Congressional Testimony

S. HRG. 116–72 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CONGRESS HEARING BEFORETHE COMMITTEE ON BANKING, HOUSING, ANDURBANAFFAIRS UNITED STATES SENATE ONE HUNDRED SIXTEENTH CONGRESS FIRST SESSION ON OVERSIGHT ON THE MONETARY POLICY REPORT TO CONGRESS PURSU- ANTTOTHEFULLEMPLOYMENTANDBALANCEDGROWTHACTOF1978 JULY 11, 2019 Printed for the use of the Committee on Banking, Housing, and Urban Affairs ( Available at: https://www.govinfo.gov/ U.S. GOVERNMENT PUBLISHING OFFICE 37–911 PDF WASHINGTON : 2019 COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS MIKE CRAPO, Idaho, Chairman RICHARD C. SHELBY, Alabama SHERROD BROWN, Ohio PATRICK J. TOOMEY, Pennsylvania JACK REED, Rhode Island TIM SCOTT, South Carolina ROBERT MENENDEZ, New Jersey BEN SASSE, Nebraska JON TESTER, Montana TOM COTTON, Arkansas MARK R. WARNER, Virginia MIKE ROUNDS, South Dakota ELIZABETH WARREN, Massachusetts DAVID PERDUE, Georgia BRIAN SCHATZ, Hawaii THOM TILLIS, North Carolina CHRIS VAN HOLLEN, Maryland JOHN KENNEDY, Louisiana CATHERINE CORTEZ MASTO, Nevada MARTHA MCSALLY, Arizona DOUG JONES, Alabama JERRY MORAN, Kansas TINA SMITH, Minnesota KEVIN CRAMER, North Dakota KYRSTEN SINEMA, Arizona GREGG RICHARD, Staff Director LAURA SWANSON, Democratic Staff Director JOE CARAPIET, Chief Counsel CATHERINE FUCHS, Counsel BRANDON BEALL, Professional Staff Member ELISHA TUKU, Democratic Chief Counsel CAMERON RICKER, Chief Clerk SHELVIN SIMMONS, IT Director CHARLES J. MOFFAT, Hearing Clerk JIM CROWELL, Editor (II) C O N T E N T S THURSDAY, JULY 11, 2019 Page Opening statement of Chairman Crapo ................................................................. 1 Prepared statement .......................................................................................... 44 Opening statements, comments, or prepared statements of: Senator Brown .................................................................................................. 3 Prepared statement ................................................................................... 45 WITNESS Jerome H. Powell, Chairman, Board of Governors of the Federal Reserve System ................................................................................................................... 5 Prepared statement .......................................................................................... 46 Responses to written questions of: Senator Brown ........................................................................................... 49 Senator Rounds ......................................................................................... 50 Senator Tillis ............................................................................................. 55 Senator Moran ........................................................................................... 61 Senator Menendez ..................................................................................... 69 Senator Warren ......................................................................................... 72 Senator Cortez Masto ................................................................................ 75 Senator Jones ............................................................................................ 76 Senator Smith ............................................................................................ 80 Senator Sinema ......................................................................................... 81 ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD Monetary Policy Report to the Congress dated July 5, 2019 ............................... 82 (III) THE SEMIANNUAL MONETARY POLICY REPORT TO THE CONGRESS THURSDAY, JULY 11, 2019 U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. The Committee met at 10:02 a.m., in room SD–106, Dirksen Sen- ate Office Building, Hon. Mike Crapo, Chairman of the Committee, presiding. OPENING STATEMENT OF CHAIRMAN MIKE CRAPO Chairman CRAPO. The hearing will now come to order. We welcome Chairman Powell back to the Committee for the Federal Reserve’s semiannual Monetary Policy Report to Congress. In this hearing, the Banking Committee will evaluate the current state of the U.S. economy, the Fed’s implementation of monetary policy, and discuss its supervisory and regulatory activities. In the last semiannual Monetary Policy Report, Chairman Powell provided additional clarity on the Fed’s plans to normalize mone- tary policy, including how the size of the balance sheet would be driven by financial institutions’ demand for reserves, plus a buffer. Since then, the Fed has provided additional information and con- tinued receiving feedback on its monetary policy strategy, tools, and communication, all of which I look forward to hearing an up- date on today. The U.S. economy is still strong, growing at 3.1 percent in the first quarter of 2019, according to the Bureau of Economic Anal- ysis, and the unemployment rate remains low at 3.7 percent, as of June, according to the Bureau of Labor Statistics. Wages have continued rising, as well, with average hourly earn- ings 3.1 percent higher in June compared to a year earlier, which is the 11th straight month in which wage growth exceeded 3 per- cent, according to the Bureau of Labor Statistics. In fact, the U.S. is officially in its longest expansion of economic growth since 1854, according to the National Bureau of Economic Research. In order to continue this positive economic trajectory, regulators must continually evaluate their regulatory and supervisory activi- ties for opportunities to tailor regulations and to ensure broad ac- cess to a wide variety of financial products and services. With respect to regulation and supervision, it has been over a year since the enactment of S. 2155, the Economic Growth, Regu- latory Relief, and Consumer Protection Act. (1) 2 Mr. Chairman, as you move forward finalizing certain rules re- quired under S. 2155 and consider proposing new ones, I encourage you to consider carefully the following: Simplify capital rules for smaller financial institutions while en- suring they maintain significant capital by setting the Community Bank Leverage Ratio at 8 percent; Simplify the Volcker rule, including by eliminating the proposed accounting prong and revising the ‘‘covered funds’’ definition’s over- ly broad application to venture capital, other long-term invest- ments, and loan creation, to improve market liquidity and preserve access to diverse sources of capital for businesses; Harmonize margin requirements for interaffiliate swaps with treatment by the CFTC by quickly making a targeted change to your margin rules to enhance end users’ ability to hedge against risks in the marketplace; Examine whether the recent proposal that applies to U.S. oper- ations of foreign banks is appropriately tailored and whether regu- lations on intermediate holding companies should be applied based on the assets of the intermediate holding company alone, rather than the assets of all U.S. operations. I also encourage you to align the foreign bank proposal with the domestic bank proposal and ex- clude interaffiliate transactions from each of the risk-based indi- cator calculations; Index any dollar-based thresholds in the tailoring proposals to grow over time to improve the rules’ durability; And modernize the Community Reinvestment Act (CRA) to en- sure banks are not ignoring their mandate to serve their ‘‘entire communities,’’ which should include legal businesses that banks disfavor operating in their communities. A bank responding to political pressure or attempting to manage social policy by withholding access to credit from customers and/or companies that it disfavors is not meeting the credit needs of the entire community. These approaches would promote economic growth by ensuring that rules are balanced, work for all stakeholders, and do not un- necessarily impede access to financial products and services in the marketplace. On a different topic, Facebook announced it is partnering with both financial and nonfinancial institutions to launch a cryptocurrency-based payments system using its social network. The project has raised many questions among U.S. and global lawmakers and regulators, including about its potential systemic importance, consumer privacy, data privacy and protection, and more. I am particularly interested in its implications for individuals’ data privacy. The Bank of England Governor Mark Carney said, ‘‘Libra, if it achieves its ambitions, would be systemically important. As such, it would have to meet the highest standards of prudential regula- tion and consumer protection. It must address issues ranging from anti–money laundering to data protection to operational resil- ience.’’ I look forward to hearing more about how the Fed, in coordina- tion with other U.S. and global financial regulators, plans to en- 3 gage on important regulatory and supervisory matters with Facebook throughout and after the project’s development. While Libra’s systemic importance depends on several factors in its future development, there are already some too-big-to-fail insti- tutions that must be addressed: Fannie Mae and Freddie Mac. They continue to dominate the mortgage market and expose tax- payers in the case of an eventual downturn. In a 2017 speech, you, Mr. Chairman, publicly referred to Fannie and Freddie as ‘‘systemically important.’’ Although my strong preference is for comprehensive legislation, the Banking Committee recently explored one option for addressing Fannie and Freddie, which is for the Financial Stability Oversight Council to designate Fannie and/or Freddie as ‘‘systemically impor- tant financial institutions,’’ and to subject them to Fed supervision and enhanced prudential standards. Chairman Powell, I appreciate you joining the Committee today to discuss these and many other important issues. We will now turn to Senator Brown. OPENING STATEMENT OF SENATOR SHERROD BROWN Senator BROWN. Thank you, Mr. Chairman. And, Chairman Pow- ell, thank you for joining us and for your public service. The stock market is soaring, but most American families get their money from a paycheck, not an account statement from their stockbroker. A critical part of your job, Mr. Chairman, is measuring and eval- uating the economy, and those measurements need to take into ac- count workers, not just wealth. Talk to workers who have not had a meaningful raise in years, who have seen their retirement cut, who watch their health care premiums rise, who have seen the cost of their child care and their kids’ college and paying off their own student loans going up and up and up. To those workers, to most Americans, the idea that a stock mar- ket rally means more money in their pockets is laughable. As the Fed’s own data reveals, the economy has not helped most Americans. Corporate profits go up and up and up; executive com- pensation explodes upwards. Workers are more and more produc- tive, but workers do not share in the wealth that they create. The top 1 percent have an average net worth of $24 million; the bottom half of all Americans each has about $20,000. That is less than one one-thousandth of their wealthiest neighbors. Meanwhile the share of workers who have been unemployed for over 26 weeks continues to climb. Mitch McConnell and Donald Trump responded a year or so ago by giving the wealthiest Americans and multinational corporations a $2 trillion bonus. Those corporations turned around and funneled the money back to their executives through stock buybacks. We are in the midst of the longest economic expansion in modern times, beginning, frankly, around the time this Committee decided to rescue the auto industry. We know interest rates are low, yet it is worrying that interest rate-sensitive sectors of the economy that provide good-paying jobs, like the auto industry, are not doing bet- ter. Employment in auto manufacturing, critical to Ohio and the industrial Midwest, continued to fall in June. 4 The Fed’s policies should ensure that everyone who contributes to the economy also shares in the wealth that they create. All work has dignity. We need an economy that rewards and honors work, not just wealth. Some of the challenges facing our economy can only be addressed by Congress. Millions of Americans struggle to pay for prescription drugs, which are increasing at five times the rate of inflation. Yet the White House looks like a retreat for drug company executives. Too many feel the squeeze of rising housing costs, with more than a quarter of renters spending over half their income on housing. The Fed cannot fix all these issues on its own. Only Congress can. But there are things that you can and should do to help the econ- omy work for the vast majority of Americans, through careful mon- etary policy and doing your job of policing Wall Street. I appreciate, Mr. Chairman, your recent recognition that this ex- pansion has the potential to benefit communities that have missed out on prior economic expansions. I hope your comments expressing frustration that wages have not increased as much as you expected means you will take action. I urge you to continue with policies that both lower unemployment and increase wages. In previous hearings, I have raised concerns about threats to the financial system, including the Fed’s steps to weaken the rules on the largest banks, the failure to activate the Countercyclical Cap- ital Buffer to prepare for the next financial crisis, and the lack of action to address risks posed by leveraged lending. Just this week, Deutsche Bank announced a significant restructuring, overhauling several businesses, cutting 18,000 jobs—almost 20 percent of its workforce. After several failed turnarounds in recent years, Deut- sche Bank’s latest effort shows it is too large and complex and has been mismanaged and underregulated. It is not the only megabank in that situation. I continue to be concerned that the Fed and other banking regu- lators are not doing enough. I add a new worry today to the list: private corporations, Facebook in this case, that have gotten car- ried away with their own wealth and their own power and are now attempting to ape the role of Government, creating their own cur- rencies and monetary policy and payment systems. So now, in addition to complex and risky Wall Street banks, we face new risks from unregulated giant tech companies—armed with vast amounts of personal data—with the intent, as far as I can tell, of conducting monetary policy on their own terms. You and I have a duty to serve the American people, but these private corporations have no duty to the broader economy or con- sumers. They are motivated by one thing: surely their own bottom line. Allowing big tech companies to take over the payments system or position themselves to influence monetary policy would be a huge mistake and is surely a threat to our democracy. Too many times, when the stock market soars and banks make money hand over fist, regulators have been complacent. As we have seen in the past, though, bank profitability is not a reliable indi- cator of a bank’s true health. The stock market is not a reliable in- dicator of the real economy’s performance. 5 I hope this is not another example of the Fed taking a pass from the responsibility to protect Americans from corporations taking big risks with our entire financial system. It is your responsibility, Mr. Chairman, to use your tools over monetary policy, the payment system, and prudential regulation to protect the financial system and make our economy work for all Americans, not just wealthy stockholders and huge corporations. Thank you for being here. Chairman CRAPO. Thank you, Senator Brown. And, again, thank you, Chairman Powell, for being here with us today. Before I turn the time over to Chairman Powell for his state- ment, I want to remind our colleagues that we have a vote at 11:00—three votes at 11 o’clock. We obviously are not going to get through all the questions for all the Senators here in that time- frame. Senator Brown and I will try to rotate during that and keep the hearing going, but I would like to ask all of our Senators to be careful, especially this time, to pay attention to your 5-minute term on your questions so that your colleagues can all have an oppor- tunity to ask questions. With that, Chairman Powell, we look forward to your statement. Please proceed. STATEMENT OF JEROME H. POWELL, CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Mr. POWELL. Thanks very much, and good morning. Chairman Crapo, Ranking Member Brown, and Members of the Committee, I am pleased to present the Federal Reserve’s semiannual Mone- tary Policy Report to Congress. Let me start by saying that my colleagues and I strongly support the goals of maximum employment and price stability that Con- gress has set for monetary policy. We are committed to providing clear explanations about our policies and activities. Congress has given us an important degree of independence so that we can effec- tively pursue our statutory goals based on objective analysis and data. We appreciate that our independence brings with it an obliga- tion for transparency so that you and the public can hold us ac- countable. Today I will review the current economic situation and outlook before turning to monetary policy. I will also provide an update of our ongoing public review of our framework for setting monetary policy. The economy performed reasonably well over the first half of 2019, and the current expansion is now in its 11th year. However, inflation has been running below the FOMC’s symmetric 2-percent objective, and crosscurrents, such as trade tensions and concerns about global growth, have been weighing on economic activity and the outlook. The labor market remains healthy. Job gains averaged 172,000 per month from January through June. This number is lower than the average of 223,000 a month last year but above the pace need- ed to provide jobs for new workers entering the labor force. Con- sequently, the unemployment rate moved down from 3.9 percent in December to 3.7 percent in June, close to its lowest level in 50 years. Job openings remain plentiful, and employers are increas- 6 ingly willing to hire workers with fewer skills and train them. As a result, the benefits of a strong job market have been more widely shared in recent years. Indeed, wage gains have been greater for lower-skilled workers. That said, individuals in some demographic groups and in certain parts of the country continue to face chal- lenges. For example, unemployment rates for African Americans and Hispanics remain well above the rates for whites and Asians. Likewise, the share of the population with a job is higher in urban areas than in rural communities, and this gap has widened over the past decade. A box in the Monetary Policy Report provides a comparison of employment and wage gains over the current expan- sion for individuals with different levels of education. GDP increased at an annual rate of 3.1 percent in the first quar- ter of 2019, similar to last year’s pace. This strong reading was driven largely by net exports and inventories—components that are not generally reliable indicators of ongoing momentum. The more reliable drivers of growth in the economy are consumer spending and business investment. While growth in consumer spending was weak in the first quarter, incoming data show that it has bounced back and is now running at a solid pace. However, growth in busi- ness investment seems to have slowed notably, and overall growth in the second quarter appears to have moderated. The slowdown in business fixed investment may reflect concerns about trade ten- sions and slower growth in the global economy. In addition, hous- ing investment and manufacturing output declined in the first quarter and appear to have decreased again in the second quarter. After running close to our 2-percent objective over much of last year, overall consumer price inflation, measured by the 12-month change in the price index for personal consumption expenditures, or PCE inflation, declined earlier this year and stood at 1.5 percent in May. The 12-month change in core PCE inflation, which ex- cludes food and energy prices and tends to be a better indicator of future inflation, has also come down this year and was 1.6 percent in May. Our baseline outlook is for economic growth to remain solid, labor markets to stay strong, and inflation to move back up over time to the Committee’s 2-percent objective. However, uncertainties about the outlook have increased in recent months. In particular, economic momentum appears to have slowed in some major foreign economies, and that weakness could affect the U.S. economy. More- over, a number of Government policy issues have yet to be re- solved, including trade developments, the Federal debt ceiling, and Brexit. And there is a risk that weak inflation will be even more persistent than we currently anticipate. We are carefully moni- toring these developments, and we will continue to assess their im- plications for the U.S. economic outlook and inflation. The Nation also continues to confront important longer-run chal- lenges. Labor force participation by those in their prime working years is now lower in the United States than in most other Nations with comparable economies. As I mentioned, there are troubling labor market disparities across demographic groups and different parts of the country. The relative stagnation of middle and lower incomes and low levels of upward mobility for lower-income fami- lies are also ongoing concerns. In addition, finding ways to boost 7 productivity growth, which leads to rising wages and living stand- ards over the longer term, should remain a high national priority. And I remain concerned about the longer-term effects of high and rising Federal debt, which can restrain private investment and, in turn, reduce productivity and overall economic growth. The longer- run vitality of the U.S. economy would benefit from efforts to ad- dress these issues. Against this backdrop, the FOMC maintained the target range for the Federal funds rate at 21⁄ 4 to 21⁄ 2 percent in the first half of this year. At our January, March, and May meetings, we stated that we would be patient as we determined what future adjust- ments to the Federal funds rate might be appropriate to support our goals of maximum employment and price stability. At the time of our May meeting, we were mindful of the ongoing crosscurrents from global growth and trade, but there was ten- tative evidence that these crosscurrents were moderating. The lat- est data from China and Europe were encouraging, and there were reports of progress in trade negotiations with China. Our continued patient stance seemed appropriate, and the Committee saw no strong case for adjusting our policy rate. Since our May meeting, however, these crosscurrents have re- emerged, creating greater uncertainty. Apparent progress on trade turned to greater uncertainty, and our contacts in business and ag- riculture report heightened concerns over trade developments. Growth indicators from around the world have disappointed on net, raising concerns that weakness in the global economy will continue to affect the U.S. economy. These concerns may have contributed to the drop in business confidence in some recent surveys and may have started to show through to incoming data. In our June meeting, we indicated that, in light of increased un- certainties about the economic outlook and muted inflation pres- sures, we would closely monitor the implications of incoming infor- mation for the economic outlook and would act as appropriate to sustain the expansion. Many FOMC participants saw that the case for a somewhat more accommodative monetary policy had strength- ened. Since then, based on incoming data and other developments, it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook. Inflation pressures remain muted. The FOMC has made a number of important decisions this year about our framework for implementing monetary policy and our plans for completing the reduction of the Fed’s securities holdings. At our January meeting, we decided to continue to implement mon- etary policy using our current policy regime with ample reserves, and we emphasized that we are prepared to adjust any of the de- tails for completing balance sheet normalization in light of eco- nomic and financial developments. At our March meeting, we com- municated our intention to slow, starting in May, the decline in the Fed’s aggregate securities holdings and to end the reduction in these holdings in September. The July Monetary Policy Report pro- vides details on these decisions. The report also includes an update on monetary policy rules. The FOMC routinely looks at monetary policy rules that recommend a level for the Federal funds rate based on inflation and unemploy- 8 ment rates. I continue to find these rules helpful, although using these rules requires careful judgment. We are conducting a public review of our monetary policy strat- egy, tools, and communications—the first review of its kind for the FOMC. Our motivation is to consider ways to improve the Commit- tee’s current policy framework and to best position the Fed to achieve maximum employment and price stability. The review has started with outreach to and consultation with a broad range of people and groups through a series of Fed Listens events. The FOMC will consider questions related to the review at upcoming meetings, and we will publicly report the outcome of our discus- sions. Thank you, and I am happy to respond to your questions. Chairman CRAPO. Thank you very much, Chairman Powell. I am going to use my time to focus on the question of cryptocurrency and the development of the new cryptocurrency payment system by Facebook and its partners. The Federal Reserve has played a significant role in overseeing data protection and privacy across the U.S. financial system, in- cluding payments. Cryptocurrency payments, particularly those based on blockchain technology, pose a number of new challenges for data protection and privacy and the effective oversight of those issues. I am sure that the members of the Federal Reserve have been looking at this, and I would just be interested in what your understanding of this point is of how the Federal Reserve’s role for data protection and privacy with respect to traditional financial services can be applied to Libra and Calibra. Mr. POWELL. Thank you, Mr. Chairman. I guess I would start by saying that we do support responsible private sector innovation in the financial system as long as that is carried out in a way that addresses the associated risks and preserves safety and soundness. So the project sponsors hold out the possibility of public benefits, including greater access to the financial system for some. But I think we agree that Libra raises a lot of serious concerns, and those would include around privacy, money laundering, consumer protection, financial stability, and those are going to need to be thoroughly and publicly assessed and evaluated before this pro- ceeds. And so we have set up a working group to focus on this at the Fed, and we are in contact with the other regulatory agencies. In- deed, we are in contact with central banks and Governments around the world on this and really just getting started. And I would just stress I think it is a great thing that you are having a hearing on this, I guess next week. I think it is important that this process of understanding and evaluating this proposal be a patient one and not a sprint to implementation. You asked specifically about data privacy. One of the features of this project is you would want to see a particular regulatory body that has oversight over the whole project, and that does not appear to be the case. There is not any one agency that can stand up and have oversight over this. We do not have oversight over Facebook. The privacy rules that we apply to banks, we have no authority to apply them to Facebook or to Libra or to Calibra, or to the Libra Association. So we are just in the process of thinking this through, 9 but I think one of the notable features of the project is that the su- pervision and regulation of it would fall in front of many, many dif- ferent agencies—State, national, and international—and we need to get our arms around that for starters. Chairman CRAPO. Well, thank you, and you have actually led into my second question on that. I was going to talk about how we fit in all of our banking regulators, the SEC, FinCEN, CFPB, and, frankly, going beyond even financial regulators to capture the en- tire scope of not just this but many other aspects of the data collec- tion that is going on in the global experience that we are having, the human experience we are having on the Internet these days. Do you think that we need to look at the possibility of creating a new regulator dealing with data protection? Mr. POWELL. I think that is exactly the question we need to be focused on, one of the many questions we need to be focused on. It is not obvious at all from our current regulatory system that we have in place what we need to assess and provide oversight over this. And I expect we will be working hard on this and, ideally, working with your staff as we explore it. Chairman CRAPO. Well, thank you, and I look forward to—I am glad to hear that you have got a working group together and that you are reaching out to other regulators who have a piece of this issue and of the broader issue of data collection, and I look forward to working with you on this. Senator Brown. Senator BROWN. Thank you, Mr. Chairman. And thank you for your questions about Facebook. Clearly this alternative banking system clearly implicates monetary policy and payments and regu- latory issues. Your concerns, I appreciate the concerns you express. Talk in a little more detail, if you would, Mr. Chair, about what kinds of risks this alternative Facebook currency would pose to or- dinary people. Mr. POWELL. Well, I think you start with privacy and the privacy of financial data, and then it moves quickly, I think, into the ques- tion that these things become—is the blockchain going to be so pri- vate that it becomes a vehicle for somehow evading money-laun- dering rules and that kind of thing. So there is a balance to be struck there. In addition, the potential scale of this, given the size of Facebook’s network, means it could be essentially immediately sys- temically important, and I think the company has acknowledged that. So that means—and I would echo what you quoted, Mr. Chairman, what Governor Carney said. That means that this should be subject to the highest level, the highest expectations in terms of privacy, but also prudential regulation. And the question is: Who is going to provide that and how and when? I wish we had an easy answer, but that is the question. Senator BROWN. You, in response to the Chairman’s question, mentioned you have been in touch with your counterparts in cen- tral banks. Can you tell me what you are hearing from them, what- ever publicly you can tell us what you are hearing from other cen- tral banks, I know China and Japan and Britain? Just your thoughts. 10 Mr. POWELL. I think, you know, everyone wants to start with the proposition that we want there to be innovation in the financial system. We do not want to be, you know, just reacting negatively to innovation. We want to find a way to incorporate it. But there just are serious concerns all around the table on how this will fit in our regulatory system and what it will really mean. And so I ex- pect we will be making quite a bit of progress. In fact, there is a G7 meeting, Ministers and Governors, in Paris next week, and I know it will be a topic there. And so I think we are at the early stages, really, of understanding—I think we understand what is in the White Paper and that sort of thing, but what are the right ways to assure that the public is protected, and the financial sys- tem. Senator BROWN. The working group that the two of you talked about certainly let us know—give us regular updates on where you are going and what you are suggesting. The Fed’s latest Monetary Policy Report says credit standards for new leveraged loans are weak and have deteriorated further over the past 6 months. A slowdown in economic activity could pose risks to borrowing firms and their creditors. These borrowing firms are companies that em- ploy millions of people, including many in the regional sector. How would a crash in the leveraged lending market decrease eco- nomic activity and how would it affect employment? Mr. POWELL. Well, I think the thought is that if the business sec- tor as a general matter has a lot of debt, companies that are highly levered will be more affected by an economic downturn should one happen. They will be more likely to cut back on capital expendi- tures and maybe hiring and that sort of thing. So highly levered companies are more vulnerable to economic shocks, and I think that is the nature of the risk we see around leveraged lending. We do not see it as akin to the risks that existed before the fi- nancial crisis, which were more risks to the financial system as such. Most of this risk is now held in market-based vehicles which have stable funding—not all of it, but most of it is held in that. So it is really for us a macroeconomic risk, and we have called it out, and, you know, we are looking hard at those vehicles and assuring that they do have stable funding, as we believe they do, for the most part. Senator BROWN. And we need you to pay special attention to those risks, as you know. Let me talk for a moment about CCAR. The Fed recently ap- proved capital distributions from the largest banks. Not surpris- ingly, you can expect the largest banks will spend tens of billions of dollars rewarding themselves and their investors with dividends and stock buybacks. That has been their history. That is likely to be their future. This clearly does not help workers and consumers. Why does the Fed continue to approve these kind of exorbitant cap- ital plans and direct so much money away from the real economy? Mr. POWELL. So the sense of the stress test is that after the shock that we apply, the global market shock in the case of many of the largest institutions, and then the economic shock to the oth- ers, the banks have to exceed certain minimum capital require- ments, even after this shock. And those requirements are higher than the actual level of capital that the banks had in 2007, so they 11 are quite high. And the shocks are quite large. And the stronger the economy is, the biggest the shock is. That is their obligation. Above that, if they have capital that is well in excess of that, or if they have—then they have the ability to pay dividends, as long as they meet that test. It is a consequence of the fact that we have spent a decade with stress tests and requirements having the banks raise their capital higher and higher and higher, and they now are in a position where they can pay out all of their earnings for that year and still be in compliance with the test, with a mar- gin of error—and a margin. So that is really where we are. Senator BROWN. Thank you. Chairman CRAPO. Senator Shelby. Senator SHELBY. Thank you, Mr. Chairman. Chairman Powell, thank you for your service. Thank you for your work to keep the Federal Reserve independent of both parties and do your job for what it was set up to be. We salute you for that. Mr. Chairman, before I get into a few questions, I am going to try to stay within the 5 minutes. I have a number of questions I would like to ask for the record, without objection, if you would. Chairman CRAPO. Without objection. Senator SHELBY. Thank you. You mentioned trade as a cloud perhaps on the economy, you know, some certainty there. We all know the economy is the best that I have seen in my lifetime at the moment. We want to sustain that. Trade is one way to sustain it if we have certainty there. That is not the only one. Would you elaborate on that, how important that is to the economy? Mr. POWELL. I will. I should start by saying that we, of course, play no role in setting trade policy and, please, no one should con- strue anything we say about—— Senator SHELBY. But it affects what we do in the economy, does it not? Mr. POWELL. Yes. But it should not be construed as in any way a criticism, because those are assigned to you and to the Adminis- tration. But what we get from our business contacts—and I imag- ine this is fairly widely the same as what you are hearing—is if you are a manufacturing company in the United States these days of any size, you probably have a supply chain that goes across international lines. And that is a really important part of your business, and so the trade negotiations that have been going on have injected uncertainty for those businesses into their supply chain. So many of them have moved their supply chains. Some moved them to Mexico and then found that Mexico might be the target of tariffs. Others are considering what to do. In any case, at a minimum, it is a distraction from going out there and, you know, rolling out new products and that sort of thing. And so it shows up a lot in the Beige Book, just overall con- cerns, and I think it is weighing on the outlook. It does seem to be weighing on the outlook. We see, you know, weakness in manu- facturing and investment and trade in the United States, and that is where it shows up. Senator SHELBY. Your mandate as Chairman of the Fed is to do what you can for full employment and also price stability. Some- times you have got to balance that. As we all know, it is very im- 12 portant for our monetary system, and I think overall you are doing a good job on that. I do worry down the road about inflation, as you do, and so forth. It seems to be fairly tame at the moment and so forth, but we have observed in the past that there has been some type of relationship in previous years between inflation rates and unemployment rates. As unemployment goes way down, jobs, there is pressure on wages and salaries and so forth. Is there a new paradigm out there as far as evaluating this today? And is it because of the global economy? Or what is it? Be- cause we have low unemployment, but we have at the moment not a lot of pressure, from your testimony and what we observe, on in- flation. Mr. POWELL. The relationship between slack in the economy, or unemployment, and inflation was a strong one 50 years ago. If you remember, in the 1960s there was a close correlation there, and that has gone away, and it has really been—— Senator SHELBY. But we had a different economy then, did we not? Mr. POWELL. Very different economy in so many ways, and in this way, that really—I would say that period—at least 20 years ago that period was over, and the relationship between unemploy- ment and inflation became weak. It has become weaker and weak- er and weaker. In addition to that, I think we are learning that interest rates— that the neutral interest rate is lower than we had thought, and I think we are learning that the natural rate of unemployment is lower than we had thought. So monetary policy has not been as ac- commodated as we had thought. So I think we are learning all of those things. At the end of the day, there has to be a connection because low unemployment will drive wages up and ultimately higher wages will drive inflation, but we have not reached that point. And in any case, the connection between the two is quite small these days. Senator SHELBY. What is your take on the ability for the German Nation to borrow money, their bond, at a lower rate than we do, say a 10-year bond? Is it based on what we traditionally know in economics as the least likelihood of default? Or what is that? Be- cause they are borrowing money around 2 percent lower than we are. Mr. POWELL. I think it is a range of factors, and I would not know them for sure. But I would say it is low inflation in Europe. That goes into rates. It is also the amount of quantitative easing and asset purchases that the European Central Bank has done. It is also expectations of slower growth. All of those things I think go into driving those extraordinarily low European sovereign rates. Senator SHELBY. Thank you, Mr. Chairman. Chairman CRAPO. Thank you. Senator Menendez. Senator MENENDEZ. Thank you, Mr. Chairman. And thank you, Chairman Powell, for your service. During your testimony in front of the House Financial Services Committee, you stated that any problems that could emerge through Libra would ‘‘rise to a systemically important level just be- 13 cause of the mere size of Facebook.’’ So is Facebook simply too big to build its own digital currency? Mr. POWELL. I think it is early to say that. I think we are at the beginning of assessing that. But I think the size of their network does focus your attention on the very likely systemic importance of this currency, and that does not mean they should not do it, but it means that—at a minimum it means that the standards that need to be applied to it will be the highest. Senator MENENDEZ. And as such, then, if Libra moves forward, we will—is it possible that our concerns rise and that we will have another too-big-to-fail institution tethered to the U.S. economy? Mr. POWELL. I certainly hope not, Senator. Again, we are at the very beginning of assessing all this. I do not know that Facebook itself—I mean, Libra is actually 28 companies, including Facebook. I do not know that Facebook would be too big to fail no matter what happens with Libra. Senator MENENDEZ. Yeah, I was referring to Libra. Let me ask you about this. If Libra moves forward as a cryptocurrency, should FSOC consider classifying Libra as a nonbank SIFI? Mr. POWELL. That is a very good question. I know the FSOC will be focusing on this. We have not had a principals meeting at FSOC since this was announced. There have been staff level meetings on it, though. So we will be focusing on it. It is the Treasury Sec- retary’s lead there. He is the Chair. Senator MENENDEZ. Yeah, but I would assume you would have some comments and say on that. Mr. POWELL. Yes, absolutely. Senator MENENDEZ. I look forward to seeing how that evolves. Chairman Powell, we see what happens in countries like Ven- ezuela when central banks stop making decisions based on eco- nomic data and instead change monetary policy to suit the political goals of those in power. The results are pretty ugly. Now, of course, I do not always think the Fed gets things right, but our system is infinitely superior to one where the President dictates interest rates, especially when we are heading into elections. President Trump has on several occasions threatened to either fire or demote you in what is clearly an attempt to intimidate you into taking certain actions, and I think I speak for all of my col- leagues when I say that we applaud your efforts to keep the Fed- eral Reserve as an independent and nonpartisan institution. So in your Monetary Policy Report, you talk a lot about how un- certainty is holding back economic growth. Is it fair to say that the President’s comments about you and the Fed’s monetary policy de- cisions are contributing to that uncertainty? Mr. POWELL. I would be reluctant to address that. I think we are really referring to uncertainties around trade and global growth in what we said in the Monetary Policy Report. Senator MENENDEZ. OK. So then let us turn to that. If it is trade, you noted several times that uncertainty over trade policy is weigh- ing on the economy. And I can tell you not a week goes by that I do not hear from folks in New Jersey that they are finding it hard- er and harder to grow their businesses and hire more workers be- cause of the Administration’s unpredictable trade policy. 14 So when you talk about ‘‘uncertainty in trade policy,’’ isn’t what you are really talking about the President’s unpredictable behavior and his obsession with tariffs, which are really just taxes on Ameri- cans? Probably the most stark example of this is when the Presi- dent put tens of thousands of American jobs at risk by threatening tariffs on Mexico to address an issue completely unrelated to trade. Would you agree that threatening to put tariffs on imports from the second largest trading partner in the world on an issue com- pletely unrelated to trade has increased uncertainty and held back our economy in the past few months? Mr. POWELL. I think businesses, like people, like a settled rule book. They like to know what the rules are so that they can act as aggressively or carefully as they want to. And I think when you go through a series of trade negotiations with your major trading partners, inevitably there will be uncertainty around that. Again, that is not to judge whether these conversations in any way—not to judge them in any way, but I think—— Senator MENENDEZ. But I am not talking about—— Mr. POWELL. ——that is what it is. Senator MENENDEZ. Excuse me, Mr. Chairman. I am not talking about trading negotiations in general. I am talking about using tar- iffs for nontrade purposes. That creates uncertainty. Every CEO I had when we were talking about, you know, tax reform, they would say to me, ‘‘Regardless of what policy you come up with, give me predictability and certainty, and I will figure out a way to make money.’’ Certainly it becomes enormously unpredictable when tar- iffs are used for nontrade issues. Mr. POWELL. I think that the reaction to that was actually pretty strong in the business community. Senator MENENDEZ. Thank you. Chairman CRAPO. Senator Toomey. Senator TOOMEY. Thank you, Mr. Chairman. Welcome back, Mr. Chairman. Good to see you here. I just want to follow up a little bit on a point that Senator Menendez was making. I, too, observed parts of your testimony be- fore the House Financial Services Committee yesterday, and I noted that you were asked whether you intend to serve out the en- tirety of your term. And you said that you definitely are intending to do that, and I want to say I for one am glad to hear that that is your conclusion, in part because I do think it is important that the Fed remain insulated from political pressure. But I also want to say for the record that I think you have done an outstanding job. I would remind my colleagues, on the day that you were sworn in, the Fed funds rate was still on a real basis very close to zero. We had an enormous balance sheet. We had not yet exited the ex- tremely abnormal monetary policy that we had pursued for about a decade. And I think that was a very dangerous experiment, and the unwind of that had no road map. There was no precedent. We had never experienced this before. And the central banks in other parts of the world were not in the process of normalizing. And so you had to figure out a way to do that because I think you believed that it was important to normalize. And you went about doing that, and we went about doing some things on our side. We did major tax reform. We rolled back some regulation that 15 we thought was excessive. And what is the result? What are the results of that work? The result is the strongest economy of my life- time: 3 percent economic growth last year, 3 percent in the first question of this year, record low unemployment, record job cre- ation. We now have more job openings than we have people looking for work. We helped to expand the productive capacity of the economy. The economy has responded tremendously. And now we are seeing an acceleration of wage gains which is strongest at the low end of the income spectrum, so this policy and this economy is narrowing the income gap, the wealth gap. And, Mr. Chairman, we used to have an expression for an economy like this. We used to call it the ‘‘Goldilocks economy,’’ strong growth, very low unemployment, ris- ing wages, and very low inflation. That is exactly what you hope for in an economy. So I am not suggesting you get all the credit for it. We certainly do not get all the credit for it. But you were able to normalize from this very strange experiment, and here we are with some terrific consequences. That leads me to my question. In light of the sovereign, the fun- damental strengths to the economy, as I see them—and I acknowl- edge that there are doubts and uncertainties. There always are. But I have to confess I have been a little surprised to see over re- cent weeks that the market has estimated about a 100-percent cer- tainty that we are going to get a reduction in the Fed funds rate. I am not asking you to tell us what the Committee is going to de- cide to do at the end of this month. But in light of the strength, the fundamental strength, it is surprising to me the breadth of the consensus that we are going to lower interest rates. And one of the things that I wonder about is to what extent is this driven by mar- ket-driven interest rates. So as you know, virtually the entire Treasury yield curve is trading below the Fed funds rates. I think you have got to go out to the 20-year maturity to get close to where Fed funds are. And maybe that is the private market telling us that the price of money should be lower than it is. And I just won- der how you think about the fixed income markets, especially the Treasury markets. To what extent does that influence the judg- ment of you and your colleagues in determining where interest rates should be? Mr. POWELL. Thank you, Senator. So we see it quite similarly to the way you described it. The U.S. economy is in a very good place, but we also see those uncertainties I mentioned as weighing on the outlook, and we also see some weakness in the United States econ- omy that I mentioned—housing, manufacturing, trade. And I think, you know, we have signaled—and central banks around the world are seeing weakness everywhere, and they are also providing more accommodation. We have signaled that we are open to doing that, and you are seeing that in the curve now. You are seeing that em- bedded in the United States interest rate curve, the fact that we have said that we are going to—— Senator TOOMEY. It seemed to me that the yield curve was sug- gesting that even before. Mr. POWELL. It was, and so what does that reflect? I think it re- flected the real concerns that arose really beginning in May. You 16 saw business confidence surveys gapping out and, you know, quite negative, fairly broadly. It was a bit of a confidence shock. Now, I think some of that has recovered, but that in part is be- cause we have stepped forward and indicated that we are—you know, that is what happens, is we address that through our policy and indicated at our last meeting that we were looking at changing rates. The bottom line is the economy is in a very good place, and we want to use our tools to keep it there. It is very important that this expansion continue as long as possible. Senator TOOMEY. Thank you very much, Mr. Chairman. Chairman CRAPO. Thank you. Senator Tester. Senator TESTER. Thank you, Mr. Chairman, Ranking Member Brown. I also want to echo what many of the Members have said already, that is, thank you for the job you are doing, Chairman Powell. I very, very much appreciate it. I think I am going to start here. It was in 2007 or 2008 that we had a hearing in here with the Secretary of Treasury when he said that we were on the cusp of a total financial meltdown. We are looking at an economy that is flying right along. We are racking up debt of $1 trillion a year. We have got a President that puts tar- iffs on at whims without any exit strategy with the tariffs. We have got allies that have been pushed away. We are witnessing China’s influence internationally that has been incredible, plus their in- vestment in infrastructure in their own country. We are seeing health care becoming unaffordable. We are seeing higher education being unaffordable. And we have invested virtually nothing in in- frastructure in this country, especially when we look at a 21st cen- tury economy. I remember that hearing that we had in this Banking Committee very, very vividly because the question I asked of the Treasury is: How come we hear about this when it is such a crisis situation that we are looking at a financial meltdown situation worldwide? And he had been in front of our Committee—you are not Secretary of Treasury, but you have a very important job. He had been in front of our Committee before and never said a word about it. So my question to you is: Since your job is very, very important and looking at the underlying factors, what is the thing that you are looking at or two or three things that you are looking at that would tip the scale? Because I think there are a lot of things going on right now that are very concerning. Even as we talk about low unemployment, we also fail to mention the fact that many of these families have to work multiple jobs to be able to afford even to rent a house. So could you tell me what the underlying factors are that you are looking at that would give me assurance that this strong economy is actually as strong as we think it is? Mr. POWELL. In terms of our economy in the near and medium term, I think we really are in a good place. Mainly the consumer part of the economy is pretty much intact. That is 70 percent of the economy. You have low unemployment. You have good job creation. You have rising wages. You have people spending. All of that is— housing is more or less sideways, and you do not see the kind of 17 risky problems that you saw before the crisis. So those are all good things. You see some weakness in the business sector here, and that is really tied to manufacturing around the globe. That is the thing that I worry about. If you talk to international economic authori- ties, people are very concerned about global growth, and we will feel that over time. So I would say that is the main thing I worry about. The other thing I worry about—and I mentioned some of these— is just the longer-run issues that we face as a country. We do not want to be at the bottom of the league table on labor force partici- pation by prime-age workers. We do not want to have an opioid problem that keeps—— