonns (figure 29). The Congressional Budget Oftice projects that - _, this ratio will rise om the next several years. , , , and the fiscal position of most state - - liaS: - 4 and local governmemts is stable --·~ - c-..- _, The fiscal position of most state and local governments is stable, although there is a range J I 1 I I I I I ! ! It I I! 1 I of experiences across these government~ After :'002 !:CO& X06 2008 ~10 ~I! 1014 !016 !018 several years of slow growth, revenue gains ~: D$1"«2018artlbcncn;tol'O!~dwtqlt.k"'ffiol'th.::)'t"~, of state govemments strengthened notably as a S l o a tu n t ~ r kc a .u ~ ol t & . \ G .- D o P om i i l c ~ ~l ~ ) i l4 . s : \U : . p ! n il . ' \ "a b " t A . AI J)'tiN. sales and income tax collections have picked up over the past few quarters. At the loc~l 27. Chang~: in n.-al goYcmmente xpenditures on le1~l. property tax collections continue 10 rise coosumptioo and im~menl at a solid clip, pushed higher by past house price gain~ After decli~inga bit in 2017, real -· state and local government purchases grew lIlFlo"l"<"" ""'"' moderately last year. driren largelyb y a boost Ql in construction but aiS() reflecting modest Ill - 4 growth ine mployment at these go1-ernment~ -l _, 11. The Joint Committee: on Taxation es:tim:alf!d 1ha1 1he TCJA" ~uld n:du« """geannuallil:< re~<nue by a liule mmt~han t p<re<n< ofGDPs~aningin lOIS and -· ftlr SC\'traJ ~'ta~ thereaf'ter. This mtnue ~imate does not 3~lll'l:t for the potenlial maC'l'Oe('Onomic tff«ts or I I I 111< kgi>lation. N09~10 ZOI\10l110131014 lOIS 2(1161GI71'(118 120 - Financial Developments The expected path of the federal funds rate over the next several years has - !6 moved down Despite the further strengthening in the labor market and continued e'pansion in the U.S. economy, market-based measures of the expected path for the federal funds rate om the next sereral years have declined, on net. since the middle of last year(figure 30). Various factors contributed to this shift. ,,11111!11· ll!l!f!!tl including increased in,·estor concerns about 1997 1000 2003 2006 '111» !(112 ~IS lOIS downside risks to the global economic Son":Th:t~:aod~~~d:ltlartooaur~(~'\1~Zid .c~Q{6!al};:m.(~~.,.~s..~~fi'(IN.~~ outlook and rising trade tension~ as well as (GOPI~.at~b'lb:fQC.Irqu.r.~~II)Q}. FOMC communications that were 11ewed as Soll<t:~"!'ol~..:n.."''!!~~'iaHflo«~tic:l. signaling patience and greater fiexibility in the conduct of moneta!)' policy in response to 29. From! go'"""""' debt h<ldb y tile public ad1~rse macroeconomic or financial market de1~lopments. - _ r , o Survey-based measures of the expected path of the policy rate through 2020 also shifted - Ill down, on net, relative to the le1~ls observed in the first half of 2018. According to the - so _., results of the most recent Survey of Primary Dealers and Survey of Market Participants, -JO both conducted by the Federal Resem Bank of New York just before the January - 20 FOMC meeting, the median of respondents' 196$: 1m 1m 1m 200* 201s modal projections for the path of the federal funds rate implies two additiona12S basis "on: Tkdmnkr.d lh:OCJ&b 201$":Ql. ~ dx.l fol ~~ ~(ODP)ar;:a~,ao;!Mlll]r.a;e.Fc6,.'f.lll&hlddbyttpublittq~Ul$ point rate increases in 2019. Relatil·e to l ~ < a dm M: l& U : ~ h ~ b S T . c , ta t s \d a m y . ~ -d b at e l l br & m i ! ll ~ k L d h m tq l u t w m r p . lo)~dtf!MiM!dit the December survey, these increases are c:N S t o r: l l t l (t ~ ; k . i t F . « F GD f'l I io ' n . l & r Jl:~ ..- w •l ) & f& x x d o . x S ! a ! ~ K I ~ S! " k S . i l s R , ( U 'b I s I ( l 7~ \ 1. w •J ~ 'II' ~ I¥J f t.; « ,J expected to oecur later in 2019. Looking A.a."'OIll.,;o(thtl.'M:d~· further ahead, respondents to the January sur~·ey for<'caSt no rate increases in 2020 and in2021.11 Meanwhile, market-based measures of uncertaintya bout the policy rate approximately one to two years ahead were little changed, on balance. from their le1"eiSa t the end of last June. 1l . Th: ""ults of the Sun"l'o r Primary !A'3 Im and IlK Survey or ~larkct P.Jnicipants are <nililablc on 11tt ffflcral R~nt Banko f New Yort ·s \\'Cbsite on bttP>iAiww.~~<~•yorkf<d.orglmark<t>lprim>T)d<Jkr_ SUM)·_qu,'Slion,.html and httP>il•ww.nt\\)OrH<d.org/ marktts!sunt)'_llt)rket_p.'l.r1kipanb.. respe"\tiwl)~ 121 MONETARY POLICY REPORT: fi8RUAAYI019 23 The nominal Treasury yield curve )0. Mark<l·implicd rc&nl funds r>le pooh continued to flatten The nominal Treasury yield cun·e ftanened somewhat further since the first half of 2018, with the 2·year nominal Treasury yield lillie - 1..50 changed and the 5-and 10-)'ear nominal Treasury yields declining about25 basis points - w on net (figure 31). At the same time. yields on inflation-protected Treasurys ecurities edged up, lea1ingmarket-based measures of - !.I» inflation compensation moderately lower. In explaining movements in Treasury yields since mid-2018, market participants hal'e ~IS 2019 pointed to dmlopments related to the global ~: Tb:~fal'dso:c~~~b)'qu«.."iOtlO\'m!lgllt~"'' economic outlook and trade tension~ FOMC $'1o-~ 6n'n11i1'C ~ t»j t>lho tP.'~c l'<\knl ~ 111t. lk implicl.lplhasoiFeMixyNl.:'Ol9.tS~•it!ltlat.-of)l:)::29, communication~ and fluctuations in oil pri~ .Nli$.Tb.-pdli!~•ith~IOC"~~~>,(tnl~ Option-implied I'Oiatility on swap rates-an oiO~~lk~p11bt:'i~~~2001~~ pl'r\Wi.('OtlllrouP~202t indicator of uncertainty about Trtasury Solm: B~g;Ft&al~'(lkwdSI.&fl'~lllllln. yieldH eclined slightlyo n net. ; I. Yitlds on nominal Tn".3SUt)' S«Uritics ·- Consistent with changes in yields on nominal ""' Treasury securities, )1elds on 30-year agency -1 mortgage-backed securities (MB S}--an important determinant of mortgage interest _-6, rates-decreased about 20 basis point~ on _, balance. since the middle of last year and remain low by historical standards (figure 32). -l Meanwhile. l~elds on both investment-grade -2 and high-yield corporate debt declined a - ' bit (figure 33). As a result. the spreads on corporate bond yields orer comparable I ! I I I I I II , II I I I I I I ! maturity TreJSUT)' )'ields are modestly 11~der lOOIYA\lOOSMI» 2009001121)13 OOIS~17.Nl19 than at the end of June. The cumulative increases over the past year have Jefi spreads tor high-yield and imtStment-grnde corporate bonds close to their historical median~ with _, both spreads notably above the 1·ery low !CI'cls 9- that prevailed a year ago. - no _,., Broad equity price indexes increased somewhat ,_ Broad U.S. stock market indexes increased somewhat since the middle of last year, on l,_- net. amid substantial volatility (figure 34). - 0 Concerns o1•er the sustainability of corporate I II II I I I I I 1 I earnings groMh, the global growth outlook, 1001)))3200SZ00'7:'009:'0lll01il01S201i2019 international trade tensions, and some Federal Xorr: Tbc &u ate dlit)•, Ytdd ~t~ is for 1bc FJD'li: MJt .\G.ye1t tvntat~lbe~tA:M'<IIbicllllno'~~st\uilits •ou14kp0."rl''l~Pif.orfa.'t,l'lb:',s,u..J~ailt.11tk:&I('R(tollk S..JIOo}Q'IIOCnicla!Tr~·)~ Sc:ure ().~ofr.\:TI'm.ll');~byJLro'e, 122 Reserve communications that were percei1'ed as less accommoda1ive than expeeted weighed on investor sentiment for a time. There were - !0 considerable diftcrences in stock returns across - IS sectors. reHecting their varying degn.>es of -_,16 sensitivities to energy price declines, trade -12 tensions, and rising interest rates. In particular. - 10 stock prices of companies in the utilities s sector- which tend to benefit from falling - 6 interest rates-11nd in the heallh<are sector outperlormed broader indexes Conversely, stock prices in the energy sector substantially I I I II I ! ! ! II I I I I II I I If I I ! I underperformed the broad indexes as oil 199$ XOI Z(O.( lWI ZOIO NIB Z'OI6 Z<119 prices dropped sharply. Basic materials--a -Son:: 1.:.\~·pkiHb: 10>)\W ~nplc>B,..,!ndlrcofl«b:kcftfcl:j,.c sector that was particularly sensiti1·e to >leW .of tho: let ~\It i4>10.y" cripk-8 U.S. C~:.: llldct (CI;A').II'sfti~ i$ 6:-IO.~'UJ liipo,_i.:W1 :::4 1ct\:o.'tl tb: df~'"ti-.-r )idd concems about the global growth outlook o!lh: ICt&CUtl 7·~~>1\).)aiJ.S.<3$hP.-yHi,PY.dJbh(UAO~ and trade tensions-also underperfonned. S«.~t!la ~of~ ~t."ff'iD L~tdl ~tiled "'rlb. Bank stock prioesdeclined slightly, on net, l~. Equioypri<cs as the yield curve flattened and funding costs rose. Measures of implied and realized stock price volatility for the S&P 500 index- the VIX and the 20-day realized I'Oiatility increased sharply in the fourth quarter of last year to near the high lel'els observed ine arly February 2018 amid sharp equity price declines These volatility measures partially retraced following the turn of the year. with the VLXr eturning to near the 30th percentile of its historical distribution and with realized I'Oiatilitye nding the period J ' II II II I I I 1 I I I I I I II I I 1 close to the ?01h percentile of its historical ~l200>20052001~:00112'013~1$ZCI172'019 range (figure 35). (For a discussion of financial Sol.'lU..:~d&f.."oX'sO...·Jooco.ll~,.g~T&-(For~ stability issues, see the box "Developments .loocs~l~lllf~StXtJlCDI.'«'(I(Ieb:(~~.) Related to Financial Stabilit( ') JS .. . , S&P lOth'olaoility .... Markets for Treasury securities, mortgage backed securities, and municipal bonds - 0) - ro have functioned well - 10 Available indicators of Treasury market \1X -_.JO, functioning hal'c generally remained stable since the first half of2018. with a 1•ariety of - )0 liquidity metrics-including bid-ask spreads, - !0 bid sizes, and estimates of transaction costs - 10 displaying few signs of liquidity pressures liquidity conditions in the agency MBS market were also generally stable. 01'Crall, the functioning of Treasurya nd agency MBS ~( ~ !J n t ; t Q lk U1 ~ Vl d .~ l a i t t ! a ; ~ .: * o c b. o s_t l .p $ ~ 0 ' 0 'O ® blih 0 [) \ t ! t h t a h l t r . ! - O pr I C I ' . S ) a v l . l i ~ : ; ~ JO markets has not been materially aft'ected by da)s.Fort~\'Chi(ty.tii~A't'tOmS~\tdiDatlc.~ly titip:a!f!I0\1r¢a\tft$o:"'07Spctl~ol•"ti~A~OI'tt~f'l$1 Ndr)1. Solm:Oiox\'ob:ihl}lodt\J(\'IXI)~~na81.~ 123 MONETARY POLICY REPORT: fi8RUAAYI019 25 the implementation of the Federal Reserve's balance sheet normalization program O\'er the past year and a half . Credit conditions in municipal bond markets ha\'e remained stable since the middle of last year, though yield spreads on 20·year general obligation municipal bonds over comparable-maturity Treasury securities 11~re modestly higher on net. Money market rates have moved up in line with increases in the FOMC's target range Conditions in domestic short-term funding 36. Ratio oft01al commercial b:W: cn."'::itto nominal gross markets have also remained generally stable domestic produd _/ \ J_,. since the beginning of the summer. Increases in the FOMCs target range were transmitted efti:ctil'ely through money markets, with yields -i5 on a broad set of money market instruments mo\'ing higher in response to the FOMC's policy actions in September and December. - _., The effecti\'e federal funds rate moved to parity with the interest rate paid on rescn~ and was - - 01 closely tracked by the O\'ernight Eurodollar rate. Other short·term interest rates, including - ll those onc ommercial paper and negotiable certificates of deposits. also mol'ed up in light I l I M , > 2 1 00 1 2 1 20 0 I 4 200 , $ Z I O O I S l I G lO I 2 , 0 1 I 2 , lG l. I l 2 I '01 I 6 .2 I 01 I $ J of increases in the policy rate. ~: O...~l01t~. .- S«tO; F~l Resent ao,;d. ~bli<11 R.o;k.f;!;: H.$. ·A>SCIS. W Bank credit continued to expand, and A La f a l# h: y l ; i i$ ti \' c ia 1: lk af ." C: tt O A !I W Itl )t 1 i t '< 1r . i&l~iDiki;'~S:.r-C1":8urC'alofi;((O)(T!IC bank profitability improved Aggregate credit provided byc cmmercial )J. Pcofi~biti1yofl:onk holdingcompani" banks expanded through the seccod half of 2018 at a stronger pace than the oneobsenw in the first half of last year, as the strength 2.0- - )I) in C&lloan growth more than oft'setthc 1~- ·---~ -10 moderation in the growth in CRE loans and 1~- loans to household~ In the Jounh quarter of J- - 10 last year, the pace of bank credit expansion was about in line with 1hat of nominal GOP, ~- - 16 leaving the ratio of total commercial bank I~- - :» credit to current·dollar GOP little changed IJ- relatil'e to last June (figure 36). 01'erall. tO- - JO measures of bank profitability improved further in the third quarter despite a ftanening yield cuf\'e. but they remain below their pre· ~lk~*"qu:ncd.t.clda:c~t,~Tbc-~ C!&.,PWI~l. crisis le1<els (figure 37). ScA1re Fedml RclMt" 8Ntd. r~ fJ. ''·9C'. C((S(II~ f"CJ:~o.'UI -~8>ol:llo1qC_.,_ 124 Developments Related to Financial Stability The Federal Reserve Board's financial research b)• 1he FcdeMI Resc~t Slolff, 3(3(fcnoies. ond stability monitoring !ramework othertxP1'15. Sinre !he publrcation of the fedi-fal R('SM'C Soard's mo T n h it e o f r r f o o m n.1 t\ n , c IJ i < a I i < < u !. S Jb « i ! li b ty y d 1 i h s e ti n F g e u d i e s r h • e l s R b o e s t e w ~ e ~ e n S o < a h r o d c k to s s fo om rst e l i a ll r d e n ~ c s u w / h St e ~ r b e r l \ i · t ~ y I U R J c ti p o o n t p l t o t'S n S N Ur O C \ S -e w m e b r e e < f 2 l 8 co , 2 n 0 ce 1 r 8 n . to and ,~lner•bilities of the fin.Jncialsy!(em. Shod!, h.ne cooled. p>rticul~~) !hose rel.lted to belo"' s co u n c d h it . io , n su < d , d " e e n t c )] h > a ic n 3 g 1 e 1 s ) · 1 1 0 U f rp in ri a s n e< ci a al n o d r a < re eo in no h m ere ic n dy • o n m d e s h ~ q m u e r n d t •t - y w r a a d ti e O c ! o o rp f o ~ ra t f e i n d .1 e n b c ! r . a ' l R i e n g ~o u t l u a t lo to ry ns c . o pil<ll diiticult to pred"IC1. ~ner.as '"lnerabili~es tend 10 tsptei.lll) large b>nl.s, are at hi>tori<~lly hrgh 101<1>. build up"'"' time and are the a<pe<1< of the financial fundrng nsl<s on tlw fonanci.ll !)~tl'll are low rebli\~ S)>lem !Nt are most e>:j.1<(led IOCM< "i<lesp<eod 10 the period leodong up 10 tlw cnsr~ Borrol•ing by problems in limos of 1lteSS. Some wlner.tlilitie are hcoustholcb hos l1!t<1 rooghlv in lrnt \\ rth ~ "clic.ll in narure, rising.!nd f.!lling a.tr time,"~~'~ lftCOri'<S and hos botn COftCtl'\lt<~ted among pnme i c r o e d s m u lo 1 t 1 5 s . s a th l r l. e e lp - & in l a g m . t : e h . \ e \ n l l . & . > r u io r m c e u o o i i t s e " m p ' r f f i t m ~ om a in r l i i t l o m v n o i g O n t < < 1 f - 1 o l 1 f a 0 m t 1 i 1 o l 1 n l0 . 1 A 1n s g . o . h f i . g t h h , . e . a l n o , d a . n ~ , IN « 4 I S I . ! o l t a l ~ f n o d $ ( W u . ! t s d d , f o t b < n t p a C l . o , C t \ d i \ o f b l t l · y v ta \ b \ z > W t l d h o e in x e s s U q ! l e r ll n ' s .i o i le > o d : s ,1J~nmbi!i!ies and~ iwr brood ra:<gcn<s linn!, dori!ocx.o:ed rn rht !«ond !I.V of2018. bos 1 e . d E o lt n \ 1 ac l o td de , m ., i . < .t . io . n . p - rO h SS IIm.,.s ip>altd 1>.·. ..a llst A on s! c C o I l ' " a 1 lu 1; o < li > o n on s m W. o C n ~ y a .!.t..dU 10. S lil " t ' h " i ' f 2 l 0 e 1 n 7 d a o n f d t h th ei e r e p x r ic hi e s s ! D lh ri a c l o a l r n e o h r i m gh s a rd n a d :i . i. , . . o IO ito ~ n elm~ l w hm . d . u in no r o .. la .! ls td . ii . n .. t . b ., .t . i . c .a /2 n 0 d 18 a , ~ n~ r b n ) c • r t e h ~ e t ; t o r l n i o d m « 'I o ' n SI o Cn m ' c ' . " r U .. . ~ " t " t " d s o ,. f r i . m ..o 'I o 'S n l O p< I 1 < !S S 1 U 0 te u S l ; in e l o > n h ' r a is g i: r . e A a s tt . r . p m oi . S ibiloty , a . p , p .n r'l d lt e th la e r t r r r m s e l c H l t o h l e ' " P " ' ' " ·' ' . > . O ,. U ., ! . l r lo e t d M " ' • Y tl tr r l ~ 'oUc 2 y 0 18, of OUI<iztd drops in ...a prias. 1/.oporl. ,aluahon ptt'SIUr!'S h.n~ ta!td -b.t 2. £xcessi-~ bono\\·ing by bu!4ntSS<S and on the~•IV, <orporatt bond. and k'"''ged loan llouseholds lt.n<S them \1llnerab~ 10 dilli'<SS of their morl.ers. o,., the <amt ptrrod, amod wbl!.lntial markot incomes decline or the.,.,. they own fall in .alue. \'Oiatrhty, the fon,ard ('(juoty prrce-r~•mrng~oatro of 3. Excessn·el01~rage "ilhin the financialsedor S&P SOO fonns, a mt~rrc of "luations in oquity mar~e1s, increases the risk that financial instiMions \\ill not ha\'t declined •touch, on ne1. and it currently !land; jllll theabilityroab!orblos&es"l>en hit by ad\...,. shocks. beiO\Y the lop qua nile oi its his!Orical disuibution ~. Funding risl<s expose the fon.lncials)<tem to the lfrgure A). Spreads on bolh on\tstmenl· and speculoti'~ possibilil)' thai irn-estors \\ill•run" bywithdlowing gr•de corporote bonds Ol'er comparabl. .m .