Congressional Testimony

MONETARY POLICY AND THE STATE OF THE ECONOMY HEARING BEFORETHE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED SIXTEENTH CONGRESS FIRST SESSION FEBRUARY 27, 2019 Printed for the use of the Committee on Financial Services Serial No. 116–5 ( U.S. GOVERNMENT PUBLISHING OFFICE 35–694 PDF WASHINGTON : 2019 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 K:\DOCS\HBA058.000 TERRI HOUSE COMMITTEE ON FINANCIAL SERVICES MAXINE WATERS, California, Chairwoman CAROLYN B. MALONEY, New York PATRICK MCHENRY, North Carolina, NYDIA M. VELA´ZQUEZ, New York Ranking Member BRAD SHERMAN, California PETER T. KING, New York GREGORY W. MEEKS, New York FRANK D. LUCAS, Oklahoma WM. LACY CLAY, Missouri BILL POSEY, Florida DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri AL GREEN, Texas BILL HUIZENGA, Michigan EMANUEL CLEAVER, Missouri SEAN P. DUFFY, Wisconsin ED PERLMUTTER, Colorado STEVE STIVERS, Ohio JIM A. HIMES, Connecticut ANN WAGNER, Missouri BILL FOSTER, Illinois ANDY BARR, Kentucky JOYCE BEATTY, Ohio SCOTT TIPTON, Colorado DENNY HECK, Washington ROGER WILLIAMS, Texas JUAN VARGAS, California FRENCH HILL, Arkansas JOSH GOTTHEIMER, New Jersey TOM EMMER, Minnesota VICENTE GONZALEZ, Texas LEE M. ZELDIN, New York AL LAWSON, Florida BARRY LOUDERMILK, Georgia MICHAEL SAN NICOLAS, Guam ALEXANDER X. MOONEY, West Virginia RASHIDA TLAIB, Michigan WARREN DAVIDSON, Ohio KATIE PORTER, California TED BUDD, North Carolina CINDY AXNE, Iowa DAVID KUSTOFF, Tennessee SEAN CASTEN, Illinois TREY HOLLINGSWORTH, Indiana AYANNA PRESSLEY, Massachusetts ANTHONY GONZALEZ, Ohio BEN MCADAMS, Utah JOHN ROSE, Tennessee ALEXANDRIA OCASIO-CORTEZ, New York BRYAN STEIL, Wisconsin JENNIFER WEXTON, Virginia LANCE GOODEN, Texas STEPHEN F. LYNCH, Massachusetts DENVER RIGGLEMAN, Virginia TULSI GABBARD, Hawaii ALMA ADAMS, North Carolina MADELEINE DEAN, Pennsylvania JESU´S ‘‘CHUY’’ GARCIA, Illinois SYLVIA GARCIA, Texas DEAN PHILLIPS, Minnesota CHARLA OUERTATANI, Staff Director (II) VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 K:\DOCS\HBA058.000 TERRI C O N T E N T S Page Hearing held on: February 27, 2019 ............................................................................................ 1 Appendix: February 27, 2019 ............................................................................................ 57 WITNESSES WEDNESDAY, FEBRUARY 27, 2019 Powell, Jerome H., Chairman, Board of Governors of the Federal Reserve System ................................................................................................................... 4 APPENDIX Prepared statements: Powell, Jerome H. ............................................................................................. 58 ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD Beatty, Hon. Joyce: Data Brief of the Center for Popular Democracy entitled, ‘‘The Urgent Need for a More Publicly Representative Fed: 2019 Diversity Analysis of Federal Reserve Bank Directors,’’ dated February 2019 ....................... 65 Powell, Hon. Jerome H.: ‘‘Monetary Policy Report of the Board of Governors of the Federal Reserve System,’’ dated February 22, 2019 .............................................................. 83 Written responses to questions for the record submitted by Representa- tive Barr ........................................................................................................ 152 Written responses to questions for the record submitted by Representa- tive Budd ....................................................................................................... 153 Written responses to questions for the record submitted by Representa- tive Garcia ..................................................................................................... 157 Written responses to questions for the record submitted by Representa- tive Gonzalez ................................................................................................. 160 Written responses to questions for the record submitted by Representa- tive Lynch ...................................................................................................... 161 Written responses to questions for the record submitted by Representa- tive Posey ....................................................................................................... 163 Written responses to questions for the record submitted by Representa- tive Steil ......................................................................................................... 167 Written responses to questions for the record submitted by Representa- tive Stivers .................................................................................................... 168 Written responses to questions for the record submitted by Representa- tive Tipton ..................................................................................................... 171 (III) VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 K:\DOCS\HBA058.000 TERRI VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 K:\DOCS\HBA058.000 TERRI MONETARY POLICY AND THE STATE OF THE ECONOMY Wednesday, February 27, 2019 U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. The committee met, pursuant to notice, at 10:08 a.m., in room 2128, Rayburn House Office Building, Hon. Maxine Waters [chair- woman of the committee] presiding. Members present: Representatives Waters, Velazquez, Sherman, Meeks, Green, Cleaver, Perlmutter, Himes, Foster, Beatty, Heck, Vargas, Gottheimer, Gonzalez of Texas, Lawson, San Nicolas, Tlaib, Porter, Axne, Casten, Pressley, Wexton, Dean, Garcia of Illi- nois, Garcia of Texas, Phillips; McHenry, Lucas, Posey, Luetke- meyer, Huizenga, Duffy, Stivers, Barr, Tipton, Williams, Hill, Emmer, Zeldin, Loudermilk, Davidson, Budd, Kustoff, Hollings- worth, Gonzalez of Ohio, Rose, Steil, Gooden, and Riggleman. Chairwoman WATERS. The Committee on Financial Services will come to order. Without objection, the Chair is authorized to declare a recess of the committee at any time. Today’s hearing is entitled, ‘‘Monetary Policy and the State of the Economy.’’ And I will now recognize myself for 4 minutes to give an opening statement. Chairman Powell, welcome back to the committee. I am con- cerned about some of the actions of President Trump and his Ad- ministration, and perhaps you may be asked some questions today about whether or not it is affecting the Federal Reserve’s (Fed’s) decisions. President Trump has manufactured the longest government shutdown in our nation’s history, which beyond the needless harm inflicted on effective government employees, contractors, and other businesses, also hurt our economy and outlook. However, this President declared a trade war on allies and en- emies alike, leveling tariffs on steel and aluminum, and threat- ening to rip up other deals. His trade war is bringing down con- sumer and business sentiment. His tax scam, which was a giveaway to the wealthy and to cor- porate America, is slated to reduce government revenue by $1.8 trillion over the next 10 years. Each of these actions by the Trump Administration were noted in the minutes of the Fed’s January pol- icy meetings and may have weighed in on the Fed’s decision to pause for the interest rate increases. (1) VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 2 In the midst of what some fear is slowing growth, the Adminis- tration’s economic policies are fueling the fire of a possible down- turn. It is critical that the Federal Reserve remain vigilant in pro- tecting this economy. The last matter I want to raise pertains to the Federal Reserve’s apparent efforts to modify the Dodd-Frank Act’s (Dodd-Frank) safe- guards that Congress and your predecessors at the Fed put in place following the financial crisis. In particular, I am concerned that the Fed is following some of the Trump Treasury Department’s deregulatory roadmap to weak- en the capital and liquidity buffers on some of the largest banks. This is particularly troubling given that many economists, includ- ing many at the Federal Reserve, believe that bank capital levels are at the lower end of where they should be to weather another downturn. Banks earned a record $236.7 billion in annual profits in 2018. The largest 6 banks alone raked in over $120 billion. Given these record profits, I do not believe there is a need for the Fed to further require capital and liquidity requirements. If anything, given your concerns about the economy, now is not the time to take the guard- rails off of this industry. The Fed should also be concerned with the growing economic in- equality in this country. In 2016, the Fed survey of consumer fi- nances stated that the top 1 percent of U.S. families own 38.6 per- cent of the wealth. The Minneapolis Federal Reserve Bank reported that over the last 70 years, virtually no progress has been made in reducing income and wealth inequalities between black and white households. So I would urge you and the Federal Reserve to work to tackle the scourge of economic inequality. I know that we just had a mo- ment to talk about some of these issues, and you have some infor- mation you shared with us just recently about some of the concerns that I have raised, and you may want to talk about those a little bit today. So I look forward to your testimony and to discussing these mat- ters with you. The Chair now recognizes the ranking member of the committee, the gentleman from North Carolina, Mr. McHenry, for 4 minutes for an opening statement. Mr. MCHENRY. Thank you. Thank you, Chairwoman Waters. And thank you, Chairman Powell. Since his confirmation last year as Fed Chairman, Mr. Powell has prioritized outreach to Members of Congress and public disclo- sure of Fed activities, and Members and the public have benefited from that outreach and that public-facing interaction. I am hopeful that the Chairman will continue to pursue this ap- proach, as it is important for the long-term integrity of the institu- tion and highlights the open-book approach to Fed policy that is necessary for long-term market stability and understanding of Fed policymaking. The economy over the last 21⁄ 2 years has witnessed remarkable growth, and unemployment has reached lows that many once be- lieved were impossible. Republican-led efforts for tax relief and reg- ulatory reform have supported these trends with millions of Ameri- VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 3 cans benefiting as a result of those policies, and millions more see- ing their wages grow as a result of that regulatory rightsizing and tax relief. The Fed’s interest in undertaking targeted rulemaking to provide regulatory rightsizing will help continue that trend. And it is im- portant to economic growth and stability for the pace to be picked up. At the same time, I share the Fed’s concerns that global eco- nomic uncertainty could prove challenging here at home. As the minutes of the last Federal Open Market Committee (FOMC) meet- ing made clear, Europe and China in particular represent risks the Fed should continue to monitor and, where appropriate, work to mitigate. In Europe, the specter of a no-deal Brexit not only impacts the EU–U.K. trading relationship, but it also entails spillover effects that may implicate domestic and financial institutions here at home. Further afield, chronic weakness in Italy remains a threat to eurozone economies, and new movements have emerged that seek to disrupt the continent’s post-war politics as well. As for China, the days of double-digit growth appear to be gone, but not Beijing’s misguided, state-run economic management. China continues to suffer from the politicized allocation of capital, the cynicism towards international economic governance standards, opaque channels for decisionmaking, and, of course, the absence of the rule of law. In sum, China poses a massive risk, but a risk that defies con- ventional forms of assessment because its regime lacks conven- tional forms of accountability and transparency. In both China and Europe, we are facing systemic risks that have few historic analo- gies. China’s growth is expected to decline to its lowest point since 1990, and European Union membership has only expanded, never shrunk, since its origins more than a half century ago. These are different times we are living through and different challenges cer- tainly for the Fed and for the Fed Chair. That means that the rearview mirror will be of limited useful- ness for policymakers in the years ahead. We will need to confront new sources of uncertainty with new insights and ideas, and the Fed will be essential in detecting and interpreting these challenges. While some of Mr. Powell’s predecessors developed a reputation for ambiguity, I am hopeful that he will pursue a different path, and it is certain that he already has. As he himself noted last month, greater uncertainty calls for more clarity from the Fed, not less. In the face of risks that we have yet to fully understand, our central bank must be all the more articulate and predictable. Chairwoman WATERS. The Chair now recognizes the sub- committee chair, Mr. Cleaver, for 1 minute. Mr. CLEAVER. Thank you, Madam Chairwoman. And thank you, Mr. Chairman, for being here today. Some of what I would like to focus on in this short amount of time is what I have spoken about with you in casual conversations, but I intend to say it quite openly today, and it is this: The impera- tive that the Federal Reserve remain independent as it works to VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 4 fulfill its mandate of maximum employment and price stability is key. I do hope that the Fed is able to resist the clamor of political murmurings and not allow that to drown out the critical delibera- tions that the Fed must have in order to head up our monetary pol- icy in this country. The level of politicization and explicit pressure that you, the Federal Reserve members, have received is unprece- dented and unnecessary. Madam Chairwoman, thank you. I yield back the balance of my time. Chairwoman WATERS. Thank you. The Chair now recognizes the subcommittee ranking member, Mr. Stivers, for 1 minute. Mr. STIVERS. Thank you, Chairwoman Waters, for holding this hearing. And Chairman Powell, thank you for being here today. We are all looking forward to your testimony. It is a really important time, as you know, for your dual mandate. And we finally, through some policies of tax cuts and regulatory reform, achieved an economic growth rate in the 3 to 4 percent range. We have unemployment at about 4 percent. But I have a gift for you to remind you of your dual mandate. Mark is going to bring it to you. It is a 100,000 Venezuelan bolivar note. And as you know, their inflation rate is about 65,000 percent, or was, and it is still growing. And they have people starving in one of the most resource-rich countries in the world. We and 300 million Americans are depending on you to continue your hard work to give us full employment and stable prices, Mr. Chairman. And I look forward to talking to you today. Chairwoman WATERS. I would now like to welcome to the com- mittee our distinguished witness, Jerome Powell, Chairman of the Board of Governors of the Federal Reserve System. He has served on the Board of Governors since 2012 and as its Chair since 2017. Mr. Powell has testified before the committee before, so I do not be- lieve he needs any further introduction. Mr. Powell, you are now recognized to present your oral testi- mony, and without objection, your written statement will be made a part of the record. STATEMENT OF THE HONORABLE JEROME H. POWELL, CHAIR- MAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Mr. POWELL. Thank you, and good morning. Chairwoman Waters, Ranking Member McHenry, and other members of the committee, I am happy to present the Federal Re- serve’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. Congress has entrusted us with an important degree of independ- ence 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 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 5 and their Representatives in Congress understand our policy ac- tions and can hold us accountable. We are always grateful for opportunities such as today’s hearing to demonstrate the Fed’s deep commitment to transparency and ac- countability. Today, I will review the current economic situation and outlook before turning to monetary policy. I will also describe several recent improvements to our communications practices to enhance our transparency. The economy grew at a strong pace on balance last year, and em- ployment and inflation remain close to the Federal Reserve’s statu- tory goals. Based on the available data, we estimate that gross do- mestic product 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 in- vestment. Growth was supported by increases in employment and wages, optimism among households and businesses, and fiscal policy ac- tions. In the last couple of months, some data have softened but still point to spending gains this quarter. While the partial govern- ment shutdown created significant hardship for government work- ers and many others, the negative effects on the economy are ex- pected to be fairly modest and to largely unwind over the next sev- eral 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 the workforce. As a result, the labor force participation rate for people in their prime working years, that is ages 25 to 54, who are either working or actively looking for work, has continued to increase over the past year. And 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 in 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 no- ticeably lower in rural communities than in urban areas, and that gap has widened over the past decade. The February Monetary Pol- icy Report provides additional information on employment dispari- ties between 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- VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 6 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 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 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, productivity 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 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 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 United States 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 one quarter percentage point at each, putting the current 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 effect of these developments, along with ongoing government policy uncertainty, warranted taking a patient approach with regard to future policy changes. Going forward, our policy decisions will con- tinue 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 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. 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 long-run goals of maximum VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 7 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 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 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 demand for Federal Re- serve liabilities, particularly currency and bank reserves. The Feb- ruary Monetary Policy Report describes these liabilities and re- views 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, our 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. 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 com- prehensive 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 provides further discussion of these initiatives. Thank you very much. I will be happy to respond to your ques- tions. [The prepared statement of Chairman Powell can be found on page 58 of the appendix.] Chairwoman WATERS. Thank you very much, Mr. Powell. Last Congress, I and other Democrats warned that S.2155, which Republicans claimed to be a bill to benefit community banks, was in fact a broader deregulatory giveaway to large banks that would fuel mergers, accelerate industry consolidation, and make it more difficult for community banks to compete. Now, we have SunTrust and BB&T proposing to merge and be- come the sixth largest bank. Furthermore, even though banks made record profits of $237 billion last year, you said yesterday im- plementing S.2155 was your highest priority, and the Fed has VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 8 made several proposals that would reduce bank capital and liquid- ity reserves for our largest banks. Board Governor Brainard voted against these proposals, noting that the Fed’s tailoring proposal would reduce high-quality liquid assets held by large banks by about $70 billion. The FDIC origi- nally opposed the Fed’s leverage proposal as it would reduce bank capital by more than $120 billion. The Fed is also looking at making stress testing more trans- parent, which could undermine the purpose of the test. And former Fed Chair Fischer has called these deregulatory efforts, ‘‘something I find extremely worse.’’ So, Chairman Powell, please explain, will easing big bank capital and liquidity requirements as the Treasury Department has pro- posed, and your agency appears to be following through with, not undermine safeguards that have been carefully built up over the last decade to protect our economy and which made the U.S. frame- work the gold standard that others around the world follow? Should we expect to see further industry consolidation if deregu- lating big banks is a top priority for the Federal Reserve? It was discussed in the Senate Banking Committee yesterday how the Fed has accelerated its merger reviews and appears to be rubber- stamping them. SunTrust-BB&T claim their proposed merger will be approved by September. But can you assure us that the Fed will not rush the process, will consult with all affected parties, will hold field hear- ings, and will focus on the public’s interest, even if it means reject- ing the application? The Office of the Comptroller of the Currency (OCC) unilaterally released an Advance Notice of Proposed Rulemaking (ANPRM) to modernize the Community Reinvestment Act, or CRA. The Fed and the FDIC did not join in that release. I was troubled to see that Comptroller Otting recently said that if he could not reach agree- ment with your two agencies, the OCC would go on its own with CRA reform. Would that be a good outcome? Could two different CRA regimes lead to regulatory arbitrage of our banks? And, lastly, a minute on diversity. I believe diversity in the Fed- eral Reserve’s leadership, including at the Reserve Banks, is cru- cial because it is hard to stay committed to all communities in the country when the leadership lacks an understanding of those com- munities that comes from experience. That is why I, and so many on this side of the aisle, have encouraged you to continually push to diversify in order to more closely represent the American public. The Center for Popular Democracy recently found that the cur- rent Board Directors are 76 percent banking or business, 74 per- cent white, and 62 percent male. They also cite that, in 2013, 12 of the 105 Board Directors were African American. That number has increased to 22 out of 108 today. This is an improvement, but it still does not look good. Federal Reserve Governor Brainard recently spoke about increas- ing diversity efforts through a better pipeline at the inaugural Sadie T.M. Alexander Conference for Economics over the weekend. Right now, even before a search is underway for new Directors, how is the Federal Reserve trying to build the pipeline for more di- verse candidates? When you lead with Reserve Bank leaderships, VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 9 how are you encouraging a focus on increasing director diversity? Why do you believe increasing diversity is a challenge? In your testimony, again, you stated that current economic condi- tions were healthy and the economic outlook favorable but noted that over the past few months, ‘‘uncertainty is elevated around sev- eral unresolved government policy issues.’’ I won’t put it as delicately as you have. President Trump’s poli- cies are damaging our economy, and are challenging growth. This is why you have had to pause rate hikes. This lack of an economic agenda that changes with the wind is presenting market volatility and incredible consumer and business uncertainty. Just yesterday, you said that uncertainty is the enemy of busi- ness. That is why former Federal Reserve Chair Janet Yellen says the President doesn’t understand macroeconomic policy. If he did, he would understand that only a stable, inclusive, economic agenda will support an even economic expansion. So, Chairman Powell, the President is engaged in a trade war with an uncertain outcome that seems to change every other week. He has also forced the longest government shutdown in our na- tion’s history. How are these actions affecting the U.S. economy, in your estimation? How can you continue to achieve full employment and stable prices if this erratic economic agenda persists? Lastly, on monetary policy, in the minutes released for the Janu- ary 29th and 30th FOMC policy meeting, participants discussed moving forward with monetary policy while having a large balance sheet. In what can be seen as a course change from the gradual balance sheet reduction that began in October 2017, the FOMC now noted that it is likely to stop reducing the balance sheet which now stands at approximately $3.9 trillion. I believe—and correct me if I am wrong—the thought is to allow the gradual reduction to continue until the FOMC is comfortable with the size of the still elevated balance sheet later in the year. In an interest rate environment where the Fed funds rate is still low, between 2.25 and 2.50 percent, how is the FOMC likely to use a large balance sheet as a monetary policy tool in the case of an unexpected downturn? For instance, San Francisco Federal Reserve Bank President Mary Daly has suggested that you could use your balance sheet as a monetary policy tool. Does this mean that QE could become rou- tine in this low-interest-rate environment? If so, does this entail buying securities as the Fed did during the financial crisis and at a similar size and pace, or could you consider smaller scale pur- chases and types of securities? With that, I will now recognize the distinguished ranking mem- ber, Mr. McHenry, for 5 minutes for questions. Mr. MCHENRY. Good morning. Chairman Powell, I have a series of questions for you, and I would love to have your answers on these questions. You testified yesterday regarding the bank’s balance sheet, which stands at roughly $4 trillion, and you gave an answer about sort of normal- izing the balance sheet and what your view of that normalization looks like. And you referenced the demand for reserves as a ref- erence point for that. Can you elaborate on that? Mr. POWELL. Sure, I would be glad to. VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 10 So, before the financial crisis, the size of the Fed’s balance sheet was a function of demand for our liabilities, principally currency and, to a far less extent, reserves. Quantitative easing comes along. We hit the zero lower bound. The Fed buys a lot of assets. That was about buying assets. And the size of the balance sheet as a percent of GDP went from 6 percent to 25 percent, and that was really driven by a desire to buy longer-term credit assets or rather Federal Government debt and drive down longer-term interest rates. So now we are normalizing the balance sheet, and normalizing it really means going back to a situation where the size of the bal- ance sheet is driven by demand for our liabilities, which has evolved, so currency and reserves mainly. What has happened is demand for currency has grown—currency outstanding has grown much faster than the economy, and demand for reserves is now much higher than it was because really we re- quire banks to hold very high levels of high-quality liquid assets, and they choose to hold reserves. We can’t go back to that very small balance sheet. So what we think is that—the Committee has been working on this carefully for the last three FOMC meetings and devising a plan. We are close to agreeing on a plan which would lay out—would sort of light the way to the end of the process. Mr. MCHENRY. And do you plan to communicate that? Mr. POWELL. Very much. Mr. MCHENRY. That plan? Mr. POWELL. Yes, we do. When it is agreed upon. We found it is good to be very careful with the balance sheet and— Mr. MCHENRY. But your reference point was about $1 trillion in bank reserves at the Fed would be the reference point for when you sort of end the reduction of the balance sheet. Do you have a time- frame on that? Mr. POWELL. Yes. There is a lot of uncertainty around the actual level. What I did was I cited public estimates and said those ap- pear reasonable. We actually don’t know when the equilibrium de- mand will be. We are going to have to find it over time. And my guess is we will be announcing something fairly soon. Mr. MCHENRY. So, in light of yesterday’s housing figures, in which housing starts fell to the lowest number in more than 2 years, what impact do those housing figures from yesterday have on your timing on holding rates steady, or do they have any im- pact? Mr. POWELL. In terms of what we said is we are going to be pa- tient and watch as the economy evolves and also as the evolving risk picture changes and how that affects the—will affect the out- look. And we will be looking at a full range of data. It would in- clude housing starts. It would include anything that could affect our achievement of the dual mandate, principally growth and then, of course, the labor markets and inflation. So we will be looking at a wide range of data. That is one piece of it, but it is one of many pieces. Mr. MCHENRY. So, related to that, housing finance reform, you know, Fannie Mae and Freddie Mac are more than a decade into nationalization. You are a major holder. The Fed is a major holder VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 11 of these assets. Do you think it is important for Congress to prioritize housing finance reform for the American economy? Mr. POWELL. I do. I very much do. This is a big, unfinished piece of business for sort of the post-crisis era, and I think it will be good for the economy to move to a system where a lot of private capital is there supporting housing risk again, and it is not just all wind- ing up on the Federal balance sheet. Mr. MCHENRY. Okay. Pivoting to a result of some recent state- ments, there are a lot of crosscurrents, conflicting signals in the terminology the Fed has used in the U.S. economy and global econ- omy. How do you respond to those who say you are making finan- cial market stability an unofficial mandate to the Fed’s decision- making? Mr. POWELL. No, I wouldn’t say that is what we are doing. First, I think financial stability has been part of the Fed’s role, and in fact, it really was our original role. Central banks generally evolved out of a desire to support the stability of the financial system. It has always been something that we have done. Our mandate from you is maximum employment and stable prices. That is the mandate. We also look after financial stability and particularly as it supports the dual mandate. Mr. MCHENRY. Financial stability but not necessarily stock mar- ket stability? Mr. POWELL. No. By financial stability, we are really talking about the capacity of the financial system, particularly banks but also other aspects of the financial system, to perform their role and intermediate between savers and borrowers and support economic activity. Mr. MCHENRY. So what do you say to those folks who claim there is a now a ‘‘Powell Put’’ in the market. Mr. POWELL. Anything that matters for the dual mandate mat- ters for us. And financial conditions—our tools work through finan- cial conditions. So I would say that when there are major changes in broader financial conditions, as you point out, not any one mar- ket or set of markets, but when there are, for a sustained period, important changes in broader financial conditions, that matters for the macro economy. It matters for achievement of the dual man- date, and we will, of course, take that into account. Mr. MCHENRY. You mentioned the headwinds internationally, the softening in the EU, the softening in the Chinese economy, the risk of Brexit. We see what is happening internationally for global terror and things of that sort, but I want to talk specifically about China and ask you, how does China’s use of state-run banks to al- locate credit affect financial stability for the rest of the world? Mr. POWELL. I don’t know that there are important implications for global financial stability. It is a part of their system. I know they are trying to move to a more market-based system over time, and that is a challenging transition. Mr. MCHENRY. More to this point, it is an opaque market. So getting numbers and getting a solid understanding of that alloca- tion of capital is much more difficult in China than it is in the rest of the first world, is it not? Mr. POWELL. That is right. In addition, so much of their eco- nomic activity in effect has the backing of the central government. VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 12 Mr. MCHENRY. Let me just wrap up with a broader question. You mentioned our national debt. The debt and deficit challenge is a real one. I firmly believe we have to right-size our spending, com- mensurate with long-run obligations that we have to the American people. But fundamentally, our deficit does have an impact on your dual mandate, does it not? Mr. POWELL. I would say in the longer run. Mr. MCHENRY. In the longer run. And our national debt too in the longer run has an impact in Fed policymaking as it results in stability and full employment, does it not? Mr. POWELL. You know, I would say the unsustainable path of the Federal Government is a longer-run problem. It doesn’t really affect—most of our thinking is about business cycle frequencies and supporting the economy when it is weak and holding it back when it is overheating. But that is just in general and not so much about fiscal unsustainability. But we worry about in the longer run what will happen is we will wind up spending our money on interest pay- ments rather than on the things we really need. Mr. MCHENRY. I yield back. Chairwoman WATERS. Thank you very much. Mr. Chairman, as you answer the questions, they will be overlap- ping. Feel free to expound on some of the questions that I put be- fore you. I took up all the time, and I didn’t give you an oppor- tunity to answer those questions. But as you answer questions from the others, feel free to include in those answers some of those concerns. Now, the gentlelady from New York, Ms. Velazquez, is recog- nized for 5 minutes. Ms. VELAZQUEZ. Thank you, Madam Chairwoman. Chairman Powell, thank you so very much for being here today. I have heard from several constituents who have expressed con- cern about the impact the current expected credit loss methodology could have on lending to consumers and small businesses. They tell me the proposal, while well-intended, could be more procyclical than the current incurred loss method, especially in a downturn, and would disproportionately impact consumer lending and LMI borrowers, who, as you know, can least afford an increase in the cost of credit or a complete loss altogether. Much of the talk thus far has been about accounting policy, but what about economic policy? Has the Fed conducted a review of the economic impact of current expected credit losses (CECL) particu- larly in a downturn? Mr. POWELL. So we have tried to think carefully about the ques- tions that have been raised by banks about this, and we have thought a lot about this over time. We have tried to work with banks so that they will be able to implement this FASB decision in ways that are not too disruptive and too expensive and too com- plicated. We have also allowed banks to start a 3-year phase-in of this be- ginning, I guess, next year. So we are doing everything we can to avoid a big change that is disruptive to lending. And in addition, we will be watching carefully to see what the actual results are. VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 13 Ms. VELAZQUEZ. But, Mr. Chairman, I am not concerned about how the banks will be handling this. I am concerned about the eco- nomic impact that it could have on mortgages for a segment of our population who is already—who have been not participating in cap- ital access, such as low-income borrowers or small businesses. Have you conducted any economic impact on that? Because I know that the Financial Stability Oversight Council (FSOC), at their Decem- ber meeting, they discussed this issue. Mr. POWELL. Yes. Ms. VELAZQUEZ. How do you— Mr. POWELL. We are aware of those concerns, and we will be watching to see whether there is any such effect. We don’t expect that there will be such an effect, but we will be watching carefully to see. Ms. VELAZQUEZ. Chairman Powell, you recently gave a speech at Mississippi Valley State University that addressed economic devel- opment challenges in rural areas. While New York City is certainly not rural, I believe many of the challenges you spoke about could also apply to urban centers, particularly those of color. In that speech, you noted the importance of workforce training due to the loss of key industries and the resulting mismatch be- tween the skill of local workers and those demanded by new em- ployers. As Federal banking regulators contemplate updating CRA regulations, should banks receive CRA credit for supporting or par- ticipating in such workforce development programs? Mr. POWELL. That is a good question, and I don’t know how—I don’t know whether that would get CRA credit or not. It is cer- tainly—I was speaking at a conference that was looking at basi- cally broad measures to alleviate poverty, and I will check into that and get back to you. Ms. VELAZQUEZ. Thank you. Recently, and the Chair already alluded to this, Comptroller Otting said that he was hopeful that all three bank regulators will join the proposed CRA reforms by the summer. But he also indi- cated that if you were not all able to agree, the OCC will be willing to propose the reforms on its own. This is counter to statements made recently by Governor Brainard when she stated that Federal regulators should speak with one voice on CRA. What is your view? Mr. POWELL. I think ideally we would like to have a unified view. It would be better to have one agreed-upon framework for CRA. That is obviously the best outcome, and we are going to be working toward that. But I want to add, though, that we are very com- mitted at the Fed to the mission of CRA, and we are looking to make it more effective. Ms. VELAZQUEZ. Should there be a joint rulemaking, and do you believe the Fed will ultimately sign onto the OCC’s proposal? Mr. POWELL. We will have to see. I think it would be ideal for the three regulators to get together, and we are working with the other two agencies on that. I think the goal is to get to a joint an- swer. Ms. VELAZQUEZ. I yield back. Chairwoman WATERS. The gentleman from Oklahoma, Mr. Lucas, is recognized for 5 minutes. Mr. LUCAS. Thank you, Madam Chairwoman. VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 14 Chairman Powell, thank you for being here today. And I believe that my colleagues will do an outstanding job of covering the broad- er issues and with a number of inquiries. So, as has been my cus- tom in recent years, I would like to focus in on some particular issues, and if we could once again converse about the joys of deriva- tives, so to speak. My questions will deal with those issues that are within the Fed’s role. First, turning to an issue I have raised several times, which is inter-affiliate margin, as you know, transactions between affiliates are risk management tools and do not expose counterpar- ties to each other’s risks. I have pushed with my colleagues on the Agriculture Committee to exempt those inter-affiliate transactions from initial margin re- quirements. The CFTC and European regulators agree with me, and yet the Fed hasn’t changed its policy to be consistent with those regulations when it comes to bank swap dealers. I understand these issues predate your tenure, but, Mr. Chair- man, I would like to know if you intend to administratively pursue a more risk-reflective approach on initial margin for inter-affiliate swaps. Mr. POWELL. I know we haven’t made a decision on that, but we are looking at the inter-affiliate margin question, and we will get back to you on that. Mr. LUCAS. And hopefully that is something in the near view as opposed to the longer view, perhaps, Mr. Chairman? Mr. POWELL. Yes, sir. Mr. LUCAS. I think that is a leading question, so to speak. Mr. POWELL. That is a ‘‘yes.’’ Mr. LUCAS. Thank you, sir. Speaking frankly, I hear a lot of good things from both you and Mr. Quarles on this issue, and I appreciate that very much. But the lack of formal action still concerns me, and I think it is time to quickly move onto this. These rules currently capture a whop- ping $38.8 billion for capital in transactions that are not inherently risky, and I would certainly ask you and your staff to move forward soon on this please. Now, moving to something else I raised with Mr. Quarles last year in this space, you are currently engaged in a joint comment period with the OCC and the FDIC about the Standardized Ap- proach for Counterparty Risks (SA-CCR) proposal. That framework asked to hear from other industry stakeholders about the need for an offset for client margin in the supplemental leverage ratio. If I may, I would like to offer you a few thoughts here. The num- ber of firms providing clearing services has declined from 88 to 55. This affects farmers and ranchers and other end users in derivative markets. They are steadily losing options for clearing activity. This part of the SLR contributes to the closing of these markets to folks I mentioned. For what it is worth, the CFTC Commissioners agree with me and have submitted a joint comment raising the same con- cerns. Now, Mr. Chairman, I know I can’t ask you to comment on any action now considering the recent extension of the comment period, but as you proceed through this comment period, I would like to make sure you know about those concerns and that you would be VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 15 able to take my concerns into consideration as you move through that joint comment process. Mr. POWELL. We are in the process of reviewing the comments, as you point out. Mr. LUCAS. Thank you. I have one more note, Mr. Chairman, on the SA-CCR proposal. I understand that the framework would sig- nificantly raise the capital requirements for over-the-counter on- margin swaps. As you know, Congress was very explicit in allowing nonfinancial end users to continue trading in the OTC market. We were this explicit in making hedging affordable to the enemies. I am concerned that a significant increase in capital requirements associated with these swaps will make them far more expensive, and this would, of course, frustrate congressional intent. In particular, it is my understanding that the capital require- ments will essentially be high for commodity derivatives, such as those uses to hedge oil and natural gas cost. Where I am from, ac- cess to risk-management products for the energy and agriculture sectors are critical, and I want to make sure that we don’t come under pressure by way of excessive requirements imposed on those bank counterparties. Mr. Chairman, I have spent a lot of time on these issues, as you know, and I would very much appreciate it if you would be willing to bear these concerns in mind, which are shared by the end-user community as we move forward. I have always found you would be a practical person, and I like to think that I use my time and ef- forts to address practical issues that impact not only my economy back home in Oklahoma but the whole country. And, with that, unless you have a thought, Mr. Chairman, I will yield back the balance of my time. Mr. POWELL. Thanks. Mr. LUCAS. I yield back, Madam Chairwoman. Chairwoman WATERS. Thank you very much. Mr. Sherman, the gentleman from California, is recognized for 5 minutes. Mr. SHERMAN. First, in responding to the ranking member, I think it is important that Fannie and Freddie continue to be what they have become, perhaps accidentally, and that is Federal Gov- ernment agencies. We need a Federal backstop in terms of credit risk, but never again should we have a semi-public, semi-private agency where taxpayers take the risk and shareholders try to reap the profit. Mr. Chairman, I appreciate your patience on not raising rates. You have a twin mandate, but I am going to ask you to also con- sider an additional factor, not as important as your twin mandate, and that is the profit that you create is a byproduct of your efforts, at times turning over to the Treasury as much as $100 billion or nearly $100 billion in a single year. And I want you, in your decisions, to reflect on the fact that that is not just a dry accounting entry. It is life and death. We have lim- ited amounts of money that we can spend here in Congress on can- cer research, on body armor for our troops and research to make it better, on opioid programs. So people will live or die based upon whether you are able, as you have in the past, to turn over nearly $100 billion of unintended VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 16 profit. And I realize that it is not your mandate, but it is life and death. We talked at another meeting about wire transfer fraud, and I will get you some background material on that. But I do want to just focus the committee on the fact that people are being tricked through the internet to wire their funds into a particular numbered account thinking they are sending the money to, say, the person they are buying a house from, and instead, it is going somewhere else. So, if we have a confirmation of payee system like the British, we can avoid much of that. As to your balance sheet shrinkage, that diminishes your profit that you can turn over. It also, as you sell off or allow to run off your mortgage-backed securities, you are raising mortgage costs for people. Your testimony said that we have a good job market. It is not good until there is a labor shortage that drives wages up to make up for the 20 years of stagnant wages that we have had over the last 2 decades. So I hope you would aspire for more than just a 4- percent unemployment rate. I do have a question for you here, and that is, in your statement you comment on the Federal debt. You say the Federal Govern- ment debt is on an unsustainable path. Of course, fiscal policy is outside your purview but it affects what you do. We also have a trade deficit, about a half a trillion dollars a year, kind of similar in size to the budget deficit. And so every year we borrow another half trillion dollars to finance that as a country bor- rowing from abroad. I wonder if you could say that the U.S. trade deficit of over half a trillion dollars a year is on an unsustainable path? Mr. POWELL. Yes, I mean, I don’t think I would say that. The current account deficit is really set by the difference between sav- ings and investment. And the reason the Federal budget is on an unsustainable path is that the debt as a percentage of GDP is at a high level, but much more important than that, it is growing faster than GDP. So debt cannot grow faster than GDP forever, whereas I don’t know that I would say that about the current ac- count balance. Mr. SHERMAN. The accumulated trade deficit where every year we borrow over half a trillion dollars just adds to our foreign debt. But I want to go on. Some of my colleagues find these hearings kind of dry and so they have urged me to spice things up by asking an accounting principles question. We have CECL, the proposal for the current expected credit loss system, being proposed by FASB. The effect of this may be to increase reserves, but you and the other bank regulators are supposed to determine the size of re- serves. We shouldn’t increase or decrease reserves because of an es- oteric accounting theory discussion which has gone awry. And so I wonder whether you believe that we should make this major accounting change for banks that will deter, lending particu- larly in economic downturns, without a quantitative impact study. Have you had a chance to look at this issue and how it will affect the banks that you regulate? Mr. POWELL. Yes. So we don’t think that it will have that effect, but we will be watching carefully. And, we will be looking at this, VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 17 and it has really been under discussion for a decade now. It is a decision that FASB made and that we are just implementing. And if we find that it does have effects like that, then we will take ap- propriate action. Mr. SHERMAN. Thank you. Chairwoman WATERS. Thank you very much. The gentleman’s time has expired. The gentleman from Florida, Mr. Posey, is now recognized for 5 minutes. Mr. POSEY. Thank you very much, Madam Chairwoman, and Mr. Ranking Member, for holding this hearing. And, Chairman Powell, thank you for being here to present your semiannual report. I would like to think that everyone in this room at one level or another is enjoying the success that we are seeing continue in this country right now. And I want to thank you for the contributions that you have made to that. It is also great to have a Chairman here who answers questions so directly, and we appreciate that. I saw recently some trends in banking indicating that, since 2008, we have seen a decline in the number of FDIC-insured banks of about 38 percent, from 7,870 banks to 4,909 banks on the spreadsheet that I saw. Over the same period of time, assets grew by 80 percent, from $10 trillion to $18 trillion. Mergers have been going on at a very brisk pace, as you are no doubt aware. And I would like you to share what your research shows about the economic implications of increasing concentration in the banking industry and how that might restrict or perhaps enhance the availability of credit to those who take the risk on investments to grow our economy. Mr. POWELL. Thank you. The number of banks has been decreas- ing pretty steadily now for more than 30 years. I remember 14,000 was the number, I think, when I was in the government 25—30 years ago. And it is a range of factors. It is people leaving rural areas. It is also allowing interstate banking and things like that. But for whatever reason, you have seen a long-run process. Now, we know that when a small bank goes out of business in a rural county or a small town, that is not a good thing. And that is bad for the country. It is bad for that town, bad for the social fabric. So we try not to add to the problems of community banks through excessive regulatory burden. We try to be mindful of their important role in society. Actually, the number of mergers last year, 2018, was the lowest in quite a long time. I asked the staff to go back and look. It is the lowest in at least 15 years. So mergers and consolidation are actually at a pretty low level. The last thing I will say is I think we need banks of all different sizes. We need small banks. We need banks across the spectrum at different business models serving different communities. We want a diverse ecosystem of banks out there to have a healthy economy. Mr. POSEY. Okay, related to that same question, could you share the criteria that the Fed uses in evaluating bank merger applica- tions? VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 18 Mr. POWELL. I would be glad to. It is quite detailed. There is a Federal Reserve Act section that lays out a lot of detail, and there is also plenty of guidance on that issue. Actually, I have a picture of it here. So we look at competitive factors, banking community factors, managerial resources. We look at compliance with consumer and fair lending laws and CRA record and that kind of thing. We look at the combined finan- cials, of course, of the two companies. We also invite public com- ment. We have a pretty thorough, carefully worked out process. We go through this process carefully for mergers and look at all those factors and then make a decision. Mr. POSEY. Okay. Thank you very much. I wasn’t going to dwell in this realm until we had a series of slides up here overhead and somebody else mentioned Fannie and Freddie. And so I am curious if you could give us an update on the amount of tax dollars that have been spent to date on defending the crooks who mismanaged Fannie and Freddie and nearly bank- rupted the whole operation. The last time we got a report, I am thinking it was about 8 years ago, that we had already spent over $600 million of taxpayer dol- lars defending these guys from stockholder suits. Can you give us an update on that? Mr. POWELL. I don’t actually have an update on that for you. I can check into that, though. Mr. POSEY. I know. Okay. If you would communicate that to us, I would appreciate it very much. And I yield back the balance of my time. Thank you. Chairwoman WATERS. Thank you very much. The gentleman from New York, Mr. Meeks, is recognized for 5 minutes. Mr. MEEKS. Thank you, Madam Chairwoman. Good morning, Mr. Chairman. Mr. POWELL. Good morning. Mr. MEEKS. Let me ask you a question. There was a study that was done by the New York Fed that found that Americans are bor- rowing more for cars while borrowing less for houses. And the rea- son why the statistic caught my eye is because of my strong belief in home ownership and that it is the best value for low- and mod- erate-income households to build wealth over a long period of time. And I often have said I would want individuals to rent the car and own the home as opposed to owning the car and renting the home. And in a separate report, the Federal Reserve described a link between rising student debt and an acute decline in home ownership, particularly among young Americans. So my question is, what does declining home ownership rates, es- pecially among young people saddled with student debt, say about the overall health of the United States economy? Mr. POWELL. I think the overall household picture of debt, if I can start with that, is basically a healthy one. There are a couple of areas of concern. And you touched on the main one, which I think is student debt. And there is a growing body of research that shows that students who borrow for their education and wind up not getting the kind of value they thought they would get so that their incomes are lower than they expected, can’t pay the debt back. That debt can hang over their economic and personal lives VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 19 for many years, meaning lower levels of home ownership and other sort of measures of economic success. So we are seeing more and more evidence of that as student debt grows. Mr. MEEKS. And on I guess a different column the same way, you have identified that debt is also high among low-rated or unrated nonfinancial firms, and that underwriting has deteriorated in lend- ing to highly indebted businesses. I am switching from the indi- vidual to the business, this leveraged lending. And obviously, we want to encourage prudent lending to American businesses, even those with existing debt, but I don’t want to go back to 2008. So does the Fed believe that increased credit risk in the lever- aged loan market poses systemic vulnerabilities, particularly in the event of an economic downturn? Mr. POWELL. This is an important supervisory focus. And the headline answer to your question is we don’t believe it poses sys- temic kinds of risks, but we do think it poses a macroeconomic risk, particularly in the event of an economic downturn. These are com- panies that have borrowed in good times and borrowed high amounts of debt. And if there is a downturn, they will be less able to carry out their roles in the economy and that may have an am- plification effect on a downturn. Our supervision of banks indicates that the banks do not have excessively high exposures to these highly leveraged nonfinancial corporations and also don’t have excessively large pipelines of com- mitments that they have made. Those are two things that they did have before the financial crisis that they don’t have now. So the actual—the banks—and that is our window into this is largely through bank supervision. The banks have really changed the way they manage their involvement in this business in a way that puts the risk out in the holder’s hands rather than the bank’s hands. Mr. MEEKS. So we tried to—and we came up with Dodd-Frank to deal with the mortgage crisis back in 2008. And we try to make sure that we are now watching with reference to living wills and other things to prevent—do you think we are prepared and we have enough regulators are watching closely enough so that we can avoid leveraged lending ending up being the next bubble that bursts and that causes us to have the same kind of financial crisis that we had in 2008? Mr. POWELL. Yes. I think our financial system is so much better capitalized and has so much more liquidity. It has a better sense of its risks and a better ability to manage those risks. Stress tests require banks to take a forward-looking—particularly the largest banks—assessment of their capital adequacy. They have also done resolution planning. So our banking system is so much more resilient and so much stronger than it was before the financial crisis, so that it should be able to withstand the kinds of shocks that we are talking about. If there were, for example, unexpectedly high credit losses among nonfinancial corporates, then yes, the banks should have plenty of capital and liquidity to absorb those losses. It doesn’t mean there wouldn’t be disruptions and losses, because there would be in the economy, but it would not be, we don’t think, the kind of thing that we saw in 2008. VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 20 Mr. MEEKS. So, by and large, Dodd-Frank did a lot to help us, and there may be other avenues that I think that we may need to include therein to continue to protect ourselves. Is that correct? Mr. POWELL. I think Dodd-Frank and the whole broader regu- latory program, which went way beyond Dodd-Frank, did serve its purpose in strengthening our financial system, yes. Chairwoman WATERS. The gentleman from Missouri, Mr. Luetke- meyer, is recognized for 5 minutes. Mr. LUETKEMEYER. Thank you, Madam Chairwoman. Chairman Powell, welcome. It’s good to see you again. Before I get to my questions, I would like to bring up one issue related to guidance. I have consistently fought to ensure that the difference between guidance and rule is clear. You and I have had a number of conversations on this, in fact, in this committee before. However, just last week I saw a letter from Senators Tillis and Crapo to the Comptroller General regarding the Large Institution Supervision Coordinating Committee (LISCC). From reading this letter, it appears that the Fed, throughout the Obama Administra- tion, created a regulatory and advisory regime that forced banks to meet numerous requirements related to liquidity and capital with- out going through the rule-making process. If this is true, the Fed has to take a second look at the guidance issued in relation to LISCC and ensure that the proper rule-making process is followed. I just want to give you a heads-up. I am going to be watching this issue very carefully and I appreciate your attention to this matter. With regards to my good colleague from Oklahoma, Mr. Lucas, I just want to add my thoughts to his with regard to inter-affiliate margin. This is also an issue I want to watch very carefully, and I want to watch your actions. I think it is important that we take action on this issue. So I am looking forward to working with you on that as well. The issue that is of most concern to me this morning is CECL. We talked about this a number of times earlier this morning with a number of my colleagues. There seems to be a growing concern from more and more, not only bankers but consumers, whether it is the realtors, the mortgage bankers, the Chamber, the home builders, as they begin to understand the costs that are associated with this. I know you indicated a minute ago that you didn’t think it is going to have much effect, but, my colleague across the aisle a minute ago said that she is not concerned about how it is going to affect banks. So I am desperately and very, very concerned about how it is going to affect banks, because how it affects banks is going to affect consumers. If banks have to raise their cost of being able to make a loan, that is going to cause people to no longer have the ability to have home loans. We had in this committee back in December home builders testify that for every thousand dollars worth of increased cost, it deprives 100,000 people people across this country of the op- portunity to have a home loan. And, of course, those are going to be the low- to moderate-income folks. This is very concerning to me. VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 21 And when you look at the banks having to either pass that cost along or eat it and, therefore, ensure that they spread the cost out against other costs, other incomes they have, or they just curtail their lending activities altogether, which in some cases has hap- pened. In my district, I have banks that no longer make home loans because of increased cost. So I guess my question to you this morning, Mr. Chairman, is, this to me is going to have a devastating effect on the home lending market, especially when you start to talk about the GSEs. And when we start having a dramatic effect on the government-spon- sored enterprises (GSEs), which no longer have—if we lose 100,000 homeowners, that is going to affect the economy. You already talked about the building that is not going to go on, about all the sales of materials that are not going to go on. This is going to have a devastating effect on our economy, which is directly in your pur- view. So in conversations with Chairman Otting, who now oversees Freddie and Fannie, he gave me some figures, which I am trying to get him to verify in a written letter request that are going to be out of this world of how he is going to have to reserve for this and have to pass those costs along. So can you tell me, from just this conversation I am having here with you, what your thoughts would be along those lines? Would you have concerns about the GSEs having to pass those costs along and the inability of consumers to have access to credit as a result of that? Mr. POWELL. Sorry. Were you tying that back to CECL? Mr. LUETKEMEYER. Yes. Mr. POWELL. You are, okay. Well, yes, I think we know that reg- ulation does have a cost and that is why we try to make it as effi- cient as we can and no more burdensome than it needs to be. Again, I think on CECL, we have tried—we put a lot of resources toward trying to understand how it will affect the behavior of banks, and we are going to be watching that very carefully. Again, for our banks, we have allowed a 3-year phase-in that doesn’t even start until next year. So we are going to be seeing it coming in gradually, and we are going to be watching very carefully to see whether these effects happen. Mr. LUETKEMEYER. Well, I know in talking with banks from Wall Street to Main Street, especially small guys, nobody likes this rule. And it is going to be—and to me, what was told by FASB is the original reason for it was to have better transparency, under- standing risk on the balance sheet with regards to home loans. But if you are an investor investing in a limitly held bank or a credit union or a a single individual owning a bank, there is no need for this sort of risk exposure and, therefore, it is unnecessary. So I am very concerned about this and, as I said, there is a grow- ing groundswell of concern out there and I hope that you take this into consideration. I yield back. Chairwoman WATERS. The gentleman from Texas, Mr. Green, is recognized for 5 minutes. VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 22 Mr. GREEN. Thank you, Madam Chairwoman. And I thank Chairman Powell for being here with us today. I am honored to be in your company again. I have great respect for your intellectual prowess. And I say this because you have had to deal with a level of inanity that most Fed Chairs don’t have to deal with. I would like for you to hear now the words of the President of the United States. He indicated, ‘‘I am doing deals and I am not being accommodated by the Fed.’’ That would be you. ‘‘I am not happy with the Fed. They are mak- ing mistakes because I have a gut and my gut tells me more some- times than anybody’s brain can ever tell me.’’ You have access to some of the greatest minds in the world. You do research. I assume that when you are setting the Federal funds rate that you rely on that research and not on the President’s gut. I assume that you do this because you understand the impact that it can have on the economy. And I would just like for the record, would you indicate that you do have the level of research necessary to make these decisions without the benefit of the President’s gut? Mr. POWELL. I think we have quite adequate resources at the Fed. We have terrific people, and we have a very strong culture more than anything, which is a culture of commitment to making these decisions for the benefit of all Americans, based on our best thinking, diverse perspectives, and without considering political factors. That is our culture, and it is a strong one. Mr. GREEN. Thank you. And you do quite a bit of research in var- ious and sundry areas. You have done research in terms of African- American unemployment, unemployment of teenagers. Is that a fair statement? Mr. POWELL. Oh, yes, quite a bit. Mr. GREEN. I would like to ask you, if I may, if the stock market is a fair acid test for the health of the economy? Should we rely solely on the stock market? It seems that the President does. Mr. POWELL. We, of course, look at a wide range of financial con- ditions, credit market conditions. The stock market is one of many factors. Mr. GREEN. One of many, but not the sole factor? Mr. POWELL. No. It is simply one of many. Mr. GREEN. Not the one that supercedes others? Mr. POWELL. No. It is one of many. Mr. GREEN. One of many. Why is it so important for the Fed to be independent? Mr. POWELL. I think it is important because you have given us an important job, which is to achieve maximum employment and stable prices, and we need to do that in a way that is strictly non- political. You have given us long terms. You have given us protec- tion from sort of shorter-term political considerations, and you have kind of ordered us to do our business that way. And the record is that central banks that are independent, that have a degree of independence from the rest of the government do a better job at serving the general public. Mr. GREEN. Would it also have a little bit to do with the fact that you want people to rely on what you do and you want people to as- sume that what you do is not predicated upon the whims of some political personality? VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 23 Mr. POWELL. It is very important that the public understand who we are and how we do our business, which is strictly nonpolitical and based on the best thinking we can muster. Mr. GREEN. Now, let me get to the question that I really wanted to ask, and it is this: Invidious discrimination. You have done many studies. You have acknowledged it. You have acknowledged that you have some of the best minds in the world. I want you, Mr. Powell, to do a study to determine the impact that invidious dis- crimination—that would be racism; sexism; homophobia; Nativism; anti-Semitism—has on the economy. This is a question that will help us to better assure that you can meet the mandates that have been accorded you. It is unfortunate that we try our best to change the cir- cumstance, but we have been doing it without the benefit of this intelligence. How soon do you think you can help me with this in- telligence, please? Mr. POWELL. I will speak to some of my research colleagues and get back to you. I will get back to you quickly. Mr. GREEN. I will look forward to hearing from you. Thank you. Mr. POWELL. Great. Thank you. Chairwoman WATERS. Thank you. The gentleman from Michigan, Mr. Huizenga, is recognized for 5 minutes. Mr. HUIZENGA. Thank you, Madam Chairwoman. And, Chair Powell, it is good seeing you here today. I have four areas I want to quickly go over: the Volcker Rule; options, specifi- cally exchange listed options; a Fed inflation target increase discus- sion, if at all possible; and then workforce participation that you had brought up in your opening statement. First on the Volcker Rule, as ranking member of the Capital Markets Subcommittee, I have been very concerned about the Volcker Rule and how the rule has been detrimental to U.S. capital markets. And last October, myself, Chairman Luetkemeyer and Chairman Hensarling at the time sent you a letter dated October 16th. I don’t believe we have actually received a response as of yet. But in this, it was concerning, we raised concerns that the Volcker Rule unnecessarily restricts a bank’s ability to make long- term investments in small businesses as a result of the covered funds provisions. And as you know, such funds provide the same type of financing that a bank is authorized to do on its own balance sheet, but the Volcker Rule prohibits a bank from performing this activity through fund structures. Previously, you have recognized that a bank’s long-term invest- ments in covered funds generally do not threaten safety and sound- ness, and said regulators would look for ways to encourage this im- portant activity within the language and intent of the statute. Now, the letter was addressed to Secretary Mnuchin, yourself, Chair Clayton, Comptroller Otting, Chair McWilliams, and Chair Giancarlo at the time—this has been referred to at various times as the ‘‘five-headed hydra,’’—and I am wondering when you are planning to address this issue? Mr. POWELL. I think we received quite extensive comments on that proposal, and you mentioned the covered funds part of it. I will just say we are looking carefully at ways to address some of VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 24 the concerns that were raised on that and also on the accounting part. Mr. HUIZENGA. How quickly can we expect clarity? Mr. POWELL. I don’t have a date for you, but I can get you a bet- ter sense of that quickly and get back to your office. Mr. HUIZENGA. That would be helpful. And last May, the Federal Reserve issued a proposal that would focus compliance and application of the Volcker Rule on the size of a banking firm’s market trading business rather than on the size of the bank’s assets. The two are not always the same, as we know. And when do you envision finalizing that proposed tailoring rule? Mr. POWELL. This is S.2155? That one, so, again, we have com- ments. I think we have a dozen rules out for comment and back. Mr. HUIZENGA. That was last May that you issued a proposal. Mr. POWELL. If you are talking about the overall tailoring pro- posal or are you talking about—this isn’t the Volcker Rule. This is the Volcker part of the— Mr. HUIZENGA. Correct. It is dealing with the size of the firm’s trading business rather than the size of its assets. Mr. POWELL. I will get back to you with a time. Mr. HUIZENGA. Okay, I would appreciate that. Options. As you know, for the centrally cleared exchange listed options market, the Current Exposure Method has negatively im- pacted liquidity and has increased cost to customers. Last Con- gress, the Options Market Stability Act received unanimous sup- port. And I know America doesn’t believe us when we actually say we can agree on something on occasion, but I believe it would have solved some of these issues. Thankfully, the Federal Reserve, along with the OCC and the FDIC, issued a proposal in October of last year to replace the Cur- rent Exposure Method proposed for purposes of exchange-listed op- tions with a more risk-sensitive methodology to be applied, known as the standardized approach for calculating counterparty risk. Can you indicate when the banking agencies intend to finalize this rulemaking? Mr. POWELL. I know that is another one for which we have com- ments out. I think that is coming soon. I will get back to you with a particular date. Mr. HUIZENGA. All right. I am looking forward to that. It sounds like we are going to have a long meeting after this one. In my remaining minute here, the Fed inflation target increase— and by the way, the dual mandate has been brought up, and I have never quite understood why it is called the ‘‘dual mandate’’ when it says, ‘‘from 1977, Congress mandated that the Fed, promote ef- fectively the goals of maximum employment, stable prices, and moderate long-term interest rates.’’ We somehow forget that third part all the time when we have this discussion. But last week, news reports indicated that the Fed may be con- sidering a higher inflation target rather than the 2-percent that has been adopted, not mandated but adopted. And I am concerned that the Fed, frankly, is going to be rushing into some new ap- proaches when we are not necessarily understanding what we are living with right now. And I wonder if you can comment on that. VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 25 Mr. POWELL. We are not looking at a higher inflation target, full stop. Mr. HUIZENGA. Okay, excellent. Mr. POWELL. What we are looking at is a way to more credibly achieve our existing symmetric— Mr. HUIZENGA. Two percent. Mr. POWELL. A 2 percent inflation target. Mr. HUIZENGA. Great. And then, in the remaining seconds, why is the labor participation rate for ‘‘prime age workers,’’ as you had said in your opening statement, falling? We are seeing older work- ers, those labor rate increasing, but seeing prime age. Mr. POWELL. That is a longer conversation and a really impor- tant one. And I think it is a range of things. It is people who—it is largely in younger workers. It has to do with globalization. It has to do with technology. It has to do with the opioid crisis. It has to do with the flattening out of U.S. educational attainment over the years. So this is an incredibly important issue, and I would love to talk more about it, but— Mr. HUIZENGA. I look forward to our next meeting. Mr. POWELL. Thanks. Chairwoman WATERS. The gentleman from Missouri, Mr. Cleaver, is recognized for 5 minutes. Mr. CLEAVER. Thank you, Madam Chairwoman. Mr. Chairman, I think at this very moment, the U.S. Trade Rep- resentative is testifying before the Ways and Means Committee. And one of the issues they are going to raise is U.S.-China trade issues. And according to the U.S. Trade Representative, in 2016, about 85,000 workers in Missouri were employed because of our trade. That trade is very critical because of the employment. And then, in 2017, the Trade Representative reported that about $14 billion a year in agricultural exports actually promoted the employ- ment situation in Missouri, 85,000 jobs. I don’t want you to get into policy, but how do you weigh the un- certainty in trade with the Fed actually trying to create healthy monetary policy? Mr. POWELL. So, as you know, we have this thing called the Beige Book, where we accumulate the comments of our vast array of economic and other contacts around the country. And really for the last year or so, a principal feature of those comments has been uncertainty around trade. We have companies say that they are concerned about higher prices, because they are importing mate- rials as part of their product. And some of them saying that they are delaying investments of various kinds and hiring of various kinds. We can’t really see through to what the effect of it is. Prob- ably at the aggregate level, it is not big. Individual companies, of course, can be very much affected. So there is a lot of uncertainty out there, and it would be good to have trade issues resolved. That said, of course we don’t have a role in trade. Mr. CLEAVER. Right. Mr. POWELL. We don’t advise the Administration, and we don’t comment on particular policies, as you indicated. Mr. CLEAVER. That $14 billion that comes into our State to sup- port these jobs, much of that comes from my congressional district. VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 26 Saline County, for example, is one of the top spots in the nation for the export of beans to China. And the farmers are—just to— actually what you just said, the farmers, some of them are even saying, ‘‘Maybe we should just leave our beans in the ground. Why go through the whole process?’’ And even though they have been getting a little compensation from the Federal Government, they are saying, ‘‘We want trade, not aid.’’ And so there is a serious issue. But the U.S. deficit and fiscal concerns as it relates to the tax bill are something that you have heard us speak about. And, again, I want to try to ask a question so that it doesn’t require you to get into policy. But it would be interesting to know what the economic impact of the tax package has been and may continue to impact our economy. Is there any data available that would give us an idea about that impact of the tax package? Mr. POWELL. I think CBO would be the best source to sort of score what is happening to the economy from a particular law. We look at the aggregate economy and the effects of the tax package are mixed in with everything else that is happening, from our standpoint. Mr. CLEAVER. Okay. So the Fed wouldn’t speak to that? Mr. POWELL. We had estimates, but with a $20 trillion economy, we don’t spend a lot of time trying to look back. That is really not what we do. We made estimates at the beginning, and I think we have adjusted them along the way. Mr. CLEAVER. Thank you, Mr. Chairman. Thank you, Madam Chairwoman. Chairwoman WATERS. Thank you very much. The gentleman from Wisconsin, Mr. Duffy, is recognized for 5 minutes. Mr. DUFFY. Thank you, Madam Chairwoman. Welcome, Mr. Chairman, it’s good to see you. Just a quick ques- tion on insurance before we go to other topics. I think you have in- dicated that the U.S. insurance regulatory model has provided for strong solvency, our insurance companies are well-capitalized, but now the IAIS is developing a new international capital regime. I think your colleague, Mr. Quarles, indicated that it would be a challenge for us to implement that new regime in the United States. And so my question for you is, as you are part of these negotia- tions, is the U.S. going to agree to a new insurance capital set of regulations, or are we going to provide some pushback and try to get formal recognition of our U.S.-based model? Mr. POWELL. My understanding is that we are working with that group internationally to make sure that whatever they do adopt in the end works for our system, which we think is a good system. So we are, of course, not going to implement something that doesn’t work for us. And we are working with that international group to make sure that what is ultimately adopted does work for us. Mr. DUFFY. Okay, fair enough. In 2018, you said the U.S. GDP growth was what? Mr. POWELL. It looks like it is just a tiny bit under 3 percent. It might turn out being 3 percent. It might be 2.9 percent. VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 27 Mr. DUFFY. Pretty good. When is the last time we hit 3 percent growth for a year? Mr. POWELL. 2006, I believe. Mr. DUFFY. 2006. So it has been over 10 years. Mr. POWELL. Twelve years. Mr. DUFFY. I think some other people had indicated that the U.S. economy could never hit 3 percent again. What happened? Why are we hitting 3 percent? We are pretty long into this recovery, right? This is one of the longest expansions that we have had since the Great Depression. Fair enough? Mr. POWELL. It is one of the longest in U.S. history. Mr. DUFFY. So, at the end of the expansion, you should see this petering out, but you didn’t. You have actually seen some of the highest growth in the whole expansion in over 12 years. What hap- pened? Mr. POWELL. Well, it was a good year. There are a lot of things that happened. Mr. DUFFY. I know it was a good year. What happened? Mr. POWELL. Well, a lot of things did. And I think that the tax cuts and spending increases, the fiscal package certainly supported demand in a meaningful way. Mr. DUFFY. So lower taxes actually contributed to growth? Mr. POWELL. Yes, they supported demand. I think the real hope, though, would be that there would be supply side effects over time. And that is something we hope will be big, but that takes longer. It takes more time to work its way through the system. Mr. DUFFY. And so tax cuts have contributed to 3 percent growth. Has any kind of regulatory reform from the Administration helped with that growth as well? Mr. POWELL. It is really hard to isolate that. That is a question that people really struggle with. The way I think about it is we really don’t want regulation to be any more costly or burdensome than it needs to be to get the job done. Mr. DUFFY. And so 3 percent growth. And did you make some commentary about the unemployment rates of whites, Latinos, and African Americans? Mr. POWELL. I did. Mr. DUFFY. What are they? Is unemployment higher today, or is it lower for those individuals? Mr. POWELL. I think for Blacks and Latinos and Latinas, we are at historic lows, since the data haven’t been kept for more than the last 40, 50 years. You are near historic lows there. Mr. DUFFY. So, more people are working. And if we want to look at all of the races, everyone is working more, right? Mr. POWELL. Yes. The labor market is very healthy. Mr. DUFFY. Very healthy. And their wages, did you testify was what? Their wages are going down or their wages are going up? Mr. POWELL. Wages have been moving up nicely in the last year or so. Mr. DUFFY. They are making more money, right? Mr. POWELL. Particularly for people at the lower end of the labor force. Mr. DUFFY. So more people are working. More people are making more money. And more people I think you indicated with the lower VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 28 education or lower skill sets are making more money. Is that cor- rect? Mr. POWELL. Yes, that is right. Mr. DUFFY. So I find it fascinating that some of my colleagues across the aisle bash the tax cuts. They bash the President and the economic policies that have come from this Administration and a Republican Congress. But the net end result has been that more people work, more people make more money. The economy grows at 3 percent. And when all those great things are happening for all of these Americans, no matter whether you are a Republican or a Demo- crat, whether you are African American, you are white, you are Hispanic, you are Latino, everybody is doing better under these policies, but all the same, my friends across the aisle try to tap me down as they also bash the President on policies that have helped every single American. I think that is shameful. I yield back. Chairwoman WATERS. Thank you. The gentleman from Illinois, Mr. Foster, is recognized for 5 min- utes. Mr. FOSTER. Thank you, Madam Chairwoman. And along the same vein, I think if you look at figure 1 in the report that you gave us, you look at the rate of job creation. And I think it is remarkable how constant it has been, with no visible change as a result of any of the policies of the last 2 years, and I think that is the relevant observation there. Now, this Saturday, March 2nd, the currently suspended debt limit, ceiling on the debt limit is going to come back into effect un- less we pass legislation or do something about it. Now, we have some runway on various extraordinary measures that can be done by the Treasury and others. Do you have a feeling, first off, on how much runway we have before Congress has to deal with the debt limit, and can you say a little bit about what the implications of defaulting on that would be? Mr. POWELL. I think that there is real uncertainty about when the actual date that the government will run out of cash and not be able to pay all bills when they are due will come, but it will be later this year. It could be late in the summer. It could be in the fall. I think it remains to be seen at this point. And, I think the main thing is we have never failed to pay all of our bills when and as due, and I think that can never happen. That is just not something we can allow to happen. I think our credit rating and our credit as a country is such an important asset that we need to stop short of letting that happen. I think it could have very hard to predict but possibly quite bad consequences if we were to default on our payments. Mr. FOSTER. In the past, when we have come close to defaulting and sort of walked up to the cliff on that, what have been the ef- fects to markets, credit ratings, what were the implications for the general economy? Any way to quantify that? Mr. POWELL. It’s very, very hard to quantify it. I know, in 2011, we were downgraded as a consequence of this. And I know that fi- VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 29 nancing costs went up for a period right at the height of the crisis, and there was significant cost imposed on the taxpayer for that. Mr. FOSTER. Now, a few days ago, the President proudly an- nounced that he had reached a currency manipulation deal with China, which I understand you indicated you consult with the Ad- ministration on this. Have you been told what that deal is? Has the Federal Reserve been informed? Mr. POWELL. I think our staff is—basically, our point is—we don’t handle currency. That is really the Treasury’s job. The thing that is our concern is that we be allowed to conduct monetary pol- icy with a free hand. Mr. FOSTER. But have you been informed of what that deal is? Mr. POWELL. At the staff level, I think people are in contact and made sure that that limited interest has been addressed. Mr. FOSTER. Was that a yes or no or— Mr. POWELL. Yes. Mr. FOSTER. So you have been informed. So people in the Fed know what that deal is, although I understand you might not— Mr. POWELL. As it relates to our interest, I believe so, yes. Mr. FOSTER. Okay. Are there other tail risks that you think we should be worrying about, things like hard Brexit? What are your top few sources of tail risk that you think we should be thinking about in Congress? Mr. POWELL. I think the outlook for the U.S. economy is a posi- tive one. And I think that I would start with slowing global growth. We have seen global growth, particularly in China and Europe, through the course of 2018 and right into 2019. Growth in 2017 was a real tailwind for the United States economy. It was syn- chronized global growth around the world. As the global economy slows outside the United States, it be- comes a headwind. So we are feeling that. Brexit is just an event, and it may pass without much implication for the United States, but it is unprecedented and so it is hard to say exactly what the implications—of course, we are monitoring it very carefully. Mr. FOSTER. Now, late last year, the comment period closed on considerations you had for developing a real-time interbank settle- ment system. And can you say a little bit about—just give us an update on what your current thoughts are on that, the schedule we might be looking at? Mr. POWELL. Yes. We put this proposal out for comment. We have gotten a lot of comments. We are reviewing them. And the idea is that central banks can really provide immediate final settle- ment, real-time payments, and really— Mr. FOSTER. And some do internationally. Mr. POWELL. Many do internationally. And the question is, should we take this on? And I think it is a question we have to evaluate under our existing statute, and we will take our time in doing that. We have to conclude that it is economically viable, that we can charge for it in other words, and also that it is something that the private sector can’t adequately handle. So we are going to look at that. We think, clearly, it could sup- port real-time payments, which we think would be a positive thing. On the other hand, it has to work under our statute. Mr. FOSTER. Thank you. VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 30 Mr. POWELL. Thank you. Mr. FOSTER. I yield back. Chairwoman WATERS. The gentleman from Ohio, Mr. Stivers, is recognized for 5 minutes. Mr. STIVERS. Thank you, Madam Chairwoman. Chairman Powell, thank you for being here. I want to follow up on some questions that the gentleman from Wisconsin, Mr. Duffy, was talking to you about. Obviously, 3 percent economic growth, 4 percent unemployment, real wage growth is growing. It was a pret- ty good year for the American people and the American worker, correct? Mr. POWELL. Yes, it was a good year. Mr. STIVERS. One of the things that you talked about with Mr. Duffy as a result of the tax cuts, one of the things that we would all like to see is some supply-side growth over time. Can you help us understand what that would mean? It would mean capital in- vestment, which would grow productivity and then make the econ- omy grow even faster, correct? Mr. POWELL. Yes. I think a couple of things. The first would be the one you mentioned, which is if you give more favorable treat- ment to capital expenditures in the Tax Code, over time you ought to see more capital expenditures. Capital expenditures drive pro- ductivity, and productivity is what drives the rising of living stand- ards. But I think with supply-side initiatives, it takes time. It has to work its way into the thinking of businesses and into the capital stock, and I just think—we hope those effects are large, but we will have to be patient to see them come in. There is also a smaller pos- sible effect in lower tax rates on individuals, which could call forth more labor supply. So these are highly uncertain supply-side effects and they will take longer to emerge, but we hope— Mr. STIVERS. And can I ask you about the beginning parts of what we are seeing on that? We have seen new people enter the labor market in the last 6 months, who had given up on working or staying in the market and were starting to leave. Isn’t that cor- rect? Mr. POWELL. Yes. The test of—so what we don’t know is how much of that is cyclical, in other words, because the labor market is so tight right now. Mr. STIVERS. And the second question, we have seen capital ex- penditures go up in the last 6 months, but we have not seen those pay off yet? Mr. POWELL. Well, we saw—so capital expenditures were very strong in the early part of 2018. They petered out a little bit, and it may be because of— Mr. STIVERS. But in the total year, they were up, correct? Mr. POWELL. Yes. And we expect them to continue to be at a healthy level. Mr. STIVERS. Great. And so hopefully what we have done on tax cuts will continue to pay dividends into the future, but I wanted people to understand how that works. Second, quickly on monetary policy, it seems that there has been a change in the way that monetary policy has worked. The Federal funds markets for non-GSEs is at a 40-year low of volume. And so VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 31 it seems that the interest on excess reserves is getting to be a more important part of what you do. Can you talk about that shift since 2008? Mr. POWELL. Yes. So pre-crisis, there was a small amount of re- serves, and we could manage the Federal funds rate by making rel- atively small adjustments in the quantity of reserves. In the cur- rent era, where the demand for reserves is so high and, frankly, a little bit volatile too, trying to do that, trying to manage scarcity in that kind of a very large pool, we would have to have a very large presence in the markets on an ongoing basis. We don’t think that is a good—that is not something we—so we think—we have decided to continue to use our existing framework, which is to use our administered rate, administered. So the interest on excess reserves is very fundamental for the way we manage our policy now, and it seems to work very well. Mr. STIVERS. Thank you. Great. And two more quick questions. One is, hopefully you can answer quickly, but there is a new sort of focus on modern monetary theory that says taxes can better fight inflation than monetary policy. Do you have a basic philo- sophical view of that? Mr. POWELL. So that aspect of it would be a complete change. I would say the reason why the Fed does that is that we can move quickly with our tools. And to give the legislature that responsi- bility, in principle, you could do that, but we have a system that has lots of checks and balances. Mr. STIVERS. So let’s assume for a second those two tools work equally. Who can move faster, the Federal Reserve or Congress? Mr. POWELL. We can move immediately. Mr. STIVERS. Much faster. Thank you. And that is assuming they are equally effective, which I would argue that monetary policy is far superior as well. Quickly, one last thing on real-time payments, something you said that I hope you will stay focused on is whether the free mar- ket and the private sector can actually provide a real-time payment system, because if they can, there is no need for the Federal Re- serve to do it. Mr. POWELL. That is part of the thing we have to look at under the Monetary Control Act. Mr. STIVERS. Thank you. Mr. POWELL. Thank you. Mr. STIVERS. I yield back the balance of my time, Madam Chair- woman. Chairwoman WATERS. Thank you. The gentleman from Washington, Mr. Heck, is recognized for 5 minutes. Mr. HECK. Thank you, Madam Chairwoman. Mr. Chairman, I always ask the same question of the Chair of the Federal Reserve Board, which is, when does America get a raise? I may have to revise that slightly, because, obviously, we are beginning to see some evidence of that, which I think is an indica- tion of the full employment objective mandate that you have. So, good job. In fact, I commend you for your hitting the patience but- ton of late. VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 32 But I am looking at these payroll gains of, I think you indicated an average of north of 200,000 jobs added every month, and I don’t think that yet looks like full employment, month in and month out. And, as Minnesota Fed President Kashkari has noted, the share of income going to labor isn’t really reversing its long-term slide. So, when the FOMC is being patient and watching the data, what are you looking for in the labor market? How much slack do we have left? Mr. POWELL. We look at a very broad range of indicators. With inflation, we can look at one indicator, and, actually, we think cen- tral banks control that. The labor market is different. So we look at the unemployment rate. We also look at labor force participa- tion. We look at wages. We look at job openings. I could go on. There are 20 or 30 things. Mr. HECK. And how much slack do we have left? Mr. POWELL. You never know precisely, and you are learning in real time. So I think we have learned from the performance of labor force participation over the last few years and particularly the last year that there are more people out there who will come back into the labor force. And that creates more slack. Mr. HECK. More slack to come? Mr. POWELL. We hope so. We don’t really know. There is a long- run aging trend in our country by which, you know, my generation is now retiring. And so you are going to have lower labor force par- ticipation compared to what you would have had. But the very strong labor market seems to be pulling people in and holding peo- ple in from leaving. So it is a very, very positive development. We hope it continues. Mr. HECK. So, once we get to full employment, the definition of which you will acknowledge has been a moving target on the part of the Fed, are you willing to let wage growth climb to 4 percent, either to begin to recover some of the decline that we have experi- enced over labor’s share of income or, alternatively, an idea that I don’t think is discussed often enough, to see if tight labor markets themselves can improve or boost productivity? Are you willing to let wage growth hit 4 percent? Mr. POWELL. We are really targeting price inflation, not wage in- flation. So, wages should equal to it in the aggregate. Mr. HECK. Okay. Mr. POWELL. Inflation plus productivity. Mr. HECK. As a follow-up, I have a couple of charts. Do we have them? These are your two mandates, obviously, full employment and price stability. You referenced the price stability. My second slide focuses just on it. So can we go to the second slide or not? The second slide. I am burning daylight. Evidently, we can’t go to the second slide. This shows the record over the last 25 years with respect to the Fed’s price stability target of 2 percent. I think what is important to note is that we have underperformed 85 months versus over- heating 2 months—213 months within a half a percent of target, and good on you for that as well. But, clearly, the long-term record of the Fed has been to underperform. So there is a relationship between wage growth and price sta- bility. And on the issue of price stability, the Fed has been under- VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 33 performing way more, a multiple of I don’t know how many, than overheating. And this speaks, obviously, to the issue of, when are we going to get wage growth that begins to compensate for years and years of decline? I know you are engaged in a healthy exercise to review the tools and communications. Frankly, sir, what I would hope is that it would be taken into account, frankly, some more transparent ad- vancing of the historic record as a means of informing policy going forward because I think this data speaks very clearly that we have a need to place a greater emphasis on wage growth and the factors that it affected. Thank you, Madam Chairwoman. Mr. POWELL. If I can just say, you are absolutely right about the inflation data, and I think a number of us have commented on that recently. So I like your charts. Chairwoman WATERS. Thank you. The gentleman from Kentucky, Mr. Barr, is recognized for 5 min- utes. Mr. BARR. Chairman Powell, welcome back to the committee. And I will note that when you were first confirmed, you did make a commitment to improve Fed communications. And I want to com- pliment you and thank you for our conversations. And I think you have fulfilled, by and large, that commitment to improve Fed com- munications, but I suppose it is my job to hold the Fed accountable and so I am going to press you on a few issues here today, the first of which is the Fed’s negative net worth. The former CEO of the Chicago Federal Home Loan Bank, Alex Pollock, recently observed that the Federal Reserve is insolvent on a mark-to-market basis. You may have read his commentary on this. Pollock’s analysis is that, as of the end of September, the Fed- eral Reserve had $66 billion in unrealized losses on its portfolio of long-term mortgage securities and bonds. This equates to 170 per- cent of the Fed’s capital and means that on a mark-to-market basis, the Fed had a net worth of negative $27 billion. If interest rates continue to rise, the unrealized loss will keep getting bigger and the mark-to-market net worth will keep getting more negative. Chairman Powell, does it matter that the Federal Reserve is in- solvent? Mr. POWELL. No, it doesn’t matter at all for any purpose. The un- realized losses have no effect whatsoever on our ability to conduct monetary policy. You will recall that we have been giving close to $100 billion every year in our profits back to the Treasury at the end of the year or during the course of the year. So, really, in no sense are we functionally insolvent. Mr. BARR. Does the mark-to-market negative net worth make it more difficult to raise the Federal funds rate? Mr. POWELL. Absolutely not. Mr. BARR. Okay. Next question is another discussion on the bal- ance sheet and the balance sheet reduction program. In your testi- mony, you stated that the Fed had made ‘‘substantial progress on reducing reserves’’ and that the Fed is ‘‘prepared to adjust the bal- ance sheet normalization program.’’ This does seem to be a shift from your comments in December when you said you believed that VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 34 the runup of the balance sheet has been smooth and has served its purpose, and I don’t see us changing that. I think I heard you explain that banks’ demand for reserves have increased, and I recognize that currency has doubled from about $850 billion to $1.7 trillion, but please explain what caused the shift in the Fed’s balance sheet reduction plan and give us a better understanding, if you can, of the final destination between the $4 trillion size right now and the $1.7 trillion currency level. Mr. POWELL. In our November meeting—I should go back an- other meeting. We began a series of meetings to engage on just this set of issues and what is balance sheet normalization going to look like? And, I didn’t want to get ahead of the committee in December. And also, I think the markets became much more sensitive to these issues. They had been pretty insensitive to them for some years. So the truth is we have now had three consecutive meetings on the balance sheet, and we have worked out, I think, the framework of a plan that we hope to be able to announce soon that will light the way all the way to the end of balance sheet normalization and that will result in the end of asset runoff sometime later this year. Mr. BARR. Well, thank you, and thanks for that explanation. I would just urge you and your colleagues to remain mindful of the fact that there are critics out there who continue to express concern about the size and the composition of the balance sheet as remain- ing fairly unconventional and the risk that that could pose. My final question is related to a regulatory matter, the G-SIB surcharge. In July, I sent a letter with 28 of my colleagues to Vice Chair Quarles regarding the G-SIB surcharge. We expressed our concern in that letter that that surcharge puts U.S. banks at a dis- advantage when it comes to international competitiveness. The sur- charge is more stringent than the one adopted by the international Basel Committee and was adopted before many of the measures to increase resiliency and resolvability were fully implemented. Yesterday, before the Senate Banking Committee, you stated that the financial system has much higher capital, much higher li- quidity, better risk management, and the stress tests have really helped banks understand managing their risks, and you said that our banking system is strong and resilient. Given these enhancements to resiliency and resolvability, would it be appropriate to reexamine the calculation of the G-SIB sur- charge since it was originally formulated in 2015, prior to the aforementioned improvements? Mr. POWELL. I think that the overall level of our capital, particu- larly at the largest firms, is about right. I am open to evidence that there are problems with that. I don’t see U.S. banks having dif- ficulty competing, particularly internationally. They seem to be competing very well. They seem to be profitable. Their stock prices seem to be fine. But in terms of the surcharge in particular, it is one of a bunch of pieces, but I would say the overall level I think is just about right. Mr. BARR. I appreciate your testimony. Thank you. Chairwoman WATERS. The gentleman from Illinois, Mr. Casten, is recognized for 5 minutes. Mr. CASTEN. Thank you, Madam Chairwoman. VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 35 And thank you, Chairman Powell. You mentioned in your intro- ductory remarks that a significant amount of the recent growth we have seen is due to consumer spending and business investment, and I would like to focus on the second of those and specifically on the impact of energy prices. I want to read a couple of quotes from you in a recent article. The chief economist at UBS Securities has said that the increase in oil prices was responsible for much of the rebound in fixed in- vestment in 2017, noting specifically how oil and gas shale plays now make us very dependent on the price of oil to drive U.S. fixed investment. Alexander Arnon of the Penn Wharton Budget Model has gone further, to say that firmer oil prices ‘‘accounted for almost all of the growth in investment in 2018.’’ The article goes on to mention how several of the Fed offices have been concerned with the softening of oil prices and what it reflects. The first question is, do you agree that the rise in oil prices over the prior year and a half have been a meaningful contributor to capital investment in the United States? Mr. POWELL. Yes. As oil prices go up, that makes it more eco- nomic for more drilling and you see more capital expenditure (CapEx.) I don’t know that it accounts for—certainly, that was very much the case in 2017. I would want to go back and look at 2018. I thought that CapEx went up more broadly in 2018. Mr. CASTEN. Okay. Well, the oil prices certainly started to fall late last year, I think from $70 and now they are down in the 40s or so, I believe. You had mentioned in your forward growth forecast that you ex- pect inflation to be lower than planned, in part, because energy costs are down and so you are sort of adjusting for energy there. Does that not apply in reverse, that if we were looking at prior growth being higher, are we treating energy cost fluctuation the same when we look at explanations of prior growth as we are when we are discounting inflation growth going forward because of en- ergy price volatility going the other direction? Mr. POWELL. I’m sorry; I didn’t get your question. Say that again? Mr. CASTEN. So, if I understood your commentary correctly, you were saying that going forward, inflation is going to be below tar- get, but that is largely driven by energy. And if I am following what is written here, the prior growth was driven in part by energy prices being more positive. So are we treating the impact of energy prices on the economy the same in a positive direction as we are in a negative direction? Mr. POWELL. Yes. Yes, we are. Sorry. So, if oil prices are flat, then they are not adding anything to inflation, and if they grow at 2 percent—so that is why we have core. We obviously exclude en- ergy and food because they are volatile. We look through to the core for that reason. Mr. CASTEN. Are we also factoring the impact of those prices on business investment? Mr. POWELL. More broadly, yes, absolutely. Mr. CASTEN. Madam Chairwoman, I would ask unanimous con- sent to enter this article into the record. Chairwoman WATERS. Without objection, it is so ordered. VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 36 Mr. CASTEN. My final question is: I just came here from—I am bouncing between two hearings today in the Science Committee about ocean sea level rise and, again, ties to the energy markets. I listened to scientists explain how over the course of the next cen- tury and much sooner than that based on current CO2 levels and based on current temperatures, we have very realistic expectations of 3 to 8 feet of sea level rise, with fairly significant impacts on the elimination of coastal communities, the collapse of housing, and significant migration inland. As we think about financial markets going forward and, in par- ticular, 30-year mortgages, are we factoring that into the value? When I put that question to them, they said that there is going to be a significant diminution of that value long before the houses are flooded because it is going to be pretty obvious what is coming. My question is, as you think about forward rates and how we think about housing policy in general, how should we be thinking about what at this point is largely inexorable? Mr. POWELL. It is a good question. So, in our supervision of fi- nancial institutions, we do take into account, for example, if you are a bank that is lending, that is in the Gulf area, let’s say, and you are subject to climate events—or not climate events, but weather events and natural disasters, then we are going to super- vise you to make sure that you have the ability to understand and manage those risks as part of your business. That is how it enters into—that is how this subject enters into our work. I think in terms of broader macroeconomic consequences, it is hard to do, it because it is such a long run. You are talking about climate change, right? Mr. CASTEN. My question is the interest rate on a 30-year mort- gage in an area that is on the coast and in any reasonable scenario may well be underwater before that mortgage is fully recovered. Mr. POWELL. Again, we supervise our banks to have them take into account that risk of having—but do we have it exactly right? I am sure we don’t. Mr. CASTEN. Thank you, Chairman Powell. Chairwoman WATERS. The gentleman from Colorado, Mr. Tipton, is recognized for 5 minutes. Mr. TIPTON. Thank you. Chairman Powell, it’s good to see you again. The U.S. Chamber of Commerce released a report last fall that found that bank lending to small businesses has not kept up with the needs of the economy, suggesting small business loans remain down 13 percent from 2008. The report goes on to point out that several regulatory actions have contributed to the slow growth in small business loans and particularly pinpoints that U.S. regulators have imposed substan- tially more stringent standards on our largest institutions than what is required under the Basel III international standards. As a former small business owner out of Colorado, I can testify that the ability of a small business to be able to access capital is vital not only in my district but nationwide. As you have acknowl- edged, the banking system today is well-capitalized and highly liq- uid, and there have been significant improvements to the risk man- agement and resolvability. VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 37 Given that, wouldn’t it be appropriate to recalibrate some of the international standards that have been gold-plated in the U.S. so that the excess capital tied up by those regulations can be deployed back into the economy to support small businesses and/or con- sumers? Mr. POWELL. As I mentioned, I think that the capital levels we have in our banks are about right, and I am open to evidence that that is not the case. But I do see our banks competing successfully and being profitable and also being resilient to the eventual downturns that will inevitably come. So I think I would like to see more evidence before we start lowering capital standards. I think we ought to hold them where they are for now. Mr. TIPTON. Okay. I appreciate your comments on that. It is my understanding that we had not only met but exceeded under Fed- eral regulations the Basel standards. Our European counterparts have not done the same. And the goal is is to be able to make sure that we are keeping the robust economy and job growth going and opportunity and hope that is something that you will continue to keep in mind. Mr. Chairman, we have talked a lot today about some of the CECL requirements that are going to be coming into place with the accounting method, and I do want to express that I have heard con- cerns that implementation will be expensive and that inevitable mistakes are going to be made after the implementation that will also be expensive. I have also heard concerns about how CECL standards will interact with the ongoing stress testing. Mr. Chairman, with the implementation of CECL on the horizon, is the Fed preparing to incorporate CECL into its supervisory stress tests before it applies it to all banks in 2022? Mr. POWELL. I think the answer is, we are not incorporating CECL at least for the next couple of cycles in the stress tests. The stress tests are already forward-looking, of course. They have for- ward-looking losses that are assumed to happen, so eventually we will incorporate it but not for the time being. Mr. TIPTON. Do you feel that the regulators are well positioned giving some of the implementations, inevitably some of the chal- lenges that are going to come out of that implementation, to be able to respond in a timely manner? Mr. POWELL. To respond to? Mr. TIPTON. Some of the challenges that are going to be paced by the cost and the implementation of CECL. Are they going to be able to respond? Mr. POWELL. Ah, CECL. Sorry. Yes, I do. I think we are alert to what we are hearing. And we—again, we have put—we have given our institutions a 3-year phase-in period so they can—and they have also had some years to study and understand it. And, we have worked with smaller institutions so they know they don’t have to have a department of CECL implementation, try to get that done in an efficient way. Mr. TIPTON. Well, I appreciate that. And I know that you are going to be keeping an eye on it, and I would like to encourage you just for the impacts potentially on the industry and on our economy just to monitor the subject. VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 38 Mr. Chairman, in your testimony, you did also note something that is important for my part of the world. There is a noticeably lower employment rate in terms of the communities in rural areas compared to the urban areas, and that gap has widened over the past decade. Has the post-crisis regulatory environment for community finan- cial institutions impacted job creations in rural communities? Mr. POWELL. I don’t think that is really the story. It seems to be more loss of manufacturing jobs. If you read the box, there really isn’t—I wish there were a clear answer at the end of the box, you get there and it says, okay, here is why, and here is what we can do about it. It is not that simple. So essentially, the unemployment rates in rural communities and metropolitan areas haven’t diverged that much. What has diverged is the labor force participation, and it seems to be—it possibly could be tied to lower education levels in rural areas, but that doesn’t seem to explain much of the difference. It may be that it is more about loss of manufacturing, which is more likely to take place away from metropolitan areas. We are still looking at why, but it is a significant disparity that emerged really after the crisis. And if you go back a ways, rural areas had higher participation and lower unemployment. So it is a curious development and one that we are calling to your attention and trying to understand. Mr. TIPTON. I yield back. Chairwoman WATERS. The gentlewoman from California is recog- nized for 5 minutes. Ms. PORTER. Thank you, Madam Chairwoman. Mr. Powell, thank you for being here today with us and for your patience during what I know is a long hearing. I wanted to ask you about the hedge fund working group that the Financial Stability Oversight Council (FSOC) formed a few years ago. Can you describe whether this working group is actually, in fact, doing any work, and the nature of that work, and when we can expect to see any work product? It has been a little over 2 years since we have had any information from that working group, and I would like to see its results and what it is doing. Mr. POWELL. I will have to look into that for you. I am sure that we have a number of staff who work full time with the FSOC, or part time at least with the FSOC, and I can get back to you on that. I don’t personally know what that working group is doing. Ms. PORTER. Okay. So in your role as a member of FSOC, I would appreciate your following up with that working group— Mr. POWELL. I would be glad to. Ms. PORTER. —and getting a briefing for yourself and sharing it when you can on what they are doing. As you know, no banks failed last year. The period in American history when the nation went the longest without a single bank failure was across 32 months, from 2004 to 2007, just before the financial crisis. Then we had three banks collapse in 2007; 25 failed in 2008; 140 failed in 2009; and 157 banks failed in 2010. Since the FDIC was created in 1933, until that run-up in the finan- cial crisis in 2004, not a single calendar year had passed without a bank failing. VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 39 Do you agree that a long stretch without any bank failures can lull the public and even financial market experts and regulators such as yourself into a false sense of security? Mr. POWELL. I think really we are talking about human nature here, so, yes, I do think so. I would say though, if I may add, that the banking system is now so much better capitalized and more re- silient than it was. And we have made sure to kind of allow for that aspect of human nature, I think, by making a system that is much more resilient to shocks. Ms. PORTER. So I appreciate your point about the importance of making sure the system is correctly capitalized, but is the Fed not reducing loss absorbing capital requirements for big banks? Mr. POWELL. No, we are not. Ms. PORTER. And have you changed the capital holding require- ments and the leverage ratios and the measures that are used in the stress tests, especially for banks that are under the $250 billion threshold? Mr. POWELL. Well, I think overall we have raised capital stand- ards. We have effectively doubled the amount of capital in the larg- est institutions. Ms. PORTER. Since when? Mr. POWELL. Since before the crisis. Ms. PORTER. Oh, okay. So I am speaking about in the most re- cent couple years. What has the direction been generally in terms of capital holding? Mr. POWELL. It has been to hold capital right where it is. I think we—the Fed’s view has always been that we don’t want the lever- age ratio to be the binding. We want it to be a high and hard back- stop. We don’t want it to be binding. And it had become binding at its current level so we lowered it a bit. The actual amount of capital that will leave the system, including the holding companies, is very, very small. Ms. PORTER. So, in fact, in the most recent couple of years we have, in your view, moderately reduced the capital holding require- ments? Mr. POWELL. It is actually de-minimus, I would say. Ms. PORTER. Okay. But we are going slowly somewhat down? Mr. POWELL. No. I like to see that—I think we are holding the level where it is. The leverage requirement, it is far less than 1 percent of capital. It is a relatively tiny amount of capital that leaves the system. Some of it can leave the bank to go to other parts of the holding company, but it doesn’t get out of the holding company. And from—other than that, we are absolutely holding the line on capital. It is not in our thinking that capital levels are too high. Ms. PORTER. And with regard to stress testing, which is one of the ways that we assess risk, my understanding is that the Fed has recently advanced proposals to reduce the stress testing stand- ards. Mr. POWELL. No, I wouldn’t say that is right, no. Ms. PORTER. Can you describe then for me and the committee what have been the changes and then maybe we can characterize them differently. But I would love to hear from you about that. VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 40 Mr. POWELL. We have tried to improve transparency without— the whole idea of a stress test is it should be stressful and in some sense surprising, and the scenarios change every year and that kind of thing. At the same time, we have tried to be more trans- parent about the way we look at losses and that kind of thing. I think the banks make the point that, you know, this is our binding capital requirement for the biggest banks and we ought to have some transparency in terms of what it is going to be so that our own capital isn’t volatile year to year. So we have tried to ad- dress those concerns but without undermining safety and sound- ness and without at all limiting the bindingness of the stress test. Ms. PORTER. Okay. Thank you very much. I yield back. Chairwoman WATERS. The gentleman from Texas, Mr. Williams, is recognized for 5 minutes. Mr. WILLIAMS. Thank you, Madam Chairwoman. And, Chairman Powell, thank you for coming to the committee today. We always appreciate having you here. And I would like—I have started asking the witnesses who come before us if they are socialists or capitalists. And I can adjust my questions accordingly when I hear that, but with you, I know what you are. You are a strong capitalist, and I appreciate you for that. Briefly, I am going to touch on—as you probably remember, I am a car dealer. I have been in the car business for 50 years, and tar- iffs have us really concerned right now. But besides tariffs, which you have no control over, we are concerned about interest rates. I come back from a 20 percent—I was in business at 20 percent, so I know what interest rates can do, and in my lifetime 6 percent has always been a good rate. The problem is today balances of the cost of goods sold are very high, much higher than they were in 1981 at 20 percent. We are concerned about the interest rates. Sometimes you can tweak the interest rate a little bit and it could change a person’s payment on a car or whatever, 50 bucks, it could put them out of the market. We are a consumption-driven nation and people want to buy. So I merely take advantage of you being here today to just ask you to be generous or be careful when you start raising the interest rates because it can affect the economy. And in my business, if peo- ple can’t buy, we cut orders and we cut orders. The plant has to lay people off and so forth. So it does trickle down. So interest rates are a real concern that we have, that—all of us at finance inven- tories, and I appreciate you being gentle to us when you consider raising those rates. Also, we need to reward people for going back to work. We need to get more people contributing to the economy, and we cannot have our citizens making rational economic decisions to stay on the sidelines of this booming economy because our government is pay- ing them to do so. The Monetary Policy Report says that the labor force participa- tion, which we have talked about today, grew by only one-fourth of a percentage point since June even though there are 7.3 million job openings. VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 41 So my question to you is, are we creating an economy that en- courages people to sit in the dugout rather than get out and play the game? Mr. POWELL. Well, clearly, we have a problem with labor force participation, and I think there are a range of opinions and views and research about why that is. I do think there are some disincen- tives to work. For example, if you—it is not that our benefits are that generous, but it is in some cases you lose all of your benefits when you go back to work. And so it becomes a pay cut in effect even though the benefits themselves have lost value in real terms over time. So that is an important thing. I also think it is just—it is people with relatively low education and skills. It is a lot of young males. It is certainly opioids. Low labor force participation is a function of many things, but many things that I think would be able to be addressed by the kinds of things that Congress can do as opposed to what we can do. We can run a strong labor economy, and I think we have that now, but to sustain that over time it needs more active measures. Mr. WILLIAMS. Well, I can tell you as an employer, we are look- ing for people to work. There is no question about it. Mr. POWELL. Yes. Mr. WILLIAMS. Next question, it seems like some of my col- leagues on the committee believe that banks bringing in more prof- its is a bad thing. Well, just because we can’t turn a profit up here in this business, it doesn’t mean that the private industry has to suffer along with us. When a bank is more profitable, there is more money to lend to small businesses like me and hire more people like we do and ulti- mately grow our nation’s GDP. We have a slide that keeps popping up there that says record profits for banks, so I personally think that is a good slide. We should show that more. So, Chairman Powell, do you believe that a sector’s profitability should be used as justification for more regulation? Mr. POWELL. I think it is important for businesses to be profit- able. It is a good thing. And for banks it is how you accumulate capital. It is the reward for servicing your companies, your cus- tomers well. Mr. WILLIAMS. ‘‘Profit’’ is not a dirty word. It never has been. Next question, we need our economy to let the private sector con- tinue to build wealth for individuals. And the government—the people in government don’t understand the government can help create a job, but it is the private sector that creates net worth. And the Tax Cuts and Jobs Act took a big step in allowing businesses to keep more of their hard-earned money and invest it how they see fit. The other major step that was taken last Congress was the pas- sage of Senate bill 2155, which will continue to roll back the overly burdensome regulations that have been hurting small businesses and Main Street for years. They are finally seeing a little respite and they are able to do business. So do you believe the Federal Reserve has been coordinating ef- fectively with the other Federal regulators to implement this much- needed regulatory relief bill? VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 42 Mr. POWELL. I do. We are implementing it. We have a lot of re- sources, and there is a lot to do under S.2155, as you know, and as I mentioned yesterday, it is our highest priority. It is the biggest thing we are working on right now. Mr. WILLIAMS. Thank you for being here, and I yield back. Chairwoman WATERS. Thank you very much. And I am pleased you like our slide. The next person that we have up is the gentleman from Illinois, Mr. Garcia, for 5 minutes. Mr. GARCIA OF ILLINOIS. Thank you, Madam Chairwoman, and ladies and gentlemen of the committee. Chairman Powell, when you served as Governor overseeing the Reserve Banks, you sent the Reserve Banks an annual letter sug- gesting candidates from a range of labor and community groups. Why do you think it is that your suggestions have largely been ig- nored, and why is the Fed still sluggish in choosing and electing class B and C directors from backgrounds outside of business and the Wall Street community? Mr. POWELL. Actually, Congressman, I think we have made pret- ty good progress there. We now have, I guess, it is 24, I think, com- munity interest—community group people, and I think six of the Reserve Banks have a person from labor on the board. So we have made real progress there. And I think also, I think our record on diversity for the B and C directors is actually an excellent one and a record that I am proud of. In the last 5 or 6 years, we have really made quite big strides there. Mr. GARCIA OF ILLINOIS. Well, Chicago for one, I think, has been a leader in that regard. The Chicago Fed has one of the most di- verse boards—as I understand it, it is the only Reserve Bank to have one director from a labor background, one director from an academic background, and one director from a community organi- zation on its board. As a matter of fact, two women who happen to be African Amer- ican and one Latino comprise that diversity in Chicago. Have you spoken with anyone in Chicago at the Chicago Fed about how they have been able to surpass other Reserve Banks in racial and occu- pational diversity, and if so, what are the best practices that they have shared? Mr. POWELL. We have an office that deals with the Reserve Banks around this particular issue, and I think—I actually would say that the progress across the Reserve Banks has been quite broad. I know that the—the statistic you are referring to is includ- ing an academic as well, and there are not as many academics. Also with many labor people, you have to give up all political ac- tivity to go on our board. I think that is hard for a lot of senior labor people, so it is a challenge for us to find—still we do though and we focus very hard on doing that. So, yes, we talk to Chicago, but, I wouldn’t want to say the other Banks haven’t made good progress too. I believe they have. Mr. GARCIA OF ILLINOIS. Thank you. On the subject of mergers and market concentration, switching gears briefly, last year the Office of the Comptroller of the Cur- rency issued an advance notice of proposed rulemaking around the VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 43 Community Reinvestment Act. Fourteen state attorneys general, including the former Illinois attorney general, issued a public com- ment on the OCC’s proposal expressing concern that the proposal might soften the conditions under which a bank’s violations of con- sumer protection laws would cause it to be downgraded. According to the attorneys general, ‘‘Such a minor downgrade will not impact regulators’ review of their mergers and acquisi- tions, the only real stick for the CRA compliance.’’ Do you share the concern that these attorneys general express that the rare cir- cumstances where the Fed presently steps in to interfere in a merger might be undermined by the OCC’s proposal? Mr. POWELL. I wouldn’t want to comment on the OCC’s—on that proposal, but I will just say, we haven’t changed our policy on CRA and mergers. And it still is that we—it is one of the things we look at. And we want companies to have satisfactory or outstanding CRA ratios who are presenting merger applications. Mr. GARCIA OF ILLINOIS. On the merger review, is it correct that about 97 percent of all mergers are approved and that over the past decade approximately 450 such mergers have been approved? Do you expect that to rise even more so? Chairwoman WATERS. The gentleman’s time has expired. Mr. POWELL. May I respond, Madam Chairwoman? Chairwoman WATERS. Yes, you may. Mr. POWELL. Sorry. I have to look at the numbers. Many merger proposals are withdrawn when we raise questions about them. Most often, you don’t wind up actually turning down a proposal. People just withdraw it because they can see it is not going to be approved. And there is a fair amount of that. It is way more than 3 percent, I believe. Mr. GARCIA OF ILLINOIS. Do they withdraw because of CRA? Mr. POWELL. They withdraw because they know—yes, I mean, among other— Mr. GARCIA OF ILLINOIS. Compliance. Mr. POWELL. Well, they withdraw because they can see that this is either going to take a really long time or it is probably not going to be a successful effort. So—or for other reasons, but in any case, we haven’t changed our policy on CRA. Mr. GARCIA OF ILLINOIS. Thank you, Madam Chairwoman, for your indulgence. I yield back. Chairwoman WATERS. Thank you. The gentleman from Arkansas, Mr. Hill, is recognized for 5 min- utes. Mr. HILL. Chairman Powell, welcome back to the committee. We are delighted to have you here. Thank you for your steady hand on the tiller of monetary policy at the Fed, and we are grateful for all the time you spend on both sides of the Hill answering our ques- tions. I want to follow up on my friend from Kentucky, Mr. Barr’s, line of questioning on the balance sheet, and, again, just looking for some detail as you look at the normalization process. I noted that the balance sheet was down about $368 billion Janu- ary to January or about a 9 percent reduction. And if you think about the size of the economy and your comments that you have made about the future balance sheet size, it occurred to me that VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 44 if, just for discussion purposes, the Fed balance sheet was down at 10 percent of GDP, so $2 trillion in theory as opposed to the 6 or 7 percent it was before the financial crisis, that at this rate it would take about 5 years to normalize in that range. And as you began to think about the balance sheet, have you all—that would be about 16 years after the financial crisis that the balance sheet would be normalized. If you look at the rolling off of the portfolio, what range of years do you think it would reach? I know it is—I am looking for some range of the denominator. Mr. POWELL. So the level of demand for our liabilities, principally reserves and currency, but also the Treasury general account, which is a place where Treasury keeps cash, more cash than they used to, and also the designated financial market utilities keep their rainy day cash there. The demand for those liabilities is so much higher that we are actually not very far from the level of that demand. And our estimates of the demand, particularly for re- serves, among the large banking institutions have gone up quite a lot just over the course of the last couple of years. So in terms of years, I actually think we are going to be in a po- sition, we are working on a plan, in fact, to stop runoff later this year. We may still be a bit above equilibrium demand for reserves, but we are not looking to limit the growth of the other liabilities because we think they meet important demands from the public. Mr. HILL. So you are suggesting that sometime this year, on the asset side, you would stop letting the securities roll off? Mr. POWELL. That is right. And so that will be about 16, 17 per- cent of GDP, whereas it was 6 percent before. Mr. HILL. Yes. Mr. POWELL. And the difference really is currency is a bigger part of—currency as a percentage of GDP and the same thing with reserves. Mr. HILL. When you look at the composition, I know you have testified, and Vice Chairman Quarles has too, that you prefer a Treasury-only balance sheet, and you have heard discussions in this committee previously where we recognize in periods of crisis that the Fed might take other assets but that many of us believe they should have swapped those back out over at the Treasury so that the central bank only maintains a Treasury portfolio. Do you still hold that view? And what is your view of Mr. Quarles’ comments last week that he would look at limited sales of the CMBS portfolio? Mr. POWELL. We have said that we want primarily a Treasury balance sheet. We have also said that we hold the possibility out there that at some point—and this isn’t something we have de- cided. It is not something in the near term—we would do limited sales of MBS to hasten that process along. I think where we are with the balance sheet is we have a bunch of decisions to make, and the one on MBS sales is probably closer to the back of the line. Really we have to decide about the maturity composition and things like that. We will be working through that in a very careful way. Markets are sensitive to this so— Mr. HILL. Yes. I know the markets would certainly connect with those sale, and I think I would encourage that. VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 45 I want to switch gears and talk about another U.K. issue that is not Brexit, and that is the subject of open banking, the U.K.’s payment services directive, which is also termed informally as open banking. And I would like to get, if not your thoughts today, get your thoughts in writing about the promise of open banking as ben- efits for more competition. And this is where consumers have access to all their data, bro- kerage banking that they get to control. It is a way to have better data security and more consumer security. It has been required now of the major banks in the U.K. Are you familiar at all with that and— Mr. POWELL. I am not familiar with the U.K. aspect of it. I am familiar with the fact that it is a very interesting and important issue here. Mr. HILL. I think as we look at FinTech in our markets and as we look at ways to level the competitive playing field between the G-SIFIs and everybody else, this will be an emerging issue, and I would invite your comments in the future about that. Thank you. Mr. POWELL. Great. Thank you. Mr. HILL. I yield back. Chairwoman WATERS. Thank you. The gentleman from New York, Mr. Zeldin, is recognized for 5 minutes. Mr. ZELDIN. Thank you, Madam Chairwoman. And thank you to Chairman Powell. You have been a great re- source for—and very open and transparent for my inquiries re- cently, in my office, just a couple weeks back. And I just want to thank you for how available you are for concerns of this committee and Members of Congress. You have been great. I wanted to follow up on the 2016 heist of $81 million from Ban- gladesh’s central bank, which exploited vulnerabilities in the New York Fed’s fraud detection process. According to a 2016 investiga- tion, Reuters concluded that, ‘‘inertia and clumsiness at the New York Fed was a key factor in the theft of these funds.’’ I understand that the New York Fed established a hotline for global banks following the heist, but could you provide us with an update on additional measures the Fed has taken to rectify the problems identified in the Bangladesh case? And are you confident that the Fed would prevent any payments if a similar hack was at- tempted in the future? Mr. POWELL. I think the Fed—the New York Fed and central banks all over the world frankly were very struck by that event and have—and there have been actions at the international level to look at principles and things we can do. And so I think we have tried to harden our systems to that kind of a fraud, where someone actually gets control of another central bank and starts to—and is able to in effect pretend to be that cen- tral bank and try to withdraw dollars or—so I think we have worked hard on that problem. We have also tried to imagine other ways that the system can be invaded in that way. So it is some- thing we have put a lot of resources in. Mr. ZELDIN. Over the course of today’s hearing you have received a lot of questions, a lot of comments. Is there anything—I have VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 46 some available time left. Is there anything that you are looking to clear up with any available time or no? Mr. POWELL. I don’t think clear up, no— Mr. ZELDIN. Great. Well, thank you for— Mr. POWELL. I have an open microphone, you know, but— Chairwoman WATERS. Will the gentleman yield? Mr. ZELDIN. Madam Chairwoman? Chairwoman WATERS. Yes. If the gentleman will yield— Mr. ZELDIN. Yes, ma’am. Chairwoman WATERS. —I will help you to post more questions to the chairman. Would you ask him—well, I will ask him if you are yielding to me, if you will expound more on the stress test. It has come up and I alluded to it when I opened. And I am worried that what you are recommending will basically create the kind of transparency where you are giving banks the an- swers ahead of time. And that is not what was intended in Dodd- Frank. Would you help us with that? Mr. POWELL. Sure. We think stress testing is probably the most successful post-crisis regulatory innovation, and we absolutely in- tend to preserve stress testing as a key pillar of post-crisis regula- tion, especially for the very large financial institutions. I think we—the idea that we would give them our actual models is not a good idea for a couple of reasons: One, that really would be showing, in effect, giving away the test; but, in addition, I think it would create real incentives for banks to kind of stop thinking about the way—about risk on their own and kind of relying on our thinking about risk and our loss rate estimates. We want them to model their own risks and not use our models. And, of course, we want to check it with our models. So we have stopped way short of that. But we have provided more trans- parency and I think appropriately so. I think in—you know, in our system of government we owe a level of transparency to the public, and I think we have tried to strike the right balance. Mr. ZELDIN. Madam Chairwoman, kindly, if I could reclaim my time, I would like to yield to the ranking member, Mr. McHenry. Chairwoman WATERS. Thank you. Mr. MCHENRY. Thank you. Along the same lines, the living will process and the stress test process, I agree have had a beneficial impact. The complaint I have heard from those who have to submit to the stress test is they don’t get any feedback. It is pass or fail, everything is on the line, and they hear when the public hears, and they pass or don’t and that is all they hear. So what is the feedback you are giving them on this measure, to the chairwoman’s similar question? And in her view, you are less- ening the burden; in my view, you are better communicating with those people you are seeking to get information from. So how do you see that? Mr. POWELL. So, I guess, my sense was and I will go back to the office and look into this, but my sense was there is actually quite a lot of feedback, for example, at the staff level and also above the staff level. For example, if you have one particular business that is impor- tant to you, then we are going to look at the risk models and we VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 47 are going to be evaluating them and see that they are capturing evolving risks and that kind of thing. And a lot of that kind of thing comes out in the stress test and in our feedback. Mr. ZELDIN. I yield back. Chairwoman WATERS. Thank you. The gentleman’s time has ex- pired. The gentleman from Guam, Mr. San Nicolas, is recognized for 5 minutes. Mr. SAN NICOLAS. Thank you, Madam Chairwoman. And thank you, Chairman Powell, for being with us today. In a prior setting, I posited a question with respect to interest rate policy and how it can be applied to various size companies. And I want to, I guess, reinitiate the inquiry, but first begin by kind of laying the foundation for why I am posing the question. The Fed has a dual mandate to stabilize prices and provide for maximum employment. But when we pursue interest rate policy that applies across the board to all institutions equally, sometimes we may be carving into one at the expense of the other. For exam- ple, community banks and smaller financial institutions don’t have the same employment figures necessarily as those areas that are more commonly served by the ‘‘big banks.’’ In the more rural areas that are serviced by community banks, you will find that the unemployment figures are higher than they are when factored against the national average. On the other hand, when it comes to price stability and using interest rates to try and reduce the amount of capital in the economy, the big banks are the ones that are more pervasive in terms of the consumer credit that they issue on a net basis. And so if we were to, for example, raise rates to try and stabilize prices, that rate increase would apply to both community banks and big banks, thereby reducing the lendability of the community banks the same way that they would impact the bigger banks. But what that would do is it would exacerbate the employment cir- cumstances in the rural areas while also containing the prices on the big bank areas. And so my question that I posited in a prior setting that I would like to put on the record here today is whether or not the Fed would consider bifurcating interest rate policy to consider a dif- ferent interest rate policy with respect to community banks or smaller institutions and the areas they serve versus the larger in- stitutions and the more broad stroke that they have on the overall financial system? And just to kind of tie up my question, again, in our previous set- ting I mentioned that the contagion risks, the systemic risks that community banks pose are more diluted versus the systemic risk that our big banks present. And so that also just kind of puts into my mind the fact that an interest rate policy that looks at both service areas a little differently might actually help to not only im- prove employment numbers but to do so in rural areas that are dragging down the overall average and to do so in a way that may not necessarily impact pricing pressures because it is not an across- the-board rate policy. VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 48 So could you please share your thoughts on the idea of perhaps bifurcating interest rate policy between larger institutions and smaller institutions? Mr. POWELL. That is an interesting question. I think it would not, of course, be in keeping with the tradition of interest rates, which is our policy rate is, you know, it applies to the whole econ- omy, and we don’t get into distinguishing between different bor- rowers and that kind of thing. I wouldn’t want to see us going down that road. That is more for you to distinguish between dif- ferent entities under the law. But I think, again, I wouldn’t want to see us going down the road of raising rates, different amounts on different people and different sectors. I think the interest rate is a blunt tool. Remember that we are not elected. We are, you know, we have—we are not supposed to be—we are supposed to be with interest rates just operating at the national level and I think that is probably a healthy thing. Mr. SAN NICOLAS. I appreciate your feedback. But, when we get back to the question of the mandates of the Fed—and the man- dates are very clear: stabilize prices; and maximize employment. But if the variables that are impacting both are different with re- spect to the institution sizes and the interest rates as they apply to them, we may be unnecessarily impacting employment in pock- ets of the country by taking a broad stroke approach on interest rates with respect to the pursuit of price stability, for example. And so while I don’t encourage the Fed to necessarily pick and choose, if we were to have the Fed consider growing and evolving its mandate in a way that is using the available data that is out there to be able to target the employment areas that are typically more exacerbated in the community or rural bank places while also pursuing an interest rate policy of price stability that is more so impacted by the bigger banks, I think that that is something that will be worthy of consideration. So I just wanted to put it on the record. Thank you, Madam Chairwoman. And I yield back. Chairwoman WATERS. The gentleman from Georgia, Mr. Loudermilk, is recognized for 5 minutes. Mr. LOUDERMILK. Thank you, Madam Chairwoman. And thank you, Chairman Powell, for sitting through this again. I have several issues I want to touch on, but first of all, something you and I have spoken about privately and something that Mr. Luetkemeyer brought up, being CECL. I have emphasized my con- cern. He has expressed his concerns about the potential impact it would have on our economy. First of all, I appreciate the numbers that you brought forward to us, the strength of our economy, the incredible economic expansion and the long-term expansion we have seen. This is good news, good news for everybody in the coun- try in all demographics. We don’t want to do anything to suppress that at all. One of the grave concerns that the manufacturers have in my district, which was surprising to me as I met with them, and I asked their concerns, of course, trade is always a concern with them. But the number one concern was the lack of single-family homes, entry-level homes so that the large number of employees VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00052 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 49 they are bringing in have a place to buy, to enter into the housing market. So I would just reemphasize the concern that we have had as we would love to see an offset in capital requirements with CECL to make sure it doesn’t suppress this great economic gain that we have made. But to move onto some issues, as you and I have spoken, I have an IT background and I also represent Georgia, which contains about two-thirds of the payment processors across the nation. And so I know that the Fed is exploring the possibility of getting into the payment business and especially with the realtime payment network. My question, and I haven’t fully developed an opinion on this, but I am very hesitant whenever the Federal Government engages in any practice that competes with the private sector, my first question would be, if you do establish a realtime payments net- work, is it appropriate for you to continue serving as the regulator for the private sector with which you would be competing? Mr. POWELL. We do have some instances where we operate, for example, ACH and there is another ACH operator. I think though it is a fair question, and we do hold ourselves to a big standard in that. It is not a—by the way, it is not a payments network really. It is a settlement system. Really only the central bank can provide real, final settlement in immediately available funds. The private sector can provide that too to some, but it is actually on its own books. It is a little bit different approach. Mr. LOUDERMILK. Okay. And one of the things that you have in- dicated with the request for comment is that if you do implement the system, it would be fully compatible with the private sector networks. Mr. POWELL. Yes. Mr. LOUDERMILK. What have you done to ensure that this would be the case, that it would be fully compatible? Mr. POWELL. Well, we just will have to do that. That is an under- taking that we have made. And we haven’t decided to do this yet, so, but if we do it, it will absolutely be fully compatible. Mr. LOUDERMILK. Is there any thought, once you establish this, of eventually privatizing? Mr. POWELL. I hadn’t thought of that. Mr. LOUDERMILK. Okay. I am a big fan of privatization, and as Mr. Williams pointed out, you are a capitalist. I am a strong pro- ponent of the free market and competition, but also I am very hesi- tant when the government which regulates a certain area competes in it as well. One of the other areas I would like to ask you a question about, is first of all, I appreciate all the work that you have done in tai- loring the proposal for reasonable banks under S.2155. When will the Fed produce a rule on tailoring prudential regulations for U.S. subsidiaries of foreign-owned banks? Mr. POWELL. We are working on that, and I do think that is something we, I believe, expect to get done pretty shortly here. Mr. LOUDERMILK. Is there a reason why it has taken so long? VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 50 Mr. POWELL. It is just complicated, and we have—I think we have done a dozen rulemakings under S.2155. It is—there are just a lot of things in the law, but we are working on that one. Mr. LOUDERMILK. Okay. The end result, do you think it will be similar to the proposal for domestic regional banks? Mr. POWELL. Conceptually, we are trying to treat them similarly, yes. Mr. LOUDERMILK. Okay. Well, I encourage you to move forward as quickly as possible, but not to the point that we don’t have a good end product but also to keep our domestic banks in mind. The last question, just a little bit off the cuff, regarding cryptocurrency, I know the Securities and Exchange Commission is currently regulating it. Do you have any position or thoughts from a monetary policy standpoint on the impact of cryptocurrency? Mr. POWELL. From a monetary policy standpoint, the implica- tions are not large, certainly in the near term. People are not using cryptocurrencies in large size for payments, for example. It has really been more of a store of value for some, and you can see that it is highly volatile, so I think it is not attracting a lot of success there. We can talk about it more offline. Mr. LOUDERMILK. Okay. Thank you. Chairwoman WATERS. The gentleman’s time has expired. The gentleman from North Carolina, Mr. Budd, is recognized for 5 minutes. Mr. BUDD. Thank you, Madam Chairwoman. And, Chairman Powell, I appreciate you being here today, for your steady hand and your continued service, so, again, thank you. Back in 2017 the Treasury Department issued a series of reports. They had recommendations for streamlining and improving the regulation of the financial systems so that it creates maximum value for American businesses and consumers. While progress has been made on some of those recommendations, there are still some that even 18 months later, haven’t been implemented. An example of that would be a requirement that banks exchange margin on transactions between their own affiliates or the inter-af- filiate margin, I think it is called. It is a requirement that is not imposed over at the CFTC or by international regulators. According to a recent survey, this ties up about $40 billion in capital with no known benefit and it actually prevents banks from most efficiently managing risk in this area. Last November, Vice Chairman Quarles agreed that the regu- lators should prioritize this issue and that the agencies had the ability to move into compliance with the rest of the world on this. Can you describe the Fed’s plans to implement the Treasury’s rec- ommendation with this initial margin requirement, when it would be exempted and when we might expect to get some progress on this? Mr. POWELL. I know it is something we are working on, and I don’t have a date for you or really a result, but I can get back to you on that. Mr. BUDD. Do you have the sense that it is actually a priority? Mr. POWELL. Yes. But remember, with S.2155 we have a lot of priorities right now, and that is one which is certainly under ac- tive—it is being worked on actively, I know that. VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 51 Mr. BUDD. Thank you. I appreciate that. I want to switch over to CECL or the current expected credit loss rule, and ask a couple of questions on that. As currently struc- tured, a lot of us on both sides of the aisle think that CECL pre- vents or presents a major capital volatility risk affecting pricing and ability of lending for 30-year mortgages and to borrowers of lower quality credit, especially during downturns. Personally, I feel that it is pro-cyclical. There have been proposals made that before implementing this major accounting change, there should be a quantitative impact study conducted to look at these concerns. So I worry that this 3- year phase-in that the Federal Reserve recently finalized does not address this underlying pro-cyclicality issue. Do you see any harm in conducting such a study, this QIS? Mr. POWELL. You know what, I think we have—I can go back and look at that, but I think we don’t think it will have that effect but we are going to be watching very carefully— Mr. BUDD. So to do a study on it, would it be reasonable even to do a QIS? There are varying opinions among very respected peo- ple on this. So a QIS would be reasonable? Mr. POWELL. I would have to go back and talk to the group on this, but this is something we have been working on for 10 years. I think there has been a lot of thought that has gone into it. And I don’t have an answer for you on QIS but I can get that. Mr. BUDD. But as you stand right now, you don’t have any known harms that a study would do? Mr. POWELL. Well, I don’t sitting here today, but I don’t know how long it would take, and I am not sure what we have done on that front. I can check. Mr. BUDD. Sure. I would encourage us to do our homework as much as possible, including a QIS. Thank you. I want to go back briefly to international insurance regulation and your conversation with Congressman Duffy. You told Mr. Duffy that you wanted to negotiate something that ‘‘works for the U.S.’’ Thank you for that, by the way. This is still just a little bit ambiguous for a lot of us, but there are really only two possible outcomes that you could try to achieve, either we are trying to reach an agreement that will require the U.S. to adopt some specific changes to our system or we are trying to have the U.S. system achieve a formal mutual recognition that would require no changes to our system of insurance regulation. So do you have a preference which way are you headed, either we get mutually recognized as is, or are we going to force changes on the system? Mr. POWELL. I think, you know, we are not looking to change the fundamental nature of our insurance system. We think it works well. We are also looking to have an international agreement that works with our system. So I am not sure that exactly responds to your question, but we are certainly not looking to say, okay, we have negotiated this deal with this group abroad and we are going to come back and it sub- stantially changes our insurance regulation system. That is not going to happen. Mr. BUDD. So more of a mutual recognition, this is how it works? VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 52 Mr. POWELL. Yes, I don’t say that—there may be some things that we take on board which sound like good ideas. I don’t really know much about the details. But I know that we are in very, very close contact all the time with the State supervisors on this. We have had quite a lot of consult on this and— Chairwoman WATERS. The gentleman’s time has expired. Mr. BUDD. Chairman Powell, thank you. I yield back, Madam Chairwoman. Chairwoman WATERS. The gentlewoman from Ohio, Mrs. Beatty, is recognized for 5 minutes. Mrs. BEATTY. Thank you, Chairwoman Waters, and Ranking Member McHenry. And thank you, Chairman Powell, for being here today. You have had a lot of questions thrown at you from monetary and policy and banking and a whole host of things, so I am going to shift and talk about people for a little bit. I have two questions. The first question is going to be centered around the Federal Reserve’s bank board’s diversity, and the sec- ond is going to be about income equality and the wealth gap. So let me start by saying I want to draw your attention to a re- port from the Center for Popular Democracy’s Fed Up Campaign, which conducts an annual analysis of gender, racial, and occupa- tional diversity of the Federal Reserve. And, Madam Chairwoman, I would like to submit this for the record. Chairwoman WATERS. Without objection, it is so ordered. Mrs. BEATTY. The Federal Reserve Act, as you know, of 1913 in 12 USC 302 that class B and class C directors are to be selected to represent the public with, quote, due but not exclusively consid- eration to the interest of agriculture, commerce, industry, service, labor, and consumers, and without discrimination. However, the analysis done by this report suggests that the Fed- eral Reserve Banks around the country are not representative of the public at all. The report found, quote, that in 2019, among the 108 current Federal board directors, 70 percent—76 percent come from the banking or business sector, 74 percent are white, and 62 percent are male. Additionally, the report found that an overwhelming number of Federal Reserve Bank presidents are overwhelmingly white at 83 percent. The most troubling aspect of the report was what hap- pened just last year. In 2018, the incoming board of directors was comprised of 50 percent people of color, and 43 percent women. But in 2019 we backslid with incoming directors who were from 82 per- cent banking or business sectors, 75 percent white and 61 percent male. You have consistently committed to this committee that you are committed to diversity, of which I am very appreciative. And let me remind you of a quote that you gave: ‘‘We make better decisions when we have diverse voices around the tables, and that is some- thing we are very committed to at the Federal Reserve.’’ You prob- ably remember saying that. So do you have any thoughts on this report? Because I am con- cerned that we are losing momentum on this issue that was started by Janet Yellen, your predecessor. And I am thinking that I may VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00056 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 53 need to expand my legislation to include the ‘‘Beatty Rule’’ with the Federal Reserve, patterned after the Rooney Rule, which I am sure you are also familiar with, because we have had dialogues about it. Do you have any thoughts on that? And because my time is probably going to run out, I want you to also address, when asked about the challenges—you did a town- hall with regular people. I think it was teachers. And you cited widely shared prosperity and mobility, the opportunity to move from being born into a low quintal of wealth spectrum to the high- est. And so as Chair of the Subcommittee on Diversity and Inclusion, I am certainly interested in this and would like to know if you can elaborate on what you believe to be one of the top challenges this economy faces over the next decade as related to diversity and in- clusion? Mr. POWELL. Okay. Thank you. I think that my experience over my private sector career and public sector career has been that successful organizations value diversity, value inclusion, value freedom to speak, and those sorts of things. And that is certainly true at the Fed. I really do believe that we get better results to the extent we have diverse perspec- tives around the table. I feel strongly about that. I have also been involved in the selec- tion of Reserve Bank directors now really since I joined the Board in 2012, and I think that we have made very substantial progress there. And I am proud of the progress that we have made. I think if you look at the numbers over the last 5, 6, 7 years, the number of the diversity among B and C directors is actually higher than the numbers that you read from that report. Mrs. BEATTY. Let me interrupt you for one second. That is very true of Chicago, but then when you look at Dallas, it is the direct opposite. Mr. POWELL. I know the numbers at the aggregate level, I think, of the B and C directors that we currently have, 70 percent are di- verse in one dimension or another and 25 percent are African American. And these numbers have come way up from where they were 7 or 8 years ago. If I could just say a second on the Rooney Rule, we are way past the Rooney Rule. I have been involved in eight selection processes for Reserve Bank presidents and in every case we have had mul- tiple diverse candidates, racially diverse, gender diverse, all kinds of diversity. We—and Reserve Banks, you know, hire a national search firm and they go into that. Anyway, sorry. Mrs. BEATTY. We can talk later. My time is up. Chairwoman WATERS. The gentlelady’s time has expired. Chairman Powell has a hard stop at 1:00. We are going to get our last Member in, Mr. Davidson from Ohio. You are recognized for 5 minutes. Mr. DAVIDSON. Thank you, Madam Chairwoman. Chairman Powell, thank you for your testimony. And I know it has been a long stretch there at the microphone, so it is an honor to be able to get this question in and several hopefully. Really with great foresight, Congress has acted at times and sometimes not so much. One of the things Congress got right was VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00057 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 54 the Telecommunications Act of 1996. And the reality is, our econ- omy is so vibrant because it is fostered in an amazing amount of innovation. Incredibly with the internet, Congress had the foresight to say it is the policy of the United States to preserve the vibrant and com- petitive free market that presently exists for the internet and other interactive computer services unfettered by Federal or State regu- lation. Now, it wasn’t zero regulation. There was a framework for it, but it was fairly light touch. As we look at the token economy, tokenized assets and the crypto market, inherently people think of Bitcoin. They think of Bitcoin as the first website that you came across. You might like it, you might hate it, but it certainly didn’t represent the internet because it was a website. And Bitcoin doesn’t represent blockchain anymore than a website represents the internet. It is one use. But as our country has kind of been reluctant to provide any regulatory certainty, capital has fled the United States where this innovation initially was off to a good start for other pastures. Do you believe that regulatory cer- tainty could foster increased innovation in this market in the token economy? Mr. POWELL. I would want to understand that better, but, yes, that makes sense on its face to me. Mr. DAVIDSON. And when you look at consumer protection, for example, the SEC is focused on protecting the securities market. And the concern is, if everything looks like a security, there is a lack of certainty for investors. And so the Token Taxonomy Act, a bipartisan legislation, that would provide that certainty to say if it meets these criteria then it is not a security is one that we are cur- rently working on and hope to move through this committee in short order. Beyond that, obviously the scope of the Federal Reserve has a charter. And earlier in your testimony, you talked about 2 percent inflation as a target. Here in Congress, and around the country in certain sectors, people hear 2 percent plus or minus zero deviation, certainly no long-term deviation. Can you state that or confirm that it is a policy to target precisely 2 percent or to what extent is there some level of variance for higher or lower inflation? Mr. POWELL. Yes. We say that inflation—that our objective is 2 percent but it is a symmetric objective. Because, of course, in the nature of an economy, it is never—it will rarely be exactly 2.000 percent. It is going to be a little bit higher. It is going to be a little bit lower as economic activity fluctuates, as oil prices fluctuate and that sort of thing. Mr. DAVIDSON. Right. No, but what sort of time horizon do you look at that? Mr. POWELL. Well, one, it is symmetric in a sense that we are always going to be trying to get back to that. And these things don’t move super quickly, so we will be conducting monetary policy in a way that achieves both of our objectives. We also have our maximum employment objective, so— Mr. DAVIDSON. Right. And so in balance and maybe over a longer period than a quarter, for example? Mr. POWELL. Yes. Definitely over a longer period. VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00058 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI 55 Mr. DAVIDSON. Okay. And the last time we spoke, we finished talking about trade. And I think it is fitting we finish talking about trade today. Obviously, the United States has become really the world’s land of opportunity. We are a great destination for good services, capital, intellectual property, labor, and including people. But trade has definitely been a high point for this current Ad- ministration. We have strengthened our trade deals. We are work- ing to strengthen our trade deal with China as we speak, but there has been a lot of consternation about tariffs. Historically, Congress has overall authority for trade and they have delegated that to the presidency. My concern is, as we look at 232 tariffs on steel and aluminum, for example, while U.S. steel companies have benefited from higher tariffs with greater profits, their share prices have been destroyed. And part of that is there is no certainty as to how long this tariff is going to last. If we passed a law, whether it was a 25 percent tariff or a 200 percent tariff or a zero tariff, would the certainty provide better outcomes for the market? Mr. POWELL. I think certainty in these matters would be helpful. Mr. DAVIDSON. So toward that end, we are working on the Global Trade Accountability Act. My hope is that it can be bipartisan and Congress can eventually lock in our rates and the trade deals that do make trade great again. Thank you, and my time has expired. I yield back. I appreciate your testimony. Chairwoman WATERS. Thank you very much, Chairman Powell. I would like to thank you for your testimony today. The Chair notes that some Members may have additional ques- tions for this witness, which they may wish to submit in writing. Without objection, the hearing record will remain open for 5 legis- lative days for Members to submit written questions to this witness and to place his responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous mate- rials to the Chair for inclusion in the record. I will ask our witness to please respond as promptly as you are able. And with that, this hearing is adjourned. [Whereupon, at 1:05 p.m., the hearing was adjourned.] VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00059 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00060 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI A P P E N D I X February 27, 2019 (57) VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00061 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 58 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00062 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 100.49653 ereh 1 oilof tesffo tresnI For release at 8:30 a.m. EST February 27, 2019 Statement by Jerome H. Powell Chainnan Board of Governors of the Federal Reserve System before the Committee on Financial Services U.S. House of Representatives February 27. 2019 59 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00063 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 200.49653 ereh 2 oilof tesffo tresnI Good morning. Chairwoman Waters. Ranking Member McHenry, 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 tor monetary policy--maximum employment and price stability. We arc 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 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 actions and can hold us accountable. We are always grateful for opportunities, such as today's hearing, to demonstrate the Fed's deep commitment to transparency and accountabi Ii ty. Today I will review the current economic situation and outlook before turning to monetary policy. I will also describe several recent improvements to our communications practices to enhance our transparency. 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 employment 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 lollowing 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, optimism among households and businesses, 60 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00064 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 300.49653 ereh 3 oilof tesffo tresnI -2- 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 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 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 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 intlation, as measured by the 12-month change in the price index for personal consumption expenditures (PCE), is estimated to have been I. 7 percent in December, held down by recent declines in energy prices. Core PCE intlation. which excludes 61 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00065 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 400.49653 ereh 4 oilof tesffo tresnI -3 - 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 colleagues 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 declines in energy prices will likely push headline inflation further below the Federal Open Market Committee's (FOMC) longer-run goal of2 percent for a time, but aside from those transitory effects, we expect that in nation will run close to 2 percent. While we view cutTent 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 became more volatile toward year-end, and financial conditions are now less supportive of growth than they were earlier last year. Growth has slowed in some major foreign economies, particularly China and Europe. 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 impot1ant longer-run challenges. For example, productivity 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 f(,rce 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, addressing these pressing issues could contribute greatly to the longer-run health and vitality of the U.S. economy. 62 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00066 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 500.49653 ereh 5 oilof tesffo tresnI -4- Monetary Policy Over the second half of 2018, as the labor market kept strengthening and economic activity continued to expand strongly, the FOMC gradually moved interest rates toward levels that are more nonnal for a bealthy 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 cun·ent range at 2-1/4 to 2-l/2 percent. 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 developments and assessing their implications for the outlook. In January, with inflation pressures muted, the FOMC determined that the cumulative effects of these developments, along with ongoing government policy 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 inf(lrmation as economic conditions and the outlook evolve. For guideposts on appropriate policy, the FOMC routinely looks at monetary policy rules that recommend a level f(lr the federal funds rate based on measures of inflation and the cyclical position of the U.S. economy. The February lvfonetmy PoliCJ' 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. however, 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. 63 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00067 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 600.49653 ereh 6 oilof tesffo tresnI -5 - We have also continued to gradually shrink the size of our balance sheet by reducing our holdings of Treasury and agency securities. The Federal Reserve's total assets declined about $310 billion since the middle of last year and currently stand at close to $4.0 trillion. Relative to their peak level in2014. 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 cun·ent 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 arc 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 dctennined by the demand for Federal Reserve liabilities such as currency and bank reserves. The February 1\Ionetary 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, Financial Stability Report, shares our assessment of the resilience of the U.S. financial system, and the second, Supervision and Ref!:ulation 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 64 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00068 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 700.49653 ereh 7 oilof tesffo tresnI -6- comprehensive review of the strategies, tools, and communications practices we usc 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 provides further discussion of these initiatives. Thank you. I am happy to respond to questions. 65 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00069 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 800.49653 ereh 8 oilof tesffo tresnI FEBRUARY 2019 DATA BRIEF MORE PUBLICLY REPRESENTATIVE FED: ', I FJfiCfJNPOMy b~~~t~~CY CENJi: 66 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00070 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 900.49653 ereh 9 oilof tesffo tresnI ACKNOWLEDGMENTS Th1s report was wntten and researched by Maggie Corser. It was edited by Emily Gordon, and Jordan Haedtler, Ruben Lucio, and Shawn Sebastian. ABOUT THE CO.ccNc:.TccR:ciB:oU:.:.T_cOccR"'S------------ Fed Up is a coalition of community organizat1ons and labor unions across the country, calling on the Federal Reserve to reform its governance and adopt policies that build a strong economy for the American public. The Fed can keep interest rates low, give the economy a fair chance to recover, and pnorit1ze genuine full employment and rising wages. www.ThePeop!esFed.org The Center for Popular Democracy (CPO! works to create equity, opportunity and a dynamic democracy in partnership with high-impact base-building organizations, organizing alliances, and progressive unions. CPO strengthens our collective capacity to envis1on and win an innovative pro-worker, pro~immigrant. racial and economic justice agenda. www.populardemocracy.org 67 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00071 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 010.49653 ereh 01 oilof tesffo tresnI 2019 Diversity Analysis of Federal Reserve Bank Directors 2019 Data Brief The Center for Popular Democracy's Fed Up Campaign conducts an annual analysis of the gender, racial, and occupational diversity of the Federal Reserve system's leadership. This is designed to gauge progress on the Federal Reserve's public commitments to diversity and highlight areas for continued growth in the coming year. The 2019 analysis reveals a shocking lack of progress in diversity among the nation's most powerful monetary pollcymakers. While some Federal Reserve Banks have made modest progress in gender and racial diversity, board members from the business and banking sectors continue to dominate leadership positions. In 2019, among the 108 current Fed Board Directors: 76% come from the banking or business sectors. 74% are white, and 62% are male. These diversity issues also extend to Federal Reserve Bank Presidents who are overwhelmingly (83%1 white and are most commonly recruited from with the Federal Reserve's existing leadership or the finance sector. Without diverse perspectives, the Federal Reserve's failure to represent the interests of the American people will persist. In 2019, policymakers and advocates continue to call on the Federal Reserve to actively pursue greater diversity at all levels of its leadership. Despite the Federal Reserve Act's requirement that the Federal Reserve system leadership "represent the public," and draw from the interests of "agriculture, commerce, industry, services, labor, and consumers," the Federal Reserve (the Fed) has consistently failed to ensure that Reserve Bank directors reflect the rich diversity of our economy.' In 2016 the Fed Up campaign published "To Represent the Public: The Federal Reserve's Continued Failure to Represent the American People." The report's diversity findings sparked a public outcry and led to a coordinated campaign among community groups, and allied think tanks, calling on the Federal Reserve to diversify its leadership.' In the face of sustained public pressure, and repeated calls from Congress and advocates to appoint a leadership reflecting the Amencan people, the Fed leadership signaled it would take steps to improve. At the time; Fed Chair Janet Yellen publicly stated: "I am committed to improving diversity throughout our organization. Improving diversity requires effort and constant focus. We will continue 68 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00072 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 110.49653 ereh 11 oilof tesffo tresnI The Urgent Need for a More Pub!idy Representative Fed working hard to achieve this goal."' In 2017 the incoming Fed Chair Jerome Powell pledged to carry on Yellen's commitment: "We make better decisions when we have diverse voices around the table, and that's something we're very committed to at the Federal Reserve."' The Fed's public commitment to develop a more diverse leadership was tested in 2018 when the New York Federal Reserve Bank appointed a new president The New York Fed plays an especially critical role given its close proximity to Wall Street and central role in formulating the Fed's response to the financial crisis. When asked by Representative Maxine Waters what Jerome Powell would do to ensure the New York Fed considered diverse candidates In its President search process, he said "We will always have diverse candidates. They will always have a fair shot I cannot in any individual case guarantee that we will have a diverse outcome.''' Ultimately, John C. Williams, a white man who spent his career at the Fed was appointed President of the New York Federal Reserve Bank.' Immediately before his appointment to the New York Fed, Williams was the San Francisco Reserve Bank President. This left a presidential vacancy at the San Francisco Fed which was ultimately filled by Mary Daly, a white woman who spent her career at the Fed.7 When the search committees in New York and San Francisco invited Fed Up to discuss presidential vacancies in 2018, Fed Up presented them with a diverse and qualified list of candidates. These candidates: reflected gender, racial, and occupational diversity; had demonstrated independence from the financial sector; and had a proven commitment to the Fed's full employment mandate.' In addition, each candidate put forward by Fed Up was qualified by the standards laid out by the search committee. In New York, none of Fed Up's proposed candidates were ever contacted. In San Francisco, these candidates were not seriously considered, and the search committee ultimately chose longtime Fed insiders for both positions. 69 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00073 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 210.49653 ereh 21 oilof tesffo tresnI 2019 Diversity Analysis of Federal Reserve Bank Directors Data shows the Federal Reserve is on the incremental progress it made on in 2018. The Federal Reserve Banks appointed 28 new directors to the boards of the twelve Reserve Banks in 2019. Indisputably, the Federal Reserve Banks failed to appoint a diverse group of incoming directors, This year's incoming Fed directors are: 82% Banking/Business 75% White 61% Male In contrast the 2018 incoming directors were 50% people of color and 43% women.' There is deeply inadequate gender or racial diversity among these 2019 incoming directors which indicates the Fed 281ncoming Fed Directors in 2019 is backsliding on its diversity commitments. As in previous years, directors from the banking and business sectors continue to dominate. The federal Reserve Overall, the composition of the 2019 board of directors of the twelve Federal Reserve Banks remains disproportionately white, male, and from banking and business backgrounds. The 108 current board directors are: 76% Banking or Business 74% White 62% Male These numbers stand in stark contrast to the American public. Far from the 76% of Fed directors in banking of business, only 18% of our economy is comprised of people w1th business and financial Total lOS Fed Directors services jobs.10 Despite men making up 49% of the US population, they are overrepresented in Fed leadership as 62% of all directors.11 70 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00074 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 310.49653 ereh 31 oilof tesffo tresnI The Urgent Need for a More Publicly Representative Fed While this change is wholly inadequate, it is worth noting that public demands for a more diverse leadership have yielded some incremental progress since 2013. In 2016, Fed Up recommended that each Reserve Bank board include at least one director from a labor background, one from an academic background, and one from a non-profit/civic organization background. Although the twelve Reserve Banks are still a long way from implementing that recommendation, the number of Reserve Banks with a director from the labor sector has increased from JUSt two in 2016 to five {or nearly halt of the Reserve Banks) in 2019. The most diverse Reserve Bank board in the country, the Chicago Fed, has fulfilled Fed Up's recommendation. The Chicago Fed currently has a d~rector from labor (Jorge Ramirez), an academic !Susan Collins), and a director from a community organization (Helene Gayle) all serving on the board." When comparing diversity data from 2013 (the first year Fed Up began tracking these numbers), it's clear that the Fed's pace of change is entirely too slow. In 2013, 85% of Fed directors came from banking and business sectors. The last six years saw a 10% increase in directors from non-profit, academia, and labor sectors, but even with this change, financial and business sectors continue to dominate leadership positions at 76%. In 2013, only 12 of the 105 directors were African American-" Today that number has increased to 22 African American directors out of 108. Sector 37% Financial 38% 111111111111 Business 48% 38% Non-Profit Academia Public Service !I 2013 labor 71 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00075 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 410.49653 ereh 41 oilof tesffo tresnI 2019 Diversity Analysis of Federal Reserve Bank Directors Gender 74% Men 62% 1112013 Women 2019 70 80 Race 83% 2013 2019 100 72 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00076 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 510.49653 ereh 51 oilof tesffo tresnI The Urgent Need for a More Publicly Representative Fed The diversity data for each Reserve Bank's board of directors highlights that some Reserve Banks have farther to go than others. Progress is uneven with many Reserve Banks improving in one area of diversity but not improving in others. Chicago currently has the most diverse Federal Reserve Bank board of directors: 45% of directors come from labor, academic, or non-profit sectors. 44% of directors are African American or Latino. Even as the most diverse Reserve Bank, Chicago still must improve its gender diversity. Women make up only 33% of directors in 2019, despite women making up more than 50% of the population in the Chicago Fed's region-" Dallas is the least diverse Bank in the Federal Reserve system. The Dallas Fed's board of directors are: 89% Banking/Business 78% White 78% Male In 2019 the Dallas Fed added another director from the business sector which further decreased its diversity.1!l Philadelphia and Saint louis are tied for least progress in 2019. Both the Philadelphia and St. Louis Federal Reserve Banks made no improvements in gender, racial, or occupational diversity this year. 73 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00077 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 610.49653 ereh 61 oilof tesffo tresnI 2019 Diversity Analysis of Federal Reserve Bank Directors 2018 2019 55% Banking/Business 66% Banking/Business 67% White 67% White 78% Male 67% Male Boston added one female director but made no improvements in racial diversity. The Reserve Bank increased its number of directors from the banking and business sectors. 2018 2019 66% Banking/Business 66% Banking/Business 67% White 56% White 78% Male 67% Male New York added one director of color but made no improvements to gender or occupational diversity. 2018 2019 66% Banking/Business 66% Banking/Business 78% White 78% White 56% Male 56% Male Philadelphia made no improvements in gender, racial, or occupational diversity. 2018 2019 89% Banking/Business 89% Banking/Business 67% White 67% White 78% Male 67% Male Cleveland added one female director but made no improvements in racial or occupational diversity, 2018 2019 77% Banking/Business 66% Banking/Business 89% White 89% White 56% Male 56% Male Richmond added one director from the non-profit sector but made no improvements in racial or gender diversity, 74 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00078 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 710.49653 ereh 71 oilof tesffo tresnI The Urgent Need for a More Publicly Representative Fed 2018 2019 100% Banking/Business 89% Banking/Business 89% White 78% White 78% Male 56% Male Atlanta made modest improvements in racial diversity and solid progress on gender diversity. 2018 2019 66% Banking/Business 55% Banking/Business 56% White *'56% White '$ 78% Male 67% Male Chicago made progress on gender and occupational diversity. 2018 2019 88% Banking/Business 88% Banking/Business 78% White 89% White 44% Male 44% Male St. Louis made no improvements in racial, gender, or occupational diversity. 2018 2019 76% Banking/Business 77% Banking/Business 88% White 89% White 50% Male 44% Male Minneapolis added two female directors but made no progress on racial or occupational diversity.16 2018 2019 77% Banking/Business 66% Banking/Business 78% White 67% White 67% Male 67% Male Kansas City made improvements in racial and occupational diversity but no improvements in gender diversity. 75 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00079 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 810.49653 ereh 81 oilof tesffo tresnI 2019 Diversity Analysis of Federal Reserve Bank Director<.> 2018 2019 77% Banking/Business 89% Banking/Business "78% White 78% White 78% Male 78% Male Dallas added another director from the business sector and made no improvements in racial and gender diversity. 2018 2019 100% Banking/Business 89% Banking/Business 78% White 78% White 78% Male 78% Male San Francisco added one director from the labor sector but made no improvements in racial or gender diversity. The data demonstrates that progress has been slow and uneven. As with previous years, the Federal Reserve Banks also missed a key opportunity to improve diversity by renewing directors' terms. Every year, each of the twelve Regional Reserve Banks have directors whose terms are set to expireY In 2019, the 19 directors whose terms were renewed are 68% white, 53% male, and 52% come from the banking or business sectors. Given the current diversity challenges at the Federal Reserve, when Banks choose to renew directors' terms it often maintains the status quo at each Bank. Moving forward, the Federal Reserve must take advantage of terms ending in order to appoint new directors and ensure a more diverse leadership. 76 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00080 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 910.49653 ereh 91 oilof tesffo tresnI The Urgent Need for a More Pub!ic!y Representative Fed The Presidents of the twelve federal Reserve Banks are white and male. In 2019 the twelve Fed Bank Presidents are: 83% White 75% Male In 2017 the Federal Reserve made history when it appointed Dr. Raphael W. Bostic, a prominent African American economist and academic, to lead the Atlanta Federal Reserve. In the history of the Federal Reserve System there had been 134 Federal Reserve Bank Presidents. Previously, not one of those Presidents was African American or Latino.18 Three newly appointed Federal Reserve Presidents started their terms in 2018: John C. Williams, New York Fed President; Tom Barkin, Richmond Fed President; and Mary Daly, San Francisco Fed President. All three of these Presidents are white and two are male. Barkin comes from the business sector while Daly and Williams both had 20+ year tenures at the Fed prior to their appointments. 54% of current Presidents are Fed insiders who spent their careers at the Federal Reserve. In fact, these seven individuals spent a combined 158 years at the Fed before their appointments as Fed Presidents. 23% of Presidents come from the financ1al or business sectors In fact, 3 of the 12 current Fed Presidents have strong ties to Goldman Sachs. 23% of Presidents come from academia 77 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00081 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 020.49653 ereh 02 oilof tesffo tresnI 2019 Diversity Analysis of Federal Reserve Bank Directors In light of the fact that the Federal Reserve has made minimal progress towards their diversity goals, Fed Up's recommendations from 2018 continue to apply. The Federal Reserve Chair, Board of Governors, and leadership at the twelve Reserve Banks must take proactive steps to: Appoint new directors who improve the gender and racial diversity of the board of directors at the twelve Federal Reserve Banks. Fnd the outsized representation and influence of the bankmg and business sectors among the twelve Reserve Bank boards of directors. Improve the occupational diversity of the boards by promoting directors with non-profit, academic, and labor backgrounds. Ensure a transparent and publicly inclusive Federal Reserve Bank presidential selection process. This includes releasing: a public time!ine, list of criteria, list of candidates, and opportunities for public input via town halls or forums. When people of color, women, labor representatives, consumer advocates, non-profit professionals, community activists, and academics are underrepresented within the Fed's leadership, policymaking at the Federal Reserve skews towards the interests of bankers and businesspeople. Moving forward, the Fed must be led by a diverse leadership that includes people of color, women, and people from a range of sectors and backgrounds. This will help ensure that the Fed's policies are maximally inclusive and truly take into consideration economic conditions of all regions and communities. Methodology: This report draws on publicly available information to determine sector and demographic backgrounds of each incoming Federal Reserve board of director and President. The Federal Reserve Board of Governors and the twelve Federal Reserve Banks are welcome to provide the Fed Up Campaign with full diversity disclosures, in the event these data require any updates or additions. 78 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00082 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 120.49653 ereh 12 oilof tesffo tresnI The Urgent Need for a More Publidy Representative Fed "The f·ederal Reserve Act of 1913," https://www 10 U.S. Bureau of Labor Statistics, "Employment by mujor federalreserve.gov/oboutthefed/fract.htm indusby sectOI" Table ?.1 Employment by maJOr 1ndustry sector, 2006,2016, and projected 2026," October 2il, 2017. Center for Populilr Democr<Jcy "'To Represent the Public' httrs:/,/www.bls.gov/emp/lables/employment,by-major· The Federal Reserve's Contmued Failure to Represent the industry-sector.htm Amencan People" February 2016, https//popu!ardemocracy. org/sltes/dcf<lult/fi!es/Fed%20Up.pdf 11 U.S. Census Bureau, "QuickFacts: United States," July 1, 2017, https.//www.census.gov/quick!acts/factjtab!e/US/ Remarks by Janet L. Yellen, Chair Board of Governors of the PST04:)2r! Federal Reserve System, at "Banking and the Econorny: A Forum for Minonty Bankers" Federal Rt'Serve Bank of Kansas 12 Center for Popular Democracv. "The Federal Reserve: Real City, September 29,2016, https://www_federwlrescrve_ gov/ a'ld Pl'rCC'Ived Conflicts nf !ntrrbt and a f)ath r orward," June newseve nts/s peech/v elle n 2 016 09 29a. pd f 20,2016, https//populardemocracy.org/ncws/publlcations/ fede"al-reserve-real-and-percelved-conflicts-intcrest-and "Jerome Powell: I'm a big supporter of diversity," path-forward CNBC, November 28, 2017, https://www.cnbc.com/ v1deo/ 2017/11/ 28/Jerome· powell-1m -a-big-supporter- of· l3 in 2013 there were three vacant red dtrector positions diversity.html bringing the total number to 105 Joshua Zumbrun, "Dtversity at the Fed," WaH Street Journal, 1:1 U.S. Census Bureau, "QuiCkFacts: !l!ino1s," July l. 2018. r ebruary 27. 2018, https //www.wsj.com/livecoverage/fed https://www.census.gov/quickfacts/il. Note: the ChiCago jefOme· powell-february-2018-testimony/card/151971) 60511-. Fed's 7th District covers iowa and most of Illinois, Indiana, Michigan and Wisconsm. For the purpose of this Federal Reserve Bank of New York, "John C. Williams Named report, Illinois (v,·hlch is the lootion of the Chicago fed's President und CEO of New York Fed," Press Release, Apn! headquarters) was used to determine the overall percent of 3, )018, https·;;www.newyorkfed.org/newsevents/news/ women m the region about thefed/ 2 018/o a 18 04 0 3 15 While San Francisco, like Dallas. is 89% banking/busmess, Federal Reserve Bank of San Francisco, "Mary C. Daly 78% white, and 78% male, m 2019 the San Francisco fed Named Federal Reserve Bank of San Francisco Prestdent added one D1rector w1th a labor background which shghtly and Chief Executive Officer," Press Release, Septernber 14, Improved tts diversity numbers. Dallas, on the other hand, 2018, https.//www.frbsf.org/our-districtjpress/news becamr less diverse after 1ts 2019 appointments. releases/2018/mary ·c ·daly· named-ledera l-reserve-bank-of sart-lr anclsco-rn'Sidt'nl-and-chief-c'xcnJ!ivc-officer/ . 16 Note: Mmneapolis had one vacant director position in 2018 which acc-ounts lor the 1 percentage rumt dlfiPrcntc betwt~en "Fed Ur Coa!it1on Advocates for Candidates from Diverse 2018 and 2019 Backgrounds for San Franc1sco Pres1dent," Center lor Porular Democracy, July 18,2018, https//populardemocracy_org/ 17 Federal Reserve Bank directors serve three-year terms, news· and· publications/fed-coal1t1on, advoc atE>s·candidate<;· renewable once for a maximum of SIX years of service "New York Backlash Aga1nst New York 18 Aaron Klein" fhe f ~·d's striking lacK of cilvcr~1ty and why Jt F0d Pre<;idpntitll Selection Process," C0nter for Popular matters" Brooking<; lnst1tute, August 1. 2016, https://www Democracy. March 28, 2018, https.//populardemocracy.org/ brookJngs.rdu/opinions/the·fcds"sfrik!n;•~-lack-of-diversity­ news"and-publications/new-ymk-elec-teds"fcd·adv!sers~ and-why-it-matters/ Join· bJcklash ·against-new-york-fed· pres1dent1al "Working People Still Need a VoiCe at the Fed 2018 Diversity Analysis of Federal Reserve Bank Directors," Center for Popubr Democracy, ~ebruary 2018. http.// populardemocrary org/SI Lt:esjdef ault/files/f edUp-D:vNsity~ Dvta·Brief WEB-Output 3 pd!, 3 79 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00083 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 220.49653 ereh 22 oilof tesffo tresnI So much for the Rcpuhlican tax cut as a game changer-the inu-stment hnom i>; liuJing fas.t-Market Watch Opinion: So much for the Republican tax cut as a game changer- the investment boom is fading fast Published Jan 19, 2019 9:45a.m. ET The price of oil has a bigger impact on capital expenditures than the corporate tax rate Spot oil price, '!f>/barref (purple, left axis) change (green, right axis) EfAIBEA!Haver Analyt!CS With oil pnces softening. will business mvestment weaken as well? The inveStment boom that began in 2016 is fading faSt, quashing the never~reallstic hopes of Republicans that the corporate tax cut had permanently transformed the economy for the better. There's good reason to believe that the tax cut had almost no impact on business investment Rather, it was Slrong demand. especially for oil. that encouraged businesses to expand capacity. Now investment is softening along \Nith aggregate demand. A year ago, .FS.ero~A.Yif'd:~_d_&.tl!J.g_that their big tax cut for businesses would create a virtuous cycle of higher fixed investment, leading to higher growth rates lasting for years. A month ago. \M1ite House economist Kevin companies were investmg more in equipment, software and facilities, enough to propel U.S. potential gro\lllth from an anemic 2% to a steHar 3% or more. https://www.markctwatch.comi. .. o-mnch-f(lr-thc-rcpuh!ican-tax-cut-as-a-game-changcr-lhc-im cstmcnt-hoom-is.-filding.-fast-20 19-0 l-18/pr!ntf2/27/20 19 2:15:30 PM! 80 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00084 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 320.49653 ereh 32 oilof tesffo tresnI So much fN the Republican tax cut as a game changer the investment bnom is fading fast-Markt.:t\Vatch ,0,;U!Q_QfisLrus.._ Hassett was too cheery. Now, hopes that the inveStment boom would continue into 2019 are in tatters, victim to four factors that are dragging on the economy: reduced fiscal stimulus (inc!ud1ng the shutdown), a weakening global economy. the uncertainty of Donald Trump's trade policy and soft oil prices. Capex plans scaled back Those four interrelated trends are weighing on aggregate demand in the U.S. and global economies, forcing companies to scale back their investment plans. It's already visible in the data and in surveys of business expectations. It's important to define terms from the start. V'vhen economists talk about uinveSlment," they aren't talking about putting money into the stock market They are talking about hWII.9JD&1.9Jill DJa!D1Q]JiUJQJJLQ::l~Jr.1LY.P'.Sl~$~E1:? that will continue to create value for years There are three broad dasses of fixed inves1rnent structures, such as factories, oil wells and housing; equipment. such as machinery. airplanes and computers; and intellectual property, such as softvvare, new drugs. and blockbuster Hollywood movies. Businesses inveSt when they believe demand for their products will rise. Right now, fewer companies are confident of that future revenue. MOS! of the leading indicators of demand are slumping as the new year begins. Surveys of manufacturing executives show that the giddy optimism of early 2018 has turned to caution. The new orders component of the ISM manufacturing index, for instance, Qi&.LQg.e.d..1.1_QQiD1$_in December. Company guidance, U.S. regional surveys and global purchasing managers surveys are telling the same story: Companies are scaling back their plans for capital spending. Economists at Morgan Stanley say their capex plans index (which is based on the regional Fed surveys of capital~spending expectations} has fallen in eight of the paSt n1ne months to the lowest level in a year. 'The continued softening in the index indicates restrained capita! spending activity in 2019 as the shine of tax Stimulus fades, and slower global growth, uncertainty around trade policy, and tighter financial conditions weigh on inveSlment plans," said Morgan Stanley economist Molly \t\klarton in a note to clients. Hard data also show that capital spending is softening. Real business investment surged at a 10% annual pace in the firSt half of the year, but slowed to 2.5% in the third quarter. Core capital equipment orders and shipments slowed through November, and pnvate nonresidential construction spending has also weakened. Unfortunately, the government shutdo\Nll means this key data isn't being reported or collected. It's never a good time to fly blind. doubly so now. Impact of oil prices There's something else going on besides weak aggregate demand: The impact of oil prices on U.S. inveStment is underappreciated. https:l/www.markctwatch.com/. .. o-much-for-thc-repuh!ican-fax-cut-as-a-gamc-cllangcr-thc-invcstment-bnom-is-Hlding-fast-20!9-0l-18!print[2!27/2019 2:15:30 PMJ 81 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00085 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 420.49653 ereh 42 oilof tesffo tresnI So much !Or the Republican tax cut as a game changer.,_ the investment boom is fading fast-Market Watch lt used to be that changes in oil prices mainly affected consumption -lower prices boosted the economy by making energy consumers richer. while higher prices frequently led to recessions But since the fracking revolution earlier in this decade, changes in oil prices have become highly correlated Wlth changes in investment Traditional oil production is based on long-fasting projects requiring huge inveStments of hundreds of millions of dollars< The analysis of the profitability of, say, an offshore drilling project doesn't depend on spot crude oil prices ~CJ,.GB but on prices expected for the duration of the project's llfe. Temporary fluctuations in oil prices won't affect this kind of investment But produclng oil from shale is different in an important way: The investments are much smaller (less than $10 ml!!ion per well), prcx:luction can ramp up quick1y, and the productive life of any well is much shorter. This means the profitability of inveSting in a shale-fracking project depends on expected oil prices over the next few years. That creates a lot of volatillty in oil-field investment High prices attract a lot of investment, but \\!hen prices fall, as they did in 2014 and 2015, inveStment collapses. The dip in U.S. growth rates in 2015 and 2016 was largely due to the impact of lower oil prices on business investment Oil accounted for all growth After a study of county-level economic data, Seth Carpenter, chief U.S. economist at UBS Securities, concluded that the increase in oil prices vvas responsible for much of the rebound in fixed inveStment in 2017, including inveStments in drilling equipment, Storage tanks, pipes, machinery, vehicles. worker housing, and the equipment needed to supply the required sand and water. Alexander Amon of the Penn Vvharton Budget Model eStimated in a blog poSt title!t~:Ille...2rLc.e..p.f.QiLLs.l:lo.Yx..a1S.e.:LD!iY.eLQf '"~~""=s.c"~"'·""JlL that firmer oil prices accounted for a!moSl an of the growth in investment in 2018. Unfortunately, oil prices have fallen again. OH prices, which were near $70 in October, fell to $43 in mid-December and are now around $52. That's right at the midpoint of profitability for most fracking projects, according to tba_D.allf:ls_Eacfii.EnQ.rgy_Sl.LGLe.Y& "The current !eve! of oil prices puts energy investment on a cusp," vvrote carpenter of UBS. "Further declines in the price of 'v\lest Texas Intermediate are likely to have a subStantively negative effect on energy's contribution to U.S. GOP. Manufacturers in the Dallas and Kansas City Federal Reserve districts have noticed, Morgan Stanley's \fvharton points out. Most oil investments aren't profitable 1f the price falls muct1 below $50 a barrel. "Declining oil prices are a concern going into the f1rst quarter of 2019," one fabricated metal product manufacturer told the Dallas Fed in December. About half of energy firms in the district have lowered their capital spending plans for 2019. Likewise, oil and gas dri!lmg activity in the Minneapolis Fed dtSlrict "slowed notably recently in response to a rapid decline in the pnce of crude oil." ''An industry contact reported that expectations for capital expenditures in the Bakken oil patch have shifted downward dramatically " The incentives Jn the 2017 tax cut had almoSt nothing to do With the investment boom we saw in 2017 and 201R which helps https:ih>\W.mnrkctwatch.com/. .. o-much-i()r~the-rcpublican-tax-cut-ns-a-gamc-chnnger-!hc-invc;;tment-boom-is·l'ading-fa;;I-2019-01-1R/print[2/27/20l9 2:15:30 PMJ 82 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00086 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 520.49653 ereh 52 oilof tesffo tresnI So much f()f the Republican tax cut as a game changer-the imcstJncnt boom is fading fast-Market Watch explain Vv'hy many corporate executives and macro-economists don't think the tax cut transformed the economy at at! For instance, IHS Markit is predicting that U.S. gross domestic product\Nl!l fade from 2.9% in 2018 to 1.4% in 2023. The Federal Reserve. the Congressional Budget Office, the !MF and other forecasters agree that the tax cut was a temporary jolt, not a game changer. The U.S. economy needs a higher rate of productivity if we want living Standards to improve. The tax cut didn't change the weak trend in business inveStment. Maybe it's time to invest more public money into transportation, alternative energy, education and health care to increase the nation's capital stock and boost our grov.A:h rate. Related commentary: RexNutting Rex Nutting is a columnist and Marketwatch's international commentary editor, based in Washington. Follow him on Twitter @RexNutting We Want to Hear from You Join the conversation https://w,Yw.markctwatch.com/ ... o-much-for-thc-rep1Jblican~tax-cut-as-a-gamc-changcr-thc-invcstmcnt-boom-is-fading-fast-2019-0l~l8/nrintl2/27/2019 2:15:30 l'Ml 83 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00087 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 620.49653 ereh 62 oilof tesffo tresnI For us<~ at 11:00 a.m., EST February 11,2019 MoNETARY Poucv REPORT February 22, 2019 Board of Governors of the Federal Reserve System 84 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00088 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 720.49653 ereh 72 oilof tesffo tresnI OF TRANSMITTAL BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Washington, D.C., February 22, 2019 TI!E PRESIDENT OF THE SENATE TilE SPEAKER OF THE HOUSE OF REPRESENTATIVES The Board of Governors is pleased to submit its Monetary Policv Report pursuant to section 2B of the Federal Reserve Act. Sincerely, Jerome H. Powell, Chairman 85 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00089 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 820.49653 ereh 82 oilof tesffo tresnI ON GoALS AND Poucv 20 The Federal Open Market Committee (FOMC) is llrmly committed to fulfllling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decisionmaking by households and businesses, reduces economic and l1nancial uncertainty, increases the cllcctiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society. lnllation, employment, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Moreover, monetary policy actions tend to influence economic activity and prices with a lag. Therefore, the Committee's policy decisions reflect its longer-run goals, its medium term outlook, and its assessments of the balance of risks, including risks to the linancial system that could impede the attainment of the Committee's goals. The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee rcatlirms its judgment that inflation at the rate of 2 percent, as measured by the annnal change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. The Committee would be concerned if inflation were running persistently above or below this objective. Communicating this symmetric inllation goal dearly to the public helps keep longer-term inflation expectations l1rmly 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. The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a lixcd goal lor employment; rather, the Committee's policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Information about Committee participants' estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC's Summary of Economic Projections. For example, in the most recent projections. the median of FOMC participants' estimates of the longer-run normal rate of unemployment was 4.4 percent. [n setting monetary policy, the Commil!ec seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee's assessments of its maximum level. These objectives are generally complementary. However, nnder circumstances in which the Committee judges that the objectives are not complementary. it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation arc projected to return to levels judged consistent with its mandate. The Committee intends to realllrm these principles and to make adjustments as appropriate at its annual organizational meeting each January. 86 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00090 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 920.49653 ereh 92 oilof tesffo tresnI 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 Risks ...................................................... 51 Abbreviations ......................•....................... 65 List of Boxes Employment Disparities between Rural and Urban Areas ........................... 10 Developments Related to Financial Stability ..................................... 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 NoTE: This report reflects information that was publicly available as of noon EST on February 21, 2019. Unless othrrwise statf'd, the timP Sf'ries in thP figurE's: f'xtend through, for daily rlat<J, Febru<1ry 20, 201 9; for data, January 20 i 9; and, for quarterly data, 20 I B:Q4. In b;1r charts, ,15 notf'd, the changE' for a given pf'riod measurerl to its fin;d quarter from tlw final quarter of the prt:'ceding For iigures 1 h ,md 34, note that the ~,«.P ')00 Indo; ,1nd tfw I )ow !nne~ B.mk !nckx ,llf' pmdun<; of S&!' Dow Jom'~ !ndin'"!! C ;md/m ib d11i!i;:l1P<; .and hav{' h('Pn 1in'n-.f><i !or use hy the Board and/or its aitili,1lC'<.. All R('di~lrihution, reproduction, 87 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00091 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 030.49653 ereh 03 oilof tesffo tresnI Economic activity in the United States year to an estimated I. 7 percent in Decem her, appears to have increased at a solid pace, on restrained by receut declines in consumer balance, over the second half of 2018, and the energy prices. The 12-month measure of labor market strengthened further. Inflation inflation that excludes food and energy items has been near the Federal Open Market (so-called core inflation), which historically Committee's (FOMC) longer-run objective has been a better indicator of where overall of 2 percent, aside from the transitory effects inflation will be in the future than the headline of recent energy price movements. In this measure that includes those items, is estimated environment, the FOMC judged that, on to have been 1.9 percent in December-up balance. current and prospective economic '!. 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 have generally been stable, FOMC raised the target range for the federal though market-based measures of inflation funds rate twice in the second half of 2018, compensation have moved down some since pulling its level at 2'14 to 2'h percent following the first half of 2018. the December meeting. In light of softer global economic and financial conditions late Economic growth. Available indicators suggest in the year and muted inflation pressures, the that real gross domestic product (GDP) FOMC indicated at its January meeting that increased at a solid rate, on balance, in the it will be patient as it determines what future second half of last year and rose a little under adjustments to the federal funds rate may 3 percent for the year as a whole--a noticeable be appropriate to support the Committee's pickup from the pace in recent years. congressionally mandated objectives of Consumer spending expanded at a strong maximum employment and price stability. rate for most of the second half, supported by robust job gains, past increases in household Economic and Financial wealth, and higher disposable income due in part to the Tax Cuts and Jobs Act, though spending appears to have weakened toward The lahor market, The labor market has year-end. Business investment grew as well, continued to strengthen since the middle of though growth seems to have slowed somewhat last year. Payroll employment growth has from a sizable gain in the t\rst hal[ However, remained strong, averaging 224,000 per month housing market activity declined last year since June 2018. The unemployment rate amid rising mortgage interest rates and higher has been about unchanged over this period, material and labor costs. Indicators of both averaging a little under 4 percent a low level consumer and business sentiment remain by historical standards----while the labor force at favorable levels, but some measures have participation rate has moved up despite the softened since the fall, likely a reflection of ongoing downward influence from an aging financial market volatility and increased population. Wage growth has also picked concerns about the global outlook. up recently. Financial conditions. Domestic financial Inflation. Consumer price inflation, as conditions for businesses and households have measured by the 12-month change in the price become less supportive of economic growth index for personal consumption expenditures, since July. Financial market participants' moved down from a little above the FOMCs appetite for risk deteriorated markedly in the objective of 2 percent in the middle of last latter part of last year amid investor concerns 88 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00092 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 130.49653 ereh 13 oilof tesffo tresnI 2 SUMMARY about downside risks to the growth outlook International Developments, Foreign economic and rising trade tensions between the United growth stepped down significantly last year States and China. As a result, Treasury yields from the brisk pace in 2017. Aggregate growth and risky asset prices declined substantially in the advanced foreign economies slowed between early October and late Decem bcr in markedly, especially in the euro area, and the midst of heightened volatility, although several Latin American economics continued those moves partially retraced early this year. to underperform. The pace of economic 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 201R. Inflation pressures in shifted down, long-term Treasury yields and major advanced foreign economies remain mortgage rates moved 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 part reflecting political nonfinancial firms remained solid in the second uncertainty in Europe and Latin America, half of 20 18; 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 improved in recent credit expanded at a solid pace, and linancing weeks, alongside those in the United States, on conditions for consumers largely remain balance since July 2018, global equity prices supportive of growth in household spending. were lower, sovereign yields in many economics 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 US. economy's trading partners. emerging market economies increased somewhat. Market-implied paths of policy rates in advanced foreign economies generally ~Financial stability. The US. financial system edged down. remains substantially more resilient than in the decade preceding the linancial crisis. Pressures associated with asset valuations eased compared with July 201R, particularly Interest rate policy. As the labor market in the equity, corporate bond, and leveraged continued to strengthen and economic loan markets. Regulatory capital and liquidity activity expanded at a strong rate, the FOMC ratios of key financial institutions, inducting increased the target range for the federal large banks, are at historically high levels. funds rate gradually over the second half of Funding risks in the financial system arc 20 IS. Specifically, the FOMC decided to raise low relative to the period leading up to the the federal funds rate in September and in crisis. Borrowing by households has risen December, bringing it to the current range of roughly in line with household incomes and 2:,-:; to 2\f, percent. is concentrated among prime borrowers. While debt owed by businesses is high and ln December, against the backdrop of credit standards---especially 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. developments and assess their implications for 89 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00093 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 230.49653 ereh 23 oilof tesffo tresnI MONETARY POLICY RFPORT: FEBRUARY 2019 J the economic outlook. In January, the FOMC required. In addition, the Committee noted stated that it continued to view sustained that it is prepared to adjust any of the details expansion of economic activity, strong labor for completing balance sheet normalization in market conditions. and inflation ncar the light of economic and tlnancial developments. Committee's 2 percent objective as the most likely outcomes. Nonetheless, in light of global economic and financial developments and muted inflation pressures, the Committee Labor markets in urban versus rural areas. noted that it will be patient as it determines The recovery in the U.S. labor market since what future adjustments to the target range the end of the recession has been uneven for the federal funds rate may be appropriate across the country, with rural areas showing to support these outcomes. FOMC markedly less improvement than cities and communications continued to emphasize their surrounding metropolitan areas. 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 rate in rural by the implications of incoming data for the areas remain well below their pre-recession economic outlook. In particular. the timing levels. while the recovery in urban areas has and size of future adjustments to the target been more complete. Di1Terences in the mix of range for the federal funds rate will depend industries in rural and urban areas~.,a larger on the Committee's assessment of realized share of manufacturing in rural areas and a and expected economic conditions relative to greater concentration of fast-growing services its maximum-employment objective and its industries in urban areas.,-have contributed to symmetric 2 percent inHation objective. the stronger rebound in urban areas. (See the box "Employment Disparities between Rural Balance sheet policy. The FOMC continued and Urban Areas" in Part 1.) to implement the balance sheet normalization program that has been under way since Monetary policy roles. Jn evaluating the October 2017. Specifically, the FOMC stance of monetary policy, policymakers reduced its holdings of Treasury and agency consider a wide range of information on the securities in a gradual and predictable manner current economic conditions and the outlook. by reinvesting only principal payments it Policymakcrs also consult prescriptions for the received from these securities that exceeded policy interest rate derived from a variety of gradually rising caps. Consequently, the policy rules for guidance, without mechanically Federal Reserve's total assets declined by about following the prescriptions of any spccilic $260 billion since the middle of last year, rule. The FOMC's approach for conducting ending the period close to $4 trillion. systematic monetary policy provides sufficient flexibility to address the intrinsic complexities Together with the January postmeeting and uncertainties in the economy while statement, the Committee released an keeping monetary policy predictable and updated Statement Regarding Monetary transparent. (See the box "Monetary Policy Policy Implementation and Balance Sheet Rules and Systematic Monetary Policy" in Normalization to provide additional Part 2.) information about its plans to implement monetary policy over the longer run. In Balance sheet normalization and monetary particular. the FOMC stated that it intends policy implementation. Since the financial to continue to implement monetary policy crisis, the size of the Federal Reserve's balance in a regime with an ample supply of reserves sheet has been determined in large part so that active management of reserves is not hy its decisions about asset purchases for 90 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00094 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 330.49653 ereh 33 oilof tesffo tresnI 4 SUMMARY economic stimulus, with growth in total assets Transparency also enhances the effectiveness primarily matched by higher reserve balances of monetary policy and a central bank's of depository institutions. However, liabilities efforts to promote financial stability. For other than reserves have grown significantly these reasons, the Federal Reserve uses a over the past decade. In the 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 various factors affecting the as clearly as possible. Through several 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 will 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 pnrsues Federal Reserve transparency and its statutory responsibilities. (See the box accountability. For central banks, transparency "Federal Reserve Transparency: Rationale provides an essential basis for accountability. and New Initiatives" in Part 2.) 91 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00095 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 430.49653 ereh 43 oilof tesffo tresnI 5 AND Domestic The labor market"'"'''"'""' during !he second I. Net change in payroll employment M(>nth!y Payroll employment gains have remained 400 strong, averaging 224,000 per month since June 2018 (figure 1) . This pace is similar to the :wo pace in the 1lrst half of last year, and it is faster than the average pace of job gains in 2016 200 and 2017. 400 The strong pace of job gains over this period 600 has primarily been manifest in a rising labor ROO force participation rate (LFPR)· · the share of the population that is either working or actively looking for work--rather than a declining unemployment rate.' Since June 2018, the LFPR has moved up about V. percentage point and was 63.2 percent in 2. Labor force pai1icipation rates and January----a hit higher than the narrow range it employment-to-population ratio has maintained in recent years (figure 2). The improvement is especially notable because the Percent aging of the population-and. in particular, the movement of members of the baby- boom cohort into their retirement years---has otherwise imparted a downward influence on the LFPR. Indeed, the LFPR for individuals he tween 25 and 54 years old· which is much less sensitive to population aging---has 1. The observed pace of payroll job gains would have been sulficient to push the unemployment rate lower had the LFPR not risen. Indeed, monthly payroll gains in the range of 115.000 to 145,000 appear consistent with an unchanged unemployment rate around 4.0 percent and an unchanged LFPR around 62.9 percent (which arc the June 2018 values of these rates). If instead the LFPR were dedining 0.2 percentage point per year-···wughly the influence of population aging~-·thc range of job gains needed to maintain an unchanged unemployment rate would be about 40.000 per month lower. There is considerable uncertainty around these estimates, as the difference between m(mthly payroll gains and employment changes from the Current Population Survey (the source of the unemployment rate and LFPR) can be quite volatile over short periods. 92 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00096 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 530.49653 ereh 53 oilof tesffo tresnI 6 PART 1: RFCENT FCONOMIC ANIJ FINANCIAL OI:VIIOPMINTS 3. Measures of labor underutilization 18 14 12. 10 improved considerably more than the overall LFPR, including a '/, percentage point rise since June 20 I R2 At the same time, the unemployment rate has remained little changed and has generally been running a little under 4 percent.' Nevertheless, the unemployment rate remains at a historically low level and is '/,percentage point below the median of the Federal Open Market Committee (FOMC) participants' estimates of its longer-run normal level (figure 3)4 Combining the movements in both unemployment and labor f()rce participation, 2. Since 2015. the increase in the prime-age LFPR for \Vorncn was nearly 2 percentage points, while the increase for men was only about l percentage ln January. the LFPR for prime-age women was above where it stood in 2007, whereas for men it was still about 2 percentage points below. 3. The unemployment rate in January was 4.0 percent, boosted somewhat by the partial government shutdown, as some furloughed federal workers and temporarily laid off federal (;on tractors are treated as uncmpJc,yed in the household employment survey. 4. Sec the Summary of Economic Projections in Part 3 of this report . 93 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00097 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 630.49653 ereh 63 oilof tesffo tresnI MONETARY POLICY REPORT: HcBRUARY 2019 7 the employment-to-population ratio for individuals 16 and over---the share of that segment of the population who are working-- was 60.7 percent in January and has been gradually increasing since 20 ll_ Other indicators are also consistent with 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 level 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 layoiT rate has remained low, and the number of people filing initial claims for unemployment insurance benefits has also remained low. Survey evidence indicates that households perceive jobs as plentiful and that businesses sec vacancies as hard to fill. groups over the past several years The ilattening in unemployment since mid- 2018 has been evident across racial and ethnic groups (figure 4). Even so. over the past several years, the decline in the unemployment rates for blacks or African Americans and for Hispanics has been particularly notable, and the unemployment rates tor these groups are near their lowest readings since these series began in the early 1970s. Differences in unemployment rates across ethnic and racial groups have narrowed in recent years, 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, with differentials generally a bit below pre-recession levels. The rise in LFPRs for prime-age individuals over the past few years has also been apparent in each of these racial and ethnic groups. Nonetheless, the LFPR for whites remains 94 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00098 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 730.49653 ereh 73 oilof tesffo tresnI B PART 1: RECENT ECONOMIC AND riNANCIAI DFVELOPMFNTS 4. Unemployment rate by race and ethnicity Monthly I'PfU'nl 18 Blackm Afriran.'\nH"Jtcan 16 --- 14 12 10 higher than that for other groups (figure 5). Important diifcrcnccs in economic outcomes 5. Prime-age labor force parlicip<~tion rJle by rare and persist across other characteristics as well ctlmicity (see. for example, the box "Employment Disparities between Rural and Urban Areas," Monthly --~------- which highlights that there has been less 81 improvement since 2010 in the LFPR and 83 employment-to-population ratio for prime-age 82 individuals in rural areas compared with 81 urban areas). 80 79 78 Most available indicators suggest that growth of hourly compensation has stepped up further since June 2018 after having firmed somewhat over the past few years; however, growth rates remain moderate compared with those that prevailed in the decade before the recession. Compensation per hour in the business sector--a broad-based measure of wages and benefits, but one that is quite volatile-rose 2V. percent over the four quarters ending in 20 18:Q3, about the same as the average annual increase over the past seven years or so (figure 6). The employment cost index, a less volatile measure of both wages and the cost 95 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00099 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 830.49653 ereh 83 oilof tesffo tresnI MONHARY POLICY REPORT: FEBRUARY 2019 9 to employers of providing bcnclits, increased 6. Measures of change in hourly compensation 3 percent over the same period, while average hourly earnings-which do not take account of bencflts--incrcascd 3.2 percent over the 12 months ending in January of this year; the annual increases in both of these measures were the strongest in nearly lO years. The measure of wage growth computed by the Federal Reserve Bank of Atlanta that tracks median 12-month wage growth of individuals reporting to the Current Population Survey showed an increase of 3.7 percent in January, near the upper end of its readings in the past three years and well above the average increase in the preceding few years5 ... and have likely been restrained by slow growth of labor productivity over much of the expansion These moderate rates of compensation gains likely reflect the offsetting influences of a strong labor market and productivity 7. Change in business-sector output per hour growth that has been weak through much l't'fC('!lt,annualrdtc of the expansion. From 2008 to 2017, labor productivity increased a little more than I percent per year, on average, well below the average pace from 1996 to 2007 of nearly 3 percent and also below the average gain in the 1974-~95 period (ligure 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 recovery that followed. More recently, however, labor productivity is estimated to have increased almost 2 percent at an annual rate in the lirst three quarters of 2018 still moderate relative to earlier periods, but its fastest three-quarter gain since 20 I 0. While it is uncertain whether this faster rate of growth will persist, a sustained pickup in productivity growth, as well as additional labor market strengthening, would likely support stronger gains in labor compensation. 5. The Atlanta Fed's measure di1fcrs from others in that it measures the wage growth (lnly of workers \vho were employed both in the current survey month and 1:2 months earlier. 96 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00100 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 930.49653 ereh 93 oilof tesffo tresnI 10 PART L RECENT FC:ONOMIC AND FINANCIAL DIVEIOPMENTS Employment Disparities between Rural and Urban Areas The U.S. labor market has recoverf'd substantially A. Employment-to-population ratios since 2010. For people in their prime working years 25 to 54), the unemployment rate has moved steadily to levels below the previous business cycle peak in 2007, the labor force p.1rticipation rate 82 (LFPR) has retraced much of its decline, and the share of the population who are employed-known as the so employment-to-population ratio, or EPOP ratio-·- 78 hJs returned to about its level before the recession. However, the labor market recovery has been uneven 76 across the country, with "rural" (or nonmetro) areas showing markedly less improvement than cities and 71 their surroundings (metro areas). 1 72 The extent of the initial decline and subsequent improvement in the EPOP ratio varied by metropolitan status. The gap between the EPOP ratios in rural and larger urban areas is now noticeably wider than it was before the recession, and the cyclical started later in rural ;uee~s. Specifically, <1s shown in A, the prime-age EPOP is now slightly ahovf' its pre recession level in larger urban areas, whereas it is just below its pre-recession average in smaller urban areas and much below its pre-recession level in rural areJs.1 B. Um~rnploymcnt rates The EPOP ratio can usefully be viewed as summarizing both the L~PR ··that is, the share of the popula!ion that eithE'r has a job or is actively looking for work~and the unemployment rate, which 10 measures the share of the labor force without a job and 'SmaH<·r MSAs actively searching.1 The divergen\e "in rural and urban EPOP ratios during the economic expansion almost entirely reflects divHgencf's in U·PRs rather than in unC'mploymrnt rate.:; {iigurf'~ R and C). In pcu!ic.u!Jr, thf' rural and urban unemployment rates have tracked each (ronUnued) 1 l·or convf'nicnce, we refer to nwtropo!itan countie.:; with ties to an urbanized center as "urban" ,md thdt lack such ties ~'s "rural." popuLHion" anrl the unC'mployme>n! rate is. defined as "persons unemployerl/!abor forcf'." The'>t"' numbers are multiplied by 1 on for pn><,entation purpo"C'" in the figurrs 97 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00101 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 040.49653 ereh 04 oilof tesffo tresnI MONETARY POLICY RFPORTo FEBRUARY 2019 11 other fairly closely in this expansion, though they have C. Labor force participation rates divergE-d a littlE' in the past few In contrast, the difference between rural and LFPRs has widened Momhly significantly over the past decade. On average, people in rural areas tE'nd to have 85 fewer years of schooling than pC'ople in urban areas, 8·1 and because the EPOP ratio tends to be lower for individuals with less education, this demographic difference has contributed to the persistent rural--urban divide. However, these educational differences do not 82 appear responsible for the fact that the gap between 81 rural and urban EPOP ratios have widened. D shows that, in recent 80 ratios diverged '"'"'"""''"Y 79 CJtegories, similar to the generally. The left panel of figure D shows that the 78 EPOP ratio of non-college-educated adults 25 to 54 has been much lower in rural areas than urban ones beginning in 2012. ThP right pane! of figure D shows that the EPOP ratio of college-educated adults used to be higher in rural areas than in urban ones, but that is no longer so. Thus, the recent widening of the rural-urban disparity in EPOP ratios has not been primarily driven diffprences in years of education. Nevertheless, the in the tPOP ratio for non-college-educJted adults rural areas (continued on next page) D. Employment to-population ratios Nonroltege odults College adults iG 98 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00102 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 140.49653 ereh 14 oilof tesffo tresnI 12 PART 1: RECFNT ECONOMIC AND fiNANCIAl. DFVELOPMENTS Employment Disparities (continued) has been particularly weak, it is likely that broader Insurance (SSDI) benefits, and, in hct, take-up mJcroeconomic trends-·-inc!uding the ongoing shift in increased a little more in rural areas than it did in urban labor demand that has favored individuals with more ones over thP past decade.4 education--··have had more adverse conspquencf's Wht"'n regions are faced with adverse changes for the populations in rural areas than in urbdn areas. in labor demand, some residents respond by for example, manufJcturing, where employment has migrating to more prosperous areas. more out~ stagnated, accounts for a larger share of employment migration that occurs from areas with relatively fewer in rural areas than in urban while fast-growing labor market opportunities, the smaller should be the services industries, such as and professional observed decline in local-area EPOPs.5 However, some services that tend to employ workers with more research that the average migration response education, are more concentr~tted in urban areas. to adverse shocks has decreased in recent Indeed, employment in manufacturing has not yet decJdes, which could amplify the !Jbor market Pifects fully recovered from the recession. And, despite> of local shocks and lead to persistent disparities in the strength in the past two the share of total EPOP ratios across J.reas.6 employment in post-recession low. 4. -!his could health The fact that most of the EPOP divergence is seen problems expands the pool of qualify in labor force participation rather than unemployment for SSDI} and sluggish labor dr•mand in rural areas (which increases the propensity of individuals to apply for SSDI rates suggests th<1t many rural workers who experienced !wncfits). a permanent job loss, perhaps due to a factory closing, 5. Although J higher fJte of rur,ll out,mlgralaon decided to eventually exit the labor force rather than close the EPOP gap, depopulation exacert>al<e e<:onomiC <:-ontinue their job search. Some individuals who had difficultif''> for thmf' who rC'rnain in rural areas. been working, despite ongoing health problems, may Lo 6 u . n g S a e n e i , ( f 2 o 0 r 17), MJi D L< a 1 o b , o r D avide Furceri, and P in r a t k h a e s h have responded to job loss and poor reemployrmmt United St.:ltes: Trend 0nd Cvcle," opportunities by applying for Social Security Disdbility Statistics. voL ryq {May), pp'. 243-57. 99 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00103 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 240.49653 ereh 24 oilof tesffo tresnI MONETARY POLICY RFPORT: FfBRUARY 2019 1 3 Consumer price inflation has fluctuated around the FOMC's objective of 2 percent, largely reflecting movements in energy prices. As measured by the 12-month change in 8. Change in the price index for personal consumption expenditures the price index for personal consumption expenditures (PCE), inflation is estimated to have been l. 7 percent in December after being above 2 percent for much of 2018 30 (figure 8)-'' Core PCE inflation--that is, inflation excluding consumer food and energy prices-is estimated to have been 1.9 percent in December. Because food and energy prices arc often quite volatile, core inflation typically provides a better indication than the total measure of where overall 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 because food price inflation has remained relatively low. Core inflation has moved up since 2017. when inflation was held down by some unusually large price declines in a few relatively small categories of spending, such as mobile phone services. The trimmed mean PCE price index, produced by the Federal Reserve Bank of Dallas, provides an alternative way to purge inflation of transitory influences, and il may be less sensitive 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 Novcmber7 lnllation likely has been increasingly supported by the strong labor market in an environment of stable inflation expectations; inflation last year was 6. The partial government shutdown has delayed publication of the Bureau of Economic Analysis's estimate fiJr PCE price inflation in December, and the numbers reported here arc estimates based on the December consumer and producer price indexes. 7. The trimmed mean index excludes whichever prices showed the largest increases or decreases in a given month. Note that over the past 20 years, changes in the trimmed mean index have averaged about :14 percentage core PCE inflation and 0.1 percentage point total PCE inflation. 100 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00104 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 340.49653 ereh 34 oilof tesffo tresnI 14 PART 1, RECENT ECONOMIC AND FINANCIAl DEVElOPMENTS also boosted slightly by the tariffs that were imposed throughout2018. Oil have in recent months ... As noted, the slower pace of total inflation 9. Spot and futures prices for rrude.oil in late 2018 relative to core inflation largely reflected softening in consumer energy prices toward the end of the year. After peaking 130 at about $86 per barrel in early October, the 120 price of crude oil subsequently fell sharply IJO and has averaged around $60 per barrel this 100 90 year (figure 9). The recent decline in oil prices 80 has led to moderate reductions in the cost 70 of gasoline and heating oil. Supply factors, (-i(l including surging oil production in Saudi 50 40 Arabia, Russia, and the United States. appear 30 to be most responsible for the recent price 20 declines, but concerns about weaker global growth likely also played a role . . . . while of other !han energy have also fiP<rliriNI After climbing steadily since their early 2016lows. nonfuel import prices peaked in 10. Nonfuel import prices and industrial metals indexes May 2018 and declined tor much of the rest of 2018 in response to dollar appreciation. !00 lower foreign inflation, and declines in -~-~------~ ------~-- commodity prices. In particular. metal prices 120 lnduwia!metals fell markedly in the second half of 2018. partly 110 102 reflecting concerns about prospects for the 100 !00 global economy (figure 10 ). Nonfucl import 90 prices, before accounting for the effects of YR tariffs on the price of imported goods, had HO 96 roughly a neutral influence on U.S. price 70 inflation in 2018. 60 94 Expectations of inflation likely influence actual inllation by affecting wage-and price setting decisions. Survey-based measures of inflation expectations at medium-and longer term horizons have remained generally stable over the second half of 2018. In the Survey of Professional Forecasters. conducted by the Federal Reserve Bank of Philadelphia. the median expectation for the annual rate of increase in the PCE price index over the 101 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00105 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 440.49653 ereh 44 oilof tesffo tresnI MONfTARY POI.ICY REPORTo FEBRUARY 2019 15 next 10 years has been very close to 2 percent 11. Median inflation expectations for the past several years (figure 11 ). In the University of Michigan Surveys of Pt>f(C!lt Consumers, the median value for inflation expectations over the next 5 to 10 years has been around 2V2 percent since the end of 2016, though this level is about '/. percentage point lower than had prevailed through 2014. In contrast, in the Survey of Consumer Expectations. conducted by the Federal Reserve Bank of New York, the median of respondents' expected inflation rate three years hence-while relatively stable around 3 percent since early 2018~~·is nonetheless at the top of the range it has occupied over the past couple of years. . . . while market-based measures of Inflation expectations can also be gauged by market~bascd measures of inflation compensation. However. the inference is not straightforward, because market- based measures can be importantly affected by changes in premiums that provide compensation for bearing inflation and liquidity risks. Measures of longer~tcrm inflation compensation--derived either from differences bet ween yields on nominal Treasury 12. S·to-10-year-forward inflation rompl'nsation securities and those on comparable-maturity Treasury Innation-Protccted Securities (TIPS) or from inflation swaps~-moved down in the fall and are below levels that prevailed earlier in 201 R (figure 12)-' The TIPS-based 3.0 measure of 5-to-lO-ycar-forward inllation 25 compensation and the analogous measure 20 from inflation swaps are now about 1% percent LJ R. Inflation compensation implied by the TIPS 10 hreakeven inflation rate is based on the difference, at comparable maturities, between yields on nominal Treasury securities and yields on TIPS. which arc indexed to the total consumer price index (CPl). Inflation swaps arc contra...:ts in which one party makes payments of certain fixed nominal amounts in exchange for cash llows that arc indexed to cumulative CPT inflation over some horizon. Inflation compensation derived from inflation swaps typically exceeds TIPS-based compensation. but week-to-week movements in the two measures arc highly correlated. 102 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00106 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 540.49653 ereh 54 oilof tesffo tresnI 1 6 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS and 2:14 percent, respectively, with both measures below their respective ranges that persisted for most of the 10 years before the start of the notable declines in mid-20149 Rca! gross domestic product growth was solid, on balance, in the second half of 2018 Real gross domestic product (GDP) rose at an annual rate of 3'/, percent in the third quarter, 13. Change in real gross domestic product and gross and available indicators point to a moderate dmnestic income gain in the fourth quarterw For the year, GDP growth appears to have been a little less than I'Prn'nt.annualrm•• 3 percent, up from the 2Y, percent pace in 2017 and the 2 percent pace in the preceding two 03 years (figure 13). Last year's growth reflects, in part, solid growth in household and business spending, on balance, as well as an increase in government purchases of goods and services; by contrast, housing-sector activity turned down last year. Private domestic final purchases--that is, final purchases by households and businesses, which tend to provide a better indication of future GDP growth than most other components of overall Sm•RG: Bureau nf Economic Analysis via I lavN Aual)1its. spending-likely posted a strong gain for the year. Some measures of consumer and business 14. Change in real personal consumption expenditures sentiment have recently softened~ --likely and disposable personal income reflecting concerns about financial market volatility, the global economic outlook, lilf Pt•rsnna! con~umption l'xpenditures trade policy tensions, and the government <\ Disposable JWr>ona! income shutdown--and consumer spending appears to have weakened at the end of the year. Nevertheless, the economic expansion continues to be supported by steady job gains, past increases in household wealth, expansionary flscal policy, and still-favorable domestic financial conditions, including 9. As these measures arc based on CPI inflation, one should probably subtract about 1;4 percentage point~~thc S\llJRCF.: Bureau of Economic Analy~i5 via !laver Analytlrs average differential with PCE inflation over the past two decades -~~to infer inflation compensation on a PCE basis. 10. The initial estimate of GDP by the Bureau of Economic Analysis for the fourth quarter was delayed because of the partial government shutdown and will now be released on february 2R. 103 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00107 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 640.49653 ereh 64 oilof tesffo tresnI MONETARY POLICY REPORT: FEBRUARY 2019 1 7 moderate borrowing costs and easy access to 15. Personal saving rate credit for many households and businesses. PrlH'!ll Ongoing improvements in the labor market continue to support household 12 income and consumer spending ... lO Real consumer spending picked up after some transitory weakness in the first half of 2018, rising at a strong annual rate of 31h percent in the third quarter and increasing robustly through November (figure 14). However, despite anecdotal reports of favorable holiday sales. retail sales were reported to have declined sharply in December. Real disposable personal income---that is. income after taxes and adjusted for price changes--looks to 16. Prices of existing single-family houses have increased around 3 percent over the year, boosted by ongoing improvements in -------· ..... ____ --· --- " P " f'i-<-e·iU·-(h-a·n-g-e-f-ro-m·-y·c·a-rr-a-r-li·rr- - the labor market and the reduction in income 15 taxes due to the implementation of the Tax Cuts and Jobs Act (TCJA). With consumer 10 spending rising at about the same rate as gains in disposable income in 2018 through the third quarter (the latest data available). the personal saving rate was roughly unchanged, on net, 10 over this period (figure 15). --- !5 --- 20 recently softened While increases in household wealth have likely continued to support consumer spending, gains in net worth slowed last year. House prices continued to move up in 2018, boosting 17. Wealth-to-income ratio the wealth of homeowners. but the pace of growth moderated (figure 16). U.S. equity Ratio prices arc, on net. similar to their levels at the end of 2017. Still, the level of equity and 7.0 housing wealth relative to income remains very high hy historical standards (figure 17).11 G.5 6.0 5.3 I 1. Indeed. in the third quarter of 2018 the most recent period for which data arc available household net worth was seven times the value of disposable income. the highest-ever reading for that ratio, which dates back to 1947. However. following the decline in stock prices since the summer, this ratio has likely fallen somc\vhaL 104 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00108 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 740.49653 ereh 74 oilof tesffo tresnI 18 PART lc REGNT ECONOMIC AND FINANCIAL f)[VflOPMEN!S 18. Jndl'Xes of consumer sentiment Consumer sentiment as measured by the Michigan survey flattened out at a high level Index through much of 2018, and the sentiment 1'10 !20 measure from the Conference Board survey Conft>rence Board 1~0 1\0 climbed through most of the year, with both 130 measures posting their highest annual averages !00 110 since 2000 (figure 18). However, consumer 90 90 sentiment has turned down since around 70 80 year-end. on net, with the declines primarily 50 70 reflecting consumers' expectations for future 60 conditions rather than their assessment of current conditions. Consumer attitudes about car buying have also weakened. Nevertheless. these indicators of consumers' outlook remain at generally favorable levels, likely reflecting rising income, job gains, and low inflation. Knrr<>WIIn<~ conditions for consumers 19. Changes in household debt remain generally favorable despite interest rates being near the high end of their post-recession range \,000 800 Despite increases in interest rates for consumer 600 loans and some reported further tightening 400 in credit card lending standards, financing 200 conditions for consumers largely remain supportive of growth in household spending. and consumer credit growth in 2018 expanded further at a solid pace (figure 19). Mortgage credit has continued to be readily available for households with solid credit profiles. For borrowers with low credit scores, mortgage underwriting standards have eased somewhat since the first half of 2018 but remain noticeably tighter than before the recession. 20. Change in real private nonresidential fixed investment Financing conditions in the student loan market remain stable, with over 90 percent of such credit being extended by the federal Stru\""ture.~ !ill Fquipmf'nt and intangible capital 20 government. Delinquencies on such loans, Ill !5 though staying elevated, continued to improve gradually on net. Business investment moderated after strong in 2018 ... Investment spending by businesses rose rapidly in the first half of last year, and the available data are consistent with growth having slowed in the second half (lignrc 20). 105 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00109 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 840.49653 ereh 84 oilof tesffo tresnI MONFTARY POliCY RfPOn FEBRUARY 201'! 19 The apparent slowdown rcnccts, 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, capital spending plans, and pro11t expectations from industry analysts-have softened recently but remain positive overall. And while new orders of capital goods llattened out toward the end of last year, the backlog of unfilled orders for this equipment has continued to rise. Spreads of yields on nonfinancial corporate bonds over those on comparable-maturity Treasury securities widened modestly, on balance. since the middle of 2018 as investors' risk appetite appeared to recede some. 21. Selected components of net debt financing for Nonetheless, a net decrease in Treasury nonft11ancial businesses yields over the past several months has left interest rates on corporate bonds still low by historical standards, and financing conditions iii! Commerdal paper Bonds 8() appear to have remained accommodative II loan" 60 overall. Aggregate netllows of credit to large nonfinancial firms remained solid in the third 40 quarter (figure 21). The gross issuance of 20 corporate bonds and new issuance of leveraged loans both fell considerably toward the end of the year but have since rebounded, mirroring 20 movements in financial market volatility. 40 Respondents to the January Senior Loan OHiccr Opinion Survey on Bank Lending Practices, or SLOOS, reported that lending standards for commercial and industrial (C&I) loans remained basically unchanged in the fourth quarter after having reported easing standards over the past several 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 Cor small businesses have remained generally 106 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00110 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 940.49653 ereh 94 oilof tesffo tresnI 20 PART L RfCENT [C:ONOMIC AND FINANCIAL DEVELOPMENT'> 22. Privale housing starts and permits accommodative. Lending volumes to small businesses rebounded a bit in recent months, Monthlv Mi!lion\o!umN anmMlmw and indicators of recent loan performance stayed strong. !.2 1.0 in the housing sector has been .8 Residential investment declined in 2018. as .4 housing starts held about flat and sales of existing homes moved lower (figures 22 .2 and 23). The drop in residential investment reflects rising mortgage rates---which remain higher than in 2017 despite coming down some recently-··--as well as higher material and labor building costs, which have likely restrained new 23. New and existing home salf's home construction. Consumers' perceptions of homebuying conditions deteriorated sharply Milli<>H'•, ,mnual ratf' Million~. ammal r~w over 2018, consistent with the decline in the affordability of housing associated with both higher mortgage rates and still-rising house prices (figure 24). likely subtracted from GOP in 2018 · After a strong performance in the first half of last year supported by robust exports of agricultural products, real exports declined in the third quarter, and available indicators suggest only a partial rebound in the fourth quarter (figure 25). At the same time, growth in real imports seems to have picked up in the second half of 2018. As a result, real net exports---which lifted U.S. real GOP growth 24. Mortgage rates and housing afTordabilHy during the first half of 20 I 3--appear to have lnd~x subtracted from growth in the second hal[ For the year as a whole, net exports likely l lousing affordabi!ity index 205 subtracted a little from real GOP growth, --- 190 similar to 2016 and 2017. The nominal trade dcticit and the current account deficit in 2018 175 were little changed as a percent of GOP from 160 2017 (figure 26). 145 130 !15 Fiscal policy at the federal level boosted GDP growth in 2018, both because of lower income and business taxes from the TCJA and 107 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00111 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 050.49653 ereh 05 oilof tesffo tresnI MONFTARY POLICY REPORT: I·EBRUARY 2019 21 because federal purchases appear to have risen 25. Change in real imports and exports of goods signilicanlly faster than in 2017 as a result of and services the Bipartisan Budget Act of 2018 (figure 27)." The partial government shmdown, which was in effect from December 22 through January 25, likely held down GOP growth in the first quarter of this year somewhat, largely because of the lost work of furloughed federal government workers and temporarily affected federal contractors. The federal unified deficit widened in fiscal year 2018 to 3% percent of nominal GOP because receipts moved lower, to roughly 16'/, percent of GOP (tlgure 28). Expenditures edged down, to 20'1i percent of GDP, but remain above the levels that prevailed in the decade before the start of the 2007··09 26. U.S. trade and current account balances recession. The ratio of federal debt held by the public to nominal GOP equaled 78 percent at the end of fiscal2018 and remains quite elevated relative to historical norms (figure 29). The Congressional Budget Office projects that this ratio will rise over the next several years. and local governments is stable The fiscal position of most state and local governments is stable, although there is a range of experiences across these governments. After several years of slow growth, revenue gains of state governments strengthened notably as sales and income tax collections have picked up over the past few quarters. At the local 27. Change i11 real government expenditures on level, property tax collections continue to rise cmtsumption and investment at a solid clip, pushed higher by past house price gains. After declining a bit in 2017, real state and local government purchases grew 1-"edPral moderately last year, driven largely by a boost in construction but also reflecting modest growth in employment at these governments. 12. The Joint Committee on Taxation estimated that the TCJA would reduce average annual tax revenue by a little more than 1 percent of GDP starting in 20lX and for several years thereafter. This revenue estimate docs not account for the potcmial macroeconomic effects of the legislation. 108 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00112 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 150.49653 ereh 15 oilof tesffo tresnI 22 PART 1: RECENT ECONOMIC AND EINANCIAIDEVELOPMLNTS 28. Federal receipts and expenditures financial Armual l'ert'Pntofnmnirw!CDI' The exr1ectea of the federal funds rate over the next several years has 26 moved down 24 Despite the further strengthening in the 22 labor market and continued expansion in the 20 U.S. economy, market-based measures of 18 the expected path for the federal funds rate over the next several years have declined, on 16 net, since the middle of last year (figure 30). 14 Various factors contributed to this shift, including increased investor concerns about downside risks to the global economic outlook and rising trade tensions, as well as FOMC communications that were viewed as signaling patience and greater flexibility in the conduct of monetary policy in response to 29. Federal government debt held by the public adverse macroeconomic or financial market Quaner!v l'cw1.'ntofnmnina!GDP developments. so Survey-based measures of the expected path of the policy rate through 2020 also shifted down, on net, relative to the levels observed 60 in the first half of 2018. According to the 50 results of the most recent Survey of Primary 40 Dealers and Survey of Market Participants, 30 both conducted by the Federal Reserve Bank of New York just before the January FOMC meeting, the median of respondents' modal projections for the path of the federal funds rate implies two additional 25 basis point rate increases in 2019. Relative to the December survey, these inaeases arc expected to occur later in 2019. Looking further ahead. respondents to the January survey forecast no rate increases in 2020 and in 2021.13 Meanwhile, market-based measures of uncertainty ahout the policy rate approximately one to two years ahead were little changed, on balance, from their levels at the end of last June. 13. The results of' the Survey of Primary Dealers and the Survey of Market Participants arc available on the Federal Reserve Bank of New York's website at http<.:://\\ \V\\ .lll'\Vj \lrk fcd.org/markct:Jprimar~ dealer_ :-:unc;, ... que:>ti,om.html and http;-,Jiwww.llt'\\YOrkfcd.ort:l markcbi:;un ~~:. m<HL'l __ p,micipanb, respectively. 109 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00113 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 250.49653 ereh 25 oilof tesffo tresnI MONfTARY POliCY RfPORT: FfBRUARY 2019 23 The nominal Treasury yield curve 30. Market-implied federal funds rate path Qwutrrly The nominal Treasury yield curve flattened somewhat further since the lirst half of 2018, with the 2-year nominal Treasury yield little ~ 2.50 changed and the 5-and I 0-year nominal Treasury yields declining about 25 basis points 2.25 on net (ligure 31 ). At the same time, yields on inllation-protcctcd Treasury securities edged up, leaving market-based measures of -- 2.00 inflation compensation moderately lower. In explaining movements in Treasury yields since mid-2018. market participants have pointed to developments related to the global economic outlook and trade tensions. FOMC communications, and fluctuations in oil prices. Option-implied volatility on swap rates--an indicator of uncertainty about Treasury yields---declined slightly on net. 31. Yields on nominal Treasury srcurities Consistent with changes in yields on nominal Daily f't•ln'IU Treasury securities, yields on 30-year agency mortgage-backed securities (MBS)--· an important determinant of mortgage interest rates----decreased about 20 basis points. on balance, since the middle of last year and remain low by historical standards (figure 32). Meanwhile, yields on both investment-grade and high-yield corporate debt declined a bit (ligure 33). As a result. the spreads on corporate bond yields over comparable maturity Treasury yields are modestly wider than at the end of June. The cumulative Sot'r<:n. Departnwnt of th(' Tr('a~my via ! lawr Analytic~ increases over the past year have left spreads 32. Yield and spread on agency mortgage-hacked securities for high-yield and investment-grade corporate bonds close to their historical medians, with J'Pff('Bl both spreads notably above the very low levels :mo that prevailed a year ago. 250 200 150 !(}() Broad U.S. stock market indexes increased somewhat since the middle of last year. on 50 net, amid substantial volatility (figure 34). Concerns over the sustainability of corporate earnings growth. the global growth outlook. international trade tensions. and some Federal 110 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00114 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 350.49653 ereh 35 oilof tesffo tresnI 24 PART lo RECENT ECONOMIC AND FINANCIAl DEVELOPMENTS 33, Corporate bond yields, by securities rating Reserve communications that were perceived as less accommodative than expected weighed on investor sentiment for a time. There were considerable differences in stock returns across sectors, reflecting their varying degrees of 16 sensitivities to energy price declines, trade 14 --- 12 tensions, and rising interest rates. In particular, 10 stock prices of companies in the utilities 8 sector which tend to benefit from falling interest rates-and in the health-care sector outperf(mned broader indexes. Conversely, stock prices in the energy sector substantially underperformed the broad indexes, as oil prices dropped sharply. Basic materials ··a sector that was particularly sensitive to concerns about the global growth outlook and trade tensions also underperformed. permission Bank stock prices declined slightly, on net, 34. Equity prices as the yield curve Jlattencd and funding costs rose. Measures of implied and realized stock price volatility for the S&P 500 index-the 200 VIX and the 20-day realized volatility-· 175 increased sharply in the fourth quarter of last year to near the high levels observed 100 in early Fchruary 2018 amid sharp equity 125 price declines. These volatility measures 100 partially retraced following the turn of the '/5 year, with the VlX returning to near the so 30th percentile of its historical distrihution 25 and with realized volatility ending the period close to the 70th percentile of its historical range (flgurc 35). (For a discussion of financial Dow stability issues, see the box "Developments Related to Financial Stability.'') 35. S&P 500 volatility -- f) - ,u - ly - ------------------- Markels securities, mor't";"'''- backed securities, and 80 have functioned well "10 60 Availahle indicators of Treasury market \'JX 50 functioning have generally remained stable since the first half of 2018, with a variety of liquidity metrics--including bid-ask spreads, bid sizes, and estimates of transaction costs-· displaying few signs of liquidity pressures. Liquidity conditions in the agency MBS market were also generally stable. Overall, the functioning of Treasury and agency MBS markets has not been materially affected by 111 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00115 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 450.49653 ereh 45 oilof tesffo tresnI MONETARY POLICY REPORT FEBRUARY 2019 2 5 the implementation of the Federal Reserve's balance sheet normalization program over the past year and a hal[ Credit conditions in municipal bond markets have remained stable since the middle of last year, though yield spreads on 20-year general obligation municipal bonds over comparable-maturity Treasury securities were modestly higher on net. market rates have moved up in increases in the FOMC's target range Conditions in domestic short-term funding 36. Ratio of total commercial bank credit to nominal gross domestic product markets have also remained generally stable since the beginning of the summer. Increases in the FOMC's target range were transmitted effectively through money markets, with yields 75 on a broad set of money market instruments moving higher in response to the FOMC's 70 policy actions in September and December. The effective federal funds rate moved to parity 65 with the interest rate paid on reserves and was 60 closely tracked by the overnight Eurodollar rate. Other short-term interest rates, including those on commercial paper and negotiable certificates of deposits, also moved up in light of increases in the policy rate. and Aggregate credit provided by commercial 37. Profitability of bank holding companies banks expanded through the second half of J-'>j'ltrnL annual r~\<' 2018 at a stronger pace than the one observed in the Jirst half of last year. as the strength 2.0 30 in C&lloan growth more than oiTsct the zo moderation in the growth in CRE loans and loans to households. In the fourth quarter of 10 last year, the pace of hank credit expansion was about in line with that of nominal GDP, Ill leaving the ratio of total commercial bank 20 credit to current-dollar GDP little changed relative to last June (Jigurc 36). Overall, measures of bank profitability improved further in the third quarter despite a flattening yield curve, but they remain below their pre crisis levels (Jigurc 37). 112 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00116 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 550.49653 ereh 55 oilof tesffo tresnI 2 6 PART 1: RfCFNT f:CONOMIC AND FINANCIAL DfVflOPMENTS Developments Related to Financial Stability The Federal Reserve Board's financial research by the Federal Rese-rve staff, academics, and stability monitoring framework other Since publication of the Federal Reserve Board's The framework US('d by the Federal Reserve Board to first Financia/Stahility Report on November 28, 2018, monitor financial stability distinguishes between shocks some areas where valuation pressures were a concern to <1nd vu!nerJbi!ities of the financial system. Shocks, have cooled, particularly those related to below such as sudden changes to financial or economic investment-grade corporate debt/ Regulatory capital conditions, are typically surprises and are inherently and !iquiclity ratios of kPy financial institutions, difficult to predict, whereas vulnerabilities tend to especially banks, are at historically high levels. build up over timp zmd 11re the aspects of the financial funding risks the financial system arc !ow relative system that are most expected to cause widespread to the period leading up to the crisis. Borrowing by problems in times of stress. Some vulnerabilities are households has risen roughly in line with household cyclical in nature, rising and falling over time, whilt~ incomes and has been concentrated among prime others are structural, stemming from longer-term borrowers. Nonetheless, debt owed by businesses is forces shaping the nature of credit intermediation. As a high, and credit stJndards, especially within segments result, the framework focuses primarily on monitoring of the loan market focused on lower-rated or unrated vulnerabilities and emphasizes four broad categories firms, deteriorated in the second half of 2018. based on academic research. 1 Asset valuations increased to the high end of their 1. Elevated valuation pressures are signaled by asset historical ranges in many markets over 2017 and the prices that are high relative to economic fundamentals first half of 2018, supported by the solid economic or historical norms and are often driven by an increased expansion and an apparent increase in investors' willingness of investors to take on risk. As such, appetite for risk. HowPver, compared with July 2018, elevated valuation pressures imply a greater possibility Jround the time of the previous Monetary Policy of outsized drops in asset prices. valuation pressures have eased somewh<lt 2. Excessive borrowing by businesses and in equity, corportlte bond, ZJnd !everJged loan households leavf's them vulnerable to distress if their markets. Over the same period, amid substantial markf't incomes decline or the as<;ets they own fall in value. volatility} the forward equity price-to-earnings ratio of 3. Excessive leverage within the financial sector S&f) 500 firms, a metric of valuations in equity markets, increases the risk that finJncial institutions will not have declined a touch, on net, and it currently stands just the ability to absorb losses when hit adverse shocks. below the top qudrtile of its historicJ! distribution 4. Funding risks expos<-~ the to the A). Spreads on both investment-and speculative~ possibility 1hat investors will "run" by corporate bonds over comparable-maturity their funds from a particular institution or sector. securities widerwd modestly to h:vels dose L1ring ,1 run, financial imtitutions m.1y need to sell to the medians of their historical since 1997 asse-ts rtuickly at "fire sale" prices, therPby incurring (figure B). on newly issued substantial losses and potentially even becoming widened in the fourth quarter insolvent Historians and economists often refer to real estate m<wkcts, comrnerciJI real estatf:' prices have widesprr<:~d invf:'stor nms as "financial panics." bet>n growing faster than rents for several years, leaving While this fr,1mework provides a systcm,ltic way valuations stretchf'd. to assess financial stJhi!ity, some potentia! risks do Since the 2007-09 r('{~cssion, household debt and not fit neatly into it because they an' novr! or diffi\u!t C). Over the to quantify, such as cybersecurity or devPiopments past st>veral households has stayPd in ln addition, some vu!nerabilitif's <1re in line with growth has heen concen- to measure with currently dvadab!P datJ, and tratf'd among borrowers with strong credit histories. the set of vulnerabilities may evolve over time. Civen ( continuf'd) these limitations, we continually rely on ongoing l For ,1 review of the resf',m:h literaturt> in this ,1rea and. further Daniel Covitz, and Nt>llie Monitoring," (fkrcmb('r), 113 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00117 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 650.49653 ereh 65 oilof tesffo tresnI MONETARY POLICY REPORT: FEBRUARY 2019 27 A. Forward prin:'~to-earnings ratio of S&P 500 firms C. Businrss-and household-st~ctor crediHo··GDP ratio Rmio 11 75 26 l.O 70 23 65 .60 B. Corporate bond spreads to similar-maturity Treasury securities {figure 0). Issuance of these instruments significantly in November and December 2018 because of the sharply higher spreads demanded by investors to hold them, but issuance has rebounded somewhdt in 2019. Credit for new leveraged loans deteriorated over the SPCond half of 2018. The share of npwly issued large loans to corporations with high leverdgt'-<iPlllneri as thosP with ratios of rleht to (earnings before interest, taxes, depreciation, Jnd amortization) above 6-increased through 201 B to levels exceE~ding prPvious peaks observPrl in 2007 and 2014, when underwriting quality was notc1bly poor. In addition, issuance of covenant-lite !oans~~lodns with few or no traditional maintenance covenants--~rem.:lined high during the second half of 2018, although this e!pvatNi level may reflect, in p,1rt, J greater prevalence of investors who do not traditionally monitor and exercise loan covenants. 1 Nonetheless, the strong economy has helped sustain solid credit performance of leveraged loans in 2018, contrast, borrowing by businesses, including riskier with the default rdte on such loans near the low end of has exp,1ndf'd significantly. For""" UldUVP- its historical rangP. and unraterl firms, the r<ltio to ,bsrts has (continued on nPxt page) steadily since 2010 and remains IW<H its historical peak. t-=urthf~r, growth in debt to businessE.'S which are predominantly with lower credit ratings and with l'levated rapidly over the past levels of borrowing, such as high-yield and a m h u o t u u t a 6 l 0 fu n p d e s rr ( h 'n o ! lr o l f levt'ragf'd loans, has been subst;:mtial over the past 114 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00118 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 750.49653 ereh 75 oilof tesffo tresnI 28 PART 1: RfCFNT FCONOMIC AND FINANCIAL DEVELOPMENTS Financial Stability (continued) D. Net issuance of risky business debt and a deepf'r recession than in 2018 as well as typically largp declines in financial asset prices. Capita! levels at insurance companies and broker dealers also remJined relatively robust by historical standards. A range of indicators suggest that hedge fund levE'rage was roughly unchanged over 2018; however, comprehensive data, available with a significant time from early 2018 showed that leverage remained at upper end of its range over the past eight years. Vulnerabilities associated with funding risk-~-that is, the financing of illiquid assets or long-maturity assets with short-1naturity debt-continue to be low, in pJrt because of the post-crisis implementation of 40 liquidity regulations for banks and the 2016 money market reforms.4 Banks are holding higher levels of liquid assets, while their use of short-tern1 wholesale funding as a share of liabilities is near historical lows. Assets under management at prime funds, institutions that proved vulnerable to runs in the past, have risc>n somewhat in recent months but remained f<:H below pre-reform levels. TI1e credit quality of nonfinancial high-yield Potential downside risks to international financial corporJte bonds was roughly stable over the past stability include a downturn in global growth, several years, with the share of high-yield bonds political and policy uncertainty, an intensification outstJnding that are ratE'd B3/B-or below staying of trade tensions, and broadening stress in f!at and below the fin;mcia! crisis peak. In contrast, market economies (EMEs). In many advanced the distribution of ratings among investment-grade economies, financial conditions tightened corporate bonds deteriorated. The share of bonds rated in the second half of 2018, p.Jrtly reflecting a Jt the lowest investment-grade level (for example, an deterioration in the fiscal outlook of Italy and Br'€xit S&P rating of triple-B) reached ne<H-record levels. As of uncertainty. The United Kingdom and the European December 2018, around 42 percent of bonds Union (EU) have not yet ratified the terms for the outstanding were at the lowest end of the United Kingdom's March 201 g withdrawal from the EU grade segment, amounting to about $3 trillion. (Brexit). Without such a withdrawal agreement, there Vulnerabiliti('S from flnanciJI-soctor will be no transition period for important trade and continue to be low rC'Iutive to historic.JI in fin;mcia! interaction~ between U.K. and lU residents, part because of reguiJtory reforms enacted sinn' the and, despite for a "no-deal Brexit" a wide financial crisis. Core financial interrm:diaries, including rang(' of ,md financial activities could b0 large banks, insurann-' companies, and broker-dealers, disrupted. LMFs also Pxpcricnced heightened financial appear well positioned to we-ather economic ~tress. As ~tress in the ~ccond half of 2018. Although that stress of the third quarter of 2018, rPgulatory capital ratios for has receded somewhat more recently, many f:MEs the US globdl systemie<J!!y important banks rC>rnained continue to hclrbor important vulnerabilities, reflecting well above regulatory requirements dnd were close one or more of substdntia! corporate fisc1l to historical highs. Those banks \Viii he subj~·ct to the concerns, or excessive reliance on foreign 2019 Dodd-Frank Act stress tests and Comprehensive Capital Assessment and Review. Consistent with the Federal Reserve Board's public framPwork, this year's scenarios feature a largc'r increJse in unemployment 115 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00119 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 850.49653 ereh 85 oilof tesffo tresnI MONfTARY POliCY REPORT FEBRUARY 2019 29 International Economic activity in most ioreign economies weakened in the second half of 2018 After expanding briskly in 2017, foreign GOP growth moderated in 2018. While part of this slowdown is likely due to temporary factors, it also appears to rctlect weaker underlying momentum against the backdrop of somewhat tighter financial conditions, increased policy 38. Real gross domestic product growth in selected advanced foreign economies uncertainty, and ongoing debt deleveraging. Pt'ITf'n!,annualrJIC The growth slowdown was !IIIII Uniti'd Kingdom pronounced in advanced economies Real GOP growth in several advanced foreign economics (AFEs) slowed markedly in the second half of the year (figure 38). This slowdown was concentrated in the manufacturing sector against the backdrop of softening global trade tlows. In Japan, real GOP contracted in the second half of 2018, as economic activity, which was disrupted by a series of natural disasters in the third quarter, rebounded only partly in the fourth quarter. Growth in the euro area slowed in the second half of the year: Transportation bottlenecks and complications in meeting tighter emissions 39. Consumer price inOation in selected advanced foreign standards lor new motor vehicles weighed economics on German economic activity, while output contracted in Italy. Although some of these !2monthper(('n\thangt- ·····--·--·-- headwinds appear to be fading. recent indicators--especially for the manufacturing sector· ·point to only a limited recovery of activity in the euro area at the start of 20!9. In recent months, headline inflation has fallen below central bank targets in many major AFEs, reflecting large declines in energy prices (figure 39). In the euro area and Japan, low headline inflation rates also reflect subdued core inflation. In Canada and the United Kingdom, instead, core intlation rates have been close to 2 percent. 116 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00120 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 950.49653 ereh 95 oilof tesffo tresnI 30 PART lc RECENT ECONOMIC ANO riNANCIAl DEVELOPMENTS ... 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 negative levels. Although the ECB concluded its asset purchase program in December, it signaled 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. 40. Equity indexes for selected foreign economies The BOE noted that elevated uncertainty I (Ill around the United Kingdom's exit from the European Union (EU) weighed on the 140 country's economic outlook. 130 Political uncertainty and slower 120 economic growth \~eighed on AFE 110 asset 100 Moderation in global growth, protracted 90 budget negotiations between the Italian 80 government and the EU, and developments related to the United Kingdom's withdrawal from the EU weighed on AFE asset prices in the second half of 201 R (figure 40). Broad stock price indexes in the AFEs fell, interest rates on sovereign bonds in several countries in the European periphery remained elevated, <11. Nominal 10-year government bond yields iH and European bank shares underperformed. seiPcted advant:ed ecm1omies although these moves have partially retraced in recent weeks. Market-implied paths of policy l't•rn•nt in major AFEs and long-term sovereign bond 3S yields declined somewhat, as economic data 3,0 disappointed (figure 41 ). Growth slowed in many <>rr"'''''in<> market economies Chinese GDP growth slowed in the second half of 2018 as an earlier tightening of credit policy, aimed at restraining the buildup of debt, caused infrastructure investment to fall sharply and squeezed household spending (figure 42). However, increased concerns about a sharper-than-expected slowdown in 117 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00121 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 060.49653 ereh 06 oilof tesffo tresnI MONFTARY POLICY REPORT: FEBRUARY 2019 31 growth, as well as prospective clTccts of trade 42. Real gross dmnestic product growth in selected policies, prompted Chinese authorities to emerging market economics case monetary and fiscal policy somewhat. Elsewhere in emerging Asia, growth remained well below its 2017 pace amid headwinds from moderating global growth. Tighter financial conditions also weighed on growth in other EMEs--notably, Argentina and Turkey. Economic activitv ct.·. . n•nth., ... ...,.<~ somewhat in Me~ico Brazil, but uncertainty about policy developments remains elevated In Mexico, economic activity increased at a more rapid rate in the third quarter after modest advances earlier in the year. However, growth weakened again in the fourth quarter, as perceptions that the newly elected government would pursue less market-friendly policies led to a sharp tightening in financial conditions. Amid a sharp peso depreciation and above-target inflation, the Bank of Mexico raised its policy rate to 8.25 percent in December. Brazilian real GDP growth rebounded in the third quarter after being held down by a nationwide trucker's strike in May, and financial markets have rallied on expectations that Brazil's new government will pursue economic policies that support growth. However, investors continued to focus on whether the new administration would pass significant fiscal reforms. Financial conditions in market economies we1·e on net, little since july Financial conditions in the EM Es generally tightened in the second half of 2018, as investor concerns about vulnerabilities in several EMEs intensified against the backdrop of higher policy uncertainty, slowing global growth, 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 EME sovereign bond spreads over U.S. Treasury yields rose, and benchmark EME equity indexes declined. However. 118 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00122 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 160.49653 ereh 16 oilof tesffo tresnI 32 PART L RECENT ECONOMIC AND FINANCIAL DEVElOPMENTS 43. Emerging market mutual fund flows and spreads financial conditions improved significantly in recent months, supported in part by more positive policy developments--including the U.S.-Mexico-Canada Agreement and progress on U.S.-China trade negotiations----and FOMC communications indicating a more gradual normalization of U.S. interest rates. EME mutual fund inflows resumed in recent months after experiencing outflows in the middle of 2018 (figure 43). While movements in asset prices and capital flows have been sizable for a number of economies, broad indicators of t1nancial stress in EMEs arc below those seen during other periods of stress in recent years. The foreign exchange value of the U.S. dollar is bit a higher than in July (figure 44 ). 44. U.S. dollar exchange rate indexes Concerns about the global outlook, uncertainty about trade policy, and monetary - w ~ ~~ - kl - y ---------... .. . ···- Wt - 'i - .' - k~ - 'n - di - ng - Ja - nu - My ~ !l - . - 2 - 01 - 5-100 policy normalization in the United States contributed to the appreciation of the dollar. !50 The Chinese renminbi depreciated against the 140 dollar slightly, on net, amid ongoing trade 130 negotiations and increased concerns about 120 growth prospects in China. The Mexican peso has heen volatile amid ongoing political 110 developments and trade negotiations but has, 100 on net, declined only modestly against the Euro 90 dollar. Sharp declines in oil prices also weighed on the currencies of some energy-exporting economies. 119 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00123 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 260.49653 ereh 26 oilof tesffo tresnI 33 2 MONETARY POLICY The federal Open Market Committ<•e reflected the solid performance of the us_ continued to gradually increase the economy, the continued strengthening of the federal funds rate in the second half of labor market, and the fact that inflation had last year moved ncar the Committee's 2 percent longer run objective. From late 2015 through the first half of last year, the Federal Open Market Committee looking ahead, the FOMC will be (FOMC) gradually increased its target range as it determines what future ; .. cfmnn'k 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 ;m,nron•n:'t" Committee's congressionally mandated objectives 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 neutral level-' the federal funds rate at its September and that is, the level of the federal funds rate that is December meetings, bringing the target range neither expansionary nor contractionary. to 21/. to 2\12 percent (figure 45)_14 The FOMC's decisions to increase the federal funds rate Developments at the time of the December FOMC meeting, including volatility in tlnancial markets and increased concerns 14. Sec Board of Governors of the Federal Reserve System (2018), "Federal Reserve Issues FOMC about global growth, made the appropriate Statement.'' extent and timing of future rate increases more uncertain than earlier. Against that mtT!l'lar~ .:ill XtN.:::6a.htm: and Board of Governors of backdrop, the Committee indicated it would the Federal Reserve System (201R}, "Federal Reserve monitor global economic and financial Issues FOMC' Statement," press release, December 19, developments and assess their implications http<..:,-/\\\\\\ .!Cd.:r~dr.:~cnc.:;:o\ news..;\ ~.:nt..:ipr.:S\IYk'a"-.:"' mo;1::-ttr: .20 l S! 219a.htrn. for the economic outlook_ In the Summary 45. Selected interest rates Perren! __ _[__J_.LJ__j__L__l__L~____L__L__J_Lj 2017 2018 201!) maturity yields based on !!w mos! artive!y tradt•d :-txurities. 120 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00124 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 360.49653 ereh 36 oilof tesffo tresnI 34 PARl2: MONETARY POliCY 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 to 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.11 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 expansion monetary policy and, at the same time. of economic activity, strong labor market provides flexibility to address many of the conditions, and inflation ncar the Committee's limitations of these policy rules (see the box symmetric 2 percent objective as the most "Monetary Policy Rules and Systematic likely outcomes. Nonetheless, in light of Monetary Policy"). global economic and financial developments and muted inflation pressures, the Committee The FOMC has continued to •mniP•m•'nt will be patient as it determines what future to gradually reduce adjustments to the federal funds rate may be Reserve's balance sheet appropriate to support these outcomes. The Committee has continued to implement the balance sheet normalization program that future changes in the federal funds rate has been under way since October 2017.16 will depend on the economic outlook as Under this program, the FOMC has been informed by incoming data reducing its holdings of Treasury 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 the economic payments it received from these securities. outlook as informed by incoming data. Specilkally, such payments have been Specifically. in deciding on the timing and size reinvested only to the extent that they exceeded of future adjustments to the federal funds gradually rising caps (figure 46). rate, the Committee will assess realized and expected economic conditions relative to its In the third quarter of 2018, the Federal objectives of maximum employment and Reserve reinvested principal payments from 2 percent inflation. This assessment will take its holdings of Treasury securities maturing into account a wide 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 (MBS) the amount expectations. and readings on tlnancial and of principal payments from its holdings of international developments. agency debt and agency M BS received during each calendar month in excess of $16 billion. In addition to evaluating a wide range In the f(mrth quarter, the FO M C increased of economic and financial data and the caps for Treasury securities and for agency information gathered from business contacts securities to their respective maximums and other informed parties around the of $:10 billion and $20 billion. Of note, country, policymakers routinely consult 16. h1r more information, sec the Addendum to 15. See the December Summary of Economic the Policy Normalization Principles and Plans, which Projections, which appeared as an addendum to the is available on the Board's website at https:i/\\ W\\'. minutes of the December 18 19, 2018, meeting of the FOMC and is presented in Part 3 of this report. 121 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00125 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 460.49653 ereh 46 oilof tesffo tresnI MONETARY POLICY REPORT: FEBRUARY 2019 35 46. Principal payments on SOMA securities Treasury securities Agency debt and mortgage-backed securities Monthly Mollthly BJ!!ionsoldolla~ Ill Redemptions II Rt•demptions l~einwstnwnts 80 Reinvt•.stnwnts 80 - Monthly rap 70 - Monthly cap 70 SotrRn: Federal Rc,;crvc Bank of "Jew York; l·'cdcral Rc;-;crw Hoard ~ta!Tcakulati(>ns 47. Federal Reserve assets and liabilities reinvestments of agency debt and agency MBS agency debt and agency MBS at approximately ceased in October as principal payments fell $1.6 trillion (figure 47). below the maximum redemption caps. As the Federal Reserve has continued to The Federal Reserve's total assets have gradually rednce its securities holdings. the continued to decline from about $4.3 trillion level of reserve balances in the banking last July to about $4.0 trillion at present, system has declined. In particular. the level with holdings of Treasury securities at of reserve balances has decreased by about approximately $2.2 trillion and holdings of $350 billion since the middle of last year. and 122 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00126 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 560.49653 ereh 56 oilof tesffo tresnI 36 PART 2: MONFTARY POLICY Monetary Policy Rules and Systematic Monetary Policy Monetary policy rules are mathematical formulas Economists have analyzed m.my monetary policy that relate a policy interest rate, such as the federal rules, including the well-known Taylor (1993) rule. funds rate, to a smJ!I number of other economic Other rules include the "balanced approach" rule, the variables-, typically including the deviation of inflation "odjusted Taylor (1993)" rule, the "price level" rule, and from its target value and a me.Jsure of resource slack in the "first difference" rule (figure A). J These policy rules the economy. The prescriptions for the policy interest embody the three key principle.:; of good monetary rate from these rules can providE' helpful guidzmce for policy and take into account estimates of how far the the Federal Open Market Committee ('OM(). This economy is from the Federal Reserve's dual-mandate discussion provides information on how policy rules goals of maximum employment and price stability. Four inform the FOMC's systematic conduct of of the five rules inc!udr. the diUcrcncc between the rate policy, as well as practical considerdtions that of unemployment that is sustainable in the longer run it undesirable for the FOMC to mechanically follow and the current unemployment rate (the unemployment thf' prescription.:; of any specific rule. Th<" r:OMC's ratC' gap); the first-difference rule includes the change approach for conducting monetary policy provides in the unemployment rather than its leveL4 In suificient flexibility to address the intrinsic complexities addition, four of the rules include the difference and uncertainties in the economy while keeping (continued) monetary policy predictable and transpdrent Policy Rules and Historical Prescriptions fhe effectiveness of monetary policy is enhanced when it is well understood by the pub!ic.1 In simple rnodels of the economy, good economic performance can be achieved by following a policy rule that fosters public and that incorporates key principles of good monetary policy.1 One such principle is that monetary policy should respond in a predictablf' way to changes in economic conditions and the economic outlook. A S('Cond principle is that monetary policy should he accommorbtive when infl.ltion is helmv policym<tkNs' longer-run inflation and employment is below its maximum level; conversely, monetary policy ~hould be restrictive when the opposite holds. A third principle is that, to stabilize mf!at!on, the policy rate should be adjusted by more than one-for-onP in to persistent increases or dt<c:rt'ases 123 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00127 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 660.49653 ereh 66 oilof tesffo tresnI MONETARY POLICY REPORT: FEBRUARY 2019 37 A. Monewry policy rules Taylor (1993) rule Balanced-approach rule Taylor (1993) rule, adjusted Price-Jevd rule First-difference rule the values of the nominal federal funds rate prescribed by the Taylor (1993), and first-difference rules, for 411artcr t, u, is the ""''""'lm•menl rate in quarter t, and r,u~. is the level of the neutral real federal the lon}!er run that, on is to be consistent with sustaining maximum employment and inflation at the FOMC's 2 percent longer-run ln addition, u,UI is the rate of unemployment in the longer run. Z, is the cumulative sum of past deviations of the funds rate from the prescriptions of the Taylor (1993) rule when that rule prescribes setting the federal funds rate below zero. PLgap, is the percent deviation of the actual level of prices from a price level that rises 2 percent per year from its level in a spcci(lcd starting period. The Taylor{ t 993) rule and other policy rules arc generally written in terms of the deviation of real output from its full capacity leveL In these equations. the output gap has been replaced with the gap between the rate of unemployment in the longer run and its aetuallevel (using a relationship known as Okun's law) in order to represent the rules in terms of the FOMC's statutory goals. Historicatly. rnovemcms in the output and unemployment gaps have been highly correlated. Box note 3 provides references for the policy rules. between recent infl<1tion and the FOMC's longer- lower bound may therefore not provide enough policy run objective (2 pNcE'nt as measured hy the ;mnual accommodation. To make up for the cumulatiVE-~ shortfall change in the price index for personal consumption in accommodation (Z), the adjusted rule expenditures, or PCFl, whitt> the price-level rule only a gradual return of the policy rate to (positive) includes the gap betwpen the !(•vel of prices today and levels prPscrilwd by the standard Taylor (1993) rule after thf' levf'l of prices that would bt> observPd if inflation the economy begins to recover. The version of the price had bN'n con<>tant at 2 from a SfWCifird starting levPl rule sprcificd in figurf' ;\also recognizes that the year (PLgap,).~The rule then-~by takt~s federal funds ratP cannot he n•ducPd rnateridlly below account of the of inflation from the .1cro. lf inflation runs below the 1 objective long-run objective In edr!ier periods as we!! as the during pt>rlods when the rule prescribes current period. sc•tting the federal funds rate well below zero, the rule The adjusted T,1ylor (1993) rule that will, ovf-'r time, c.J!! for more Jccommoddtion to m.Jke the federal funds rate cannot be up for the past inflation ':>hortfdll. below zero, and that following the nrc•scrintinns As shown in B, the different monetdry policy of the (1 993) rulE' rules oiten diffpr their prescriptions for the federal funds rate has fallen to its funds ratc.6 Although almost all of the simple policy (continued on next page) are calculated (1) published data for unemployment ;md (2) survey- b.1SPd estimate<> of the longer-run value of' the nf•utral reo! rate and the longer-run value of the ratP. 124 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00128 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 760.49653 ereh 76 oilof tesffo tresnI 38 PART 2c MONFTARY POLICY Monetary Policy Rules (continued! B. Historical federal funds rate prescriptions from simple policy mJes (,luariPdy ~---~--~-~--~~---~~~ /.... '/ \. Hdl,mi •il ,li'J'Wdch n;k rules would have ca!lt"'<1 for values for the fedPral funds mJtters further, monetary policy affects the Federal rate that were increasing ovE>r time in recent yeMs, the RPserve's goal vMiables of inflation and employment prescribed values vary widely across rules. In genf'ral, with long and variable lags. For these reasons, there is no unique criterion for favoring one rulp good monPtary policy must tah-~ into account the over another. inforrnJtion contairwd in the redl-timt~ forecast of the economy. Finally, simple policy rules do not take into Systematic Monetary Policy in Practice account that the risks to the economic outlook may be asymmetric, such as during thC' periorl when the Although monetary policy rules seem appealing fedPral funds rJte was still close to zero. At that time, for obtaining and communicating current and future the FOMC took into considerJtion th<Jt it would have policy rate prescriptions, the usefulness of these rules limited scope to respond to an unexpected weakening for policymakers is limiterl by a of practical in the economy by cutting the federal funds rate, but considerations. According to monetary that it would have ample scope to increase the policy rules, the policy intC>rcst ratE' must respond to an uncxpE>cted strengtht>ning in the nY•ch,,m;,·"llc to a small number of v.1riables. However, dsymmt>tric risk provided a rational{·) for these rnay not reflect import<Jnt infonnJtion the federal funds rate more gradually than available to ro!icymakers at the time they make by some policy rules shown in figure 8.11 decisions. ror Pxample, none of the inputs into the Taylor (1993) rule includf' fin<mCJa! rlnd cn'rlit market (continued) conditions or indicators of consumN and business s(~ntiment; these factors are often w~ry informativp for the future f'ourse of the economy. Similarly, monetary policy rules tend to indue!£.:~ only the current values of the selected variables in the rule. But thE' rplationship lwtween the current values of these variables .md the outlook for the economy changes over time for a number of reasons. For example, the structure of the Pconomy is evolving over time and is not known with certainty at any given point in time.7 To complicate of Monetary Policy Rules" in 111(' discus5es how 5hifts in the 125 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00129 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 860.49653 ereh 86 oilof tesffo tresnI M0Nl1ARY POLICY REPOH FEBRUARY 2019 39 The FOMC conducts systematic monetary policy in C. Change in 10 -year yield in response to Employment a framework that respects the key principles of good Situation report monetary policy whilf' provirling suffici<'nt fl<:xibility to address many of the practical concerns described Parlier. At the core of this framework lies the FOMC's firm commitment to the Federal Reserve's statutory mandate of promoting maximum employment and price stability, a commitmt-~nt that the Committee reaffirms on a regular basis.'1 To explain its monetary policy decisions to the public Js dearly as possible, the FOMC communicates about the econon1ic data that are relevant to its policy decisions. As part of this communication strategy, the Federal Reserve describes the economic and financial data inform its policy decisions in the Monetary Policy Report and the FOMC meeting minutes. These datJ include, but are not limited to, measures of labor market conditions, inflation, household spPnding and business investment, asset prices, ,1nd the global economic environment. The FOMC postmeeting statements and the meeting minutes detail how the data inform the Committee's overall economic outlook, the risks to this outlook, and, in turn, the Committee's assessment about the appropriate stance of monetary policy. This appropriate stance depends on !he FOMC's longer-run goals, the economic outlook and the risks to the outlook, and the channels through which monetary policy actions influence economic activity and prices. The FOMC combines Jll of these particip<mts adjust their ()xpectations for policy in elements in determining the timing and size of this manner is shown in figure C. The figure plots the adjustments of the policy interest rates. The quc:~rterly change in the H)-year yield on Trc'asury securities in a Summary of fconomic Projections additional one-hour window around th(~ release of employment information about each fOMC forecasts reports on the vertical .1xis against the difference in for the economy and the longer-run assessments of thf' the actual value of nonfarm payroll job gJins and the economy, under her or his indivirlual views concerning (-'xpectations of privJte-sector analysts immediJtely ,1ppropriate policy. before the release of the dat,) on th0 horizontal axis--" These policy communications hc>lp the public thJt is, a proxy for "surprisps" in nonfarm payroll job understand the FOMC's approach to gains. Whf'n actual nonfarm job gains turn out po!kymaking and the principles that under!i(' to !w higher than markc~t expect, the yield Consequently, in response to incoming inform.Jtion, on to increase. The market pMticipants tend to adjust their expectations risf' in 1 O··yf'ar yield rd!Pcts markf't pJrticipants' regarding rnonPtary policy in thP direction consisf(>nt expectdtion that, as a result of stronger-than-expected with achieving the maximum-employment and prin~­ labor market data, the path of short-term interest rates stability goals of the FOMC. Hl Evidence that market will be higher in the future. Conversely, the 1 0-year yield tends to decline after negative in nonfarm payroll data, the interest rates will be somewhat in the future. These adjustments in the 10 -year yield help stabilize the Pconorny even befor0 the FOMC changes the level of the federal funds r<1te in the dirc>ction consistf:'nt with !ldf. New Pconomic information can be compost>d of data achieving its goals, as higher long-term interest rates or of factors thilt risks to future economic tend to slow the IJbor mrtrkPt while lower rates tend to but M<' not yet in tlw data. strengthen it. 126 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00130 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 960.49653 ereh 96 oilof tesffo tresnI 40 PART 2: MONETARY POliCY by about $1.2 trillion since its peak in 2014.17 Treasury. Preliminary linancial statement At the January meeting, the Committee results indicate that the Federal Reserve released an updated Statement Regarding remitted about $65 billion in 2018. Monetary Policy Implementation and Balance Sheet Normalization to provide additional The federal Reserve's implementation of information regarding its plans to implement monetary has continued smoothly monetary policy over the longer run.18ln this As with the previous federal funds rate statement, the Committee indicated that it increases since late 2015, the Federal Reserve intends to continue to implement monetary successfully raised the eflcctivc federal funds policy in a regime in which an ample supply rate in September and December by increasing of reserves ensures that control over the level the interest rate paid on reserve balances of the federal funds rate and other short-term and the interest rate offered on overnight interest rates is exercised primarily through the reverse repurchase agreements (ON RRPs). setting of the Federal Reserve's administered Specifically, the Federal Reserve raised the rates, and in which active management of interest rate paid on required and excess the supply of reserves is not required. This reserve balances to 2.20 percent in September operating procedure is often called a "!loor and to 2.40 percent in December. In addition, system." The FO M C judges that this approach the Federal Reserve increased the ON RRP provides good control of short-term money offering rate to 2.00 percent in September market rates in a variety of market conditions and to 2.25 percent in December. The Federal and effective transmission of those rates to Reserve also approved a '/.i percentage point broader financial conditions. In addition, the increase in the discount rate (the primary FOMC stated that it is prepared to adjust credit rate) in both September and December. any of the details for completing balance Yields on a broad set of money market sheet normalization in light of economic and financial developments. ~ instruments moved higher, ronghly in line with the federal funds rate, in response to the Although reserve balances play a central role FOMC's policy decisions in September and in the ongoing balance sheet normalization December. Usage of the ON RRP facility has process. in the longer run, the size of the remained low, excluding quarter-ends. balance sheet will also be importantly The cllcctivc federal funds rate moved to parity determined by trend growth in nonreserve with the interest rate paid on reserve balances liabilities. The box ''The Role of Liabilities in in the months before the December meeting. Determining the Size of the Federal Reserve's Balance Sheet" discusses various factors that At 1ts December meeting, the Committee made influence the size of reserve and nonrescrvc a second small technical adjustment by setting liabilities. the 111 teres\ on excess reserves rate 10 basis points below the top of the target range for Meanwhile, interest income on the Federal the federal funds rate; this adjustment was Reserve's securities holdings has continued to intended to foster trading in the federal funds support substantial remittances to the U.S. market at rates well within the FOMC's target range. 17. Since the start of the normalization program. The federal Reserve will conduct a reserve balances have dropped by approximately $600 billion. review of its strategic framework for 18. Sec the Statement Regarding Monetary Policy monetary policy in 2019 Implementation and Balance Sheet Normalization With labor market conditions close to which is available on the Board's website at ' maximum employment and inflation ncar the Committee's 2 percent objective, the FOMC 127 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00131 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 070.49653 ereh 07 oilof tesffo tresnI MONETARY POliCY REPORTc FEBRUARY 2019 41 The Role of Liabilities in Determining the Size of the Federal Reserve's Balance Sheet The size of the Federal Reserve's balance sheet influenced their size since the financial crisis. Many increased from $900 billion at the end of 2006 to Jbout of the Federal Reserve's liabilities arise from statutory $4.5 trillion at thP end of 2014-or from 6 resporlStl>IIHies, such as supplying and serving of gross domestic product (GOP) to about pern'nl Department's fiscal agent. liability of GDP--rnainly as a result of the large-sGlie asst>t provides benefits to the economy and plays an purchase (LSAP) programs conducted in response to important role as a safe and liquid asset for the public, persistent economic weakness following the financial the banking system, the U.S. government, or other crisis. The expansion of total assets that stemmed from institutions. the LSAPs was primarily matched by higher reservE' Figure A plots the evolution of the Federal Reserve's balances of depository institutions, which peaked in main liabilities relative to nominal GDP over the post-· the fall of 2014 at $2.8 trillion, or almost 16 percent World War II period. Federal Reserve notes outstanding of COP, rising from about $10 billion at the end of have traditionally been the largest Federal Reserve 2006. Liabilities other than reserves have also grown liability and, over the past three decades, have been significantly and played a role in the expansion of slowly growing as a share of U.S. nominal GDP. U.S. the balance sheet The magnitude of these nonreserve currenq is an important medium of exchange and liabilities as well as the flows their variability store of value, both domestically and abroad. Despite are not closely related to the inneasing use of electronic means of payment, Since October 2017, the Federal currency remains widely used in retail transactions gradually reducing its securities holdings resulting in the United States. Demand for currency tends from crisis-era purchases. Once these holdings have to incrt.~ase with the si?e of the economy because unwound to the point at which reserve balances households and businPsses need more currency to have declined to their longer-run level, the size of use in exchange for a growing volume of economic the balance sheet will be determined by factors transJctions. In addition, with heavy usage of U.S. uffecting the demand for Federal Reserve liabilities. currency ovt.>rseas, changes in global growth as well This discussion describes the Federal Reserve's most as in financial ;md geopolitical stability f'f'ln also significant li<1bilities and reviews the factors that (continuf'd on next page) A Liabilities as a share (f nonlnal gross domestic product Reserve balance~ Other!i<lhilities Treasury (Jenera! Account 15 Ct1rrcncy 20 !5 128 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00132 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 170.49653 ereh 17 oilof tesffo tresnI 42 PART 2c MONETARY POliCY The Role of liabilities wo/11/nlwu, materially affect the rate of currency growth. Since the Banks' higher demand for reserves appears to reflect in start of the Global Financi<JI Crisis, notes in circulation part an increased focus on liquidity risk management in have more than doubled and, as of the end of 2018, the context of regulatory changes. stood at dbout $1.67 trillion, equivalent to about Liabilities other than currency and reserves 8 percent of U.S. CDP, implying that accommodating include the Treasury General Account (TGA), reverse dPm<md for alone requires a larger balance H'purchase agreements conducted with foreign officbl sheet than before crisis. account holders, and deposits held by designated Reserve balances Jre currently the second- financial market utilities (DFMUs). By statute, the largest liability in the federal Reserve's balance Federal Reserve serves a special role JS fiscal <:~gent sheet, totaling $1.66 trillion at the end of 2018, or or banker for the federal government. Consequently, nearly 8 percent of nomina! GDP. This liability item the U.S. Treasury holds cash balances at the Federal consists of deposits held at Federal Reserve Banks by Reserve in the TGA, using this account to receive depository institutions, including commercial banks, taxes and proceeds of securities sales and to pay the savings banks, rredit unions, thrift institutions, and government's bills, including interest and principal on most U.S. branches and agencies of foreign banks. maturing securities. Before 2008, the Treasury targeted These babnc('s indurl<.' resNves held to fulfill rpservc a steady, !ow balance of $5 billion in the TGA on requirements as well as reserves held in excess of most days, Jnd it used privJte accounts at commercial these wquirements. Reserve balances Jllow banks to banks to managt' the variability in its cash flows. Since facilitate daily payment flows, both in ordinary times 2008, the Treasury has used the TGA as the primary and in stress scenarios, without borrowing funds or account for managing cash flows. !n May 2015, the selling assets. Reserve balances have been declining Treasury announced its intention to hold in the TGA a for several years, in part as a result of the ongoing level of cash generally sufficient to cover one week of balance sheet normalization program initiated in outflows, subject to a minimum balance objective of October 2017, and now stand about $1.2 trillion below roughly $150 billion. Since this policy change, the TGA their peak in 2014. At its January 2019 meeting, the balance has gPnerally been vvell above this minimum; FedPrdl Open Market Committee decided that it would at the end of 2018, it was about $370 billion, or nearly continue to implemPnt monetary policy in a regime 2 percent of CDP. The current policy helps protect with an ample ~upply of reserves, which is often called against the risk that extreme weather or other technical a "floor system" or an "abundant reserves "1 or operJtional events might cause an interruption in Going forward, the banking system's access to debt markets Jnd leave the Treasury unable for reserve bal.lnces and the Committee's judgment to fund U.S. government operations--·a scenario that 0bout t!w quantity thilt is appropri"tc for the f'ffici('nt could have serious consequences for financial and effe\tive implementation of will Reverse repurchase agreements with determine the longer-run /eve! of reserve accounts, also known as the foreign Although the level of reserve balances Ih at banks will rose recent years. The Federal eventually demand is not yet known with certainty, it long this service as part of ,1 suite of banking is likP!y to be appreci;>b!y higher than before thP crisis. and custody services to foreign cpntral hanks, foreign governments, and international official ins1itutions. 1. SeP footnok' 1 gin the mel in text. (continllf>d) 129 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00133 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 270.49653 ereh 27 oilof tesffo tresnI MONETARY POLICY REPORT FfBRUARY 2019 43 Accounts at the Federal Reserve provide foreign official Financial Crisis, central bank balance sheets increased institutions with access to immediate dollar liquidity to in jurisdictions. Relative to GDP, the Federal support operational needs, to dear and settle securities babnce sheet remains smaller than those of in their accounts, and to address unexpected dollar other reserve-currency central banks in major advanced shortages or rate volatility. The foreign foreign economies thal currently operate with abundant repo pool has grown an average level of around reserves-such as the European Central Bank, the $30 billion before the crisis to J current average Bank of japan, and the Bank of England---although this of about $250 billion, to a little more difference is partly due to the Federal Reserve being than 1 percent of GOP. rise in foreign f('po pool much further along in the policy normalization process balances has reflected in part CE-'ntral bJnks' preference after the crisis. In addition, the Federal Reserve's lo maintain robust doiiJr liquidity buffers. balance sheet relative to GDP is only modestly larger Finally, "other deposits" with the Federal ResE'rve than those of central banks, such as the Norges Bank H~1nks have also risen steadily over recent years, from and the Reserve Bank of New Zealand, that aim to less than $1 billion before the crisis to about $80 billion operate at a relatively low level of abundant reserves. at the end of 2018. Allhough "other deposits" include Of course, differences in central bank balance sheets balances held by international and multilateral also reflect differences in financial systems across organizations, government-sponsored enterprises, countries. and other miscellaneous items, the increase has !Jrgely been driven by the establishments of accounts B. Central bank balance sheets relative to gross domestic for DFMUs. DFMUs provide the infrastructure for product transferring, clearing, and settling payments, securities, Pf'rumofGDP and olhf'r transactions among financial institutions. The Dodd-Frank Wall Street Reform and Consumer ProtPction Act providPs th;lt DFMUs-thosc financial 100 market utilitif's designated as systemically important by the Financial Stability Oversight Council-can maintain 80 accounts at the Fcderd! Reserve and edrn interest on • Res.l'fV('Bankof New Zealand bakmces maintained in those <1ccounts. 60 Putting togethPr all of the-se e-lements-that is, proj('Cted trPnd growth for currency in circubtion, the Committee's decision to continue operating with ample reserves, Jnd the higher levels for thf' TGA, the fon~ign repo pool, and Di-=MU b~llances--~expldins why the longer-run size of !he Fedt'ra/ Reserve's balance sheet will be considerably larger than before the crisis. At the end of 201 a, the federal Reserve's balance sheC't totaled $4.1 trillion, or about 20 of GDP. Figure B considers the size of thE' shPet in ,\n internatiorhll context. In response to the Clobal 130 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00134 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 370.49653 ereh 37 oilof tesffo tresnI 44 PART 2' MONETARY POLICY judges it is an opportune time for the Federal Spccitic to the communications practices, the Reserve to conduct a review of its strategic Federal Reserve judges that transparency is framework for monetary policy--including essential to accountability and the effectiveness the policy strategy, tools, 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 to improve the and decisions to the Congress and the public Committee's current 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 achieve its Initiatives" discusses the steps and new statutory mandate of maximum employment initiatives the Federal Reserve has taken to and price stability. improve transparency. 131 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00135 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 470.49653 ereh 47 oilof tesffo tresnI MONETARY POLICY REPORT: Fr:BRLI!\RY 2019 45 Federal Reserve Transparency: Rationale and New Initiatives Over the past 25 years, the Federal Reserve ChairmJn bC'gan holding a press conference after Jnd other major central banks have taken steps to C'ach FOMC meeting, doubling the frequency of the improve transparency, which provides three import<:mt press conferences that were introduced in 2011. benefits. First, transparency hP!ps ensure that \Pntrzd These press conferences are held 30 minutes after hanks are held accountJble to the public Jnd its the release of the postmeeting statement and provide elected representatives. Accountability is ess(~ntial to additional information about the economic outlook, democratic legitimacy and is particularly important the Committet-'s policy decision, and policy tools. for central banks that have been granted extensive Press conferences .1lso allow the Chairmrtn to answer operational independence, as is lhe case for the questions on monetary policy Jnd other issues in a Federal Reserve. Second, transparency enha11Ces timely fashion. the effc>ctiveness of monetary policy. If the public In November 2018, the Federal Reserve announced understands the central bank's views on the economy that it would conduct a broad rE>view of its monetary and monetary policy, then households .1nd businesses policy framework-·-specifically, of the policy strategy, will take those views into account in making their tools, and communication practices that the FOMC spending and investment plans. Third, transparency uses in the pursuit of its dual-mandate goals of supports a central bank's efforts to promote the s.1fety maximum employment and price stability. The Federal and soundness of fin<:mcial institutions and the overall Reserve's existing policy framework is the result of financial system, including by helping financial decades of learning and refinements and has allowed institutions know what is expected of them. Thus, for the FOMC to pursue effectively its dual-mandate each of these reasons, the Federal Reserve seeks to goals. Centra! banks in a number of other advanced explain its policymJking approach and decisions to the economies have also found it useful, at times, to Congress and the public as clearly as possible. conduct reviews of their monetary policy frameworks. To foster transparency and accountability, the Such a review seems particularly appropriate when the Federal Reserve uses a widE' variebtyy of communications, economy appears to have changed in ways that matter including semi.mnual testimony the ChJirman for the conduct of monetary policy. For example, the in conjunction with this report, the neutral level of the policy interest rate appears to have Policy Report. In addition, the Federal Open fallen in the United States and abroad, increasing the Committee (FOMC) has released a statement after every risk thJt a centr;:d hank's policy rate will be constrained reguldfly scheduled meeting for almost 20 ye,lfs, and its effective lowPr bound in future economic det<1iled minutes of FOMC meetings have been released The review will consider ways to t~nsure since 1993.1 ln 2007, the r.eder.1l Reserve pxpanded that the Federal Reserve's monetary policy strategy, the economic projections th.Jt have Jccompanlf'd the tools, and communications going forward provide the Monetary Policy Report since 1979 into the Summary best means to dchieve and maintain thE' dual-mJndatC' of Economic Projections, which FOMC participants objpctives. submit cvpry quarter. And in 2012, the F'OMC first Thr review will include outreach to and consultation rPieased its Statement nn Longer-Run Goals and with a broad range of stJkehnlders in the U.S. economy Monetary Po! icy Strntegy, which it n?Jffirms annua!!y.I through a series of "Fed Listens" events. The Reserve The Federal Reserve continues to mdke BJnks will hold forums around the countrv, in a town improvem('nts to its communications. In JanuJry, the hall format, allowing the Federal Reserve to gather per<>pectives from the pub!ic including representatives 1 of business and industry, !dbor lc~aders, community Jnrl economic df'vf'lopmC'nt officials, acrtdernics, nonprofit oro.miz.ttinrls. community bankers, local government ant.! rcpresenlatives of congressional offices in Reserve Bank Districts,' In addition the Federal Reserve 1 (continued on next pdge) L ''Fed listens" f.'Vents will be held at the Federal Reserve> Bank of Oalbs this and .11 the Feder.1l Reserve Bank oi Minneapolis this ApriL "Fed listens" Pvents will be announced in 132 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00136 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 570.49653 ereh 57 oilof tesffo tresnI 46 PART MONETARY POLICY Federal Reserve Transparency 'cuntinueci; System will sponsor a resparch conference this june at or,oerv/S,,on and Regulation Report provides the Ft>derJ! Reserve Bank with academic an of banking conditions and the current speakers and non-academic from outside the areJs of focus of the Federal Reserve's regulatory Federal Reserve System. policy framework, including pending rules, and key Beginning Jround the middle of 2019, as part of themes, trends, and priorities regarding supervisory their review of how to best pursue the Fed's stJtutory programs. The report distinguishes between large mandate, Federal Reserve policymakers will discuss financial institutions and regional and community relpvant economic research as well as the perspectives banking organizations because supervisory approaches offered during the outreach events. At the end of the and prioritk•s for these institutions frequently differ. process, policymakers will assess the information and The report provides information to the public in perspectives gdthered and will report their findings and conjunction with sC'miJnnual testimony before the conclusions to the public. by the Vice Chairman for Supervision. This review comp!emt•nts other recent chJnges Financial Stdbility Report summarizes the to the Ferleral Reserve's communication practices. Hoard's monitoring of vulnerJbilities in the financial !n November 2018, the Board inaugurated two system. The Board monitors four broad categories of reports, the Supervision and Regulation Report and vulnerabilities, including elevated valuation pressures the Financial Stability Report.4 These reports provide (as signaled by asset prices that are high rel<llive to information about the Board's responsibility, shJred economic fundamentals or historical norms), excessive with other government agencies, to foster the safety borrowing by businesses and households, excessive and soundness of the U.S. banking system and to within the financial sector, ~md funding promote financial stability. Transparency is key to these associated with a withdrawal of funds efforts, JS it enhances public confidence, allows for the from a particular financial institution or sector, for considPration of outside ideas, and makes it easier for exdmp!e as pJ.rt of a "financial panic"). Assessments regulated entities to know whJt is expecterl of thpm of these vulnerabilities inform Federal Reserve actions and how best to comply. to promote the resilience of the financial system, including through its ~upervision and regulation of financial institutions. Through all of these efforts to improve its communications, the Federal Reserve seeks to enhance transparency and accountability regarding how it pursues its statutory responsibilities. 133 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00137 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 670.49653 ereh 67 oilof tesffo tresnI 47 3 SuMMARY or- EcoNOMIC The following material appeared as an addendum to the minutes of the December 78-79,2078, meeting of the Federal Open Market Committee. In conjunction with the Federal Open participants continued to expect real GDP Market Committee (FOMC) meeting held on growth to slow throughout the projection December 18 19. 2018. meeting participants horizon, with a majority of participants submitted their projections of the most likely projecting growth in 2021 to be a little below outcomes for real gross domestic product their estimate of its longer-run rate. Almost (GDP) growth. the unemployment rate, and all participants who submitted longer-run inflation for each year from 2018 to 2021 projections continued to expect that the and over the longer run.19 Each participant's unemployment rate would run below their projections were based on information estimate of its longer-run level 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 for the percentage change in the price index for federal funds rate and its longer-run value- personal consumption expenditures (PCE), and assumptions about other factors likely would increase slightly over the next two to affect economic outcomes. The longer- years, and nearly all participants expected run projections represent each participant's that it wonld be at or slightly above the assessment of the value to which each variable Committee's 2 percent objective in 2020 would be expected to converge, over time, and 2021. Compared with 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 for real GDP growth and inflation the future path of policy that each participant in 2019. Table I and figure I provide summary deems most likely to foster outcomes tor statistics for the projections. economic activity and inflation that best satisfy his or her individual interpretation of As shown in figure 2, participants generally the statutory mandate to promote maximum continued to expect that the evolution of employment and price stability. the economy. relative to their objectives of maximum employment and 2 percent inflation, All participants who submitted 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 above their individual projections for the federal funds rate for the 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. Five members of the Bonrd of Governors, one of 2020 and 2021 would be modestly higher more than in September 2018, were in office at the time than their estimate of its level over the longer of the December 2018 meeting and submitted economic run; however, many marked down the extent projections. 20. One participant did not submit longer-run to which it would exceed their estimate of the projcctlons for real GDP growth, the unemployment rate, longer-run level relative to their September or the federal funds rate. projections. 134 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00138 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 770.49653 ereh 77 oilof tesffo tresnI 48 PART 3o SUMMARY OF FCONOMIC PROifCTIONS Table I. Economic projections of 1-'Cdcral Reserve Board members and Federal Reserve Bank presidents, under their individual assessments of projected appropriate monetary policy, December 201 R Percent Vanablc ~OJR 2021 Longer 20\R 2021 Longer Change in real GDP 3.0 2.:'1 2.0 LR 1.9 3.0 :u :.u 2.5 1.8 2.0 1.5-2.0 LR-2.0 3.0 " :UJ-2.7 1.5-2.2 1.4 2.1 1.7-2.2 September projection 3.1 2.5 2.0 1.8 LB 3.0-3.2 2.4--2.7 U<!J 1.6 2.0 UI<!.O 2.9-3.2 2.1 2.1\ 1.7-2.4 L5 2.1 1.7 ::u Unemployment rate 3.7 3.5 3.6 3.t:: 4.4 3.7 :u-3.7 3.5 3.B J.7 3.4-A.O September projection 3.7 3.5 3.5 3.7 4.5 3.7 3.4--38 3.7-.18 3.4-3.8 PCE inflati(l[j 1.9 1.9 :u 2.1 2.0 Ul-L9 Ul 2.1 2.0-2.1 LR 1.9 1.8-2.2 September projeclion 2J 2,1) 2.1 2.1 2.0 2.0-2.1 2.0-2.1 2.1 2.2 1.9 2.2 2.0--2.3 Con: P('E inll<:~tlnn" 1.9 2.0 2.0 2,0 1K1.9 2.0<!.1 2_0-2.1 LS-1.9 1.9 2.2 2.0 2.1 2.1 2.1 1.9 20 2.0 2.1 2.1-2.2 1.9 2.0 2.0-2.3 path On balance, participants continued to view growth for 2018 and 2019 were slightly lower, the uncertainty around their projections as while the median for the longer-run rate of broadly similar to the average of the past growth was a bit higher. Several 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 revisions to their near risks to real GDP growth as weighted to the term growth estimates. downside, and one less participant viewed the risks to inflation as weighted to the upside. The median of projections for the unemployment rate in the fourth quarter of 2019 was 3.5 percent, unchanged from the September SEP and almost I percentage point The median of participants' projections for the below the median assessment of its longer growth rate of real GDP for 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 pace expected for 2018. Most projections for 2020 and 2021 edged back up participants continued to expect GDP growth to 3.6 percent and 3.8 percent, respectively. to slow throughout the projection horizon, Nevertheless. most participants continued to with the median projection at 2.0 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 unemployment was the medians of the projections tor real GDP slightly lower than in September. 135 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00139 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 870.49653 ereh 87 oilof tesffo tresnI MONETARY POLICY REPORT: FFBRUARY 2019 49 Figure I. Medians, ct~ntral tendencies. and ranges of economic projections, 2018--21 and over the longer run Percent Change in real GDP - Median of projections 0 Central tendency of pro_jtttions I Rang:e of projections - 3 Percent tJncmploymcnt rate ___ _j___ __ L_ ____l _ 201.\ 2014 2015 2016 2017 2018 2019 2020 202! Percent - 3 ;;±; = i':E ~ ::!01:1 2014 2015 2016 2017 2018 2019 2020 2021 Longer run Non::: Ddlnitions of variables and other explanations arc in the notes to tah!c J. The data for the actual values of the variables arc annual. 136 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00140 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 970.49653 ereh 97 oilof tesffo tresnI 50 PART Jo SUMMARY OF ECONOMIC PROJECTIONS Figure 2. FOMC participants' assessments of appropriate monetary policy: Midpoint of target range or target level for the federal funds rate Percent 5.0 4.5 4.0 3.5 3.0 2.5 2.0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -. . ! . . . ···········- 1.5 '''i"'''''''' .. '''''''''- 1.0 ................................... , .... ·················- 0.5 0.0 2018 2019 2020 2021 Longer run Non:: Each shaded circle mdicatcs the value (rounded to the nearest l/l': of the target range for the federal funds rate or rate at the longer run. for the fCderal funds rate. Figures 3.A and 3.B show the distributions of participants' projections for real GDP growth and the unemployment rate from 2018 to 2021 The median of projections for total PCE price and in the longer run. The distributions of inflation was 1.9 percent in 2019, a bit lower individual projections for real GDP growth for than in the September SEP, while the medians 2019 and 2020 shifted down relative to those for 2020 and 2021 were 2. l percent, the same in the September SEP, while the distributions as in the previous projections. The medians of for 2021 and for the longer-run rate of GDP projections lor core PCE price inflation over growth were little changed. The distribution of the 2019-21 period were 2.0 percent, a touch individual projections for the unemployment lower than in September. Some participants rate in 2019 was a touch more dispersed pointed to softer incoming data or recent relative to the distribution of the September declines in oil prices as reasons for shaving projections; the distribution moved slightly their projections for inflation. higher for 2020, while the distribution for the longer-run normal rate shifted toward the Figures 3.C and 3.D provide information on lower end of its range. the distributions of participants' views about 137 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00141 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 080.49653 ereh 08 oilof tesffo tresnI MONHA~Y POLICY RFPORTc FEBRUARY 2019 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 inllation beyond gradually to the Committee's 2 percent this year either shified slightly to the left or objective. Some participants cited a weaker were unchanged relative to the September near-term trajectory tor economic growth or SEP. Most participants revised down slightly a muted response of inflation to tight labor their projections of total PCE price inflation market conditions as factors contributing to for 2019. All participants expected 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 2020 and 2021. Most participants projected that core PCE inflation and Risks would run at 2.0 to 2.1 percent throughout the projection horizon. In assessing the appropriate path of the federal funds rate. FOMC participants take account of the range of possible economic outcomes, the likelihood of those outcomes, and the Figure 3.E shows distributions of participants' potential benefits and costs should they occnr. 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 various private and government from 2018 to 2021 and over the longer run. forecasts over the past20 years---for real GDP The distributions tor 2019 through 2021 were growth. the unemployment rate, and total PCE Jess dispersed and shifted slightly toward price inflation. Those measures arc represented lower values. Compared 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 fan charts display the median SEP over the 2019--21 period. for the end of 2019, projections tor the three variables surrounded the median of federal funds rate projections by symmetric confidence intervals derived was 2.88 percent, consistent 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 attending 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 participants expected that the federal funds Table 2. Average historical projection error ranges rate at the end of 2020 and 202 I would be modestly higher than their estimate of its level over the longer run; however, many marked down the extent to which it would exceed their estimate of the longer-run level relative to their September projections. The median of the longer-run projections of the federal funds rate was 2. 75 percent, 25 basis points lower than in September. In discussing their projections, many participants continued to express the view that any further increases in the federal funds rate over the next few years would likely be gradual. That anticipated pace reflected a few factors, such as a short-term neutral 138 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00142 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 180.49653 ereh 18 oilof tesffo tresnI 52 PART 3: SUMMARY OF ECONOMIC PROJECTIONS NumOCr ofparllc!pauts 1.2 1.4 1.6 I.R~ 2.0- 2.2-- 2.4 L6 2~8 3.0 3.2-· 1.3 1.5 1.7 L9 2.1 23 2.5 2.7 2.9 3.1 3.3 Percent range Number of participants 2019 -JR -16 -14 -12 -10 g 6 4 2 1.2 1.4 1.6 I.R 2.0·- 2.2 2.4 2.6 2.8- 3.0 3.2 1.3 !.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 Percent range Number of participants 2020 -18 -16 -14 -!2 -10 8 6 4 2.6·- 2.8 3.0 3.2~ 1.5 L9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 Percent range Number of participants 2021 lR -16 -14 12 10 g 6 ~ L2 1.4- 1.6 1.8- 2.0 2.2 2.4 2_6 2.8 3.0 3.2 1.3 1.5 1.7 1.9 2.1 2.3 2.7 2.9 3.1 3.3 Percent range Numhcr of participants Longer run 18 -16 -14 12 10 8 6 4 ' 1.2. 1.4 1.6 1.8 2.0~ 2.2 2.4 2.6 2.X 3.0 3.2 1.3 1.5 1.7 1.9 2.! 2.3 2.5 2.7 2.9 3.1 3.3 Percent range NoTE: Definitions nf\'arlah!c:s and other explanations arc in the notes tn !ahlc 1. 139 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00143 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 280.49653 ereh 28 oilof tesffo tresnI MONETARY POLICY REPORT: FEBRUARY 2019 53 Figure 3. B. Distribution of participants' projections for the unemployment rate, 2018 · 21 and over the longer run m..· ···.-..··.. .. -.·.·. . Number of participants 2018 0 S D e e p c t e e m m b b e e r r p p w r j o e j c e t c J tw ~m n ~ s ~ - - - - 1 1 1 1 4 8 2 6 -10 I . ~ I R c I ... ·. .. I_ 6 4 ~2 3.0 3.2 3.4 3.6 u 4.0 4.2 4.4 4.6 5.0 3.1 33 3.5 3.7 3.9 4.1 4.3 4.5 4.7 5.1 Percent range Number of participant'> 2019 3.0 3.2 3.4 3.6· 3.8 4.0 4.4 4.6 4.8 5.0 3.1 3.3 3.5 3.7 3.9 4.1 4.5 4.7 4.9 5.1 Percent range Number of participants 2020 -18 16 -14 -12 -10 8 " 4 3.0 3.2- 3.4 3.6 3.8 4.0 4.6 4.8 5.0. 3.1 3.3 3.5 3.7 3.9 4.1 4.7 4.9 5.1 Percent range Numbe-r pf participants 2021 18 16 -14 -12 1() R 6 i 3.0 3.2 4.2 4.4 4.0 48 5.0- 3.1 3.3 4.3 4.5 4.7 4.9 5.1 Pcrccllt range Number of participants Longer run -18 16 -14 -12 10 8 6 4 2 3.0 3.2 3.4 3.6 3.8 4.0 4.2· 4.4 4.6· 4.8 5.0 3.1 3.3 3.5 3.7 3.9 4.1 4.3 4.5 4.7 4.9 5.1 Percent range NoTE: Detlnitions nfvanablcs and other ex plana! ions art' in the notes tc'~ table I. 140 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00144 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 380.49653 ereh 38 oilof tesffo tresnI 54 P.~RT 3: SUMMARY OF FCONOMIC PROJFCTIONS Figun~ 3.C. Distribution of participants' projections for PCE inflation, 2018~ 21 and over the longer run Number of participants 1g -16 -14 -12 10 8 6 4 ' J.7, 1.9 2.1 23 1.8 2.0 2.2 2.4 Percent range Number of participants 20!9 -18 16 14 -!2. -10 8 6 4 ' 1.8 2.4 Percent range :Kumbcr of participants 2020 18 -16 -14 12 J() 8 6 4 ' L__ __________ JJ__ _~ ~--L-J-----~--~------------~ 1.7 1.9 2.1 2.3 1.8 2.1) 2.2 2.4 Percent mngc Number of participants 202! -18 -16 -14 -12 10 8 6 4 L_--------~~~~~~_L~~~~~========~' 1.7 1.9 2.1 2.3 1.8 2.0 2.2 2.4 Percent range Number of participants Longer nm 18 16 14 12 10 8 6 4 ' 1.7 1.9 2.1 2.3 1.8 2.0 2.2 2.4 Percent range NorE: Definitions ofvariahlcs and other explanations are in the notes w table I. 141 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00145 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 480.49653 ereh 48 oilof tesffo tresnI MONETARY POLICY REPORT: FEBRUARY 2019 55 Figure 3.0. Distribution of participants' projections for core PCE inflation, 2018.,·21 Number of participants 201R 0 IR -16 14 12 10 Pcn:ent range Numlx:r of participants 2019 -JR -!6 -14 12 10 1.7 2.! l.S Percent range Number of participants 2020 -18 16 -14 1.7 1.9 2.1 2.3 1.8 2.0 2.2 2A Pcrcen1 range Numher of parti~ipants 2021 -IX lh 14 1.7 1.9 2.1 2.3 I.S 2.0 2.2 2.4 Pcrcl'n1 range NoTE: Ddinitions nfvariahh.:s and l)thrr cxplanatinns are in the notes to table I 142 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00146 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 580.49653 ereh 58 oilof tesffo tresnI 56 PART .·l: SUMMARY OF FCONOMIC PROIECTIONS figure 3.E. Distribution of partlclpants' judgments of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate, 2018··2l and over the longer run Number of participants 2018 -JH 16 14 12 10 8 " 4 2 1.88 2.13 2.38 2.63-- 2.88 3.!3. 3.38 3.63 U8 4.13 4.38 4.63 4.88 2.12 2.37 2.62 2.87 3.12 3.37 3.62 .1.R7 4.12 4.37 4.62 4.87 5.12 Percent range Number of participants -IR -16 -14 -12 -10 8 " i 1.88 2.D 2.38 2.63 2.88 3.13. 3.38· 3.63· 3.88· 4.13 4.38 4.63 4.88 2.12 2.37 2.62 2.87 3.12 J.:n 3.62 3.87 4.12 4.37 4.62 4.87 5.12 Percent range Number of participants 2020 IB -16 -14 12 10 8 6 4 1.88 2.13 2.38 2.63 2.88 3.13 3.38 3.63 3.88 4.13· 4.38 4.63 4.88 2.12 2.37 2.62 2.R7 3.12 3.37 3.62 3.87 4.12 4.37 4.62 4.87 5.12 Percent range Number of participants 2021 -!K -!6 -14 12 -10 8 6 4 ' 1.88 2.13· 2.38 2.63 2.88 3.13 3.38 3.63 3.88 4.13 4.38 4.63 4.88 2.12 .2 ..1 7 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62 4.87 5.12 Percent range Numher of participants Longer run -lR -16 14 -12 -10 8 6 4 2 3.13 ,.3S 3.63 3.RR 4.13 4.3S 4.63 4.8S . 2.37 .2.61 2.87 J.:n 3.62 3.X7 4.12 4.37 4.62 4.87 5.12 Pen:cnt range NOTE: Ddlnitions of variables and other explanations arc in the note:-> to tahk 1. 143 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00147 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 680.49653 ereh 68 oilof tesffo tresnI MONETARY POliCY RIPORT: FEBRUARY 2019 57 of past forecast errors and the risks around the with three participants judging the risks to projections are broadly balanced, then future the unemployment rate as weighted to the outcomes of these variables would have about downside and two participants viewing the a 70 percent probability of being within these risks as weighted to the upside. In addition, confidence intervals. hx all three variables, the balauce of risks to the inflation projections this measure of uncertainty is substantial and shifted down slightly relative to September, as generally increases as the forecast horizon one Jess participant judged the risks to both lengthens. total and core inflation as weighted to the upside and one more participant viewed the Participants' assessments of the level of risks as weighted to the downside. uncertainty surrounding their individual economic projections are shown in the In discussing the uncertainty and risks bottom-left panels of ligures 4.A, 4.B. and 4.C. surrounding their economic projections, Participants generally continued to view participants mentioned trade tensions as the degree of uncertainty attached to their well as financial and foreign economic economic projections for real GOP growth and developments as sources of uncertainty or inflation as broadly similar to the average of downside risk to the growth outlook. For the past 20 years." A couple more participants the inflation outlook, the effects of trade than in September viewed the nncertainty restrictions were cited as upside risks and around the unemployment rate as higher lower energy prices and the stronger dollar as than average. downside risks. Those who commented on U.S. fiscal policy viewed it as an additional source Because the fan charts are constructed to be of uncertainty and noted that it might present symmetric around the median projections, two-sided risks to the outlook, as its effects they do not reflect any asymmetries in the could be waning faster than expected· or turn balance of risks that participants may see out to be more stimulative than anticipated. in their economic projections. Participants' assessments of the balance of risks to their Participants' assessments of the appropriate economic projections arc shown in the future path of the federal funds rate were also bottom-right panels of figures 4.A, 4.B, subject to considerable uncertainty. Because and 4.C. Most participants generally judged the Committee adjusts the federal funds the risks to the outlook for real GOP growth, rate in response to actual and prospective the unemployment rate, headline inflation, developments over time in real GOP growth, and core inflation as broadly balanced--in the unemployment rate, and intlation, other words, as broadly consistent with a uncertainty surrounding the projected path symmetric fan chart. Two more participants for the federal funds rate importantly reflects than in September saw the risks to real GOP the uncertainties about the paths for those key growth as weighted to the downside, and economic variables along with other factors. one Jess judged the risks as weighted to the Figure 5 provides a graphical representation upside. The halance of risks to the projection of this uncertainly, plotting the median for the unemployment rate was unchanged, SEP projection for the federal funds rate surrounded by contidcncc intervals derived from the results presented in table 2. As with 2L At the end of this summary, the box ''Forecast the macroeconomic variables, the forecast Uncertainty" discusses the sources and interpretation uncertainty surrounding the appropriate path or uncertainty surrounding the economic forecasts and of the federal funds rate is substantial and explains the approach used to assess the uncertain tv and risks attending the participants' projections. ~ increases for longer horizons. 144 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00148 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 780.49653 ereh 78 oilof tesffo tresnI .58 PART 3: SUMMARY OF ECONOMIC PROIECTIONS Figure 4.;\, Uncertainty and risks in projections of GDP growth Median projection and confidence interval based on historical forecast errors Pcr,;;ent -0 2013 2014 2015 2016 2017 2018 20!9 2020 2021 FOMC participants· assessments of uncertainty and risks around their economic projections Number of participants Number of participants Uncertainty about GDP growth 0 -!8 12 10 8 Lower Broadly liighcr Weighted to Broadly Wcie:hted to similar dowm;ide balanced nP:'iidc NoTE: The hlue and red lines in the top pane! show actual values and median values, respectively, ()f the percent change in real gross domestic product (GDP) from the fourth the four!h indicated. The Clmfidcncc interval around the median squared errors of various data is available in 20 years. the width and shape of the conndence FOMC partit::ipants' current assessments of the uncertainty and risks around their proj<..'l.:tions: these current assessments arc summarized in the lower panels. Generally speaking. participants who judge the uncertainty about their projections as ''broadly similar" to the kw!s of the past 20 years would view the width of the confidence interval shown in the historic..'ll fan chart as with their assessments of the uncertainty about their projections. Likewise. participants who judge .. broadly ba!anc~d" would view the c0nfidencc interval around their projections as approximately and risks in economic prnjections. see the box .. Forecast Uncertainty.·· 145 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00149 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 880.49653 ereh 88 oilof tesffo tresnI MONETARY POLICY REPORT: FEBRUARY 201'1 59 Figure 4.B. Uncertainty and risks in projections of the unemployment rate Median projection and confidence interval hascd on historical forecast errors Pcrttnt -10 2013 2014 2015 20!6 2017 2019 202() 2021 FOMC participants' assessments of uncertainty and risks around their economic projections ~umber of participants Numhcr of participants Uncertainty about the unemployment rate 0 - IR -16 -14 12 10 g 146 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00150 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 980.49653 ereh 98 oilof tesffo tresnI 60 PART 3: SUMMARY Of FCONOMIC: PROjfCTIONS Figure 4.C. Uncertainty and risks in projections of PCE inflation Median projection and confidence interval bascJ on historical forecast crrnrs Percent - 3 -I Actual 2015 2014 2015 2016 2017 20lk 2019 1020 2021 FOMC participants.' assessments of uncertainty and risks around their economic projections Number or participants Uncertainty ahnm PCE intlation D -18 16 14 11 12 10 10 8 8 Lnwcr Brnad!v Higher Weighted tn Broadly Weighted tn similar· downside balanced upside Number of participants -18 Lower NOTE pr~vious yeilf values is assumcd to he symmetric government fnrccast<> made over the prcvinll':; 20 years; more infonnation about these data i<; availahlc ill tahlc 2. from those that prevailed. on average, \lVer the previous 20 years_ the wldth and shape t\f the contldence interval estimated on the basis of the historical forc-.:ast errors may nN rctkct FOMC participants' current assessments of the uncertainty and risks around their these current assessmt•nts arc summarized in the lower panels. Generally speaking. participants who judge the about similar" to the average levels of the past20 years \Voukl view the width of the confidence interval with their assessments of the uncertainty about their projections. view the confidence interval risks in economic projections, sec the 147 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00151 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 090.49653 ereh 09 oilof tesffo tresnI MONfTARY POliCY REPORT: FEBRUARY 2019 61 of the federal funds rate Median projection and confidence interval hascd on historical forecast crwrs Pe-rcent 2()!3 2014 2015 2016 2017 20!8 2019 2020 202! of short-term interest rates in the fnurth quarter of table 2. The shaded area encompasses less than a 70 percent coni\Jcncc interval irthc confiJcm:c im..::rva! has hl'cn truncated at Icro. 148 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00152 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 190.49653 ereh 19 oilof tesffo tresnI 62 PART SUMMARY Of ECONOMIC PROJECTIONS Forecast Uncertainty The economic projections provided by the members in table 2 would imply a probability of about of the Board of Governors and the presidents of percent that actual COP would exp;md within J the Federal Reserve Banks inform discussions of of 2.2 to 3.8 pPrcent in the current 1.4 to monetary policy among policymakers and can aid percrnt in the second year, and OJ) to percent public understanding of the basis for policy actions. in the third and fourth years. The corresponding Considerable uncertainty attends these projections, 70 confidf'nCe intervals for overall inflation however. The economic and statistical models and be LB to L2 in the current year and relationships used to help produce economic forecasts 1.0 to 3.0 pPrccnt in sC'cond, third, and fourth years. are necessarily imperfect descriptions of the real world, Figures 4.A through 4.C illustrate these confidence and the future path of the economy can be affected bounds in "fan charts" that are symmetric and centered by myriad unforeseen developments and events. Thus on the medians of FOMC participants' projections for 1 in setting the stance of monetary particip<mts COP growth, the unemployment rate, and inflation. consider not only what appears to most likely However, in some instances, the risks around the economic outcome as embodied in their projections, projections may not be symmetric. In particulnr, the but also the range of alternJtive possibi!itiE's, the unemployment rnte cannot be negative; furthermore, likelihood of their occurring, and the potential costs to the risks around a particular projection might be tilted the economy should they occur. to either the upside• or the downside, in which case Tdble 2 summarizes the average historical accuracy the corresponding fan chart would be asymmetrically of a range of forecasts, including those reported in positioned around the median projection. past Monetary Policy Reports and those prepdred Because current conditions may differ from those by the Federal Reserve Board's staff in advance of that prevailed, on average, ovN history, particip;:mts meetings of thE' Federal Open Market Committee provide judgments as to whether the uncertainty (FOMC). The projection error ranges shown in the attached to their projections of each economic variable table illustrate the considerable uncertainty associated is greater than, smaller than, or broadly similar to with economic forecasts. For typical levels of forecast uncertainty seen in the past participant projects that real 20 years, as presented in table 2 and reflected in {GOP) and total consumer the widths of the confidence intervals shown in the annu<1! rates of, cP<nN-t<v'-''v top panels of figures 4.A through 4.C. ParticipantS1 If the uncertainty attending similar current assessments of the uncertainty surrounding to that experienced in the their projections dr~ summarizc~d in the bottom~left the projections are broadly 149 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00153 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 290.49653 ereh 29 oilof tesffo tresnI MONETARY POLICY REPORT: fERRUARY 2019 63 panels of those figures. ParticipdrHs J!so appropriate monetary policy and are on an end-of judgments as to whether the risks to projections year basis. However, the forecast errors should provide are weighted to the upside, are weighted to the a sense of the uncertainty around the future path of downside, or are broadly balanced. That is, while the federal funds rate generated by the uncertainty the symmetric historical fan charts shown in the top about the rnacropconomic variables as well as panels of figures 4.A through 4.C imply that the risks to additional adjustments to monetJry policy thJt would participants' projections are babnced, participants may be appropriate to offset the effects of shorks to the judge that there is a greater risk that a given variable Pconomv. will be above rather than below their projections. These !fat s~me point in thE: future the confidence intervd! judgments are summarized in the lower-right pa.ne!s of around the federal funds rate were to extend below iigures 4.A through 4.C. 1ero, it would be truncated at zero for purposes of As with n'r.d JCtivity and inflation, the outlook the fan 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 for the feder.1l funds rate that to considerable uncertainty. This uncertainty aris(~S has been adopted by the Committee in the past. This primarily because each p~u1icipant's Jssessnwnt of approach to the construction of the federal funds rate the appropriate stance of monetary policy depends fan chart would be merely a convention; it would importantly on the evolution of r<:>al activity and not have any implications for possible future policy inflation over time. If economic conditions evolve decisions regarding the use of negative interest rates to in an unexpected manner, then assessments of the provide additional monetary policy accommodation setting of the f~::~deral funds rate would if doing so Wt~re appropriate. !n such situations, the from that point forward. The final line in Committee could also employ other tools, including shows the error ranges for forecasts of short- forward guidance and asset purchases, to provide term interest rates. They that the historical additional accommocbtion. confidence intervals with projections of While figures 4.A through 4.C provide information the federal funds rate are quite wide. It should be on the uncertainty around the economic projections, noted, however, that these confidence intervals are not figure 1 providf•s informa!ion on the range of views strictly consistent with the projections for the federal across FOMC participants. A comparison of figure-1 funds rate, as these projections are not forecasts of with figures 4.A through 4.C shows that the dispersion the most quarterly outcomes but r,lt!wr are of the projections Jcross participants is much smaller "·"~"""'"" individual assessments of than thf' average forecast errors over the past 20 years. 150 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00154 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 390.49653 ereh 39 oilof tesffo tresnI 65 ABBREVIATIONS AFE advanced foreign economy BOE Bank of England C&l commercial and industrial CRE commercial real estate DFMU designated financial market utility EBITDA earnings before interest, taxes, depreciation, and amortization ECB European Central Bank EME emerging market economy EPOP employment-to-population EU European Union FOMC Federal Open Market Committee; also, the Committee GOP gross domestic product JOLTS Job Openings and Labor Turnover Survey LFPR labor force participation rate LSAP large-scale asset purchase MBS mortgage-backed securities Michigan survey University of Michigan Surveys of Consumers ONRRP overnight reverse repurchase agreement PCE personal consumption expenditures SEP Summary of Economic Projections SLOOS Senior Loan Ollkcr Opinion Survey on Bank Lending Practices SSDI Social Security Disability Insurance TCJA Tax Cuts and Jobs Act TGA Treasury General Account TIPS Treasury Inflation-Protected Securities VIX implied volatility for the S&P 500 index 151 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00155 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 490.49653 ereh 49 oilof tesffo tresnI 152 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00156 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 590.49653 ereh 59 oilof tesffo tresnI Questions for The Honorable Jerome H. Powell, Chail', Board of Governors of the Federal Reserve System from Representative Barr: As you know, the GSIB surcharge was adopted in July 2015, based on the FRB's assessment of the GSIBs' resiliency and resolvability. The FRB has since acknowledged significant improvements in resiliency and resolvability. In fact, Vice Chait'man Quarles said in April 2018 before the House Financial Services Committee that "a process of thinking about" recalibrating the GSIB surcharge is appropriate now in light of those improvements. Further, in adopting the GSIB surcharge, the :FRB committed to periodically reevaluating the surcharge methodology to ensure that economic growth does not unduly affect fi•·ms' risk scores or hinder their ability to provide credit and other essential financial services. However, in identical letters to Congress last year, both you and Vice Chairman Quarles cited two unrelated factors-the profitability of U.S. GSIBs and their higher stock valuations relative to foreign banks peers-as justification for not recalibrating the GSIB surcharge. You repeated this answer in response to my question about the GSIB surcharge on February 27, 2019 and stated that capital was "about right." While I have full confidence in your leadership, I ask that you please explain your justification further as to why the GSIB surcharge shouldn't be recalibrated right now. In particular, I would lil;:e you to explain why you believe bank profitability and stock valuations have any beadng on the appropriate calibration for financial regulation. Additionally, I would like to know if there is a formal internal process for reviewing the GSIB surcharge and how frequently that will be exercised. As Vice Chair Quarles indicated in April 2018, the Federal Reserve Board (Board) is cunently reviewing and revising aspects of its regulatory fl-amework. In the regulatory capital space, there are several inteiTelated projects underway, certain of which have statutory deadlines and are therefore being prioritized by the Board. For example, the Board approved proposals to tailor the prudential standards that apply to large banks and depository institution holding companies (October 2018)1 and to foreign banking organizations (April 2019),2 and the Board intends to complete these tulemakings ahead of the November 2019 statutory deadline. With respect to the GSIB surcharge, the Board indicated when it issued the rule that it would reassess the regime at regular intervals to review whether the surcharge was calibrated appropriately.3 Although 1 continue to believe that the levels of capital in the U.S. banking system are about right, I do snppmt regular reviews of all the Board's rules, including the GSIB surcharge rule. I cannot give you a timeline for the review ofthe GSIB surcharge rule, but I note that the Board currently has outstanding a proposal that would calibrate the GSIB leverage surcharges and a proposal that would simplify capital requirements for large banking firms by integrating a banking lirm's supervisory stress test results into its regulatory capital requirements. ·--- -~-~-~~---·------ 1 See 83 FR 61408 (Nov. 29, 2018); 83 FR 66024 (Dec. 21, 2018). 2 See https://www.federalreserve.gov/newsevents/pressreleaseslbcreg20 19 0408a.htm. 3 See 80 FR 49082, 49085 (Aug. 14, 2015). 153 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00157 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 690.49653 ereh 69 oilof tesffo tresnI Questions for The Honorable .Jerome H. Powell, Board of Governors of the .Federal Reserve System from Representative Budd: 1. For regulatory consistency domestically, as well as presenting a united front internationally, I believe it is important that the Federal Reserve and state insurance commissioners coordinate their development of insurance capital standards. As the :Fed develops its "building blocks approach" (BBA) for an insurance capital standard, how do you intend to ensure that the BBA and the group capital calculation (GCC) from the states are not significantly divergent'? As stated in the Board ofGovemors of the Federal Reserve System's (Board) insurance capital Advanced Notice of Proposed Rulemaking, our goal is to develop a capital standard for insurance savings and loan holding companies that efficiently uses existing legal-entity-level regulatory capital frameworks, including those of state insurance supervisors. In developing the Building Block Approach, the Board has been mindful of the potential interaction with the development by the National Association ofinsurance Commissioners (NAIC) of the group capital calculation. The primary functional supervisor for insurance companies for which the Board is consolidated supervisor is a state insurance regulator. It is just good policy for the authorities that mutually supervise firms to coordinate efforts in order to streamline, seek hannony, and minimize inconsistencies. To that end, in August of2017, the Federal Reserve initiated contact with the NATC and state insurance supervisors to engage in dialogue with the aim of achieving consistency, wherever possible, between the two capital frameworks under development. We meet frequently and engage substantively with representatives of the NAIC and the states. Input fi:om the NAIC and the states has helped identify areas of commonality while remaining respectful of the somewhat different objectives of the relevant supervisory bodies and legal environments. Some differences may arise because of the Board's mandate to protect the safety and soundness offcdcrally insured depository institutions. As to a firm's insurance subsidiaries, the state supervisors' focus is on policyholder protection, while the Board serves as consolidated supervisor of the organization. The Board's capital standard also must comport with federal law, while the NAIC's group capital calculation interfaces with states' laws. 2. Does the Federal Reserve intend to neate the "Public Option" for payments via its real time payment proposal? If so, wouldn't you need congressional authority before creating such a system? If you intend to pmceed without congressional approval, is it your goal to compete with the same private entities you regulate? And is that appropriate in your view'! The potential actions outlined in the Board's October 2018 Federal Register Notice request for comment, 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 Reserve has provided services alongside the private-sector 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 consumer groups, in response to the Federal Register Notice seeking 154 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00158 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 790.49653 ereh 79 oilof tesffo tresnI -2- public input on potential actions the Federal Reserve might take in regard to supporting faster payments in the United States. The Board is carefully 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 (MCA), and longstanding Federal Reserve policies and processes created to avoid conflicts of interest across the various roles played by the Federal Reserve. In particular, the Congress, in part motivated to encourage and ensure fair competition between the Federal Reserve and private sector, passed the MCA in 1980, which requires the Federal Reserve to 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 has also established additional criteria for the provision of new or enhanced payment services that specify the Federal Reserve must expect to (I) achieve full cost recovery over the long run, (2) provide services that yield a public benefit, and (3) provide services that other providers alone cmmot be expected to provide with reasonable effectiveness, scope, and equity. In addition to these criteria, for new services or service enhm1cemcnts, 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.2 3. During your testimony before the House Financial Services Committee on February 27th, 2019, l asked you about the "Federal Reserve's work at the International Association of Insurance Supervisors (IAIS) and the ongoing development of an International Capital Standard (ICS). You stated:· "We're not looking to change tltefundamentalnature of our insurance system, we think it works well ... We're also looking to have an international agreement that works with our .1ystem ... We're certainly not looking to say, O.J(., we've negotiated this deal witlt this group abroad and we're going to come back and substantial(y change our insurance regulation system, that's not going to lwppen ... Titere may be some things that we take on board which sow1d like good ideas ... " Thank you for your commitment to not seek to fundamentally change the nature of our insurance regulatory system through these international negotiations. I agree with you that our cun·ent state-based approach to insurance regulation works well and strongly protects U.S policyholders. One of the main pillars of the current draft of the ICS is the requirement of a consolidated group capital requirement for insurance companies. The consolidated group capital requirement is similar to what is used under European Insurance solvency regulation. As you lmow, in the U.S., insurance companies operate under a legal entity capital requirement. 2 See The Federal Reserve in the Payments System (issued 1984; revised 1990), Federal Reserve Regulatory Service 9-1558. 155 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00159 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 890.49653 ereh 89 oilof tesffo tresnI -3 - Do you agree with me that changing the structure of US solvency regulation from a legal entity capital requirement to a consolidated g1·oup capital requirement would be considered a "change (to) the fundamental nature of our insurance system?" We remain film supporters of the U.S. state-based insurance supervisory system, which has proven its strength and resilience for well over a century and provides an invaluable service in protecting policyholders. The state-based insurance supervisory system utilizes legal entity capital requirements, and the NAIC is currently engaged in the development of a group capital calculation that is based on an aggregation oflegal entity capital requirements. The Board's consolidated supervision, deriving from its statutory authorities, complements the existing work of state insurance supervisors with a perspective that considers risk across the entire firm. In order for any form of an insurance capital standard (leS) to be implementable globally, it needs to be suitable for the U.S. insurance market. We continue to advocate for an aggregation alternative in the res. Among other tl1ings, this approach would utilize and build on state insurance capital requirements. Together with the other U.S. members of the Intemational Association oflnsurance Supervisors (IAIS), we will continue to advocate for international insurance standards that promote a global level playing field and work well for the U.S. insurance market. 4. Given that the current draft of the ICS is expected to be finalized for field testing in November 2019 at the IAIS ". ... "in Abu Dhabi, what steps have you taken during the past negotiations and what steps will you be taking over the next several critical months of future negotiations to ensure that the final version of the IeS either does not contain a consolidated group capitaii·equirement or to ensure the U.S. system of insurance regulation formally deemed as outcome equivalent (or mutually recognized)? Together with the Federal Insurance Office, the NATC, and state insurance regulators, the Federal Reserve continues its advocacy of an aggregation method that can be deemed comparable to the IeS. As noted, in order for any form of an res to be implementable globally, it needs to be suitable for the U.S. insurance market. The current core reference method in the res would face implementation challenges in the United States. For example, such a framework may fail to adequately account for U.S. accounting ti·an1eworks, both Generally Accepted Accounting Principles (GAAP) and the NATC's Statutory Accounting Principles, introduce excessive volatility, and involve excessive reliance on supervised Jinns' internal models. Among other things, this motivates our advocacy of an aggregation alternative, and the usc of an altcmative valuation method that derives from U.S. GAAP, in the TCS. Furthermore, we suppmt the collection of information about an aggregation-based approach that would reside within the IeS, and actively patticipate, together with other jurisdictions that espouse aggregation-based approaches, in the development of such an approach for the res. It is also important to recall that the intemational standard-setting bodies like the TAIS do not have the ability to impose requirements on any national jurisdiction, and any standards developed through these fora arc not self-executing or binding on the United States unless adopted by the appropriate U.S. lawmakers or regulators in accordm1ce with applicable domestic laws and rulemaking procedures. 156 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00160 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 990.49653 ereh 99 oilof tesffo tresnI 4 5. When the FRB adopted margin requit·ements for covered swap entities, it recognized that its cost estimate was imprecise. Today, we know that the regulation ties up capital unnecessarily for inter-affiliate transactions. The inter-affiliate margin requirements, contrary to the rule's intent, has made risk management less efficient without attendant benefits to the financial system. You stated that updating this requi1·ement is a priority and that the FRB is working actively on it. When can we expect action from the FRB to address this important issue? As Tn oted in my testimony and consistent with the Treasury Department's recommendations, Board staff is actively reviewing the application of margin requirements to inter-affiliate transactions. These efforts include ongoing discussions with the Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, Farm Credit Administration, and Federal Housing Finance Agency (the agencies); an assessment of how the current requirements help to protect the safety and soundness of covered swap entities; an assessment of whether any changes to this aspect of the swap margin rule would be consistent with the Dodd-Frank Wall Street Reform and Consumer Protection Act; and a review of the interaction of this aspect of the rule with other regulations. Because the swap margin rule was adopted jointly with the agencies, any change to the rule would also need to be adopted jointly with the agencies. 157 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00161 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 001.49653 ereh 001 oilof tesffo tresnI Questions for The Honorable Jerome H. I' ow ell, Chail-, Board of Governors of the Fedct·al Reserve System from Representative Chuy Garcia: 1. I would like to follow up on our conversation regarding merger applications during your testimony. Accm·ding to the Federal Reserve's semiannualt·eport on banking applications activity, only one application for a merger has been rejected out of over 6,000 applications since 2014. The report also mentions that 5-8% of applications are withdrawn each year, and cites banl<s' "Community Reinvestment Act (CRA) or consumer compliance record" as one key reason why an application might be withdrawn. In recent years, advocates have argued for strengthening the CRA, arguing that the fact that 98% of banks receive outstanding or satisfactory ratings suggests enforcement is not rigorous enough. Since a positive CRA exam performance is one of the few existing obstacles to merger approval, it follows that the high percentage of banks that receive positive CRA assessments is one reason why so many applications arc approved. Of the 388 applications that have been withdrawn since 2014, how many application withdrawals have occurred because the applicants were informed that their CRA performance records were not adequate? Can you project how a weakening of CRA exams might affect the annual application approval rate, which is typically 90% or higher? The Board of Govemors (Board) has made publicly available its approach to applications that may not satisfy statutory requirements for approval or that otherwise raise supervisory or regulatory concems. 1 Applications can be withdrawn by the applicant for any number of reasons. For example, an applicant may withdraw for technical or procedural reasons; for reasons regarding the statutory factors that must be considered by the Board, including supervisory issues; or because the applicant has decided not to pursue the application for business or strategic reasons. Applicants also may have multiple reasons for withdrawing filings and, in many cases, applicants do not provide specific reasons for withdrawing filings. Therefore, the Board is not able to provide the number of applications withdrawn due primarily to Community Reinvestment Act (CRA) considerations. The Board's goal in any future rulemaking is to strengthen CRA regulations and the examination process supporting them in order to support the CRA 's goal of encouraging access to credit, particularly in low-and moderate-income communities. To this end, we will seek public comment on any potential changes to the Board's CRA regulations. However, at this time, we are not able to project how m1y potential revisions to the current CRA regulations would affect the application approval rate. 1 This is reflected SR !4-2/CA !4-l: Enhancing Tmnsparency in the Federal Reserve's Applications Process, https:l/www. fed era lreserve.gov/supcrvisionrcglsrletterslsr 1402.htm. 158 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00162 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 101.49653 ereh 101 oilof tesffo tresnI 2- 2. One of Congress' responses to the 2008 financial crisis was to authorize the Fed to create a so-called conntercyclical capital buffer. Out of recognition that the banking sector experiences "boom and bust cycles," Fed regulators were granted the authority to invoke highet· capital requirements when they assess the risk of losses among large banlG as higher than normal. With your predecessor as Fed chair now warning about high levels of corporate debt, and numerous other risks emerging on Wall Street and in the commercial real estate market, a range of Federal Rese~-ve officials, including Governor Brainard and several Reserve Bank presidents, have called on the Board of Governors to institute the countercyclical capital buffer. What factors arc you weighing when deciding whether to follow your colleagues' recommendation to activate the countercyclical capital buffer? The Board finalized its policy statement on the cotmtercyclical capital buffer (CCyB) in 2016, in which we laid out a comprehensive framework for setting its level. As indicated in the policy statement, the CCyB is intended to address elevated risks from activity that is not well supported by underlying economic fundamentals. As such, the Board expects the CCyB to be nonzero if overall vulnerabilities were judged to have risen to a level that was "meaningfully above nonnaL" The overall assessment incorporates the Board's judgment of those vulnerabilities that, as you noted, have arisen in the business sector, as well as the level of other key financial vulnerabilities that tend to vary with the economic cycle, such as household leverage, financial sector leverage, asset valuation pressures and investor risk appetite, and maturity and liquidity transformation, and how all of those vulnerabilities interact. In coming to its assessment of the broad set of vulnerabilities, the Boaxd considers a wide array of economic and financial indicators, as well as a number of statistical models developed by staff. The financial system overall appears to be quite resilient. Our f01ward-looking stress tests indicate that the institutions at the core of the financial system tbe nation's largest banks-are well positioned to support lending and economic activity during severe macroeconomic and market scenarios. Taking all ofthis together, I continue to view overall vulnerabilities as moderate. 3. In the year you've been Fed Chair, you've talked a lot about the uncertainty facing the Federal Rcse1-ve. It is hard to predict where inflation is going and it hard to know how many Jobs the economy can produce. I commend you for acknowledging and highlighting the uncertainty in Fed predictions and estimates. That said, it seems like over the past decade the Fed's predictions and estimates have always missed in one direction. The Fed has consistently overestimated the natural rate of unemployment and future inflation. How have these models been updated given the misses? In light of your own acknowledgement that estimates of the natural rate of unemployment are "very uncertain," are you reexamining the Fed's models and framework for full employment? Would you consider putting confidence intervals around the NAIRU in future Fed pro.iection materials? The Board relies on a host of different models and types of analysis to estimate the natural rate of unemployment and inflation. Because the structure of the economy is constantly changing, we 159 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00163 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 201.49653 ereh 201 oilof tesffo tresnI 3 regularly update these models and search for new models and frameworks that can better explain developments in the labor market and the U.S. economy more generally. We also periodically assess the materials we use to communicate our outlook to the public. The Summary of Economic Projections, published quarterly, presents projections conditioned upon individual Federal Open Market Committee patticipants' individual assessments of projected appropriate monetary policy. There is well-developed literature on the statistical confidence intervals sutTounding estimates of the longer-run unemployment rate. As a result, policymakers are well aware of the unee1tainty surrounding these estimates when they make their policy decisions. 160 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00164 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 301.49653 ereh 301 oilof tesffo tresnI Questions for The Honorable Jerome H. Powell, Chair, Board of Governors of the Federal Reserve System from Representative Anthonv Gonzalez: Chairman Powell, can you discuss bow the Federal Reserve's goals of a achieving its Dual Mandate has impacted real wage growth in recent yea1·s and how you take into consideration the impact on lower income worl,ers when setting policy? Nominal wage growth has picked up over the past few years, with most measures now running at or above 3 percent on an annualized basis. This increase in nominal wage growth has also translated into faster real wage growth relative to a few years ago, which I take as a good sign that the strong economy is helping workers. Moreover, recent wage gains have been fastest for low-wage workers and workers with less educational attainment, which is also a welcome development. With regard to monetary policy, our actions affect the economy as a whole and thus we cannot target particular groups of workers. However, by fulfilling the maximum employment component of our dual mandate, the Federal Reserve can ensure that the conditions are in place to keep labor demand high and stable for as many workers as possible, which in tum allows workers to more easily find jobs that best match their abilities and that provide them with the greatest opportunity to increase their skills, productivity, and earnings. The US National Debt exceeded 22 trillion dollars in recent weeks and the US is projected to exceed trillion dollar deficits annually over the ten year budget window. I am concerned about the long term impact of these projected deficits. However, some of my colleagues have stated that deficits do not matter since we bon·ow our own currency. Chairman Powell, can you comment on your view of the mounting debt that our country is taking on? I am concerned about high and rising federal government debt. The large and growing federal debt, relative to the size of the economy, projected to occur over the coming decades would have negative effects on the economy. In particular, a rising federal debt burden would reduce national saving, all else equal, and put upward pressure on longer-term interest rates, raising borrowing costs for households and businesses. Those effects would likely restrain private investment, which, in turn, would tend to reduce productivity and overall economic growth. Tn addition, a large and rising debt burden can potentially restrict the capacity of fiscal policymakers to respond to future economic and financial shocks, as well as to other adverse events. These negative effects remain a concem even though the federal government bmTows in our own currency. Some commentators have noted that the negative effects of high debt levels on the federal budget and the economy may be less pernicious than in earlier decades because real interest rates are cunently lower. Ifreal interest rates and inflation remained low then interest payments on the debt would be a smaller share of gross domestic product than they would be otherwise. However, a low interest rate enviromnent does not mean that federal budget deficits and debt do not matter, but instead would imply that the burden of servicing a given amount of federal debt would be a little less onerous. 161 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00165 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 401.49653 ereh 401 oilof tesffo tresnI Questions for The Hono.-able Jerome H. Powell, Hoard of Governors of the .Federal Reserve System from Representative Lynch: Dodd-Frank required that most derivatives be centrally cleared, bringing greater transparency and stability to the derivatives market. However, this shifted considerable risk to the Central Counter Parties. • Is the Fed concerned about the level of l"isk systemic risk that now exists in clearinghouses? If so, what regulatory steps could Congress take to examine and alleviate this risk? The Board of Governors (Board) noted in its Financial Stability Report that central clearing activities have grown over the past several decades and offer many financial stability benefits but such increased activity warrants and receives our continual attention.2 Since the financial crisis, global regulatory efforts have contributed to this growth by encouraging and, in some cases, mandating central clearing of over-the-counter derivatives. Central clearing strengthens financial stability by addressing many of the weaknesses exposed during the crisis. In particular, central clearing reduces risk exposures through multilateral netting and daily margin requirements. Central clearing also provides greater transparency through enhanced reporting requirements. Finally, central clearing may reduce the cost of counterparty default by facilitating the orderly liquidation of a defaulting member's positions and allocating any resulting losses among members of the central counterpmiies (CCPs) through loss-mutualization rules. Central clearing, however, only offers such benefits to the extent the CCPs themselves m·e managed safely. The regulatory community has worked collectively in the years since the crisis to set heightened risk management expectations for financial market utilities (FMUs), including CCPs. Federal Reserve staff participated in the development of these international standards for the governance, risk management, and operation ofFMUs. These standards, the Principles for Financial Market Infrastructures (PFMI), were published in 2012.3 Since the publication of the PFMI, regulators have implemented these standards into national regulation, as appropriate. In the United States, for example, the Commodity Futures Trading Commission (CFTC), the Securities and Exchange Commission (SEC), and the Board have promulgated regulations based on the PFMI that apply to FMUs that have been designated as systemically important by the Financial Stability Oversight Council (FSOC), pursuant to the authority in Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). The Dodd-Frank Act provided the CFTC, SEC, and the Board with important authorities that enable these agencies to supervise designated FMUs commensurate with the risk they introduce into financial markets, including prescribing risk management 2 See, Federal Reserve Board, Financial Stability Report at: https://www .federalrcserve.gov/publications/fileslfinancial·stability-rcport-20 18ll.pdf (November 20 18). 3 The Committee on Payments and Market Infrastructures (CPMI) is a global standard setting body comprised of cenn·al banks focused on promoting the safety and efficiency of payment, clearing, and settlement arrangements to support broader financial stability, The International Organization of Securities Commissions (IOSCO) is the international body of securities regulators that promulgates global standards for the securities sector. Together, CPMI-IOSCO developed and published the PFMI in 2012. 162 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00166 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 501.49653 ereh 501 oilof tesffo tresnI 2 standards for these entities. The CFTC and the SEC are the supervisory agencies with direct responsibility for the CCPs that have been designated by FSOC. The Federal Reserve has the authority to participate in exams of the designated FMUs and review changes proposed by a designated FMU to its rules, procedures, and operations. Tln·ough this activity, the Federal Reserve has gained a broader perspective across multiple systems. Board staff continues to monitor CCI's consistent with the authmities granted to the Board under the Dodd-Frank Act with the perspective that these FMUs act as important components in the financial system more broadly. Section 402(b) of S. 2155 exempted the cash deposits of custody banks held at central banks from the denominator of the supplemental leverage ratio. Please provide an update on when Section 402(b) will be implemented. Also, how docs the Fed see Section 402(b) interacting with proposed changes to the Enhanced Supplemental Leverage Ratio the Fed announced in April2018? The Board, the OfJice of the Comptroller of the Cunency (OCC) and Federal Deposit Insurance Corporation, intend to issue a joint proposal in April2019, to implement Section 402(b) of the Economic Growth, Regulatory Relief, and Consumer Protection Act. The comment period on the proposal would end 60 days after publication in the Federal Register. The April2018 proposal issued by the Board and the OCC to recalibratethe enhanced supplementary leverage ratio standards was calibrated based on the definition ofthc existing denominator of that ratio. At that time, the denominator included central bank deposits for all finns. The April2018 proposal noted that significant changes to the supplementary leverage ratio would likely necessitate reconsideration ofthe proposed recalibration, as Board and the OCC did not intend to materially 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 supplementary leverage ratio, which would meaningfully modify the supplementary leverage ratio as applied to these firms. Accordingly, as the Board weighs any re-calibration of the enhanced supplementary leverage ratio, the Board will consider the potential changes to capital levels at custodial banking organizations resulting from the implementation of section 402, as well as the expected impact on the aggregate level of capital in the banking system. 163 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00167 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 601.49653 ereh 601 oilof tesffo tresnI Questions for The Honorable .Jerome H. Powell, Chair, Board of Governors of the Federal Reserve System from Representative Posey: 1. Chairman l'owell, one of the gr·cat themes in your testimony in the Senate Ranking Committee was the role of the labor force participation rate in our cmTent macro economic outlook I'm particularly interested in your emphasis on how a higher labor force participation rate can boost economic growth and more widely distribute the benefits of prosperity-getting at some of the concerns about economic equality. In the Q&A at the Senate Banking Committee hearing, yon and others identified some things that might improve the rate both nationally and regionally like education and training, health of the population, child care, etc. One of the fascinating effects that you discussed was how government pr·ogr·ams often create an incentive to stay out of the labor force because for a prospective employee, working may mean giving up more in benefits than the income from working. Could you recount those examples and suggest how Congress might adjust prog1·ams to improve incentives to participate in the labor force'? Economic growth over the long term is determined by the growth in om labor force and the increase of the amount of output derived fi·om each hour of work, or labor productivity. Labor force growth, in tum, reflects lhe rate of participation in the labor market. Household decisions on whether to participate in the labor market and seek work are affected by many factors including wage rates, taxes, and government benefits. In general, safely net programs arc typically designed so that benefits fall as incomes rise. As a consequence, for low-and moderate-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 progran1s with a rapid phase-out of benefits, and the interaction among various safety net programs, sometimes leads to relatively high effective marginal tax rates. This, in tum, may discourage work, particularly for potential second earners. Researchers have found that programs where the phase-out range is relatively long, reduce potential disincentive effects. As you know, it is up to Congress to determine how best to ensure satcty-nct programs provide the lowest work disincentives as possible while still achieving the social goals ofthc pmgrams. For our part, the Federal Reserve is focused on pursuing our congressionally mandated goals maximum employment and price stability, and making the best decisions we can in the interest of the public. 2. The economy was in tough shape about this time ten years ago. Aftc1· the crisis, Congress also prescribed some tough medicine for bank capital and liquidity. We called it "enhanced prudential standards." Last year in the Economic Growth Act, S. 2155, we authorized the Fed to fine-tune some of those standards based on the asset size of hanks. This is of great interest to community banks in my distl'ict. I certainly support moving away from one-size fits-all regulation, hut I'm concerned that about whether we might he making our regulatory appn>llcb more complicated by putting out Earnings Per Shar·e and then putting out Tailored Earnings Per Share. 164 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00168 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 701.49653 ereh 701 oilof tesffo tresnI -2- Could you give us a conceptual description of your tailoring of capital and liquidity requirements, tell us when you expect to complete the new rules, and comment on whether these ongoing efforts tell us that the enhanced standards (like Basel III) make sense if we must tailor them? Is there something simple we can do? The principle of tailoring regulatory requirements to a firm's specific risks is a long-standing practice of the Board of Governors (Board). Recently, the Board has taken several steps towards substantial additional tailoring of its regulations. For example, the Board issued proposals that would prescribe materially less stringent requirements for firms that pose less risk, while maintaining the most stringent requirements for finns that pose the greatest risks to the financial system. One. set of proposals would revise the regulatory capital and liquidity requirements that apply to U.S. banking organizations based on their risk profiles. To determine the appropriate set of standards for a given firm, the proposals would usc thresholds based on size, cross-jurisdictional activity, reliance on short-term wholesale funding, nonbank assets, and off-balance sheet exposure. These proposals build on the Board's existing efforts to tailor its rules and experience implementing those rules, and account for changes to the enhanced prudential standards made by the Economic Growth, Regulatory Relief; and Consnmcr Protection Act (EGRRCPA). The comment period on proposals closed on January 22, 2019, and the Board is currently considering comments on the proposals1 In addition, the Board, together with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, recently proposed a rnle, pursuant to section 201 of EGRRCPA that would provide a simple, leverage-based capital requirement for community banking organizations with less than $1 0 billion in assets. The proposed rule would provide an alternative to the current capital rule, as banking organizations that qualify for and opt into the proposed rule's framework would not he subject to other risk-based or leverage capital requirements. The comment period on the proposed rule closed on April 9, 2019. 3. Chairman Powell, your recent statements have outlined how the Federal Reserve plans to reduce its balance sheet from the "dealer of last resort" levels of the crisis. In some of those statements you mention the role of hank reserves at the Fed and said that the expected level of bank reserves deposited with the Feder:! I Rcser\'e would be somewhere around $1 trillion. That's a significantly higher level-ahout 23 times higher-than the figure for bank reserves of $43 billion in early 2008. \Vc have a lot of bank assets parked in reserves instead of loans to businesses. That apparent huge increase is due to the liquidity requirements of Dodd-Frank Mr. Chairman, are our post-recession prudential standards possibly just too conservative to provide the kind of innovative financial system we need to sustain the kind of innovation and ,job gn1wth we need in the overall economy that is changing so rapidly? 1 Similar proposals were issued in April 2019 for fbrcign banking organizations operating in the U.S. 165 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00169 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 801.49653 ereh 801 oilof tesffo tresnI 3 - The capital and liquidity requirements adopted alicr the financial crisis have made the Jlnancial system far safer and much better positioned to meet the credit needs of households and businesses throughout the business cycle. As a result of these reforms and of improvements in risk management in the banking sector, banks hold greater quantities of high-quality liquid assets, including reserves. At the same time, bank lending to businesses has been growing at a healthy pace, and the Federal Reserve's Senior Loan Officer Opinion Survey shows that credit terms for commercial and industrial loans have generally cased each year since the crisis. We believe that sound bank balance sheets have been supportive of! ending to households and businesses. 4. Chairman Powell, you've been discussing your new cost-benefit analysis unit at the Fed and the role of cost-benefit analysis in improving regulatory efficiency. I !mow that it came up yesterday at your Senate hearing. I applaud your efforts. Here in the government, we sec an ongoing wave of proposals for regulation and for changes and investments in our energy, tt·ansportation, and other sectors. I wonder if the lessons you're learning about cost-benefit analysis would apply to these activities outside the Fed because we need some way-some evidence-based help-to sort through this avalanche of ideas and pick the best ones to spend our time and money on. Can you please comment on this notion? The Board takes seriously the importance of assessing the costs and benefits of its rulcmaking eHorts. Under the Board's current practice, consideration of costs and benefits occurs at each stage of the regulatory or policymaking process within the context of the Board's mission and applicable statutory intent. While the Board has always valued regulatory efficiency, establishing a unit dedicated to analyzing the costs and benefits associated with regulatory or policymaking processes has increased the capacity of the Board to conduct such analyses and enabled the Board to enhance its expe1tise in cost-benefit analysis. Cost-benefit analysis that considers both direct and indirect costs and benefits and qualitative considerations suppmis the effective implementation of the Board's statutory responsibilities. The early work of the unit has highlighted that, while some economic impacts can be quantified, others require qualitative discussion. With regard to activities outside of the Federal Reserve, many other agencies conduct cost-benefit analysis as part of their rulemaking processes that are more tailored to the nature of their responsibilities. It would be inappropriate for us to recommend an approach for areas in which we do not have expertise. 5. Chairman Powell, will the rate at which ynu'1·c reducing your holdings of mortgage backed secm·itics acquired during the crisis have :my impacts on the mortgage market or the market prices of those assets, or do you expect your market operations to have very little effect on prices? 166 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00170 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 901.49653 ereh 901 oilof tesffo tresnI -4- Experience suggests that Federal Reserve actions that alter the quantity of a financial asset held by the public can affect the price of that asset, as well as broadly similar assets.2 Indeed, the Federal Reserve's purchases of longer-term securities were an important tool for reducing long-term interest rates and promoting recovery from the crisis. The quantity of agency mo1tgage-backed securities (lVIBS) that the Federal Reserve holds or is anticipated to hold at a point in time is factored into market prices. Because the Federal Reserve has been reducing its holdings of agency MBS in a gradual and predictable manner, and because it has maintained a policy of communicating its plans for nom1alizing the size of its securities holdings well in advance, the reduction in our holdings should have only a modest cf!ect on the prices of these assets. 2 https:l/www. fedcralrcscrvc.gov/newsevents/speech/bernankc20 I 2083 I a.htm. 167 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00171 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 011.49653 ereh 011 oilof tesffo tresnI Question for The Honorable Jerome H. Powell, Board of Governm·s of the F'ederal Reserve System from Representative Steil: Chair Powell, S.2155 directed the Office of the Comptroller of the Currency (OCC) to write regulations giving federal savings associations flexibility to elect national bank lending authorities without having to change charters. The intent is to give these institutions opportunities to better serve evolving community needs without unnecessary cost and disruption. I understand that the OCC is poised to issue a final rule, and bankers considering the election are waiting for a signal regarding whether the same flexibility will be permitted for savings associations in holding company structures. Can you tell me when clarification is expected? I hope the Federal Reserve can act with timely and parallel purpose. Thank you for your question regarding section 206 of the Economic Growth, Regulatory Relief: and Consumer Protection Act. Federal Reserve Board (Board) staff is working diligently to analyze and address treatment of such federal savings associations under various laws within the Board's jurisdiction. Our staff is consulting with the Office of the Comptroller of the Currency and working to provide clarity consistent with the statute and congressional intent in a timely manner. 168 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00172 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 111.49653 ereh 111 oilof tesffo tresnI Questions for The Honorable Jerome H. Powell, Chair, Boa1·d of Governors of the Federal Reserve Svstcm from Representative Stivers: l. Despite China's ambitions fot· its currency, central banks around the world currently prefu to hold Canadian dollars more than the rcnminbi (RMB). As recently as last year, t·eservcs of the Australian dollar also exceeded RMB holdings. Do you believe central banks should hold significant HMB reserves, or increase existing t·escrvcs, as long as China is a state-controlled economy with limited transparency and no rule of law? In general, countries choose the currencies they hold as foreign exchange reserves for a number of reasons, including the stability of the currency, the safety and soundness oftbe country's economic and financial systems, the depth and liquidity of the conntry's financial markets, and exposures of individual countries to other economies through trade and financial linkages. Some countries have chosen to include renminbi in their reserve holdings, but according to data fl·om the International Monetary Fund, to date these holdings are very small in aggregate, amounting to less lhan2 percent of global reserves. The U.S. dollar is still the most widely held reserve currency, in large part because oft he safety and soundness of the U.S. economy and the depth and liquidity of U.S. financial markets. 2. You have clearly stated that the Federal Reserve is not considering an in11ation target higher than two percent. Understandably, numy interpret this statement as being consistent with current Jled policy. Others, however, propose allowing the Fed to significantly overshoot or undershoot two percent in11ation, provided that price growth averages two percent over a certain timeframe. Please respond to the following: Can you confirm that the two percent inflation target you endorsed before the Committee is identical to the }led's current policy'? And given the Fed's recent chalknges in reaching two percent inflation, do yon view proposals in which the Fed must reliably ovet·shoot or undershoot an in11ation target as credible alternatives to existing policy? If so, what is the empirical basis that lead you to consider such alternatives as both achievable and easily explainable to the public? The Federal Open Market Committee (FOMC) is firmly committed to fiJlfilling its statutory· mandate of promoting maximum employment, stable prices, and moderate long-term interest rates. The FOMC describes its current approach for achieving this mandate in the "Statement on Longer-Rnn Goals and Monetary Policy Strategy"1 and specifics in this statement that the FOMC's longer-tun goal for inflation is 2 percent, as measured by the annual change in the price index for personal consumption expenditures. The existing approach, as articulated in the statement, has served the public welL Nevertheless, the FOMC is open to considering ways to strengthen its li·amework, and it has initiated a broad review of its monetary policy strategy, tools, and communication practices. 1 https://www.fcdcralrescrvc.gov/monelarypolicy/filcs/FOMC LongcrRunGoals.pdC 169 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00173 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 211.49653 ereh 211 oilof tesffo tresnI -2- While the FOMC does not seek fundamental changes to its framework from this review, the FOMC wants to engage broadly with the public to strengthen the existing framework. Evidence in the United States and around the world suggests that episodes at the effeetive lower bound (ELB) could occur more frequently than in the past and could impose high economic costs. 3. Tn the minutes to the January 2019 J?OMC meeting, the Fed describes the federal funds rate as "the primary tool for ad,justing the stance of policy." However, you made note of the significance of interest on excess I'esel-ves (IOEH) in your testimony, and IOEH is purportedly meant as a floor for the fed ern! funds rate. If the federal funds rate is dependent on IOEH, is IOEH, de facto, the Fed's primary tool for ad,justing interest mtes, notwithstanding the use of the federal funds rate to communicate monetary policy'? The FOMC communicates the stance of monetary policy by announcing the target range for the federal fhnds rate. The effective federal funds rate is the median rate on federal fund trades by private entities, and hence is not directly determined by the Federal Reserve. The Interest on Excess Reserves (IOER) rate, along with the oH'ering rate on the overnight reverse repurchase facility, are set by the Federal Reserve to support the trading of the federal funds rate within the target range specified by the FOMC. The IOER rate has been an effective tool in supporting the FOMC's policy stance. 4. The Fed has communicated that the balance sheet's size will largely be determined by banks' demand for reserves. Prior to the financial crisis, reserves amounted to less than $20 billion, and at the end of 2018, they totaled $1.66 trillion. In other words, reserve balances are now more than 80 times greater than before the crisis, and a post normalization balance sheet with $1 trillion in reserves would still represent resc1-vc balances more than 50 times higher than pre-crisis levels. Do you believe a 50-fold inc1·ease in demand is plausible, and if so, why do yon believe banks' demand has inCI·eascd by that magnitude'? A key outcome of post-crisis regulation is that, banks hold more high-quality liquid assets on their balance sheets. Part of the reason that bank holdings of high-quality liquid assets are such large multiples of pre-crisis levels is that those initial levels were quite low. Both regulators and internal risk managers at banks now realize that banks must hold sufficient stocks of high-quality liquid assets to meet unexpected outflows. 5. In your January press conference, you indicated that an elevated balance sheet of $4 trillion o1· above would still allow for the Fed to use balance sheet policy during a downturn. As the February 2019 Monetary Policy Report illustrates, .Japan began with a large balance sheet relative to GDP prior to the financial crisis, and its balance sheet went on to experience significant growth. How does the Bank of .Japan's experience inform the views you expressed at the January press conference regarding the effectiveness of balance sheet policy in combatting a future recession'? 170 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00174 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 311.49653 ereh 311 oilof tesffo tresnI -3 - The size of the Bank of Japan's balance sheet has increased significantly, as assets rose from aboul25 percent of gross domestic product (GDP) to around I 00 percent over the past decade. That increase reflects the Bank of Japan's large-scale asset purchases aimed at curbing disini1ationary pressures and supporting its 2 percent inflation target. Evidence suggests that the Bank ofJapan's balance sheet policies helped lower longer-term yields and support asset prices, thereby providing stimulus to economic activity. This stimulus has helped to bring Japanese inf1ation out of negative territory, though inflation remains well below the Bank of Japan's objective. On balance, evidence fi·om Japan is consistent with balance sheet policy being an impm1ant tool in providing accommodation when the policy rate is at the ELB. Notably, the size of the Federal Reserve's balance sheet is much smaller than the Bank of Japan's, as assets have fallen from about 25 percent of GDP in 2014 to about 20 percent of GDP at the end of2018. Moreover, assets arc expected to shrink somewhat further this year. As the FOMC a11irmcd in January, in the event that future economic conditions call for a more accommodative policy than can be achieved solely by reducing the federal funds rate, our primary means of adjusting the stance of monetary policy, the FOMC would be prepared to use the full range of onr tools including the balance sheet. Many empirical studies in the United States find that the Federal Reserve's asset purchase and maturity extension programs used to support the economy during the recovery from the financial crisis were effective in lowering longer-term yields and improving overall financial conditions. Accordingly, adjusting both the size and composition ofthe balance sheet, along with forward guidance for the federal funds rate, remain important tools to use in the event of a future recession in which the federal funds rate reaches the ELB. 171 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00175 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 411.49653 ereh 411 oilof tesffo tresnI Questions for The Honorable Jet·omc H. Powell, Chair, lloar.d of Governors of the Federal Reserve System from Representative Tipton: The GSIB surcharge was adopted in .July 2015, based on the FRB's assessment of the GSIBs' resiliency and rcsolvability. The FRB has since acknowledged significant improvements in resiliency and rcsolvability. In fact, Vice Chairman Quarles said in April 2018 before the House Financial Services Committee that "a process of thinking about" rccalibrating the GSIB surcharge is appropriate now in light of those improvements. Further, in adopting the GSIB surchat·ge, the l<'RB committed to periodically reevaluating the surcharge methodology to ensure that economic growth docs not unduly affect firms' risk scores or binder their ability to provide credit and other essential financial services. However, in identical letters to Congress last year, both you and Vice Chairman Quarles cited two factors that some have suggested a1·e unrelated to the surcharge--the profitability of U.S. GSIBs and their higher stock valuations relative to foreign banks peers-as justification for the FHB's inaction in fulfilling its commitment to recalibratc the GSIB surcharge. These factors were again cited in your response to questions about the GSIB surcharge on February 27, 2019. Could you please explain the actions the FRB is taking to fulfill its commitment to reevaluate the GSIB surcharge's calibration, including a specific timeline for this review, and whether (and, if so, why) it's your understanding that bank profitability and stock valuations have a bearing on the appropriate calibration for financial regulation. As you are aware, the bulk of post-crisis regulation is largely complete, with the important exception of the U.S. implementation of the recently concluded Basel Committee agreement on bank capital standards. It is therefore a natural and appropriate time to step back and assess those e±Torts. The Board of Governors (Board) is conducting a comprehensive review of the regulations in the core areas of post-crisis reform, including capital, stress testing, liquidity, and resolution. The objective of this review is to consider the effect of those regulatory frameworks on the resiliency of the financial system, including improvements in the resolvability of banking organizations, and on credit availability and economic growth. The Board's capital rules have been designed to significantly reduce the likelihood and severity of future financial crises by reducing both the probability of failure of a large banking organization and the consequences of such a failure, were it to occur. Capital rules and other prudential requirements for large banking organizations should be set at a level that protects financial stability and maximizes long-tctm, through-the-cycle, credit availability and economic growth. Consistent with these principles, the Board originally calibrated the globally systemically imp01tant banking (GSIB) organizations surcharge so that~ -given the circumstances of the financial system-each GSJB would hold enough capital to lower its probability of failure so that the expected impact of its failure on the financial system would be approximately equal to that of a large non-GSJB. 172 VerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00176 Fmt 6601 Sfmt 6601 K:\DOCS\HBA058.000 TERRI 511.49653 ereh 511 oilof tesffo tresnI -2- In general, I believe overall capital for our largest banking organizations is at about the right level. Critical elements of our capital structure for these organizations include stress testing, the stress capital buffer, and the enhanced supplementary ratio. Work is underway to finalize the calibration of these fundamental building blocks, all of which form part of the system in which the GSIB surcharge has an effect. The sustained profitability of U.S. GSIBs since the financial crisis indicates that holding higher levels of capital has not reduced the ability of GSIBs to extend loans to creditworthy households and businesses. Stock valuations indicate the market's expectations for a fi1m. The GSIBs have generally experienced increases in the value of their respective stock prices as their required regulatory capital levels have increased. This movement indicates that the market also believes that the increased levels of capital of GSIBs are not inconsistent with strong performance. 0

Jerome H. Powell (2019, February 26). Congressional Testimony. Testimony, Federal Reserve. https://whenthefedspeaks.com/doc/testimony_20190227_chair_monetary_policy_and_the_state_of_the

@misc{wtfs_testimony_20190227_chair_monetary_policy_and_the_state_of_the,
  author = {Jerome H. Powell},
  title = {Congressional Testimony},
  year = {2019},
  month = {Feb},
  howpublished = {Testimony, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/testimony_20190227_chair_monetary_policy_and_the_state_of_the},
  note = {Retrieved via When the Fed Speaks corpus}
}