~turi~· their funds fronl a particular i~itution or sectOf. Trwwry ""urities widened ~tly to 11:\<ls close Facing a run, iin\lndal instilutions rmy need to~~~ to the medi.1ns of their hl~ooicalranges since 1997 as!ffl quidly a1 ·oire <ale" prices, thereby incurring tfrgurc 8). Spre.1ds on nt:\,1y i<wcd le\~r;ged lo.1ns wbslantiollosses ond polentially "~ bo<:oming widened 111arll'dly in the founh quantr of 2018.tn insol\'ti"'t. Historians and economists oiten refer to rt.11 <Slate noar~el!. comnoerciol reol <SlJte prices h.l\'e ~\ idespre.ad im~ runs: IS "fioancic.l panics.• betn SIO''ing f;~er th.ln ren~ for St\eral l••~.le3\'ing \Vhile this ftJme'\\'Ofi.: pro. ..i dna system31ic \\"Y ,.,luations ~retched. n tO o c a s ir s t e n ss e a fi t n ly a n in c r i o al i s t t b ab e i u li u ty s , e s o th m ey e a p r o e te f n lO ti \- a . l I r o is r k d < i d ff o k ult bvs S i rn ~ r s e d th e e b t 2 0 h 0 .J 7 , - t o d <J i' t ~ rg . t h d o lfr u gu s r e t ( h ). o 0 l \t d r l d h <! e > l and 10 quanoiy. sud! a~ q~nl)' 01 tl@o.-elopnwnll p.l!l St\eral )e.ors. borra."ng b)· ilouseholds lt.ls 11>)-ed in Ct)~assefs-ln addiOOn, 5001e \1Jintrabilities are on lint'"tlr income pth •nd has betn concer>o dilticull to meawre "ith <Urrendy O>ail.ll* d.u.l. •nd u.utd among..,.,.,.., '"th Slnlng credit his!Ories. the 1<1 of \'UIIItl'abilities mav .,'<)I,~ 0\-er timt. Gi\~ tl!o!t li"'iWions, "~continually rei) on, o-n.go.i.n,g · lcon~II!Jt'IJJ a.ru.,..;,...olrht..,..rn,........,.,,.,... 2 ~-oter. . ..... olf\t_al_tS, ood ....." """"' ...T obioso\Oiao. .-C..i ll. •2018 .l.....cOIIS!Jb&,.., •II..,...,.. llolrdol ood ,_.~~1>. "F-~ 0..:-· er.-. ....- lcpl; -~·~ -~,...·ofr....o.J{c_,,.._, .•... '201~~ IIIJ.lS:-9>. 125 MONETARY POLICY REPORT: fi8RUARYI019 27 - ll - l I !!! !!or!l!ol!/ II Ill·!! d am 1~ am lKW :sm 21m Nl9 N4:1rF:~Iinlt\1~tM10d$..~P~f~Ollu Sou~ D.u 1ft pk11y aaj oi<'Cid lhr•10\S.Q3. 1'k Wdrni Nrs ;w~oot.\P-"u~ror J.!~Jbcld. Thtr6M.~'~ ~ptfl(dsd~r~a,dd'IOCdbylfl(o~BI.rmvf ~ S ~ ox # 'U . l:: J ft ~ dm I l . ~ )F ~ ~ N lk - w 2 ;! 0 w 1 ff 9 . ~ !N!a RMili\• ~ S ~ ol. i at t t G F O ~ P R Rt ! st: . f\1: p & ~ w & \ t 1. m ~ Ni.:- ~ R .tk~ l.l. "f"lflltrit! ~lbxltloo~}.IBESJ~ ~oflbcUoilcd~"':.&.muolE~.wl}11S'il""-n B. Corpor.>l' bond spl<3ds IO~mibr-m>l,rity ~ D.. ~ ~PI ' ~ OOo." t Q l . br ~ d M . 2 J if ~ al " . 1 ~ ».~ T.Jbko 1.1~ Gl'l$ T~-wySl'CUrities ~'" 1~ars (f~Sure 01. kswnceof thele illllrumen~ si0\1~ signif~ntly in NCI~tbe< and Oe«nlhe< 2018 - 16 be< au se olthe sharply highe< lpfeads demanded by - 11 inl'e!tors 10 hold 1he<n, bul issuance has rebounded -- ,12. som C e r w ed h i a t t s i ~ n n e d . a u r l d y s 2 f 0 o 1 r 9 n . e w 1..-eMged loons deleriOt<lted "'"'1 he second half oi 2018. The share of newly issued large loons to CO<pOrations wilh high le~'erage-<lefined as those with ralios of debt to EBITOA (earnin~ before inlerest, Ia'"'· depreciation, and amo<tilation) abo-.e ~increased lhrough 2018\o le~-els e:<ceeding pre~ious peaks ~ed in 2007 and 2014. when undeo1ri1ing qualily ""' !ttl!ll!lllll! !Ill !Ill 1998 2001 :'004 zoo; 2010 ))13 lOt~ 2(11~ notably poor. In a<ldition, isswnce of CCI-enonl-lite loans-loans with few or no tr-.tditional maintenance 1·~ N ~> o - l l l ~ : ' ~ T : l it x l C O f . ~ ~ C ~ " t k r -8 i p l k L - S 8: . d" C k « \ p 't c S n 6 ' e !< et ' l t t < li l b .' t (C il .& e . ) \. I & < ) ' . U W oll bt t 1 b C r E S I o G ! - A )'C \I 'I L I' CCI~nanls-remained high during the second half h!Pyidd rt~dltrfft\~'( )'idJofik ICEIWAMl.7-40-lG-yQfUS. of 2018, although this elevated le~-el may reilec~ in ( (V ' tl ~ .' f h :~ y t\ H t( i " t ' ; ( \ O Y io d (l l '. l c r » d rt t o \ . $ ( ( J \' . t: M t ~ 'i t 1 ic 1 s. ~ ' ~lridi 6\w ~ !,~ pan. a greate< pre~·alence of in~"'!ors 11ilo<lo not S«.m~K'EDI&a~U<.~•llh~~ottbr: traditionally monitor and exercise loon COI'roants.' Tu~. Nonelheless, the strong economy has helped ws~in solid credit performance of iel"eraged loons in 2018, Br cont~ borrowing by businesses, including riskier with !he defaul1 rate on such foaM near the ICiv end of firms, has expanded signiftcanlly. ror !p«Uialn-e its historicdl r~nge. grolde and unr.lled firms, the raoio of debtlo asS«s has (continued on net~ page! incre<lled ~eadily since 2010 and remains near i~ histori<al peak. Furthe<, _growlh in debt to buli"""" 3. Collatera1t~:ed b.ln obli~ ""ich qce predomil\a:Mfy w '" i ~ lh I s fo o w f t b c o c rr r o e w di i t n r g ct . f s in u g c s h an "' d h w ig i1 h h - y a ie i l r d ~ b · on e d le s \ • a a n te d d i ) b " e o e l a « d r a a « s o ! < d b d , y . l l i S o e o . l l « f l l ) a s ' s " f < . o d J ri N g l ~ o if o l . o d l l 2 O , 0 , O 1 h 8 < o , l l p ~ -e u m g r i r < b o h t w a h s n : e ~ a m A b p u o < < ! i A " l 6 l y l 0 0 u 1 n p « d e 1 $ rc 1 h o - o o o l t a d J o " f '' I.,..,a ged loons, has been subst.Jnual Cl'er the pas1 abou110 fl"<''I ol lel•raged ioofiS. 126 Financial Stability (oon~IWI!d! - and • deeper rec.,sion tlloln in 1018 as 11~11 as ~-pically large declines in financial asset pri«s. -~- Capi~ll.-~ls at insurance cornpanie< and broke<· 8 lrN..cWI\Uk'-lDl'>'d"' _., dealers also remained relatil~ly robusl b)• historical • HtsJ!·)idlandlllnlcJJNnds ~andards. A range oi indicators suggest that hedge fund -Tool le~-erage11~s roughly on(hanged 01-er 10t8; ""'''""·' cornprehensil~ dota, a~·•ilablewith a signifiQJnt ume lag. from earl)· 1018 showed thatle-..-age remained at the upper end oi iB ronge over the pas~ eight yeors. Vulnerc'lbiliti~ associated with iunding risk~t is, the financing of illiquid assets or l011g-maturity asse~ with sbort-m.lturity debt-<ontinue to be iol1; _., in pan because of the post-crisi> implementation of liquidity regulation< for banks and the 1016 money I I I 1 I I I! t I I I 1 I !I marl<et reforms' 6anl:s are holding higbe< le~~s of l'0:6 :COS NJO 2012 ZON ZG16 1(11& liquid as leiS, 11~ile their use ol short-term wholesale Solr: Tou.IM~ofnJk:.·&tc"'lbt~o(thcacc~« Cun<rtng a:s as hafe of liabiliti~ is near histoe-ical rows. . ~ b. ' S l l o '. l u . b t q t t D ; ~ i ~ M \ t ~ « .: f p l- ! \ d IO t . \ · ' r C i " t I c I ~ l n \ l ~ l t m lf . ~ ~ *' l S d c lc \ < ~ .~ ~ klw..T ( h fi t ' d SD x ): a ~ an P ! ~ th.l s t fl< C u ! n I-e d d e t ~ ~ m l a n n e . t a a g b e l m e e t n o t r u a n t < p r in im th e e fu p n a d st s , , i M n l st ~ it u ri t S io I' n n s ~I.C\~'\iC~&D.ML somt\\~t in recent monlhs tx.n remained far beiO\v pre-relormiel..ts. The cre<Jit quality of noofllldncial high-yield Potential downside ri$ks to intem. 1. tional financial corpo<ate boods was roughly ~able<11·er the pasl ~abili~· include a dC111~turn in global gr0111h, SOI"tf<ll rea~. with the share of high-yield bonds pOlitical and pOlicy uncenainty, an in:ensification outs~anding that are rated 8318-or bel<11v ~aring of trade ten>ions, and broadening stress in emerging il.lt and below the financial crisis peak. In contrast, marl<et economies (L\IEsl. In maO)• adl~nced foreign the dis~ibuti011 of rating> among ini"\'Simenl·grade ecooomies, financial conditions tightened SOO'le\\hat corpornte bonds ooeriorat.O. The sha<e of bonds rated in the secOild half of 1018, pa~lr reilecting a at the IC!II"elt in1""ment·grade lt~~l (for wmple, an d<>terior,llion in the foscal outlook of Italy and Brexit S&P rating of kiple.S) rtached nt<lr-<ecord le~-els. As of uncertainty. The Unite<! Kingdom and the European December 1018, around 42 percent of corpornte bords Union lEU! have not )el ratified the terms for the outslanding were at the'"""" end of the im-estment· United Kingdom's Mard> 2019withrlrawal iron> the EU grade segment, amounting 'o about S3 trillion. IBrexiO. Without such a withdrawal agreemer~ thete Vulnerabiliues from financial-sector le~-erage will be no uansition period for important trade and continue 10 be low rel.ative to historical S!a:ndclrds, in financial interactions bet\veeo U.K. and EU reideflts, pan because of regulatory reforms enacted since the and, despite preparations for a •no-deal Brexit" a wide financial aisis. Core 1inancial intermediaries. including range of economic and financial adivities could be large bonks, irliUrance companies, and broket·de•lers. disrupled. EMEs also experien<ed ~ghtened financial appe.ar well positioned to weather econotnic str~s. As ~r.,s in the second half ol1018. Although tllolt sues< of the third quartet of1018, regulatory capitol ratios for 1m receded 10111<11-bat more recent!)", many L\IEs the U.S. global s~emicall)• imporunt bonks rem•ined (Ofllinue to harbor impor~ant wllliililbilities, retlecling well iibo\'e regulat<>r)' requirernet~IS and were dose one or more of >obstantial corpo<ate 1.-~rage, fiscal to historical highs. Tbose bonks will be subject to the concems. or excessi\"e reli.1nct on foreign funding. 1019 Dodd-Fr<nkAct stre<s tests and Cornp<ehensi1't C fe . d p e i r t a a l l A Re ss < e e s n sm ~ e B n o t a a r n d d 's R po 0 ~ 1 l o i ie c w f . r C am on e s w is o te rk n t t 1 h 1 i i > lh ) ~ th .u e ' < 'S! 4 C . A S d .. o li p .S ls . •' S IO ro O r e r ) i ' ! M ; • .s ~ a < n t d F E u x n c d h a R n el g o e r m Co R m u m le i s s , s " i o p o r< ( S 2 S 0 r t e 4 i< ~ ..._ scenarios feature a IJrgtr increase in unemp!~ment Myll. ··~""·"".go-.·.,...,~-1"""-''*""'~ot<-t•l. 127 MONETARYP OLICY REPORT: fi8RUAAYI019 29 International Developments Economic activity in most foreign economies weakened in the second half of2018 After expanding briskly in 2017. foreign GDP growth moderated in 2018. While part of this slowdown is likely due to temporary factors, it also appears to reftect weaker underlying momentum against the backdrop of somewhat tighter financial Condit ions. increased policy )$. RC3t gnm dottiC;1k prodU<t gro"1h ins cl«t<d ad\'atlC«< roo:ign oconorni« uncertainty. and ongoing debt deleveraging. The growth slowdown was particularly pronounced in advanced foreign economies Real GDP growth in several advanced foreign economies (AFEs) slo11~d markedly in the second half of the year (figure 38). This slowdown was concentrated in the - l manufacturing settor against the backdrop -· of softening global trade !lows. In Japan, n.-al GOP contracted in the second half of 2018, as economic actil1ty, which was disrupted by a lOIS ))16 l>ltl Zi~IS series of natural disasters in the third quarter, ~ ~ ~ Th , e C ' d il w :ia . w f s o r f o l r h r l O f I \ ~ W IU , T .t. h ~ e~ fo ~ r C l 'a k u k U . o K le . 'l l l l d ll w ~ p.nlt rebounded only partly in the fourth quarter. lli8:Qt Sol.. ..; f«lbo:l.'~~~OJ'l'.. ~. f«~--~~~ Gro111h in the euro area slo11~d in the seoond C~O!Y'I('('.~~of~t:.~C..NO~og.Ut;~~('-* half of the year: Transportation bottlenecks ~c~~\ilHlwtA~ti:s. and complications in meeting tighter emissions - 39. CooSWOO' prict iotl3tion ins cl«tcd adv311Cl-.d for.:ign standards for new motor 1~hicles weighed \.'\"'f''Imics. on German economic activity, while output contracted in Italy. Although some of these headwinds appear to be fading. recent -· indicators-especially lor the manufacturing sector- point to only a limited recoveryo f ..._. - 3 activity in the euro area at the start of 2019. ~ _, Inflation pressures remain contained in _.f - 1 advanced foreign economies ... E•oM In recent months. headline inHation has fallen below central bank targets in many major - I AFEs, reflecting large declines in energy prices I I I I I I 1 I I I 1 I I I I I I (figure 39). In the euro area and Japan, low WI~ 2lll6 ~17 !GIS ZOI9 headline inflation rates also reflect subdued lO : ) \ t9 o . l( T ; b T c h do : o l i« i L l h u < f t: ' . « . O . t ~ . " N " " " ' <l ~ - Q - ~ , 4 l b > ; l l > l t a o : > s t ! ) l •l ~ O) f . . o . r Tb ~ c · core inflation. In Canada and the United .... l«c.o.l>ood""""'"""'..Pll>.~l<ltl Scuo: f«lhrl."ri.'.-dK~OJTa."t'f«~l~blapm. Kingdom. instead, core inflation rates hal'e \~ r:l~ Atbits w.ICUICDI~ b lhrN'\'Ift.l. been close to 2 percent. C S: ar . J l .a l : i a s lf t \i i a c K . I a \W iO A f m f l)' ~ ti o o. . "S > . toltl.::~C~Ii-s:f«eza..ta.~ 128 ... prompting central banks to withdraw accommodation only gradually With underlying inflation still subdued.the Bank of Japan and the European Central Bank (ECB) kept their short-term policy rates at negati1<e levels. Although the ECB concluded its asset purchase program in Dettmber, it sig~1aled an only very gradual removal of policy accommodation going forward. The Bank of England (BOE) and the Bank of Canada. which both began raising interest rates in 2017. increased their policy rates further in the second half of 2018 but to levels that are still low by historical standards. .;o. Equity indcx<"S ror sdl"\"".tOO rooi.gn eoonomies The BOE noted that ele1•ated uncertainty around the United Kingdom's exit from - I., the European Union (EU) weigl1ed on the country's economic out lock. - IJO Political uncertainty and slower - 110 economic growth weighed on AFE - 110 asset prices - 100 Moderation in global growth, protracted !0 budget negotiations between the Italian - so government and the EU, and developments related to the United Kingdom's withdrawal lOIS !016 from the EUw eighed on AFE asset prices Fd ~ ruxy 1 f 0 h , : M dl l ' ~ : . llk'fi'C'd.l)'~'~ t.>fdailydl:.a d c).knd ~ in the second half of2018 (figure 40). Broad SOtlt'l: F«ftii'Oarr:L. OJ EDS:o:t..~ f»:\;f« ~ TOPlX&o..-k stock price indexes in the AFEs fell, interest IDl-:ci«'UiL'\lK. ...f TSEIOO&o..-ibh:all'liB~g.. rates on sovereig11b onds in several countries in the European periphery remained elevated. 41. Norninall0-)'t31 go,-._mmerl[ bond yields in and European bank shares underperformed, scl"1«13d'-.n«<< economics although these m01'tS have partially retraced in rettntweeks. Market-implied paths of policy in major AFEs and long-term sovereign bond - lS yields declined somewhat. as economic data - l.D disappointed (figure 41). - l.S -!.0 Growth slowed in many emerging market - u economies - u Chinese GDP gro111h slowed in the second ~ half of 2018 as an earlier tightening of credit policy. aimed at restraining the buildup of - J debt. c-aused infrastruclure investment to fall sharply and squeezed household spending ~ Jb:c!)l;att~•~mn£tSO~~·txoctam.-lr:yi.:l45~o"!<'Od (figure 42). However, increased concerns .. S . o . o. . l ,, < ~ C- 20 ~ .!0 19. about a sharper-than-expected slowdown in 129 MONETARYPOLICVRIPORT: fi8RUAAYI019 31 gro111h. as 11~11 as prospecti,·e eft'ects of trade ~~. Rtat gross domes!ic pt0<1\1<1 growth in scl«ool policies prompted Chinese authorities to c:mcrging rnarket economiC'S ease moneta£)' and fiscal policy somewhat. Elsewhere in emerging Asia. gro111h remained - " well below its 2017 pace amid head11inds from - 10 moderating global growth. Tighter financial s conditions also weighe-d on growth in other - 6 EMEs- notably. Argell!ina and Turkey. - ' Economic aclivily strengthened somewhat in Mexico and Brazil, but - l uncertainty about policy developments remains elevated - 6 In Mexico, eoonomicactirityincreased "'" .!016 :'OIS at a more rapid rate in the third quarter ~: lk&uiOrClmare~~b)·hd~lbrdatl after modest advances earlier in the year. ( g .:c < K l .« ' a ~ . ~ 1 ~ .."" ~ "'0. T JD h d e lb n 4 l a K u ( t IK K ~ on-: · a, ~ a b n4 y c !ok b \i.. t 'o) w ~ ~"'i\~ However. gro111h weak~ned again in the fourth p lO m ll im <( i ) o ~ x )· estinm-s. b ~I&Qo&, lb: 4.u for 8!W akcd ~~ quarter, as perceptions that the newly elected $ol.'l(t: f"«~Ct\i(u{\)I)."(QQ~o(~)l!Ci:fotK~&l'lk gorernment would pursue less market-friendly ofKOI'Q!foc.\l~lf$rtlllO~dt£Judi-.!ita~·~~&:.f« 81'l1ill~~rodt~f~e~IC".a:all,\ilh\\"f~~ policies led to a sharp tightening in financial condition& Amid a shmp peso depreciation and abore-target inHarion, the Bank of Mexico raised its policy rate to 8.25 percent in December. Brazilian real GDP growth rebounded in the third quarter alier being held down by a nationwide trucker's strike in May. and financial markets hare rallied on expectations that Brazil's newg01·ermnent will pursue economic policies that support growth. However, investors continued to focus on whether the new administration would pass significant fiscal reform& Financial condilions in many emerging market economies IVere volalile but are, on net, little changed since July Financial conditions in the EM Es generally tightened in the second half of 2018, as inrestor concerns about vulnerabilities in several EM Es intensified against the backdrop of higher policy uncertainty, slowing global gro111h. and rising U.S. interest rates Trade policy tensions between the United States and China weighed on asset prices. especially in China and other Asian economies. Broad measures of EM E sovereign bond spreads orer U.S. Treasuryy ields rose, and benchmark EME equity indexes dedi ned. Ho11~1·er, 130 financial conditions improved significantly in rectnt month~ supported in part by more positive policy del'elopments-including the IBooJ'=J~lt~aW) U.S.-Mexico-Canada Agn.>emcnt and progn.'SS SOl - I Eq:.il)(edlbu(ri&lll"'is) - 6G on U.S.-China trade negotiations- and FOMC communications indicating a mol\! gradual normalization of U.S. interest rates. EME mutual fund inflows resumed in rectnt months after experiencing outflows in the _., middle of 2018 (figure 43). While movements L<o- in asset prices and capital flows ha1'e been - ;I) sizable for a number of etonomies, broad indicators of financial stress in EMEs are below those seen during other periods of stress Non;lb:lx'OIIDJ~timdfkMsdafa.w~Joli!ISof"\'dt)' in rectnt years. lb:a f:vm llauxy I.!OI~.IOD..,"mmt.'-.., ll. WIS.WIIIOIICbl) lli'!IScf ,.-~~daulfromlnm)·I,2(11~.10Fd:lnw}·20..:~m.lb:flld!M:ra-sC. b ~ 1" ( 1: P ~ bi; b ~E.\ . 18! ~ -·) 6 il w !l ( : l l i ! N ~ . v o T t h cl e : b J ' J a I·. l ' m " ;., ~ ~ o f' l .m 4W <'Q )• :l ll d $ l ~ b M an : J m ~ l & t.' a t $ d The dollar appreciated slightly ~r~l9,l'li'J. Solm: f-cth:6JW~Wd~-s.EPI"R:G~:~EM61 .J.P. The foreign exchange l'lliue of the U.S. M{'(p:t[m.'fSiac_,\\.attitu:Boodlodnl'b,uB~'IJ. dollar is bit a higher than in Jul)' (figure 44). -14. U.S. dolbr t.:xdnng.e ratt indtxes Concerns about the global outlook. uncertaintya bout trade policy, and monetary •«t:~~f.:O:.JS•IOI) policy nornlalization in the United States contributed to the appreciation of the dollar. - IS<I The Chinese renminbi depreciated against the - 100 dollar slightly, on net, amid ongoing trnde - llO negotiations and increased concerns about growth prospects in China. The Mexican - Ill) peso has been volatile amid ongoing political - 11(1 de1•elopments and trnde negotiations but has, 1.0,0 on net, detlined only modestly against the £. . - dollar. Sharp declines in oil prices also 11tighed I I I I 1 I I I I I I I I I 'I. I I on the currencies of some energy-exporting ZOIS 2016 Z\117' 201& :0019 etonomics. S~;~tr.: Tbo:&u..•'bdllNia~n!IT~')'IIIibpo."''doliu.alC~ i'l~d~l)·d2tllr:l4~!t:l'l6.~F~·20.!019.Ai~by 0: wrot~. ixr.:~ ~~!.he da ftt!rct:CtiiiJ.S..doiLu~..., E® S ~ o_l, ~ '.l.( U ~. .F S_-td ..« il « R < es a mt t lk ~ ct i 4. « S- L :l l~ Rtbsc lllt\, ~ 131 33 2 PART MoNETARY Poucv The Federal Open Market Committee reflected the solid performance of the U.S. continued to gradually increase the economy. !he conlinued strengthening of the federal funds rate in the second half of labor market, and the fact that inflation had last year moved near the Comminees 2 percent longer run objective. From late 20t5 through the first half of last year, the Federal Open Market Comminee Looking ahead, the FOMC will be patient (FOMC) gradually increased its target range as it determines what future adjustments for the federal funds rate as the economy to the target range for the federal funds continued to make progress toward the rate may be appropriate Comminee's congressionally mandated objectil-es of maximum employment and With the gradual reductions in the amount price stability. In the second half of 2018. of policy accommodation to date, the federal the FOMC continued this gradual process funds rate is now at the lower end of the range of monetary policy normalization, raising of estimates of its longer-run neutrallel-el the federal funds rate at its September and that i~ the level of the federal funds rate that is December meetings, bringing the target range neither expansionary nor contractionar)'· tO 2\1, to 2\1 percem (figure45)."The FOMC's decisions to increase the federal funds rate Developments at the time of the December FOMC meeting, including rolatility in financial markets and increased concerns S)> 1 O 4 < . m S ( « 20 B 1 o 8 o ) r . . d . o F, f > d G er o .ol m R n e o s r e s n o t f I s o s h u e e F s < F d O er ~ n t l C R «<~~ abom global gro111h, made the appropriate SoaO<rncno:· pn:ss rel<ase, Sepo<mb<r 16. hoops:!/ extent and timing of future rate increases \\'WW,f«j~r3(rest"I'\"C',gO\IDCU'SC\t[IU;1prtssrt1cav;f/ more uncertain than earlier. Against that monmryWI80'Jl63.hom: and Boord of Gowmorsof backdrop, I he Committee indicated it would ohe Fedml Resm< S)>lem (2018) ...F «lernl R...,~, monitor global etonomic and financial l><ues FOMC Sl31<mtnt." pres< rtl<aSt. D<o!mb<r 19. developments and assess their implications https:h\\\w,·,fedmlrese.ro~.go,irtr'll~\tntSipres:srdruesl for the economic outlook. In the Summary monm~2018111~•.hon>. - - l -· - l _, _, -0 1(138 2009 2010 roll 2012 lOB MI-l 20:1S :M16 2011 2018 2019 Nou::: lla.:Z·)~mj lt).)U"lr~uryt~~n•clk<'OilStlnl..atrinitkf>.NsOOu.t!.: ~T~CNat1i\'t\'ytnd.:ds..'wili.-s.. Scutt [).~ollh!Tr~~rmliR~"<:Bl\W. 132 34 PART2: ,\ION!TAAY 1'0\«:Y of Economic Projections (SEP) from the prescriptions for the policy interest rate December meeting- the most recent SEP from a variety of rules, which can serve as available- participants generally revised down useful guidance 10 the FOMC. However, their individual assessments of the appropriate many practical considerations make it path for monetary policy relative to their undesirable for the FOMC to mechanically assessments at the time of the September follow the prescriptions of any specific rule. meeting.15 Consequently. the FOMC's framework for conducting systematic monetary In January, the Committee stated that it policy respects key principles of good continued to view sustained e.~pansion monetary policy and, at the same time, of economic activity, strong labor market provides flexibility 10 address many of the conditions. and inflation 11ear the Committee's limitations of these policy rules (see the box symmetric 2 percent objective as the most "Monetary Policy Rules and Systematic likelyo utcomes. Nonethdess. in light of Monetary Policy''). global economic and financial derelopments and muted inflation pressures, the Committee The FOMC has continued to implement will be patient as it determines what future its program to gradually reduce the adjustments to the federal funds rate may be Federal Reserve's balance sheet appropriate to support these outcomes. The Commiuee has continued to implement Future changes in the federal funds rate the balance sheet normalization program that will depend on the economic outlook as has been under way since October 2017." Under this program, the FOMC has been informed by incoming data reducing its holdings ofTreasury and agency The FOMC has continued to emphasize securities in a gradual and predictable manner that the actual path of monetary policy will by decreasing its reinvestment of the principal depend on the evolution of thee conomic payments it received from these securities. outlook as informed by incoming data. Specifically. such payments ha1-e been Specifically. in deciding on the timing and size reim·ested only to the extent that they exceeded of future adjustments to I he federal funds gradually rising caps (figure 46). rate. the Committee will assess realized and expected economic condi1ions relative to its In the third quarter of 2018 .. the Federal objectives of maximum employment and Reserve reinvested principal payments from 1 percent inflation. This assessment will take its holdings of Treasury securities maturing into account a 11ide range of information. during each calendar month in excess of including measures of labor market conditions. $24 billion. It also reinvested in agency indicators of inflation pressures and inflation mortgage-backed securities (M BS) the amount expectations, and readings on financial and of principal pa)•ments from its holdings of international developments. agency debt and agency MB S received during eachc alendar momh ine xress of Sl6 billion. In addition to e1-aluating a wide range In the fourth quarter, the FOMC increased of economic and financial data and the caps for Treasury securities and for agency information gathered from business contacts securities to their t'I.'Spective maximums and other intonned parties around the of S30 billion and $20 billion. Of note, country, policymakers routinely consult t6. For moo: infom1ation. ""the Add<ndum to 15. St< the t:lcrember Sumn.aryof Eronon>ic lhe Policy Normaliza.lion J>rinciplt:sand Plan;;.. ~ticb Proj<ctions. ~bich •Pl>"lred as an addendum to the isa,•ilabl< on the ll<>aro"s "<bsite at httJbJI»w~ minutO<of the D«<mb<r IS-t9. 20t8. me<ting of tit¢ f«kralr<s<nt.go,lmon<t31)poticylfik'lit"OMC_ FOMC and ~ pre><nted in Pan J of this repon. Poltey ~onnati<ation.2011061lpdf. 133 MONETARY POUCYRIPORT: fi8RUARYI019 35 46. Principal payments on SOMA se<:uriti<:S Trtasmystrurilies I R.-_ lftrin,~'fltS. - l<l - so --'!~("· -l'O -_JO., - 1/J _-..s,o - so r++llt-h~lll ,~IIIIIIIIMIIIIIIIIIIInl~, ~ - Jj) - 10 ~17 lOIS l019 :'\on; Rrift,-otm."'''lmdn\km"llOcurri(IUII{so(Trc.ISIIrySCI.'\Iritksa~crroP,'tioo5.)Uru.,iafd>nw)WI9.Rfin,'a~JflmlilDJr~iocuiDOI.Illlls ol~~;o6..1Jt;aJIJmor1~'''·bkt<:d~~~~'1ioni:~iiF'~·lJII).C~p~,Meproj..,'tiotb~...d~lilldJWI~.Tht1.bunt..'IXI tl'II\XI$1'10..'\~Y:'OI9. SOI.:to: F~U Resm~ lbnk DC~ YOtt: FNer.d RNn~ lkwt.l sufn\:ubliocK 47. Federal Reserve assels :md liabili1ies 200S ~ 1010 2011 2012 101J 2()1~ NilS 2Cll~ 2()1J 2018 2019 :wu: '"('fNit.d~tyticilib.."$-~o((lriowr)•.!a.'«<Cbf}'.Di~cm.lit~-.'1ioo<t*(\"'''ll11Nd:~·.)1111p!':.SI.IppOftfor M~ lane'. Bc:w S:cam$.. and MG: :atldotbct mdil la..-ilili<$.tOCJuditls lb.:-Prirn.y i):akr('redit fkilify, lbt As.~·&rl:(lj C~ hp:t MCC~CY ~b:k~M~fur4l~·Faci.tily.~~P'~~fM'ilic)•.~r:b:TttmA'i;SI('I.fb.i:N~~f._-i5!y,""()bcrttS(t..ird»."$ ~~~andd~oos<..'\"Vl~~~~:andotbo:r!Dbiri6.-$-indobi\'\<TSC~a£l\'~tb:U..S.T~ Go>'nl-""'lh<".S. T""'")'~r. .......A """ ll.d<o"'-""lM'Ogi>T.....,.H.l019. SI;Ayt~: f~Rc$M~Bootd.SW~Rtboic11..4.1.·F~Aff.!\'tio$RC"M-e~· reinvestments of agencyd ebt and agency MBS agency debt and agency MBS at approximately ceased in October as principal payments fell $1.6 trillion (fignre 47). below the maximum redemption cap~ As the Federal Reserve has continued tO The Federal Reserve's total assets have gradually reduce its securities holdings. the continued to decline from about S4.3 trillion level of reserve balances in the banking last July to about $4.0 trillion at present, system has declined. In particular, the le-.tl with holdings of Treasury securities at of reserve balances has decreased by about approximately S2.2 trillion and holdings of S350 billion since the middle of last year, and 134 36 PART2: .IION!TAAY 1'0\«:Y Monetary Policy Rules and Systematic Monetary Policy Mone~a~· policy rul~ are matlltmaric~l formulas Econornilll hare analyzed man,· mone~.~~· poliC)' lhJt relate a policy inter<slrdte. such as the federal rules, including the ~~~11-known Tarlo< (19'!3) rule. funds rate. to a small number of other «onomic Olhet rules include the 'balall(ed awroach' rule, the ooriabl~pically indudi ng the deviation of inilation 'adju~edTarloo-(19'!3)' rule, the "price lt.•el' rule, and irom its wget V"afue oilod a rneawre oi tesource sJack in the "GM diiierence• rule (figUieAJ.'These policy rules the economy. The pre<criptions for the polic.y interest embody the three key p<inciples of good monetary rate from these rules can prol'ide helpful guidance for polky and ~ke into account estimates of how far the the r:.deral Op.n Marlet C<lmmittee(fOMQ. This economr is from the r:.deral Re<oo'O's dual-mandate discussion providts information on how policy rules goals of maximum empiO)'mentand price s~bility. four infonn the FO.MC's sy>tematic conduct of m<>ne~ary of the fi1'0 rules include the difference bet\1-the rate polic)~ as well as I)I<ICfical considerations that make of uoempbymenllhal is StJSt.linable in 1he longer run it undesir•ble for the FO.IIC to mechanicolly follow and the current unemployment rate {the un<mplopneot the pre<criptions of any spe<ifi< rule. The FO~IC's rate gap); the f,r;t.difference rule includes the change awroach for conducting n>Onel.lry policy p<ovidts in the unernplorment gap rathe< lhJn i~ level.' In suificient flexibility to Clddress the intrinsic comp!e;{ilies addition. iour of the fio'< rules inclode the diiie.ence and uncertdinties in the e<::OOOfll)' whi!e ketping (continued! m<lnel.l')' poli()' predictal>!e and lr<lnsparent 3. The Taylortt<J'IJI "'~"·" wgges<<d U.)o/ln B. T.>ylo< Policy Rules and Historical Prescriptions (199!1 ·Oiscrt<ion '""'" ll>lityR•Ies in f'r.Kt<~· Ui~ R«htsltf Confe.<nce S<ri<> on Mlil: Pori:)·.'"'· l9 1 m 1h o e T d n e h l e i s t e o i f f s f e t " h c e t e l ~ l - e . u c n n o e d n s e o s < m o s f t y o m . o g o d o n b o e d r ~ r e th c y e o p n p o o u l m i b c l y i i c c i . p s ' e e In r n f h o si a r m m n p c d e l n e d c e ' ( A R " [ ' ) l u 1 o o l ) r e : o 1 s e t ( « m t C " 1 Y h b i i « c n P ) a , o ) g P o l o i / c : l I y n ' u R 1 8 n 9 . v • 5 T " m - . " 2 l : i y 1 t i 4 y b n . o ( ) T 1 O l< h 9 I> e 9 l n > b 9 8 1 a i . u . i ' T . A g J O n o H ) c i P o t i r ' , l r d t " o « - ' w r ! ' k · ., o a P " l a ' l A c ' " n l h ' . t< l " r ~ ' u J > ' i - l ~ s I e t I o " I . > l T " !i h c e y can he achie\'ed b)• following a spe<ifK monetary .diiiSI«<T3)1or (t99)) rvlew" •ud<din O..i<l Re;fschoeide< t p p h o o a l l t i i ( ( in ) ) • •. c ' r o u O r l p e n o l e h M s J u t I e c f s h o k s p e te < y ~ i p > n p c ri i u n p b l c e l r i p c is l u e lh s n o J d t f e g m f> o o t o a n d n e d t m a i o r n y n g p e a o n ~ l d r i c y y ' a ! I " \ J n > o " d l n ie l ) d i o r ) O ! ' h g in < _ n u a C ,' s 0 l . l 1 o e l . w d l l ' - 2 i o n I l n t R l "f ~ l"a o m t s ' l i" l ( o e 2 "n t 0 t " ! E 0 . " 0 r H j' 1 '] . · a ; " l p J l 'T o p t u t . h 9 9 t < t 8 w 3 < 4 l ) o t ~ . l l ' " . ' A " lo " l A o " n o p t i e O W r y < i . c U M ) e o ' t - . S l n Y e < < l o i r < ! t a M i a " r ~ S u i · d ) l ' e should respond in a predic!able "")'to changes in \\ilh an Ebstic P'rice Sl.lnd.lrd,. .. in Price SUbilify and PtJbl;c economic cooditions and the economic outlook. A Policy. proc...ting>ola~""""""'lpOIISOit'd by the fod«at s a lo e c n c c g o o e n m r d - m r p u o r n i d n i a n c t f i i p v la e l t e i 1 o i 1 n s h t e o h b n a j t i e n m c t o t la i n • t < i ~ o ~ a n ' n ) i d ' s h e p e m o l l o i p c w l y o r s p m h o o l e i u n c l y l d i m s h a b e l e e l r o s w ' s C A " y ' i u " t ' y " g ' ) " v , ' " s p " " t ) p I 2 q . - J ! o t J J ~ 4 ) L ' i , K 'S - o 5 3 . l l - 9 " K I , " . a p h ' r d ! G ll t i > . p r S o F y ; i C : I n f " A a l < , l l ) w d ~ ', . w e h . t t e a h l l l . d e o R i " i e n . " s r s J e s c a ~ i n c . ~ ~ ( c 1 o f < S o i d o a f . " n O H - < k : f o e o J i< r X i u , I K ! l le l > a ' I i i " s < " " a ' ! ' i~ maximum su~ainable l•rel; C001'efsely, monet.Jry l>ll<donarv~~byAIIoanasiosO<phanMJ<s(200J), A r p a o t t l e h ic i s r y h d o s p h u r o l i d n u c l h d i e p h l a e e d i r j s e ~ s t t h e r a i d ~ c t b 1 i y 0 o~ s m 1 ta 1 o b n r i e e l n i l > h t e h J e i n n o o f p u n p t e i - o o f s n o i , r t e - t o h h n e o e l p d i o n s l . i cy a A / 'H o n u i d s < m < )o o a ~ h r lo i n c / a M ( ' l . • \ o t l o n • ' o < o < l U l t r " t ~ y " Y m i l s c e { i o l w ) > o O l t i o o c l y m ) l p , A i < ' o n S ; a l , ( i ~ m o ) > · < r p i l s u . l e l a S e a O n s I n d i ) d s t I h ; l J n l e ~ o J I b T . o u l a p > y s p l n t o . 8 R < 9 . 8 R • T 1 1 e 3 , - f s ) 1 1 < f o 0 o ; < 2 r 2. response 10 peqi~l incrf.ases or decre.J"SeS 1\\onetal)' Polk)~' in 8eoj.Jmin M. rriedman and Midtael in inlkltion. Woodford. Ed<., HanrlbocJ. o(,lfon<Ur)' fCOOOlllk$, od. )8 """"'""'"'' NMh·Hdldndl, pp. 819-19. The"""' '<lume oitheHmdbootdM~l.uvlconom.irs~lsodiscu$~ I. For • discvssion ol how tho P<A>I<'s unc"'••nding ol 'W'""Ms ~""!han pol<)-ru1es for do<W;,g pol<)· rate 01<11\fUI')'poljcy""llet<wthetiiKI••••«oiii'Mlll!lary ""''''P'""'· pol<:y. "")llll< L. \"~leo fl0t21, 'Reodorion and (o'OI;t;on -'· The Ta)b (1993l ruk-ttpresetll.ed slick in reiO!Jrce in C~r"l B.i!nk Commt.mic.ation:s.,"' speech deli\'fft'd .11 the utitil<llion usitlg an output&ap(thediffeftncebetwt>«~ d~ ""''S d!ool ol&siness, Un,«>ity ol Calilom~" Berl<ele),' """'" leotlol reai!M'domesticprodoct (GOP) and the BE>d:ek:y. Qlii.,. N~-embet ll~ hl!ps.: \\WYoo.ie<lt'r.a!~t.p leotltloat GOP wo•ltl be~ the <COfiOIII)' w«e operating"' nt!w~~Kspe«M'-~ItonlOl Z1 113.1.1r.tn. m.u..itmwn ernp'n,mentl. The rules in i~gUI'f' A ri1'pl'esent siJd; ol 2 " . " ' fQ "' c ' a ~ d ' i p sc o u l s < ~ ) io : n " r " e B g- o a a rd rd in d g p e r o in - c, .. p . l , e . s .. f , o o r l d th 'f o c f o < n d d e u ta c l t b in « r a e u so s o e l t ' l { o e a U tg I > I p i b l e i t L t a er ' < l > i j o l n ! u u s r< . S i t n h s e t f h O e . u It l C l 's e " m " p ~ ~ O W I i ) r ' s ! t O . ' x I t , R""'~ S)•"" {20t31. 'Monewy 11>1<)· F'riiiCiplts and ro promo::emaximumemplq,menl. Howt\'(1(, too\tmeats ln Practice,"' Boardoi W.'t'fl'l0f5, hr!ps.:t,\mv• . iederilresen.~.goo. tW a~efnati\'e me.JSUfes ol resource Vlililalion are hisf!ty "'""''"vol"'·"''"'"''-pol;,·.priro6plt<-Jnd.pr..:ti<e.h:m. correlated. foe moce inf()C'IYI.1:ion,. ~the n«e bebv iif;fJte A. 135 MONETARY POLICY REPORT: fi8RUARYIOt9 37 A. Mon<t31)' policy rul« Taylor (1993) rul< Balaru:td-approach rul< RfA = r/Jt + R'r + O.S(rr1- ;rtR) + 2(ufR .. u,) Taylor (1993) rule. adjusted Ri' = maximum (r.'' + rr, + (u)-'-u,) + 0.5(PLgap 1). 0) First-<liftereoo: rule R{0 = R,_, +O .l(rr,-•") + (u)-'-u,)-(u~,-u,_,) Non.: R/'~. Jtu. R,"W, R/'.aOO R.'ltrepr~llbc' \'3luesof!htnomin:~~1 fl.'dcral fur.ds rate pr~b:d bythtla)lor (1993). babl'l('('d-approac-h. adju:>~ cd Ta~ior (1 993). pric\'-b"<"l. aod first-ditrcr~oo: 11Jies.. r\'SP,."i.:tiwl)'. R..dcTtOtCS till: ~tool nornirt.;d fcdcr31 fuod~ r.Ht for quarw-1. ::,is four..quartt!f pri.."\: infbtio~:~ for quartcr '·"' ~ lk uncmploym."'''l t.m itt quancr 1. aA d ,,v. is 11'\c !.:wl of~~ n..'\ltt3t ml f~tll fund$: tate in1bt lotlg..."t Milh at. Oft a\m~. is CXP.,."Citd 10b .: oon..®ent ~~oillt SU51ainin,gma.Umwn cmpfO)mtnt and inllation 31 tht FO~tC's 2 pM"C1ll mttr·run objc\ih~. X1~.ln addition. u}"isd~e r.ttcofunnn)llo)'tJICOI in ttl( klflg._'f run. Z is tt.:C'\Im111Uiw$um OfJIQStdcli3tioBSoftbe r«krol fulld$r.ue from the pn.~pEion$oftl'le T3.ylof(l993)ru.k v.hcn tlt31 All¢ prMi~'Ssettin~ !h. f~-dcnll ruodsr3tt bclow~c-ro. PLgapri s t~ p.'m'llt dc\iatioo of tht actuallc\d ofp ric\'S fr(lm 3 prit:t k\•tl that ri$1e$ 2 p.'ro.'flt per )'<'3;t from iulc\-cl in:); sp.-cifiN star1ing period. 'Th-Ta)ior (199))rulc a.nd othtr polkyntksart:g-.'tl('r.tlly 'Alilt<"n in !<"riDS ortlkdt\iationorrealoutpu! from its full capacit}' kwl.lnt~oCQwations. tlx 0\llptll pp Ms b.'I:P r~-pbtWl lith the pp k>-1\lo'Mitfl( f3t( of un..-mploymtnt in the ion~"! run and it>iK'!ual kwl (IJ..<.insa rdationsbipkoo\\n as Ok.un'sb~~.')inonkrto~ntl~Rrolcsin ttnnsoftJ!c FOMCs stalUIOI)' g;ools.l-listoricaJiy. mowm.'llts in thcou:tput and uncm~mtnl gaps ha~'t ll«n highl~·romla!C'd. Box aott3pr0\idcsrtfettii!..'¢Sfortlxpolic}'rulcs. between recent inll.ltion and the FOMC'slonge<· lower bound may 1heref0<e 1101 ptOI'ide enoogh policy ron ol>jecti1~ {2 percent as meas111ed b)• the annuol accomrnodalion. To make up f01 the cumula1i1~ shortf•ll change in lhe price i~ for peM>al COIIlUmp:ion in acoomn>odation (Z). the adju<led rule prescribes eq>enditu<es, 0< Pal, "~ile lhe price-10\~1 rule onl1• a gradual t<tom oilhe policy <ale to 1he (positive} includes lhe gap beMeen the le\'el olp rices tod.l)' and '"'"''prescribed by the standa•d Tar lor (}993} role afte1 lhe 1"~1 ol prices that 1\'0IJid be oi>sw-ed if inilalion lhe economy begins to rec01~r. The 1-enion of lhe price had been conll.lntat 2 petcent from a specified sr.ning I0\. .1 r ule specified in figure A also recognizes lh.lt the l~" iPLg.~p)11he p<ice-iel-.1 rule !hereby l>l<es federal funds r.lle cannOt be redU(ed n>ale<ially beb•• account ol the deviation of inll.ltion from 1he zero. If infution runs bel01v the 2 percent ol>jec1i1. . long-run objecli\•e in earlitf periods as \\'ell as the during period< when the p<ice-10\»> rule p<escribel (Utr. .l petiod. sening lhe federal funds rJte well bebv zero, the rule The adj"'ted Taylor 11993) rule O'<<>gnizes that will, 0\'e<time, call fo< more accommodation to make the federal fonds •ale ca nnol be •educed malerial~· up for the pa~ inll.ltion shortfall. below zero, and 1ha1 following the prescriptions As shown in figo1e 8, the differen1 moneta~· policy oi the ll.lndlrd13)10f 11'993) role after a •ecession roles oiren differ in rhe;r prescriptions for the federal du•ing ~~~ich the federal funds •ate has fallen 10 i~ fonds rale.• Ahhoogh almoslall oi the simple policy (continued"" II(>Xl pdgel s. c.W.ringlhe pre>enplioos cllhe prke-ia..t ..~ requires selecting .1 Slclcting, )'tilt ior the pric~ Je.."el irom v.hich torornu!.lte the 2 perc~ annual ti:edinfi.llion. 6. These pr<s<ripl""' a•e ca~vll:<d Uling !11 ~ill«! frgwt 8 uses 1998 ~!he SLlrting. )"ear. ArOI.Uid lh.'!t limt, dau lor inih6on And the Ul'ltf1"4)lo)·ment rate .-.nd (2) SUM')'· tht undertying lrend oi inlbtioo AM longec~erm infbtion b.l~~imatesoithelonsec«Jn\-alue-oilhcneutr,ll t>p«ta1Klns!libiliud ala ieltlconsi>!oot•ilhPCEp<i<e rt.al in:ere$lrate .and the-longtc.fJJn \·a!ut oi tht inilationbeingcloseto2ptrCen:. unemplo)mMI td:t. 136 38 PART2: ,\ION!TAAY 1'0\«:Y Monetary Policy Rules (continued! B. Hislori<al rroml r,oo, m~ prescriptions rro111 >i"'!'k policy rules ... , -· - s - ' _, -· -s ;-1)16 lOlS !~!ow. Th:tulcs~~\·.....,clin~lkfoi'i:dWrik,W~~'ftlrnll1k.~if~.:ooi~lbr~"-.,..:ta~.d!qc-ill lh.:-pMildr:'\l«p.-notlll~~i}'('El~~-Cflefl).~f'NJ(\'1iM&clb'Jt-M'~"'Ibtf.\ionli'IIUQkl6! ttx-~O.'U11k~cdrctii~~~<I~~'Citfr<n~C11ip~I~Thc~\·.a.\.;\•((11'10lbt.:61$ulro ~t:2ptflltfll. "Thtllt!(ttatt.4Wpnttlc'ldil;lllta\~k<.'tl4lflbt~ifldrt:ockorP('E~i((dllld<'l'ltf!)III99St\~M1f""«ttlll"C'f )Qf.'fk~C1.~tbroupb'JIS..-Ql.•lllltbcC\~I.'flk~IN.'Oiblcislllt:4U...,~~tt..oup!Ois.Ql, S(.(n f.c«tll~'tlbckcl~\\'ollo.'f'l~d.B~Oi9f~l:~rtdmiRC(tti'C&xatd$Ulr~ rules would hal•e called for volues fOJ the fedetal funds maners furlhet, n1000tory policy affec~ the Fedetol rate lhJ!t were increasing 0\.-et" time in recMt years, the Rese~~·s goal \otiable< of inflation and empiO)ment psescribed values '"'l' widely across rules. In general, with long and variabl< lags. ffx these reasons, there is no unique criterion ior ial'Ofing one ruk!: good moneta<y policy mUll take into account the 0\~r anothef. information cont<ined in the real-time forecast oi the economy. Finally. simple policy rules do not ;1ke into Systematic Monetary Policy in Practice account that the rislcs to the economic outlook may be asrmmetric, >UCh "during the period \\ben the Although ~·~·policy rules,..,. a~ling fedetal funds rate was still close to zero. At that time, fOJ obtaining and communic'.ating current and luture the FOMC took into con>icle<!tion that it \\1)Uid "'''' poliC)• rote prescription>. the u~ulness of these rules limited scope to respond to an unexpe<1ecl "''kening fOJ poliC)...,ker> is limited by a r.nge of p<octical in the economy by cuUing the fedetal funds rate, but con>ide<otions. According to simple mone~ry that it would h;n. .a mple scope to increase the policy poliC)• rules, the poliC)' interest rote mUll respond r.l!e in response to an unexpec1ecl strengtheoing in the t m h e e c se h o \• n a i r c i a ~ l b l) l • e t s o m a a " y " n a o l t l r n e u ff m ec b t e i f m o p i o v r o t r a i n ah t l in e< fo . r H m o a w tio " n '" '· e in < c :o r n ea o s m in )' g · T th hi e s f i e !S d } e m r.o rn l e fu tt n ic d s r i r s a k t e p r m o o vi r d e e g d r a a d r u ~ a t l i l o y n t a h l a e n f or available to policymakers 31 the time they make prescribed by some poliC)• rules Ill<>\ n in fogure s.• cled>iono. ffx <X<lmple. ,.,.,. of the inpu~ in:o the (con!inuedi T•yiOJ (1993} rule include financial •nd credit market conditiortS or indicatOfS oi c:onsumer and business senti_, lhw: fattQIS ;ue ohen '~ infOJ!llilLive f'll «00001)'"'"" t p h o e li r f ; u y t u ru re le c s o t u e r n s d e o to f i t n h c e l e u c d o e n o o n m ly y . t h S e im cu il r a r r e ly n . t ~ \O • IU ' < l S o ' f - n it e s M u ~ t i r m .l a l e f 1 t D o a o f l n t i h . n e t S « e t e s t B f o .J o t r e d t o o i \' C .il n l)' . ' O t t h n '> e ' ( I - O t i o t r n i i m d g« e - t i < h l. l t e J d n f t t - h d . u e l . u s r J e o I o o R m f e t s h p e e n r . o " : t e t b h e e t \, s . e , l . e . c t t e h d e \ c O u t r i r a e b n le t s - .I i U n < th S e o n f ~ t l h e e . s B e u v t o th ri e a b re l< la s t a io n n d s hip G ly c s .r < .t e m m o l2 rs 0 , t }u 81 1 . )1 ~ 1 - p ; p u . 3 y 7 P - c 4 l 1 i , h q l · tp l s l : , < 'W p« \\W rM ,I '. {> > c s l h er i J n ! g ft r s o t' n f\ : 'f B .g o o o ' r > d of the outlook for the e<:<>nomy changesm~r time for a '"""""pol") ~b~Ot80113_m¢uliapocl.pdl. numbef of reasons. for example, the structure of the """ 8 " . 'r f y oc p f o u l r i t C he ) r • d rv i< l c e u s s i s n i o p o r. r K e 1 g k a e rd , i s n e g e l h B e o c o :b rd al o le iW n& .' < E s f o n f o " r 'i s n o g i economr is ~'01\'ing 0\'ef time and is not known with the fed<fallt<>!En• Srst<m 120181. "Chll""l" Associa:ed certainty at anr given point in time: To cornpliute "'h Using Rut.. to~ukeMonetaryt'o!iC)•." Boo:d of 7. Thebo'< ~comp!e:Olitsoi Monetai)•PolicyR~" in the C < o h o.- o em i o ~ rs, · > h S n s ~ o i c ' i I . I > V t . t , d \ - . , f " t : . h d - e o r . . " , n l g r - e r 5 o e l f e \ s e - . . gv . >. w rno . o .. d . M ,. \ . p , o ., li . t . " l )u~ 20t8 M<Widl)•Poll<y R<portdiscusi<S ""''shin. in the pol'ocv.l<m. 137 MONETARY POLICY REPORT: fi8RUARYI019 39 The F0.\1C conduru sy;1ema1ic n10<1e1ary policy in C. Charlge in IO.y~-ar )'kidi n n'SpOflSt lo Empto)1ncrll a framework thatrespeccs !he key p<indples oi good Sit~ioon·pon 11101le!ary policy11llile prOI'iclingsunicienl ilexibili~· lo address m.1ny oi the practical concer"' described e.~rlier. Atlhecoreoithisframework lies 1he FOMC's . . ftrm commitmeniiO the Fed<ral Resen~·s stalulory .. - 10 mandate oi p<omoting n1aximum emplorment and : •, price stamli~; a commitmtnl thai Ih e Comminee reaftlrms 01'1 ar egular basi"So.'To e:xplain its ~af')' .·.'.· \·'I· , : .t poliC)' decisions to the public as cl<arl)' as possible, ----~- ' !he FOMC communiates aboollhe economic data ......'.. ,• • ,, I • 1ha1 are relt~ont to i~ policr decisions. As part oi this ••.• • t.' • -s communi"tion strateg); !he r.deral Resen~ r<gularly .. I describes the economic and llnancial dala used 10 - 10 infO<m i~ policy decisions in !he Monelary Policy I ' •' R<>pott and the FOMC ~ing minule<. These daia I I . include, but are nollimiled 10. measures of labO< -!CO -50 0 ~ ICO markel condiuons, innation, household spending ~IIIDOa6tmf?lol.ljc.betiD~I and business im'fStmer>r. asset price<, and !he global ))1 S 0 11 . 1 ~ l: cb T ¢t h "I r ID = IO.~ ~ at} ~ i'i · t . ! a ; o Ot J J ! T( h Q : j $ l. : l 1 ) 8 ~ 1p I kp. C "n S .' ~ 4tl ~ lr . U .- mF~ economic environmenL The FOMC po!tmee!ing •1-b:u•~afkrtht&ialtk«. Tbt~illfftfaMMtoll;» $(;a!ements and the meeting minut~ detail how p ~ ; 3 i n f d - r 1 b $ . m · c" f ~ l ~ l l l b . C " ' o dl b ~ . • ~ l , k " a W r ~ ." f ' ' W o I l I ) I J I C OI I I I 6 I n , l » r p - i >m r l t ~ s p D e C : h i ; l lhe dai4 infonm the C0<11mit1et's Ol'etall economic ~~Sa\<r(/~M«rlhc-dlr.:lt~. outlook. the risks lo this outlook, and, in Mn, !he Soi.JtE~ofllb..Y~~ Committee's '""'sment abootthe appmpriate stance ol rnot~e~a~· poliC)'. This appropriate stance depend! on the FQ.'IC's longe<-run goals, the economic outlook and !he rish to the outlook. and the dhannels throogh which monetary policy actions influence economic activi~· and prioes. The fOMC combines all oi these participan!S adjust their e>peclalions fO< policy in eletnMts in de-termining, the timing and size of lhis manner is shown in f~&ure C. The figure plo:s the adjust men~ oi !he policy interest rates. The qwrterly chanse in lhe 10.)t>r y;.ld on Treasury securities in a Summary oi Economic Projecti011< pr01·ides additional one-hour \\indOiv oroond the release oi empiO) _, infonmarion aboot each f0~1C participanrs fO<ecasts rep011s on the \'er1ical axis ag.1inst the difier.:-nce in for the econom)' and the longer-run a""'smen~ oi the !he act<Mll'alue oi nonfa~m payroll job gains and the ecO<lom)', under her or his individual viti~> conce<ning expect.ltions oi prh·ate-seclos anai)'S!S immediately app<optiate poliC)'. befO<e the release oi the dat.l on the hO<izontal axis- These poliC)• communicatiOII< help the public that is, a ptOX)' ior 'su!prises• in nonfarm payroll job und'"'"'nd the FOMC's approach to monetary gains. When actual nonfann parroll job gains tum oot poliC)making and lhe principle< that undedie it to be higher than market participan~ expec1,1he )'ield Conseq001tl~'. in response to iAComing information, on I ().year Treasury sec:urilits tends 10 increase. The market participan~ ten<! to adjust their expeclatiOII< rise in the 1O .year yield ref!«~ market participants' r<gar<r.ns lllOO<Ia~· poli>cy in the direction consistent e>:peclation tha~ as a result oi stronger-than-expected with achie\•ing the m.t'(i mum-emp10)'met'll and !)lice labor m.1rket dar., the path ol short-term int~ rates stability goals ol the FOMC. N Evidence thai mar~et will be higher in the future. eon,~fl<'ly, the 1O .)ta. y;.ld tend! to decline ahe< negati'• surprises in nonfarm payroll cl.1ta, retlectin~ !he path oi short-term interest rates will be somewhat tower in the fuMe. 9. S..! he SUI<'""" on long«·Run Goa~ and ''"""'"Y These adjustmer>~ in !he I 0-)~a< )'ield help sl4bilize ~icy SltJ~\ which h a\~itable on the Board's \\ebsi!t il the ecO<lom)' t~ro befO<e the FOMC changes the le.-el S l l o t > J n 1 t r t p 0 :; p r . « i s s 1 R e i '\ s · e o I w " J ' t e . o " C c ' f 0 ' . i f . . ' " K " l " 0 '¢ ' I 0 M ' 1 1 ' i . c " t l " i u " n tt • i t - o n ! c .l P r ') ' n ' > . P · u Q " i 5 ' o (' " n r n c i ' o s " ~ h ~ n t p b o t o c l M o i m c w p y . o , e s l ( e i '( d W () o F l' i l 0 ( ) \ d t 1 l .! 1 ( ! i . c _ ! o a le c i n h ! d h ie e t \ o · f i e n s d l g 0 < 1 i r v a ~ l t g f h o u e a n l l d a ~ b s O a r s a < t h m e i i g a n r h k e t e h r t e l 1 o d 1 n ~ i g r i e - l t c e e t < 1 io 0 m n 1 i - c n .r o t e r n a r ~ e te ~ s s t e a t n e l t n e w d s i t l o h O!A:omes but att no1 )'et tetlKted in dle d.na. ~rengthen il. 138 40 PART 2: MONETAAY POliCY byabou1 $1.2 1rillioo sino: ill peak in 2014." Tn :a5U'). Prelimina')' financial staltrnenl AI !he Januarymeeling.lhe Commiuec resul!s indica1e !hal !he Federal Rtsen·e released an upda1ed Sla!emtnl Regarding remiued abou! S65 billion in 2018. Mone!a')' Policy lmplcmeo!alion and Balance Shcel Normaliza!ion 10 provide addi!ional The federal Reserve's implementation of infonna1ioo ~rding i1s plans 10 implemem monetary policy has continued smoothly m sla o l n e e m 1a e r n y l . p ! o h l e ic C y o o m re m r i I u h e e c l o in n d g i e c r a t r e u d n . 1 " h a I 1 n i 1 ! his As 11~1h !he previous federal funds rale intends torominue to implemem monela')' increases since la1e 2015. the fedml Resme o s o p i r n a e o f f t u t e e l ! r i i h t r c s n S e . y e g s a t t n f i o n n e r ' d t d a f a S e t t i e h r n r e a s e e n l g w i s s f f i h u u m e e i r n d . c e e ~ d h t s e r i s r n a a ! c h c r l w i a a 1 s R t i h t e e v d e r i c a c o s p h n e m m r m d i a m a r n n o o :' a a s l t a r g h a m 0 i e e l d y r m \ p m t s l l r e e h h i m 1 n s o r h o u i r s e o u H p 1 l g p f m n e h l r y ' d d m 1 h e S s a 1 ! ra h u n p 1 1 c e d e : e \ c c i - n ! e i i m n f h 1 s i e s e c t S f r r a u e i e e l n s l l p p y l 1 t y ! u e , e r r r ! r a m e c h a 1 s h e i e b ! s a e e F p r s r d a e e a a 1 d i ! e a n d h e g o d e r o r a H e n e I l e e f X R r f r r e e n t c t c d S s e e ! e n m i t o l n l m 'e ! n - b e ( e f o 0 e b r r v : d a a - b c 1 i e l r y s a r n e n R a i d i n l c g R c e f h ! u r P s h 1 e n e s a d ) s . s i ng o S t p h ) r p 0 e ~ e t 1 s n e i u d m u p e . i p n s " l g g T y p o h o r o e o f d c F r c e e O o s d m n M u t r 'C r e C o S i l j s u i o o s d f f n g l s e o e h n s t o r 1 c r e h a H q a ll u l e e i d r t r h m e a i d s 1 " . a 1 T f p 1 to h ( p ) o r i r ! s e o r y a ch a ! i r m h e n e s d e e r f e 1 n e 0 s e d 1 2 e b r r . . a 4 a u l 0 l a e n p R p c e a t e r s i c s d e e 1 m n o 0 t n 2 i i n . r n 2 e c 0 D q r u e p e a i c e r s e r e e r m d e d n b a t e n ! h r d e i . n O I e S n ~ N e e a e p d s R t d t s r R i n ti P b o e n r , a m n a d r k e e lf l . . r . a -t t i e l s e i t n ra a n s l' m ar i i s c s t i y o n o f o m ft a h r o k s e e t c ra o 1 n e d s i t t o io ns o an ff d e r l i o n g 2 . r 2 a 5 1e p 1 e 0 re 2 c . m 00 i p n e l r X ec c n e ! m in be S r e . p T ! h cm e F b e e d r eral broader financial condi!ions. In addition, the Resene also appll)led a '• perren!age poin! 3 s f f i h 1 O n 1 e a ) M e n o t c f n C ia o t l h s r t d m e a e d t a r e e e l d i t l 1 a o " ! 1 i p h l t s i m a o f l n e o i n 1 r i t n i r s s o . l p m ig r p e h p l t e a o 1 r f i e n e d g c t o b o n a a l o a d m n j c u ic e s t a nd c i i Y n n n " c s : t d e l r l r i e d 1 u a s m s r o a e e n 1 i n e n a l ) s ! i b h n m r e o b o d a o 1 i d ! s e h c d s o e S h t u e i m o g p h f !e r e m a m r. t o e b ro n e ( u e t r h y g a e h n m l d p y a r r D i i m k n e e a 1 l c i r n t y m e ber. 1\ilh !he federal funds ra1e. in response 10 !he Ahhough rtsen·e balances play a central role FOMC's policy decisions in Sep!ember and in !he ongoing balance sliM normaliza1ion IXrember. Usage of 1heON RRP facili1y has prores..\ in !he longer run, 1he size of !he remained low, excluding quaner-ends. d b e a t l e a r n m ce i n sh ed ee b t ) 1 1 t i r l e l n a d ls g o r 0 b 1 e 1 i ! m h p in o n n a o n n ! r l e y s ene Thcdl'ec!ire fedml funds ra1e m01t.'d 10 pari!) l B l X ia a b ! la e il n r il m c ie e i s n S . i h T n e h g c e ! ! h " b e d o i S x s i c z " u e T s o h se e f s ! R h v e o a r l f e i e o o d u f e s r L f a a ia l e 1 b R o il e r i s 1 s i m t c h s a e in i ' s 1 A i 1 n i I 1 ! i h h l s e 1 l h m X e o i r n m e 1 m e h r s b e e s b l r e r f m m or t e e c l ! p i h n a e i g d . D ! o h e n c e e r C m es o b e m n er - m e m b iu e a e e l 1 a e i n n m c g e a . s d e i li n a f b t i u li ~ 1 n i c es e . !he size of restrl'e and nonresene a !h s e e i c m on e d re s s m t o a n ll « le c c e h s n s i c r a e l se a n d o ju :s s l r m a1 e e n 1 l 0 b b y a s s e i l s l ing poinls below !he top of !he targel range for ;\lean11hile. in1cres1 income on !he federal !he federal funds ra1e: I his adjus1men1 was Rtsene's securilies holdings has cominued 10 imended lo fosltr !rading in !he federal funds suppon substamial remi1 lances 10 !he U.S. market a! rmes well wilhin !he FOMC's large! range. 17. Sii'K\: tbestnrt of the nonnalitalkm prog.rant The federal Reser1e will conduct a S '" 60 " 0 " bo ' l . l. . . . ., . , ...' "'•dropp<db)- iowd) review of its strategic framework for 18. S..~ the Stot...,.,nt Rtgatding Monttary Polic)' monetary policy in 2019 • ' ll " h l " l i ' j d " lk · ! f m b tJ : t . l o . \ - w a r i a l i l 3 o ~ b a l' l a t \ o ~ o . d n ~~ t 8 . h w o e t~ l B l ~ o " o ' a o \t n S n ! l l ' i • \ M ' • p < J ! ' 1 > C' si \ t , < : < ~ " f. b .- l O i ~ P b. " . Y l m l' a l! x h im la u b m o r c m m a p r l k o e y t m c e o n n l d a i1 n i d on i s nf c t l a o 1 s io e n 1 0 n earthe IDOll<l>l)::01901?'.~:n·,. Commiuce·s 2 percent obj...-ti1e. the FO~IC 139 MONETARYPOLICYRIPORT: fi8RUARYIOt9 41 The Role of liabilities in Determining the Size of the Federal Reserve's Balance Sheet The size of the f<de<al Resen~·s balance shee1 inTluenced their size since lhe financial Cfisi"S. ,\1.any increa.ed from $900 billion at the end of 2006 to about of ohe Fedetal Resen-e's liabilities arise Iron> ~alulory S4.S uillion at the end of 201~ from 6 pe<c:tnt responsibilities. such as supplying currency and serving olyoss domestic product iGDP) to about 2S pe<cent as the Treasury Oep.1rtment's ftS<alagent Each liabili~· oi GOP-mainly as a result of the largt-!Cale asltl pr01ides social benefi~ to the econom)• and plays an purdlase [lSAPJp rograms conducted in respon;e to import.lnt role as a 1<1ie .>nd liquid asset io< the public, persi!.tent economic weakness foltow'ing the 1inancial the banking system, the U.S. ga.~rnmenl, or other cri>is. The expansion of 101al a~s th" ~emmed from inslitutions. the lSAPs was primarily matched b)· highe< resel\~ Figure A plo~ the alllution of the r..leral Resel'e's balances d depository institulions, which pe.1ked in main liabilitie< relati1-eto nominal GOP 01~ the ~­ the fall of 201 ~ at $2.8 trillion, or almost 16 pe<cent World War II period. Federal Rese~-e ootesou~l.l"'fing oi GOP, rising from about S1 0 billion atthe end of h.l1-e traditionally ba>o the Jar~ Fedetal Resen-e 2006. liabilities othet tban reser\'es haw also grown l~bility and. 01-er the p.~ thr. . decades, h.l1-e ba>o signif.cantly and plaj..t a role in the expan<ion of sl0\11y gr01,·ing as a share ol U.S. nominal GOP. U.S. the balall(e sheet The nlOgnitU<ie of these nonresen~ currency is an important medium oi exchange and liabilities as well as the'""" affecting theimriabili~· ~ore of value, both domestically and abroad. Despite are 1101 close~· related 10 monel.lry policy decisions. 1he increasing use of e!e(lroni<: means oi payment. Since Octobef 2017, the f<de<al Resen-e h.ls ba>o currency rem<~ins widely used in retail tr~n$aCtions gradll<llly reducing i~ se<urities hoklings resulting in the United States. Oen>and for currency tends irom crilis-<ra purchases. Once these holffing< hai'O to incre.Jse with the size of the e<:onom)' beuu~ unwound to the point al which _,.., balances households and busi""'ses need OlO<e rurrency 10 haw declined 10 oheir long1€·run Ia~. the si<e of use in exc!Mnge for a growing volume of economic the balance sheet will be ooermined by faClors transactions. In addition, with hea~~· us.1ge ol U.S. affecting the demand for Fedetal Resen-ellabilities. currency 01erseas, changes in global growth as 11~1 This di!Cussion describes the Federal Resen-e's most as in financ~l and geopoliti<al ~ability can also signittcant liabilities and 1eviews the iactors lhal (conrioued oo nw page! A. liabilities as as hared' nonin;J glll!Sdomcsic prodllCI Kc:-..:,.,t"b:ab~'li. Olbr:f1Ubi6li... .. - 2S 8 Tn:bul') &o.-nl Ao.'-""'l'l 8C\ttTM..) -lJ) - IS Non: 1m. f~'f 20!S f\.'fQ:iD 10 Q3 iDd arc-fn.:alk fnltNI P.t:m1t &Ml (~ Quutlf Fitutrilt R.t~t iUm~t cbLI £or 1950 ttwocp lll7~( (rom l1lc lfH.!Jt A'*" Rqqtt, j'VI1. SrA.m: Bo.tr.JclOo•o(fOOfioftb!fotdm.IRNntS}'it.aii(!OIS).I()I:IAMdRt{'Ott. .'. IJn.Ta~~R~~ofl)..~tct)IIN)Tubon.\ FCiknl R~~: 8W Oa!it.. and R~t~ l1cms (Table 6.\; 't'e!t·End 19S4-)')Ii ~ M.-clh-Et!J lll1:: T~ (.8: \'w·EA1 1913-19$~1 (W~bn,to((loo.~).fiS).~.i».MI~•'~~.f'~~'f.$01'J'Iub&a~'JiJco..l))l7~cpon#f:~NoiGQ'\~(( ibo: R&.-nl RO(no; Syi~.' .m .l:IISl Ffllttcl Rntnr &Ids ~ fl-tnlf ~ Rqutt tlf~l. T~bk; Cccbirlc4 SW..."I'DC'C.;J.ci C~(W~OQ;:(k.an,!c(Go-,~S<t-:nn..'TJO).p.).hi;I~. ... "'.M.-ra1'1('tl'tgQ\i~I~:Wl'6l.~·.. . ~·-lt'P)I1·20l~».j>lt 140 42 PART2: ,\ION!TAAY 1'0\«:Y The Role of Liabilities (cootimJ«!J mate<i•lll• affe<t the rate of currency gto"1h. Since Ih e ll.!nks' higher demand for resen-es awe•~ 10 ltil«t in st.Irt of the Global Finaocia I Cli~s. 110\es in circulation pan an incttased fOCill on liquidity rill< managen~ll in h.J\~ moreth.Jn doubled and, as oltheend of 2018. the context ol regulatory ct.Jnges stood al about S1 .67 Vi Ilion, equil·al..,llo about lial>ilities 01her thon currency •nd resent'S 8 pe<o..l of U.S. GOP. implying thai acromn!Odoting include the Treasury General ilc<ount (TGAt, r.-,.,. demand lor currency alone requires a larger b.llance repurcho<e agreernen~ cooducted with foreign oftlcial sheet than before the cri~s. account hoi clefs, aDd deposits held by designated Rese•ve balances are cu rrenlly the ~e<ond- nnaocial mcul:e: utilities (0fMUs). 8}1 S!atutt, the largest liabilil)' in the Feder<! RfSef\~'s balance feder•l Reset\~ sent'S • special role as fiscal agent sheel.lotoling $1.66 ~illion atlhe end ol2018, or or b.lnker lor the lederalgO'>"ern111f1nt. Consequ..tl)\ nearly 8 peteent ol oominal GOP. Thi< l~bility item the U.S. Tre•sury hold< cash O.l.lnces at the federal consi<~ of deposits held a1 Federal Reset~~ Bonks by Reset\'C in the TGA. using lhis accountlo recei\'C depository iMiilutions, including rommercial banks, l.lxe< and proceeds ol~e<urities 1<1les and 10 P'l' the savings banl<s, credit unions, thrift institutioos, and 8"'"'nment's bills, including interest and principal on moll U.S. branche<and agencies of foreign banks. maturing ~e<urilies. Beiore 2008, the Treasury tatge(ed These bal•nces include r~'es held to luloll resen~ a steady, low balance of SS billion in the TGA on 1equirements as well as rese'\'eS hef.d in e>:cessoi rnost days, and it ured prh·ate accounts at cornmercial these requirements. Restt~'e bai"ICes allow banks 10 banks 10 manage the \'ari~bility in its cash ~. .' S. Since facili1.11e doily payn,..t flo-,,, both in ordina~· times 2008.the Treasury has used the TGA as the p<imary and in str~ ~enarios, without borrO\ving funds Of account for managing cash ~~c.,._ In M.l)• 2015, the selling assets. Resen~ balances have been declining Treasury announced i~ intention 10 hold in the TGA a fO< several l'"~· in part as a rewlt olthe ongoing 1.-~1 oi cash generally suff~ientto 00\"er one"~ ol balance sheet normalization program initiated in outflows, sOOject to a minimum baf41oce objecthoe of October 2017, and now stand about S1 .2 uillion below roughly SISO billion. Since this policy ch.Jnge, the TGA their peak in 2014. AI its ~1nuary 2019 meeting. the balance hos genera !I)' been "~II abO\. .t his minimum; federal Open Marlcet Commin. . decided thai it "ould at the end oll018, it was about $370 billioo, or neorly continue lo implement monet.1ry polic)' in a regime 2 petcenl ol GOP. The current policy helps prote<l with anample supply of resene, which is oft.., called againstlhe risk that extreme weather Of other technical a ·ilOOf srstem" or an ·•bundont resent>Ssrstern." or opet"Cllional e\-ents might cause an intt!rf'ruption in Going forward, the banking system's"'"'" dem.lnd a<cess to debt markets and,.,,~ the Treasu~· unable for reset\~ balances and the Commill,.'s judgment 10 iund U.S. gO'>'Oinme<ll ope<ation<-a scenario that about the q.,.nti~· that is app1opriatelor the effiCieat could ha'~ serious conseqveoces for financial swbili~·· •nd eifooive impl.,...talion oi11l011etary policy will ReL-erse repurchase agreements with foreign oit1ct<~l delermine the longer·run ""'<~of reser\'e b.llances. accounB, also known as the ioreign repo pool. also Ahhough the le-~1 of reset\" balances that bank< will rose during re<ent yea~. The r.deral Resen~ has e\'entuallydemand is not ret ~nown wilh cert.dinl)', il loog oife<ed thi< se<vice as part of a suite of banking is likely 10 be appre<iably higher thon before the crisis. andcus!O<I! se<vices 10 foreign central b.lnks, foreign g0\'flnmenls 1 and inu~marional off.cial inslitul.ioos. 1. Set-footnote 13intherMinttxt. lcoo6nwdJ 141 MONETARY POLICY REPORT: fi8RUARYI019 43 Accounts a! the r.de<ol R"""~ ptOiide foreign oftic~l Financial Ctilis, central b.1nk balance W.:s increased in~iiUlioos wilh a<Cf!ISIO immediate dollar liquidily 10 in mony jurisdiCtion> Relati\t 10 GDP, the Federal suppoo opetiltional neEds, to dear and settle securities Resct~e's h.lbnce sheet """'ins ""'lie< than those ol in their accounts, itnd to address unexpected dollar other reser.-e<uH<ney cenltal banks in major adloancoo sho<l.lges or exchange rate 1ootili~·· The foreign foreign economies that cuttently Ope<a le with abund.Jnt repo pool hast'Oim from an ''"«'o'g"e'l"e'~ ~l oi around resen'OS-!Uch as the Europe.1n Cenltal S.nk. the $JO billion before1he crisis to a "~rage Sank of ).1pan, and the Bank of Englan<hlltbough this of about $250 billion, equivalenlto a liAie more difference is partly due to the r.de<al R""""' being th.ln 1 pe<cent oi GOP. The rise in foreign rp€0 pool much funhe< along in the policy nom"'lization process balances has reflect«l in p.1n cenuol banl:s' preference after the crisis. In addition, the r.de<al R"""•e's 10 main1.1in robu~ dollar liGuidi~· buffer~ b.llance sheet relati1't to GOP is only modeslly larg« Finall)', •othefdeposi~· with the Fede<ol Reser.• than those ol centro I hdnls, SU<h as the Norges Bank Banks ha\'e also risen stea.dil)' 0\'ff recent years, irom and the Resm• Bank of Ne~v Zealand, thatoim to lt'SS than $1 billion before the <ti~s to about $30 billion operate at a rei.Jtil'ei)' low lewl ofa bund.Jnt reserves. at the endoi 2018. Although •othef ~~·include Of cou. .. differences in central bank balance shee1s balances held b)• international and multilateral .ills o rer'lect diffetences in fioanci~l S)'Slems ac;rtl$~ orgdnizations, p'!!mmet~t·sponsored enterprises, counlries. and other miscellaneous items. the increase has large!)' been driwn by the ~ablishmen~ olaccounts B. Ctntra.l baJ!k balaACe shffis rda1h·e to gross domestic for DFMU~ OFMUs pr"'ide the infraltJUCture for prodl>.' triln~feaing. dearing. a~)(~ seuling pa)·ments. se<:urilks, and ~ tran"Sactions among fl~ncial instilution.s. .... T P h ro e t D «t o io d n d· A fr c a t n p k t o IV vi a d ll e < S l t h m at t O Re F lo M rm U a H nd h o C s o e o f s i u n m an e c r i al a. · .r ~ . ( .~ f "t ~. i . 7 .~. 1 1 8.W - too ". ...... ""rket utilities design.>t~ as S)>ternicall)' impotl.lnt by the FinanciaiS!ability Ol'efsight Council-con ""intain ·~""" accounts at the Federal Reser.-e and earn intefest on ·~'t(bcl.:o( balances maintained in those accounts. ""'"""'~ - 00 Putting together all ol these elements-d•11 is, projecloo Uend gr01,1h f1lf currenq• in circulation, the Committee's decision tocootintreoptf.lling with - ,. ample reset~es, and the higher le~~ls f1lf the TGA,the i01eign r'I'O pool, and DFMU balances--<xplains why the longer-run ~ze of the r.de<al Resm't's balance sheet will be considerably ~rg« thon beforelhe crisis. At the end of2018, the Federal Resen~·s h.llance sheet total«l $4.1 ~illion, Olabout20 percent ol :V,nc;~I'«2D!Sp«1210k'IQ3.o«pcfore.:-B::ll:o!~•llo:K' GOP. Figure Bc onsiders the size of the ba~nce sheet - G<r\ p « c n n m l1 m 1 ~ 1 ~ 10 F I ~ I l l i d : ( Q ) 1 l o N b « ll ~ . bit &u. t\rbit ~ tl ~'If' in an inter~tional context. In responre to the Global S«."Ut; Hll\"fANI)U..'i. 142 44 PART!: MONETARY POUCY judges it is an opportune time for the Federal Specific to the communications practices, the Reserve to eonduct a re1•iewof its strategic Federal Reserve judges that transparency is framework for monetary policy- including essential to accountability and the eft'ectiveness the policy strategy, tool~ and communication of policy. and therefore the Federal Reserve practices The goal of this assessment is seeks to explain its policymaking approach to identify possible ways 10 improve the and decisions to the Congress and the public Committee'scurrent policy framework in as clearly as possible. The box ·'Federal order to ensure that the Federal Reserve is Reserve Transparency: Rationale and New best positioned going forward to achie1-e its lnitiati1-es'' discusses the steps and new statutory mandate of maximum employment initiatives the Federal Reserve has taken to and price stability. improve transparency. 143 MONETARY POLICY REPORT: fi8RUARYI019 45 Federal Reserve Transparency: Rationale and New Initiatives 0."« 1he pa~ 21 )'tors, the Federal Resm~ Chaim1an began holding a p<ess conference aner and otMI m.Jjot cen~JI b.lnks n.ll~ t.1ken !I~ to ea(h FOMC meeting, doublin& the freqwncy of the impw.-e llansparency, which fMOvides three importanr press conierences lh.lt were fntnxfuced in 2011. benefi~ First.transparenq• helps ensure that centrJI These press conferences are held 30 minutes aner banks are held accoon~ableto 1he public and its the release olthe ~meeting staterner>tand p<ovide elect.O repcesentatii'<S.Accountability is essential to ad<li~onal information aboulthe economic outlool:, democratic legitim.1cy and is pMicularly important the Commi«ee's policy deci~on, and policy tool< for central banks thai""'"' been grant.O exlensive Press confereoces also aUow tht (bairm;~n to answer operational independence, as is the me for 1he questions on mont~al)' policy and o;her i~ in a Fette..! Resen•. Second_ ~ansp.~rency enh.Jnces timelr fashion. the "'ec1""'""" of monet.J<y policy. If the public In Nol'ember 2018, the FOO..al Resen~ announ«<i under<t.Jnds 1he central b.lnk's vie11~ on the economy that it would conducla broad review oi its moneta<y and monet.l<y policy, then households and busi,..... policy framework-->pecifiully. oi the policr w"egy. will take those views int() account in ma~ing their lools. and communication praetices that the FOMC spending and im..,~t plans. Third, tra0sp.1rency US<:S in the pursuit oi i~ dual·mandale goals ol supports a cen~al bank's eiiortlto pronlOie 1he SJfel)• maximum employn>entand price stability. The FOO..al and soondr~eSS oi finan<:ial in~itulion) and the o~'ef<tll Resen..,'s existing policy framework ~the result oi financial system, including b)· helping financial decades ollearning and refinements and has allowed institutroos know what is expected of them. Thus. for the FOMC to pursue eiiectivtl)' its dual·m>ndale e><h of these reaSOIIs. tl>e FoderaI Resen"eseeks to goals. Cenv•l bonks in a number ol o1her adl'anc.O explain i~ policymaking approach and decisions to 1he economies ha1~ ako found it useful, at times, to Congress and the public as ci<arl)• as possible. conduct reviN> of their moneta<y polic)' iranleii'Oiks To foster tr30sp.l«'fl<)' and accoontabilit)', the Socha re~·i"'" seems pMicularly approp~iate 11flen the feder~l Reser\'e uses A '''ide ''~riety oi communications, economy appears to ha1• changed in wars that matter including ,...iannualtellimonr b)• lhe Chairman for the conduct oi n>onelal)' policy. for exampl<t the in conjunction with this report, the Monewy naJir<~lle~•l oi the policy inrerest rare appears to ha1.., Policy Report. In addition, the FOOeral Open Market fallen in 1he Unit.O Slates and ab rood, increasing the Committee IFOMCl has released a st.Jtement after e~·ery risk thai a central bank's policy rate will be con<trained regularly sdl«iuled meeting for almo.t20 l•ar<, and b)' its eiiecrive lowe< bound in fu1ure ecooornic det.liled minutes oi FOMC meetings hal~ be<n released downturns. The review will consider \\"a)'S to ensure sioce 1993' In 2007, tl>e Fodera I Resen~ expand«i thatlhe Fodera I Resen'e's moneta<y policy strategr, the economic projectioB<that hal• accompanied the tools, and communications going forward ptOI'ide the Monetary Po/ic)' Report since 1979 into the Summa<y best means 10 J(hie"\~ and mairnain lhe dual-mandate oi Economic Pmjections, ~\~ich fQ,\:\C par1icip.1nts objeail. ... submit e~ery quaaer. And in 2012,the FOMC first The revif:ll•will ior:lude outreach to and consultation rel<ased i~ Stat"'""'I on Longe!· Run Goals and with a broad Mnge of sr.U:eholders in !he U.S. economy Moneta~· Policy S~tegy, 11hich it reaiti""' annwll)'·' th<ough a series oi 'Fed LiSiens• f:l'l'llts. The Reserve The r.deral Resm'Oconlinuesto make Sanl:s will hold forums "ound the countrv, in a 101m impro\'·ernenu 10 its coo1municC!Iions.. In January, the hall forma~ allowing the Federal Resen.., ro garber l""f'ec1i1'<> from the public, including repcesentaiii'OS pu 1 b . l is I l n li O ng e r ® he l m b i e n r u 2 t< Q 'S O . m I, . < . h . e w FO e< .\\ b C a l d t e o < r ; " d " e ' d l' m to o ~ t > < <g i i n n g . o ec i o b n u o si m n< i S c S d a e n l'e d l o i p n m d~ o < n y t . o l f a fi b c o ia r l l s e , a o d c e a r d s e , r c n o i m cs m , n u o n n i p ty < o a f n i d t ~ing thepubfication smedu~toptO'.ide tbe~ic\\lt.h Otganiz.alioos, community bankerts, focal ~-ettunent morerimely infOI'll'lation. oifiCials, aod representati\'es of conyessiooal oftH:es in on 1 p . . i T i. h T e h ~ e ~ r " O " . " \t " C " ' ~ ' l ~ so " p " u ' b " l ' i h W o : ~ ' b s o t g r i < o ~ o ~ i o o f g i o t l sm l e n e i t s i r n e g p s o n Resen~ Bank Oistric~.' In addition. the federal Resen.., .litet a fl\'t-)Wr &a,g. For at f:\~' ol the rNin comn..mic<~liotl (con~nued oo II<:Xl page! <ools US<C!IJr lhe Federal R<Sfl\eandccber ctnllalb.!nl:s.,.. ~c~oru-·~-•rr~'<>~icySir•teg;esoi~~i«C"'"al S Pr . in .k ci s p : & . s ~ .a ; O e O n P is t . M Kti i c la e" b ' l o e n o t n h e ~ Bo w o e K b I's p o ll g l> e b 'M sit o e. n lt e t k a r r ~ y ~ l ' l> .\ li \ c w y N . Ba ) n . i • o f i e D d . l l i ll l . < !s e 1 n )\ s is ' " ft " b ' r " u ~ a w ry ; t a l n b d e a h o e r l< il l e a F 1 e < d il e e r f a e l R d« f a s I m R t " B ' a n n t i i<der•l•htne.gc>~,...,...I)!>Oirul"""""'t'f'OI<I·pr"'<~· ofMinnt.apoHs thisAprii.Othef ·r.ro listens. . e\en:s ~\ill be •n<i1"0<1i<e.htm. antiOUnctd in coming v.uk$. 144 46 PART2: ,\ION!TAAY 1'0\«:Y Federal Reserve Transparency lcommU<'d! Syslem will spon10r a research conf«ence !his June a1 The Supetv~ion and RegulaU<Jn IIA!pott pro<•ide< !he Fode<al Resen~ Ban~ of Chicago. wilh academic an overview of banking conditionsa nd the currenl speak«S and non. ..c ademic paneli~s from oulsidt the areas oi focus ol the FOOeral Resen-e'< regulaiory Fode<;l Resen·e Syslem. policy frame~'orl;. iocluding pending rules, and key Beginningi\IOUnd !he middleoi2019, as part oi 1hemes, !rends, and priorihes regarding supervi!OfY !heir reviewo l how to be>~ purwe !he Fed's ~a!Uiory progranrs. The report di~ingui<hes beo,·een large mandate, Fode<al Resen" policym.l~«S will discu;, finaocial inS!ilulions and regional and comn>unily ctlevan1 ercooomic research as well <~s the ~"tS banking organizalions becau<e superviiOr)' approach« offetoo during 1he OUireach """KA I !he end of !he and priotilies for !hese instilulions frequently differ. proce<~. poli<ymak«S '~ll•ssess 1he informa!ion and The report ~de< information to !he public in pe<Sp«ti'"' ga1heroo and will report !heir findings and conjunction with semiannual testimony bei01e the conclusions 10 !he public. Congre;, by !he Vice Chairman fot Supervi<ion. This review complements otMr recent chc1nges The r.nanci.l!Subiliry Rripotl summarizes the 10 !he Fode<al Re!ro'e's communicalion prdClicts. Boa1d's monitoring ol vulnerabilities in the flnan<ial In N01,..,be< 2018, !he Board inauguroled ~'" <y<lem. The Boord monilors four broad calegories oi report!, !he Su{JI!fv~ion and 1/Rgul.!tion IIA!potl and vulneabililies, iocluding ele~•aled \•aluahon pressures !he FiniiJICiaiS!dbility 1/.epo<t.' These report> pr~dt (" <ignaled by asl<l price> thai are high relalh-e to information abou11he Boord's relflO"'ibili~\ shared ecoOOtnic fundamentals 01 historical nom'IS), e.xcessi\'e wilh Olher gos...,men1 ag<tlCies, lo fos1er !he s.fe1y borr01ring by businesses and hou<ehold<, exces<i•-e and soundness olt he U.S. banking sys~em and 10 le\"e(age within the iinai'ICial SOOOI, and iunding promote finaocial ~bilily. Transpareocy is key 10 1hese risks (risks associated with a withdrawal oi funds effof!>, as i!enll<lnces 1Jtlblic ronfodeoce, all01'' for !he frorn a partkul.ar linandal in>titulion 01 seaor. for consideralion oi outside idea5, and males il e.Hitr i01 example as pa~ of a •financial panicj. Assessmen~ regulaled entilies to k001v wh•l i< expected ol1hem ollhese '"lne<lbili!ies informF OOeral Resen'O ..:lion< and how bes110 comply. 10 promote !he resilience oi !he financial sys~em, including through i~ <u~sion and regula!ion of 4. The~'"""'lldR<gui>IIOI1R<jx>!Ondlhe finandal institutions.. fitlJoci.JJ SIJbi,r,l)' Repotr .areA-Aibble on the Board's Through all ol!hese eifO!I> 10 impr01-e ill 1\'tbsi!:tal, respecth'tfy, b·~AIWYo'.ft.der.attest'nf.'.go'o'' communicalions, !he Fode<al Resen" .,.ks to enhance " p ! u J b 0 l 1 < 1 a 1 i- 'f ~ 'l O '" I ' S •·" < " rq " . . < o r o r h o l b l o p< r : - J w ' p '" ! '' f ·. \ i • .o , o- . .t , " . "" _ " . ~ ~ -s ~ o · s ., .,_ lransparency and acroun!.lbilily regJrding how il pobi<""""QOI S<rq.«"ber-loi\Oil<i~-!Ubr"~'"!JJOI· I"'"""' i!S ~a!Uiory responsibilities. P"'P""-htm. 145 47 3 PART SUMMARY OF ECONOMIC PROJEOIONS The following materia[ appeared as an addendum to the minutes of the December 18-19, 2018, meeting of the Federal Open Market Committee. In conjunction with the Federal Open participants continued to expect real GDP Market Commiuee (FOMC) meeting held on gro111h to slow throughout the projection lftcember 18-19, 201&. meeting participants horizon, with a majority of participants submiued their projections of the most likely projecting growth in 2021 to be a lillie below outcomes for real gross domestic product their estimate of its longer-run rate. Almost (GDP) gr0111h, the unemployment rate, and all participants who submitted longer-run inflation for each year from 2018to 2021 projections continued to expect that the and over the longer run.~ Each panicipan!'s unemployment rate would run below their projections were based on informal ion estimate of its longer-run lel'el through available at the time of the meeting. together 2021. Most participants projected that with his or her assessment of appropriate inflation. as measured by the four-quarter monetary policy- including a path lor the percentage change in the price inde.x for federal funds rate and its longer-run value personal consumption expenditures (PCE). and assumptions about other factors likely would increase slightly orer the next two to afl'ect economic outcomes. The longer- years. and nearly all panicipants expected run projections represent each participant's that it would be at or slightly ab ore the assessment of the l'<liue to which each variable Commiuee's 2 percent objecti1-e in 2020 would be expected to converge, over time, and 2021. Compared 11ith the Summary of under appropriate monetary policy and in the Economic Projections (SEP) from September. absence of further shocks to the economy." many participants marked down slightly their '·Appropriate monetary policy" is defined as projections tor real GDP growth and inflation the future path of policy that each panicipant in 2019. Table I and figure I pr01ide summary deems most likely to foster outcomes for statistics for the projection~ economic activity and inflation that best satisfy his or her indilidual interpretation of As shown in figure 2, participants generally the statutory mandate to promote maximum continued to expect thattheerolution of employment and price stability. the economy, relative to their objectires of ma.,imume mployment and 2 percent inflation, All participants who submiued longer-run would likely warrant some further gradual projections expected that. under appropriate increases in the federal funds rate. Compared monetary policy, growth in real GDP in 2019 with the September submissions. the median would run somewhat a bore !heir individual projections for the federal funds rate for ihe estimate of its longer·run rate. Most end of 2019 through 2021 and over the longer run were a little lower. Most participants expected that the federal funds rate at the end 19. fi,·,mcmbersofthe BoardofGowmors.one of 2020 and 2021 would be modestly higher more than in Septl'111be:r 2018. wtre in office a11he 1irne than their estimate of its le1•et Ol'er the longer of tit< De--ember 2QtS m"'ting and submitted "-onomk pmje<1ion< run; however. many marked down the e.xtent 20. On< panicipont did 11ot submit long<r·run to which it would exceed their estimate of the proje<1ions for ml GOP growth. tilt unemptoymtnt ratt. longer-run le1~l relatire to their September or the federal funds rnt~ projection~ 146 48 PARTJ: SUM\~RY Of ECONO~IIC PROitCTIO:<S R"'"' R"'"' Table I. Economic proj«1ions of Fcdtr.!l Beard n>emb<rsand Federal Bank presid<ni< under lh<ir .i.n.d.i..,.i.d u~ assessmenJS of proje<1<d oppropriat< mon<lal)' policy. IA'<'<mber 2018 M!di.J.tl1 CC61ul~.: R•nsc-' zcnsl10liJI!ll~IN21 ~ '" 11)Jsj101~120~110!1 j~f 10181 !OJ~ I :!1)1(1 I !011 IL:!.:' Cha~inraiGDP » 2J ~~ IJ 1.9 JO.U 2.3 :u I.S lO L~ lO~ 1.8 !.0 }.OH 2.&-U tS!.Z I...J2JjUl1 Stf'W\~"tpt~'1ion 11 !.S ~~ 1$ 1$ J..l) 1! 2.l 2.7 Ull 1.6!.0ji.S!.O 1.912 !.1 u: I.?H 15 !.1 ~ 1.111 Uo.•~~nln:t ).1 ).$ ).6 l.l '·' ).1 l.H1 JS U M MjJZ 4.~ ).1 J.; .t.O J" 4.3 M-.12jto "-~ ~~~'1ion ).1 J.l J.l ).1 J,j ).1 )..1 ).6 .t.a lS H .t.Oj.0-4.6 lll.S UU U .t.O ;... . --...zj.a.o 4.6 PC'EifiA~Iio. 1.9 1.9 Ll Ll 2.0 1.819 1.$2.1 20.2.1 l.O 2.1 j lO 1.8:1.9 J.S.U 1.0!.2 Z.Ou: 2.0 Scpinabcfpt"~~'liotl u ~~ !J 2.1 l.O 2.1)..2.1 z.o 2.1 2.1 1.1 lO l2j 2.0 19 ZJ 2.0 n 20 22 20 H l.O CouPCEil'IIUtioe' 1.9 !A ~~ lA uu to u 2.01.1 HIZ.Ij U-1.9 J.9 !..! 2.0 2.2 2.0 l3: St'fli~mbd~"'ion ~~ H '-' H 1.9111 Z.~l.l 1.11-1 z.onj 1.91.0 l.OU 2.02.2 lOUj \kcxcPt~od appropN~~polit) f'llb Mkr.alfltlld~ulc !A 2.9 ~.1 .t.l ! 2.8 2.4 2.'-ll 2.9U 26-HjHHI !JH 2.411 2.4M Ht6~H-J.S Scplclllbn'pt~~"lio!! H 3.1 14 JA i J.(l ! I H 29 14 11 H 29 t6 lS 10 ! I H 11 H l.ll~ 21 J I !5-35 ~n;Pl"5"'>"~~et,"it..••r~a!sl\"ol~~o~~•·:1(Ciw.•~rr~"'~-...-~c{tabw.~.:~f'I'C'"'-~r,.thrf"""tlllpl~«\"ltbtrrn""<<h )C&r~tiii:(OCIItltq~~~orkrolihr~&rtllh.:-"o:-d.f'C[ilbl"""alld«>rci'C£ii&.IK-oan*r-"~~'~ol~.a.r"f"'"'~i\d).llKprir.....:tiiJon.r«~"I(IU]~ IWII~~;ro~PC(J~~~J.>ti!Nn((JfPC'EC"\OhJ~,I«,ji!JSnKff1,~10ti((lf~~IDICIII'1CC.Utf.x~,_.:T''fC(t'!WII~..-.tfllC•tilc fvo.rtll~n(l(t~qNift..:XII<'d.OOI\NC~#\~~~.U~-a.K«b.:rl~Ohrf'C~lc~~-Uec«.ft~~~~<'l'feftC(",d ru~t~~c(tbcuu~q•bJdltJo""\ur~•I"'~t-f~~~o~c=dcflCIPI'~i.J:t~ry~)lo:lidi:Ubt~oUon-.~tolkf\"\,. ~~-Tbcpr*-~~f«L~~UH1lO~UI:t*IClbcl1klcolcbt._>.~ctfftMtt<t)'(\'ttd'~IUUI'$(lntl(bl.!lt&ctJ1'UH*u:r.1c«t~~"'tdt~ biJ"(~b"tbc€i-&rJlflf!llmlUUllfcW(I(l)r~~;.rlt!Wr)m"'(IIC'flb!:~.-TkScp(~~;.-""<"IU&II~"t»>l•01illiWd~ot' lbcr~al(}pco\hA<1C"(G.II~t.-,:OCIS.~:!S:6.a!C)wpan~dlll.OC'*ll~.,..~-~llK"-.~,~tar:a1G1>P,tK~--''~·ot tb:k«ftJ(Iil)dlliiCI~~o.-tiO!a•iiiiJbc~!>~;"')Jl~ifl$..:4tfii:!'W~d~!i«~JU(bf'CO)M"*•U«·,.. ." ''iofl•illlfk~~~$.-Jt. ~\ll:lfrtt. . I, f«u<irr.~till~J!JtbtiiM"pllj(lo_. • ....._,ilt~,ufaruop.!fr..-.. .... N~~\\ltd&bt~c(~la*itf'ft.l!lt_.t'l.)t\lbc .t.•«'ftc!I~C..·o~rt~"llt::Ii. !. l~A':'Irll~a.,-w&o.IWtliuc·opN~-.it~-blol"''p~. ...V :OO.f<.ftK~•Wbkia~.edi~car. ; l!J.:t~fotl.lUWlc. .t pvt•)WICo:W:-uJifllllqt.~IU'fl'""~(rN~IO·~.f.x~t•I~I&Wt~ll. : t~~'Wctif.x«tt(Pcr.id.lli.'OI.ff~(olkatd On balance, participants continued to view growth for 2018 and 2019 were slightly lower, the uncertainty around their proje<:lions as while the median for the lonQer-run rate of broadlys imilar to the a,·erage of the past growth was a bit higher. Sev~ral participants 20 years. While most participants viewed the mentioned tighter financial conditions or a risks to the outlook as balanced, a couple softer global economic outlook as factors more participants than in September saw behind the downward re1·isions to their near risks to real GDP gro111h as weighted to the term gro111he stimate& downside, and one less participant vie,wd the risks to in Hat ion as weighted to the upside. The median of projoctions lor the unemployment rate in 1hc lourth quarter of The Outlook for Economic Activity 2019 was 3.5 percent. unchanged from the September SEP and almost I percentage point The median of participants' proje<:tions for the below the median assessment of its longer· growth rate of real GDPfor 2019, conditional run normal level. With participants generally on their individual assessment of appropriate continuing to expect the unemployment rate monetary policy, was 2.3 percent, slower than to bottom out in 2019 or 2020, the median the 3.0 percent paceexpocted for 2018. Most projections for 2020 and 2021 edged back up participaollscontinued to expect GDP growth to 3.6 percent and 3.8 percent. respecti\'ely. to slow throughout the projection horizon. Nevertheless. most participants continued to with the median projection at2.0 percent in project that the unemployment rate in 2021 2020 and at 1.8 percent in 2021. a touch lower would still be well below their estimates of its than the median estimate of its longer-run rate longer-run level. The median estimate of the of 1.9 percent. Relative to the September SEP, longer-run normal rate of unempiO)~nent was the medians of the projections forreal GDP slightly lower than in September. 147 MONETARY POLICY REPORT: fi8RUARY 1019 49 Figure I. Medians. muraiiC"ndertcies. and rangesorecooornk pro~'1ions. 2018-21 and owr the longtr run """"' CMogeinn.-alGDP -M~({~'~ IJCcaLJ~!Cndco.i'dPf'O'P,1i;xzj - IR>'$'o(~W. ~ ~ ~ ~ ~ 21)1) l1l14 l1lll l1ll6 lOll l1l1S 21119 21121) l1lll Loag<r ""' ""'""' Uotmplo)m.."''''tt3tt - 1 ~ -6 - l ~ ~ ~ ~ -4 - ) 21)1) 21)14 lOll l016 lOll l1l18 21119 :!()lO lOll longer ""' P.:11.'<111 PCE-in&uioo ~ CEi ;;;!; ~ lOll 1014 lOll l016 :'011 lOIS 2()19 :!()lO l\Jll Lonscr run """" CortPCEinllali.oi'J = §§ a:; -=r ~ -I 2(11) l014 lOll l016 lOll lOIS 21119 lOlO ltl11 Lonscr run Non~ l):finitionsof,'Sriabksandotbtrt~pbnatioosar( it~ttK-nottslo tabk I. Tkda!JI rorlhcactwl ''31urso(thc \'3ri3bk$aJ~:J.n.nual 148 50 PARTJ: SUM\~RYOf ECONO~IIC PROitCTIO:<S Figure 2. FOMC particip3 nls' assessments ofa ppropriate mone1ary policy: Midpoiru of target range or 13rg<"l ~rd fori he federal fund; nne """'' -------------------;-----;_o ..................•..........................................................................j '' ·····- ~.; .............................................................................................; ·························- .. .. -------------------~-----~] . .................................................. ... ............. _).) ·········•···-··· ---------===::....--~-==-==---.....::;::=:....-:---~-- 3.0 ...................j ••• --....o• -·····"''"''''''"''"'''''''"''''"' . ' . '" . ' . '" ''''"'''''''''''''' f ' '''"'''''"'''"'''''" . '' . '' . '' '''"'''' I ' ''"'"''40.t+"''''''"- 2.5 IIIIIUIIllllll M I .•-.............! ....... . _,. .....................................................................................................; """"'""""""''"'- 1.) -----------------+----- 1.0 ,,_ 0.5 0.0 l(IIS 2(119 Nott Each$batkd ~i.rdc iDdi<'-.Uti t)l.:,oaluc(rou.ndcd to the' l'lt.l~ liS ~f\'tl'ltag.:point)ofn indi\idual p.:mK:ipanfs judgmco.t ofd~e midroitu of the .appropri:ne tart<{ f'3~ ror the-(C\kral fllnds r.l:{( 01 ~ :lJl'PfopriltC' tar,get k\d fot' the fcdcr.tl fantJ$ nuc at the end oft~ ~"ifk'd ~r )tar« 0\tr 1~ lon~f run. Oot participant did nQ4 $ubmit loll~r-rum pcoj..X"Iio~s fortbtfOOcr.dfundsrat('. Figures 3.A and 3.Bs how the distributions of The Outlook For Inflation panicipants' projections for real GDP growth and the unempiOJ1nent rate from 2018 to 2021 The median of projec1ions for IOta! PCE price and in the longer run. The distriblllionsof infla1ion was 1.9 percent in 2019, a bit lower individual projections for real GDP growth for 1han in the Seplember SEP. while I he medians 2019 and 2020 shifte\1 down rdative to those for 2020 and 2021 were 2.I percent, Ih e same in the September SEP. while the distributions as in 1he previous projection~ The medians of for 2021 and for the longer-run rate of GDP projeclions for core PCE price inflation over growth were little changed. The distribution of the 2019-21p eriod were 2.0 percenl, a louch individual projections for the unemployment lmrer I han in Sep1ember. Some participants rate in 2019 was a touch nnore dispersed pointed 10 softer incoming data or recenl relative to the distriblllion of the September declines in oil prices as reasons for sha,•ing projections: the distribution mored slightly their projections for inflation. higher for 2020. while the distribution for the longer-run normal rate shifte\1 toward the Figures 3.C and 3.D pro,~de information on lower end of i1s range. thed istributions of panicipanls· views about 149 MONE!ARYPOLICYRIPORT: fi8RUAAYI019 51 the outlook for inflation. On the whole. the real interest rate that is currently low and distributions of projections for total PCE price an inflation rate that has been rising only inflation and core PCE price inflation beyond gradually to the Committee's 2 percent this )\'<lr either shifted slightly to the left or objecti1-e. Some participants cited a weaker were unc.hanged relative to the September near-term trajectory for economic growth or SEP. Most participants revised do11~1 slightly a muted response of inflation to tight labor their projections of total PCE price inflation market conditions as factors contributing 10 lor 2019. All participantmpected that total the downward revisions in their assessments of PCE price inflation would be in a range from the appropriate path for the policy rate. 2.0 to 2.3 percent in 2()20 and 2021. Most participants projected that core PCE inflation Uncertainty and Risks would run at2.0 to 2.1 percent throughout the projection hori.zon. In assessing the appropriate path of the federal funds rate, FOMC participants take account Appropriate Morretary Policy of the range of possible economic outcomes, the likelihood of those outcomes. and the Figure J.E shows distributions of participants· potential benefits and costs should they occur. judgments regarding the appropriate target As a reference, table 2 provides measures of or midpoint of the target range- for the forecast uncertainty- based on the forecast federal funds rate at the end of each year errors of l'arious private and g01'emment from 2018to 2021 and 01·er the longer run. forecasts over the past20 years- for real GOP The distributions for 2019 through 2021 11~re growth, the unemplo)~ent rate, and total PCE less dispersed and shifted slightly toward price inflation. Those measures are represented lower values. Compare{! with the projections graphically in the ''fan charts" shown in prepared for the September SEP, the median the top panels of figures 4.A, 4.B,and 4.C. federal funds rate was 25 basis points lower The fanc harts display the median SEP over the 2019-21 perio;!. For the end of 2019, projections for the three variables surrounded the median of federal funds rate projections by symmetric confidence intervals derived was 2.88 percent, consistem with two 25 basis from the forecast errors reported in table 2. point rate increases over the course of 2019. If the degree of uncertainty a11ending these Thereafter. the medians of the projections were projections is similar to the typical magnitude 3.13 percent at the end of 2020 and 2021. Most participamsexpected that the federal funds Table 1. Awrag< historical pro;.-.:tione rror rangos rate at the end of 2020 and 2021 would be 1\:r"-nllfC r'(lin;~ modestly higher than their estimate of its le1-el \'3-riaN: :018 llll over the longer run; however, many marked Cl!Jntcinri:aJGJ)J¥ IO.S !2.1 down the extent to which it would exceed their u~·lll(ntnct' 10.1 !O.S ±I.S ±1.9 estimate of the longer-run level relative to their fo)l:de«llu~rpti.'C:Sl ±0.2 !1.0 ti.O !1.0 September proj~tions. The median of the ~N«minm~nM-,;• ~I .U..I !~. • !~.~ longer-run projections of the federal funds rate ~rt:l'.lf\'lfr•~tJn•~,..Utt~rc\I~~PMcc~lllrrMWOC"» was 2.7) percent, 2) basis points lower than in ~ b o ) ,. • . ~ ._ t t l .: ( I I A IR r t o pt l n'K ~p! r ~" u ti 4 ot p i$c n oc c iW - SI! m : ~ ~~ c I n, 7 ~ 1 & 1 ! 1 .. 1 " • ' m ' - i r iM d M t o , l a b • e - ~ o \ ! \ ~ · t f . '« k a , ! . " u i t . . n September. t't~."tnatll~;....sctmu,•»~~tbd<n.~•))~~~~~~~~~ tW...,o.at~S....rulGOP.a~*lt..WiiiMIWf~~IM ro.kriJfi!Jiikrll<•\lt~dlf"F!I~t,'tll(t\\'f.t,tt'I<M<of~'Wf(U*'S IWr••~9'-!tfill'a.'Ni•~i.»..tttD''"'fk.('idi~•IIJ'Prttrlq In discussing their projection~ many { r 1 .. 0 .. 1 a ! 7 "a , . - . ( : ; ~t J . . , , r , n p o ~C n ik .. l T '. h : r u r Lu ~ . d C~ R ( n. O : / ~ I • M r. £ ., C .., \ ~ . · - r II. w "( t ); K &I o c. r X n l. . '- l w. t ,H t N - o J n . : . l . ] , partic.ipants continued to express the view Dftm...:4s.m.-.~~~~\\~,o.:~~(l{~d'lkr«<t•t that any further increases in the federal funds Ra I d . • D t d S i ) :o i ~ l l . ( r ll a l , . f , C c( ' \ O ' r UQ ~ . " , ' .' - I " e ' oi 1 U > t ' o i J ii \ N 6 : o J i C M IWU 1 1 I i I 0 o 1 l " ( ¥ c ~ l , o f u l b 0 i S < ; J ! '(IJ'O)l rate over the next few years would likely be l ~'~f'fi-th:qrcu1JNCW.~-rn.'tQo$n.l.bcrt»-ciiiU. .r ~LII.t.l~l\.,.. ~•16d)tie'd•fO'ftliiiCDIU~Sf"!>lkC\.'"C'O(ICCII."kc«llb.~'l*u:t gradual. That anticipated pace reflected a ~~ .t ~ f oo « a f f ~ o . l a v l t lt t .( l S(( t 'I \ c W t o ~ r d t ' a ~ lo ~ f t a ~ t t t t b W q t w l t s a" tb ~ ck I t I kf L . alf,~u.nc,ror few factors. such as a short-term neutral <Uc'fk'll«fiCt.a.:f,.;t<PlUc'rlltCOOJ-..ot.TttiM~IN!ll.~,. ....< ff«\ J!t~ahbtti$~.,¥11(1'~~111rm-nt.llllk~dt~ 150 52 PARTJ: SUM\~RYOf ECONO~IIC PROitCTIO:<S n Figure 3.t\. Distribution ofpanicipants' proje..""tions for the change in f\'al GOP. 2018-21 and O\'"er the lo!lg('r run JliiS · 0 · 1 S ) .~ : " 1 ft . t ~ t ~ «~ ' ' * tl ' l - ) , tt ~ ) = -1 : 4 : I - - I =I~ -8 I I- --·--"; c c--~ ,=,l u 1.' 1.6 I.S 2.0 2..2 2.4 2.6 l.! 3.0 3.2 1.3 1.5 1.1 1.9 2.1 lJ u 2.1 2.9 3.1 3.3 2019 -18 -16 -I" -12 --1s0 .-_..6,,, c u 1.4 1.6 I.S l.O l-1 H 2.6 ).0 3.2 1.) 1.5 l.l 1.9 2.1 2.3 2.S 2.1 3.1 3.3 l'~'fl.'\"ntl'1n~ ~~'l'«'~ip;ll:lts .lOlO -I! -16 -14 - 11 --1s0 -_6, .,2 c l.l 1.4 1.6 1.8 2.0 2J 2.4 1.6 2.8 3.0 3.2 1.) 1.5 l.l 1.9 2.1 1.3 2.$ 2.1 19 J.l ).) P~m'tltt':ltlg.: ~'wrlt\.'fol~t!.L':Iplnts Jllll -IS -16 -14 -12 --1s0 - 6 c =Ji IJ 1.4 1.6 1.& ~~ 2-2 2.6 l.S 3.~ l.l 1.3 1.5 1.1 1.9 2.1 2.3 2.1 1.9 3.1 3.3 _Lon-gtrrun -IS -16 -14 - 11' --1s0 -_6, r ---,2 1.2 1.4 1.6 1.8 2.0 2-2 2.4 1.6 lS l.O l.l 1.3 1.) 1.1 1.9 2.1 2.3 2.5 l.l 29 3.1 .U PM.'\'fltr:IJig;: N'on: Ddinilionsof,-:~rUbks:md othcrt:\rb~tions.artin the notes totabk I. 151 MONETARY POLICY REPORT: fi8RUARYIOI9 53 Figure lB. Distribution ofpantcipants· projtt1i1Jns for 1he unemployment rnte~ 2018-21 and O\X"r 1he longer run -IS -16 -II -ll --1s0 -_6, c =-tl ).0 u 14 ).6 J.S 4.0 41 4.4 4.6 4.8 1.0 ).I JJ ).$ ).1 19 4.1 4.3 4.5 4.1 4.9 S.l l019 -IS -16 -14 -_12, -10 -_6, c ..,2 3.0 u ).4 ).6 )~ 4.0 4.2 4.4 4.6 4.8 s.o ).I lJ J) 3.7 ).9 4.1 4.) 45 u 4.9 S.l PtlmliR~ Numt..-fcfrurc~1$ li)ll) -IS -16 -14 -12 - ~n --I ~ ~---~ - - - _ 1 6 s0 , c c - - I f=:-11 c ==?. [":"":)I c===? ..,2 3.0 1l ).4 ).6 )~ 4.0 4.2 4.' 4.6 4.8 s.o J.l HU3.1l9.U·U 4.5 u 4.9 1.1 Pt'A'-""113~ 20"21 -IS -16 -14 -I! - - - _ 1 6 s0 , c --,z ).0 ).2 4.4 4.6 4.8 s.o 3.1 j.J 4.$ 4.1 4.9 S.l -IS -16 -14 -12 --1s0 -_6, c -,2 3.0 J.2 3.4 3.6 J.S 4.0 ~l 4.4 4.6 4~ s.o ).I ).) J.S ).1 ).9 H 4.) 4.) u 4.9 S.l Ptl\.'«<lrangt 152 54 PARTJ: SUM\~RY Of ECONO~IIC PROitCTIO:<S Figure 3.C. Distribution crpanidpants' projections fQr PCE infta1ion. 1018-21 and owr 1he longer run -IS -I< -I' -ll ---10·s _, r -,2 1.7 1.9 2.1 B u l.O l.l 2.4 ;\\lrnb«ol,wtir..~ 11)19 -_I,S -I~ --------, -IZ I I I --8~ II, L I - - - - --- I 1 - -------,: - ; • ~ r 1.7 1.9 2.1 l.) u 2.0 2.2 2.4 ~'umbn'ol(Qib.~ -_I,I -I< -I) . --- _. 1 , · 0 ,, s r 1.7 1.9 2.1 H u 1.0 2.2 2.4 N\lfl'lb..'fot~;.~llb lOll - _ _I , S, , --,;I -1! ll ---1·s0 ~r--- _, r ,-.,! 1.7 1.9 2.1 l.) I.S 1.0 2..2 2.4 r --- P r crn"'''lr.tnJ (' :-•.ombct o{f Wt~Zlt5 _Loo.gtrrun r 1.7 1.9 2.1 lJ u l.O l.l 2.4 Pttt«~lr.tnst 153 MONETARY POLICY REPORT: fi8RUARYI019 55 Figure 3. D. Oistribution of pankipants" proje..'1ions forr on: PCE inflation. 2018-21 ro1s . o • o . S . .1 , < · " c * m - O 'I . 'O :r i< ~ \ ~ - - - - - - - - - • - - _ 1 1, 1 6, I - 11 -10 --s· -· -,2 1.7 1.9 2.1 ll 1l lO u 2.4 ~YCDl>..'l'ol'~ipm~ 1019 -IS -10 :-------, -I~ -u -_10, ~ -· r -----1 J -• I --------,-~! 1.7 1.9 2.1 l.J I~ 2.0 2.2 2.4 ~~~"fof~~fWliS -11 ,-------, -10 - I' -ll I I --1·0 - s -· -,! 1.7 1.9 2.1 2.3 I~ 2.0 2.2 2.4 l\:u~of~tti.:i~t!- ro21 _,. -11 -I< -I~ - 10 --s· _, _, 1 I 1.7 1.9 2.1 I~ l.O 2.2 154 56 PARTJ: SUM\~RY Of ECONO~IIC PROitCTIO:<S Figure 3.E. Distribution of panicipants' jLtdgments of the midpoint of the appropriate target range for the federal funds rate or t-he ap,propriat e targetlewl for the federal funds nue. 2018-21 and O\'er dtt longtr run n 2018 -_I,S. -16 --1·2 -- _8I , ~ ---~~ c tC""J_ ..,~ l.SS 2.13 1.3S 2.63 2.88 3.13 lJ.S 3.63 3.SS 4Jl .us 4.63 ·l.SS ~11 1.)1 1.61 1.81 ).12 ).)1 ).62 J.sl ~.12 ~-li ~-62 4~1 SJ1 2019 -_,I.S -16 --12· --1s0 -· c ..,2 I.SS l.U 2.3& 2.63 2.88 3.13 3.3S }.63 J.SS 4.ll .US 4.63 4.88 1.11 l.J1 2.62 2.81 J.ll J.J1 3.62 J.Sl 4.12 4J1 ~.61 4JIJ HI PCKCt~t range ~=b.'fofroW-;J:Qnb -IS -16 -- - 1·1 4 2 [] --, ---1s·0 c c - -.==~oa~L _, -,2 US 2.13 l.JS 2.63 l~ J.IJ J.!l ).63 l.SS 4,1; US 4.63 4.88 2.12 2.37 u2 2.S1 >.n 337 3.61 3.S7 .u2 4.37 4.62 4.S7 s.12 Ptl\'\'fltr3JJ~ ~~'1'o(flltti:lf'<l.tll$ 1021 -IS -16 -14 -12 0 --, - - - -1 6 s · 0 c c - =.=f:"ltD~=r::r= ---- I -,2 I~ I.IJ D8 1.63 2.88 J.J; HS l.6J J.SS 4.1; 4.JS 4.63 4.SS 1.12 B1 2.62 2.S1 J.H 3.37 3.62 lS7 ..1.12 4.37 4.62 4.87 5.12 -_,I.S -16 --12· -10 -_8, c LJOD~=· :J2 I.SS l.ll 2.38 2.63 l~ J.IJ J.J! J.6J J.SS 4.1) •.38 4.6) 4.SS l12 lJJ 2.62 2.87 112 B7 162 1.87 4.12 4.H .Utl 4..87 5.12 P~-n.'l.'lltr.lfl~ 155 MO\ETARYPOliCYREI'ORT: F£8RUAAYl0l9 57 of past forecaSt errors and the risks around the "ith three panicipants judging the risks to proj<etions are broadly balanced. then future the unemplO)ment rate as weighted to the outcomes of these rariables 11·ould hare about downside and t110 participants viewing the a 70 percent probability of being within these risks as weighted to the upside.ln addition. confidence intervals. For all three variables. the balance of risks to the in Ration projections this measure of uncenainty is substantial and shifted down slightly relati•·e to September, as generally increases as tl!e forecast horizon one less panicipant judged the risks to both lengthens. total and core inflation as weighted to the upside and one more panicipant 1iel1ed the Panicipants' assessments of the le.cl of risks as 11cighted to the downside. uncenainty surrounding their indi•idual economic projections are shown in the In discussing the uncenainty and risks bottom-left panels of figures 4.A, 4.B. and 4.C. surrounding their economic projection~ Participants generally continued to view participants mentioned trade tensions as the degree of uncenainty attached to their well as financial and foreign economic economic projections for real GDP gro111h and developments as sources of uncenainty or in Hat ion as broadly similar to the a•erage of d011nside risk to the gro111h outlook. For the past20 )ears." A couple more panicipants the inHation outlook. the elfects of trade than in September viewed the uncenaint) restrictions litre cited as upside risks and around the unemployment rate as higher 10\\tr energ) prices and the stronger dollar as than a•eroge. downside riskt Those "ho commented on U.S. fiscal policy 1'ie11ed it as an additional source Because the fan chans are constructed to be of unccnainty and noted that it might pn.'SCill symmetric around the median projection~ two-sided risks to the outlook. as its eH'octs they do not reHect any asymmetries in the could be waning faster than expected or turn balance of risks that panicipants may see out to be more stimulatile than anticipated. in their economic projections. Panicipants' assessments of the balance of risks to their Participants' assessments of the appropriate economic projections are shown in the future path of the federal funds rate 11tre also bottom-right panels of figures 4.A. 4.8. subject to considerable unccnainty. Because and 4.C. Most panicipants generally judged the Committee adju>tS the federal funds the risks to the outlook for real GDPg ro111h, rote.i n response to actual and prospect ire the unemplO)"'tent rate. headline in Oat ion. developments over time in real GDP growth, and core in Hat ion as broadly balanced in the unempl0)1ncnt rate. and inHmion, othen10rds. as broadly consistent 11ith a uncenainty surrounding the projected path S)mmetric fan chan. Two more panicipants for the federal funds rote imponantly reftects than in September saw the risks to rtal GDP the uncenainties about the paths for those ktj gfOIIth as weighted to the d011nside. and economic \'ariables aloog "ith 01her factors. one Jess judged the risks as 11cighted to the Figure 5 prorides a grophkal representation upside. The balance of risks to the projection of this uncertainty. plotting the median for the unemployment rate was unchanged. SEP projection for the federol funds rate surrounded by confidence intervals derived from the n.>sults presented in table 2. As with 21. A11hcrnd of tbi>summal). the bo< "l'orttast the macroeconomic 1ariables. the forecast UI'IC'trtaint)-di!C\ISSCS the sourm and intttpttatton uncertainty surrounding the appropriate path " o p ( " l D m <' s tiU t it I < D a I) p s p u r r o ro o u d n ll d l!< in d g t t o b< a t S \v l< n i o \ t m il< i< - f . o u r«< in OU t) a n a d o d of the federal funds rate is substantial and nsksatttod"""" ponirip;lDI>' p<Oj<.'liom. increases for longer horilont 156 58 PARTJ: SUM\~RYOf ECONO~IIC PROitCTIO:<S Figure 4.A. Unrenainlyarn! risks in projectionsofGDP g.ro'"1h Median projec1ion and confide~ int(l'\'l!l ~on historical for~XaS' errors Cb3n~ in rc.3l GOP -M~<rl~~ - I i\l ,.OOfiM'ft."'t ilun21 -4 -J -2 -I - 0 llll4 lllll lll16 lllll llliS 2()19 llllll 2021 FOMC participants' a~"QQ''(:nts of uoctnainty and risks ar-ound 11ttir econonmic proj«:ti{)ns, ::: ~ctnkfofrwti,~nts ltllto.'l.'ftainty :11bou1 GDP~r.;w.1h Risk> lo GOP~''"''" :- 0 - ( ~ ).'C ~ tf , llb« i l'fn\ o ..,.'\. n 'fio $ tb. - -1 I 6 S =· 0 · I 5 ) < .,' ! C < ft < lb 1 : 0 t, b ..' c * r ''t ~ io . n . ) . - -1 IS 6 l -14 I 1 =: ~ I I -10 I I - S =: = I 1 - 6 I I I ~1 - J '2 r - ..r:-;:1 I ~ - I ...=-:-::-:; I - J ' 2 8roadl1 H~ ~mibr Non: 1lK:-bll:k' 3nd rOO lines: in tk top p.lnd $ht»\·l<'\uaJ \~IA'$3nd m.."dUn projl\'tcd \'11~ rC\fl('C1iH·Iy. oftht ~A.'\'TII dungtin fl'algroocfomeslk"prodoo (GOJl')fromW fou.nhquanerol1bt pt\"\'iotJS }'tar toW fourtl! quanerol1bt ytu iodi.:-3tt'd. Thcwnf~ inttn'3.1 :u\l\100 the mcdi3n rroj.~t«< ,.,.lues is as:;l.UIK'd to ~s;.lflmclrl:3nd i) ba~ on roo1 m:-.111 $Qll3r00trrors of\ 1rious pri\'::11(' 1nd gc>\tmmcnt fM\.'3Sam1dc O\'tr the prt'o·ioUf 20 ~"t.ars: more infornution about t~ da11 is3\'3ibbk in tlbJe l ~UstCUITttUC'OI'IIJitioru.ma.~ diff'~from those IDlt !)rt'\'3ikd.on;a\'ttagt.O\'ttl~ pmious 2'0)~r~ 1t.t~idth artd$hap:ofch-:~·onfldc~intc"'JI~im3ttdoal"'~ofthc l't~or);'3l ro~tm>r$rna)·not r.:&\"'1 F0~1Crun~"ip.1.nt$'c urrmt a~~ncsof1hl: utK'tnainl)':a00risl:s3round thcirproj..'l."tioM.: l~turrtRt3~nts3rt wmmariud in thl: lo~~o~r p;u~Cls.. GtMr.l!l)· sp;."3ti~~g. panicil'lnts\\bo ~ 1~ unctt12int} aboutltlcir pr"'j«tioos3s .. broad!}· ~milu" to ll'h: 3\\"r:l~ k\clsoflbc pa_.q 20 )\"Jrs \\OUJd \'icwd'lt' llil.ltl't ofthc('Oilrx.lmct ini.Ct\'11 sbo\\11 in t~ ~i)toriQI fan dun as la~l)· consbt~1 ~-ith tfk-ir 3..~"'11K'flhoilht unetrUJincy 3'boot Lhcir pro]:-dioos.. l.iknis.:. pmici{\'lnt), \\flo judge t~r isl:sto tbcir proj.'l.'tions as "btoodl)' ba.lai')C('(). . \\OuJd \icw ll)croail&:ar< intm'31 :uound 11Kir proj-:~.'tions 3S3PPfO\imatc~· ~)mm.."tric. Fordtflnilioas or Ur'll:~nainty and ~ks ir:r (\"'C''Ittlic projo.'\1ions. ~ chr;.· bo~ '"fom."3SS Ufk.X'rtail'!l)'. .. 157 MONETARY POLICY REPORT: fi8RUARYI019 59 Figure 4.6. Unttrtainlyand risks in proj«tionsofthe unemployment r.ue Median projection and con"d~nct interval based on bi.s.torical ron.'Ca)t errors - UIX'f - llp M !~ O ll O "' W "tl I tr ( at ' ~ (~~ - 10 I ~oonfd."fl('(~trnl -9 -s -7 -~ -s -) -l -I 2013 2014 2015 2UI6 2011 2018 2019 2021 FO~IC p:uticipanls· assessments of unctrtainty and risks around their economic projt.>cti<ms ·n:Nuttlt \'tolN:~:): - n _., lloo.'f1ainty about the u!K'mpiO)~ct mt~ Rbl:s tot)).: '-!Jl('mploymcn\Qtl.' : • 0 • S ~' c l. p 't c tl d l < t\Y t f ' ~ C ' \' 1 P, i "t o io o tt s $ - -1 IS 6 : • 0 • D S . c ' t l ' .\ t " ~ ' " : ~ ll ' b f . l ' i ff ' l < l ; ' , (l ~ j I : O . I .~ M - -1 IS 6 -I' -I' --- I -10 I - S - I I - S 1I I0 ·1- 6 = : =! I - 4 I tl rr=JT::=l~J1 I BroadI )' W~to ~mibr Non: The bli.K' :aDd «d lirxs in tbt top l\'lllC'l s.bo~· 31.1W) \-atucsand tnt..'dia.n rroj.'\.'kd \'al ues. re5pe\.1h"dy. oftbta\c:ra.y ci\il:i3n U!\.'mpfo)m;nt ra,~ in the fourth QP.13ncr of 1~ )\'.U in<la.."3tcd. The confilk'flC\' int~-n-al ;~round the m«<i.Jn pr\l',i«tcd \'<1fue3: is. assumed 10 be S)'TI'I~uic aDd isb ased on fOOl nwl'l sqLLlr\'tl «ro~of' ~Mus pri\'3!C: and go1tmmcnt (Of('I."3StS ITltl& 0\'tt lk Jlfl."'ious 2i.l )"tarS; mo~ inrOfTil.1tion aboutthcsttbt.J i:s.a,'3ibbk in ublc 2. &,.,~usc current C'Oflilitiorrs may di!fcr ft<Jm those t!ut pre\"li\td. 003\CrJ.sc. O\tr 1bc pm'iou$ 20 )~IS.. tbr \\idth 3nd $b3~ oft he 0011fed...~ in1er.1l ~~uxl on theN.sisoft~historirJI(orC\"aS4ffl'\ltsmayootl'tlk\.'1FO~!C~rticipatnfturrtnt~ISol'lhtW'Il'('rtaint)'arwirisb : j .r O o O u ~ n t d h t e b u r r i k r ." p t r t o ta j i . r ' u \ ~· " a " b t o ~• -u OO t c 1 C b l c . i l r f p r to cn j. t \. : 'ti l ol . \$ ~ : I ss S M 3 b r ro c ad w l)' m sim lll i 3 la ri r u -t d o i n t1 1 t t b ; c )\ ~ ' \ tt ' . f 1~ p l :l " O \ C ' k t . k . G of ~ t r ~ a p 0 .'b ) l Z s O p . y ';l n l; r i s ng W . p (IU ;.r id ti c , i w pru l t !S ~ \ \ho uidth ohbe roolioknc< io1mol sllo\ln io 111< bi~oritll fan cllln "'br~lr rooiillt111 •ilh 11i<ir 3=m<111<ofll< ooo:ruiDiy 3bouttB..;r proj.;~tions. Likcwi~. !X)rticipants who jud~ th: risks to their proj.·'l:tioo~as Mbroodty b3\anoo.l--.ou3d ''lew the CMf»dcore inltn'31 :lrou.nd th..;r (II'Oj.\.'tionsasappro.\im:stc\)'S)TI'UYICirie. FM do.:finitioru. of un.xnaint)' 3nd ri~s in C\'OOO!mic pr~1ions. S« the bo'l: Mfot«"aSI Uncm;~ioty."" 158 60 PARTJ: SUM\~RY Of ECONO~IIC PROitCTIO:<S Figure 4.C. Uncenainty and risks in proj«tions of PCE inflalion Ml"dlan proja.":tion and cor~fidcnce interval based on histori('al forecast ~trrors: PCEinlbtioo -~1.-..Jianoi~Ucb 'Xr.t~-cillt('f\1.1 -J - 2 - I - 0 2013 lOIS 2016 2011 2018 2019 2020 lOll - n _, FOMC p3nicipan1s.' as:stsSmtnts of un<trtainty and risks around their e\"()nomic projections ~~'f<iP~-ni~ Ul')."\.'f'llint~ about PC£ inlbLlon Risis 10 PCE inflatjoo : • Ol • l \ $ . e ' fl t t f Mi l t l xt l ) l 'f c Q t ). ~ . " .. ' , J ;. Q ~. G$ - - 1 1 8 6 Q · l · ).. S '\ . 't ~ ii " 'J o b: ; t~" . '' " io ~ lt ~ $ - -1 IS 6 -14 -12 I --- I -ll -10 I -10 -s I - 8 - 6 I I - 6 - 4 ~ ~ ----.-; ~ r==JII]- W~¢tuN 10 Btoadlv -dO'o\11~ nNblli.'\-d _, UDCC"n.3intyabout cott liCE infLuion Risls torort PCE inllalioa : 0 -. $ l) c ; p " t a tm W~k b r c f r i p C r ' c O ; : :, i ." a: ti 1 ." i G oc S K - - - 1 1I 8 •6 • 0 • $ 1" c ' p - t ' o \ n ' t l \ l 'T lb p : r T '* pr '- ~ 1 1 i 1 .' o G es S - -1 IS 6 -ll I --- I -ll -10 I -10 -s I - 8 - - 6 ' = I -I I r=--=--=i ;, - - 6 4 l ~ l Brood~ Hi!l<r '(j_mila:t Non: The l.i~.~~:3nd n:d lillt...~ in tr.:lopr-'IXI.shouo· ai.1wl ,·;tlucsand mcdi3n rco;xttd ''31\K'$.. n.'$JX"CCihiy. ofthocp:ro:nt l"b!ngc in 1br pritt it'M.l'1: for p.:rson3l ronsump2ioat.\p.-ndi1un:s (P('E)from tbc founb qt11rtcr of1 ~ pmiollS }'\".1t to 1br fourlhquartcu(lhc )Wf icdkat«<. Th:oonfll.lc1wx intcr.'ll~Dd tk median rro~i.td \"JIUC'$ i-sassl.lfDIN to tx)ymmccrk :.\nd is ba-ed on rOOtiiiC'in squ-ared crross of \-ariQ!J$ pri\'3tt Jed ~~'tmfl.l('flt forttJSIS m.ld-:0\\'f the rrc,iou5 20)\";,\fX more W'ofl'l'l.'ltion :~boot tho..'ii!'dll:l i.s :ll'lilabk in tabk 2. Be\"3tN: rum•nt oonditioM may difft.r from thost tll:u pm':llil..-d. oa a,·crar:.O'Itr th;:-prt."\ioUS 20;.~~ ~"idlban<l shap:-oftho:confldcl),~intcn~l es~imltfd oa tlwbo.sisoftbc: h~~ rort'C3~ cn'OJ"nuy 001 rrtl«:t FO~fC p;utio."ip;lllb' currtnt ~~tsoftb.:-W'ICtrtJitlt)·Jnd ri.~s:~routld tbrir pt'Qj.\.1.~ tbrse currtnl a_~"Stlltnts art .so\Jmrnari.ud in tlK ltw.;;r JXlliCb. Grnerally sp:al;iJlg. p.3rtidpwltS v.ho judp:-tbc uncertaint)' :sbotlt tb<"irJifoj."\.1ions~ ~brood~·:-irnilar~ to th.:;ntr.!~~·fuoft~p3.$l20)l".li'Sv.oukl 'ic11 th.:v.idthoft~('C)fi!W.'fl!Xinl\"n'31 $hO'o\YI in tht hi~oti--al fao th3irt 3$ laf!l'l)' l-oo;.isl~l 1o1itb thcir ~~'titS of' I~ lltM.'trtail'll)' 3bot.Jt th..'ir proP,"1icol'li Lil;c1o1~. ~rtkiJ'Kl.fiiS v.ho jud~ tbc risk5 to tbcir pro~"tions 35 ~bfoodty balati'.:af 1roukl ,._"" tbccontidrna: intc:n-al 3rwnd tMr proj«tioM as JPPJO~m3!dy S)TntrM:tric. For d:fioitioosof W'll.\'rtainty a! XI risl:.s in ccononUc projc('!ions. $C<' th..! bo'( ~Fota.-;a~ Urx:trulnt)'-~ 159 MONETARYPOLICYRIPORT: fi8RUARYI019 61 Figure 5. Unetnainty in projections ofth.e federal funds r.l!e Median projection and oonftdeoce int(r\'al b:k~ on his1orical foret"3Sl errors: ""'''" Fcdcl11fuod3;rn1~ -,\tifJri.DIMU.rt-'1~ -6 - -~ICI.Smolrro:fC\1iom 111:~"-"Cdidmo."Ymtm-ai' -5 _, -J -l -1 -o 2QJJ lflll 1016 1017 lOIS 1019 lfllfl lOll Noi£ Th.:bluc:ll'ld n.'d li~arc b.ts4'\l onxtU3.1 \"3ll)t."$.1nd mcdiJn pro~'1cd ''ll!A~ l\."$p.'<1il"tl)'. oftl'lcComminiX's taJi<1 for the fcd.."RI furd~ rate a11bc: (11<1 of liM: ynr in<lica1cd. The anual 1"JJ~KS arc-1hc midpoinl oflhc tare~ r:any: tb: n'k\li3n proj.'l."ted \'llurstmbG.~or~ cithtrab.:midpoinl oftb!-13.r$('1 1'3.tl~Of the ta~"tlcltl.lhc®r:..i.'M: intl!'n":!l ll'OUod the median proj.'\.1«1 \'3IUCS i:s Nscd on root me:111 squll'Cd errors of ~~us pri\:Jte aDd yrwmm.:-nt forf'('J.Sts n~ Oltrlhc pm·iou:slO )~f'S. Tht('()Gi»,"'X(intm;~li~nots&ri.1~·c:on~rnl 'lltith IJlc projmion.s for tkfedmlft~ods ra1c-. prirrorilrl\."'(':)11$( tbc$c-pc0j."t'tions311:'not fOM."'3.,t$ofthclikcl~ outCQn'IC$for 1hc f('ojcQI fund~r.l!r. but ~1hcrprojc<1ion( ofp:~niclpa~~b'indhiduala..~ntsofappropriatcmoi'ICW}'poiK.')·.St~l.hi>r:oricalfom.-ast.Morsp:-O\itkabr~sell5(' oftfl.:u/X\'ftaint~ arOllnd t.hdutllrt path oltbc fOOe-ral fundsr.ttc"'~~ b)· the u~nainl)'3boul tlx ma\'l'O('I.voomk \'3ri3~.1$\\'dl:uadditi«l:aJ:tdjLmi'IX'nt$10tJu)nct31)'~'thltrna)·~aflfiWPri3.tctoolT~It~dT~'tsof~l:$to ttxt\'OOOm)'. ThcwnfM.knlx int(n1) i$ :muiTII."d to be S)1Timct~m~pl \\'hen it istf\l~wdat t~--ro the bollom oflt'..: bA~ ~~1 r.tng.c for the ftd..v.tl fund$ r:ucth.at hasb.'tn:ldop.:.cdint~p3St by th<-Commin~. Thistrut~t<~li«< ~'OIIkll\01 be inttn<kd to indil.:ale tb.:-lil:dihood oilb e I.I5C' ol~ti\'t iatmst rnlrs lo pro\ick adJitioaal monetary polic}· :N.wmnM>datioo ifd oing so WO\S j\ldgl,'d ;tppr()pri.~lc. In ~il $itU3l~ th.: ((lllUl)jlt~~l'Ould 3ko crnplo>•Oihcr tool(. ini.it.ldingfOA'3rd gllidaoo: 3[')1j b~~·SI..'ak~l pu~lwt5.tOpro\ilk:Jdditiorulan'OIM'!(Ida!ioa.lk\.'"3USC'C'Umtll ronclitiot!smaydifl'« from tbostdUI rm~IOO. on3\~, 0\·crlhc pmiot.JslO)'t3~ thcwidthaodslupcofthc('Ofltic.t,.'fl«intmillcstimatcdon tbc k'lisofthc bi'lorit-J.I fofl."C;t)) crrOJ' Dl3.Y ~ nila.'t FO~tC pl:dirip.1111>" amtttl3..~'tll\,l$of1 ~ utKXrt3inty 01nd ri~saroond tll.,;r projc\"tions, • Thecoo~inlm'3lisdC'riwdfromfon.uStsofthcawr.t,p:hclolshor1·termintc~ratt5iJitbefoonb~o~U3rt(ro( lbcyc.uiildt.."3t00: mortinfomution :t.botltt~cht3 i$;h':lib~int3bk 2. TbtWikd lrt3 cDC'MI~l'\S than3 10pc«"«'trofltid.Mctir.tM>alifttxronfltkoo:-intm-;~lhas~atruM3tNatzcro. 160 62 PARTJ: SUM\~RY Of ECONO~IIC PROitCTIO:<S Forecast Uncertainty The ecOOQmic p<Qjections provided by the members repocted in table 2 \\Ould imply a pro»Jbility of about ol the Board oi Go\~nor. and the presidenb of 70 percent !hat actual GOP\\wld expaod 1\ithin a the f<dernl Resen~ Banl;s inform discussionsoi rang< of 2.2 tO 3.8 percent in the CUrter!! yea\ 1.4 tO moneta')' policy among policymaktrs and can aid 4.6 percent in the seconc year, and 0.9 to $.1 percent public ur>dtrstanding olthe bas~ for policy actions. in the ihird and fourth l~"-The corresponding Consi<lerab!e uncertainty attenck these projections. 70 percent coniidence inter~~ls ior Ol'efall inilation hoWt\'ff. The economic and ~. .n istic.al models and would be 1.8 to 2.2 percent in the current)'"" aod relationship< Ul4'd to htlp produce economic foroca<ts 1.0 to 3.0 percent in the second, third, aod fourth ~~ars. are noces~arily imperfe<t des<ripuons of the real ""'ld, Figures 4.A through 4.( illustrate these confidence and the future paih of the economy can be aiie<ted bounc~ in •fan ch>rts" !hat are symmetric and cen:ered b)• myriad unforeseen de\-elopmen~ and ewn~. Thu>, on the ~ians of FOMC participant( proje<tions for in letting the Stance olm onetary policy, participan~ GOP g<0\11h, the unem~loyment rate. aod inflation. con>ider not only \\hot appea15 to be the most likely HOWe\'ef, in some in~aoces. the risks ~cound lhe ecooornic outcome as embodied in their pt~«tions, projections may not be srmmetric. In particular, the but also the range oi alte<nati\~ pos~bilities, the unent~IO)'ftl<flt rate cannot be negati1-e; furthermore, likelihood of their occurring. and the po:ential rosts to the risl;s around a particular proje<tion might be tilted the economy should they occur. to eiih« the up< ide e>r the downsi<le. in 1\ltich case T<tble 2 summilri'!es the a\'ffclge hi~oric~l Clccuracy the corresponding ian chart 1\00id be asymmetrkally ol a "nge of foroca~s. including those repocted in posilioned arouod the ~ian projection. paSI.IIoae!ar)•P olicy Repo<IS and those prepared Because current condilions may differ from those by the federal R"""'" Board's staff in advance oi that pr01~iled, on "'"''g<l. 0\., h<s!ory, participan~ meet ins< of the Federal Open Market Committee p<O\;<fe judgments as to "1lether the uncertain~· lfOMQ. The projection """ ranges shown in the attached 10 their projections of e.l<h economic variable table illUStrate the considerJb!e uncertainly associated is gre>ter !han. smalle< than. ori><Oadly similar to with economic foreca%. For eX<Jmple, suppose a ~'Picall01-.ls of forecall uncertain~· seen in the pa~ participant projectS !hat real gross domestic ]l<Oduct 20)~ars,as presented in table 2 and rellected in IGOPJand tottl consume< !"ices will rise sle.lcfily at the widlhs ol the confidence inter\OIS """'" in the annual rates ol, relpe<li1-ely, J percent and 2 percent. top panels of figures 4.A through 4.C. Participan~· II the uncertainty attending those projections is similar currenl a~ oi the unceruinry Sllnotmding to that e>.perienced in the j)<lsl and the risl;s around their proje<tions are summari>ed in the bonom-leit the p<Qjections are broadlr balanced, the numbers (contrnwd! 161 MONETARY POLICY REPORT: fi8RUARYIOt9 63 panels oftho<e figures. P.lrticiparus also p<Ovide apprq>riate rllOf>etlry policy and are on an encJ.of. judgmems as to whether the risks to their projections )"-'r basis. However, the foreca~ e<ror< should p<ovide are weighted to the upside, are weighted to the a seo<e olthe uncertainty around the fu1ure path of downside. "' ille broodl)' b.llanced. TIIJt is, 11Me the feder•l funds rate gene<ated b)• the uncertainty the S)'mmettic historic~I fan charts sho<.\n in the top about the macroeconomic vJriabtes as \\~I as panels of f&gures 4.At hrough 4.Ci mply thJt the risks to additional ddjustmeo~ tornone1•~· policy thai would participan~· projections are balanced, participan~ ma)' be appropriate to offset the eli~ oi shocks to the judge that there is a greater risk thJt a gh-en variable economy. 11ill be above rather than below their projections. These If at SO<ne point in the fu1ure the oonfr<lence inte<Val judgmen~ are summari>ed in the ,.,_,..,.right panels of around the federal funds "te were to extend below figures 4.A through 4.C. zero, it would be truncated dt Ze<O fO< purposes of As with feal activity and inflation~ the oudook the f.1n chart shown in figure 5; zero is the bottom of for the future path of the federal funds rate is subject the lowest target range fO< the federal funds rare that to considerable unceminty. This uocert.aint)• .arises has been adopted by the Commiltee in the pa~. This f)limarily ber:ause tach participants assessment of approoch to the constJUction of the federal funds ldtt the appropriate stance ol rnone1ary policy depends ian chart would be merely a con,'E'ntion; it would impo11antly on the <!\dution of real activi~· and 1101 hM any implicotions fO< possible future policy inftation 0\~ time. If economic conditioos e\'01\'t' decisions reg~1rding the use of negath·e inteteSt rcl!es to in an unexpected manner, then a~ts of the provide additional n1011e~ry policy acconlrnodation appropriate se«ing of the federal funds rate 11oold if doing so were .appropriate. In AAh situation}, the change irom that point fM10rd. The final line in Cornmi«ee could also empiO)' <>~her tools, including t.lble 1 shol1; the error "nges fO< forecasts of short· fonvdrd guidance and asset purchases, to provide term inle<est rates. They suggest that the hi~O<i<:al additional a«ommodation. conMence intervals as!Oeiated with projections of While figures 4.At hrough 4.Cp rovide infom!.ltion the federal funds rate are quite wide. II should be on the uncertainty around the econon1ic projections, noted, however, that these confrdenc:e inler\oals are OOl frgure I provides information on the range of vi0111 stJictl)' oon~~ent "ith the projections lor the federal .cross FOMC participants. Ac omparison of figure t funds rate, as these projections are not fO<eca~s of with frgures4.A through 4.( shol'' that the di<perSion the most like!)' quarterly outcomes brrt rather are of the projections across partkipants is much smalle< p<ojections of participan~· individualas,...rnen~ of than the a\ffage i01ecast erro~ 01-er the past 20 )~'"· 162 65 ABBREVIATIONS AFE advanced foreign economy BOE Bank of England C&I commen:ial and industrial CRE commen:ial real estate DFMU designated financial market utility EBJTDA earnings before interest. taxes, depreciation. and amortization ECB European Central Bank EME emerging market economy EPOP empiO)'ment-to-population EU European Union FOMC Federal Open Market Comminec: also. the Comminee GDP gross domestic product JOLTS Job Openings and Labor Turnover Survey LFPR labor force panicip;ltion rate LSAP large-scale asset purchase MBS mongage-backed securities Michigan survey University of Michigan Surveys of Consumers ONRRP overnight reverse repurd1ase agreement PCE personal consumption expenditures SEP Summary of Economic Projections SLOOS Senior Loan Officer Opinion Survey on Bank Lending Practices SSDl Social Security Disability Insurance TCJA Tax C1us and Jobs Act TGA Treasury General Account TIPS Treasury lnHation-Prota:ted Securities VlX implied volatility for the S&P 500 index 163

Jerome H. Powell (2019, February 25). Congressional Testimony. Testimony, Federal Reserve. https://whenthefedspeaks.com/doc/testimony_20190226_chair_the_semiannual_monetary_policy_report

@misc{wtfs_testimony_20190226_chair_the_semiannual_monetary_policy_report,
  author = {Jerome H. Powell},
  title = {Congressional Testimony},
  year = {2019},
  month = {Feb},
  howpublished = {Testimony, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/testimony_20190226_chair_the_semiannual_monetary_policy_report},
  note = {Retrieved via When the Fed Speaks corpus}
}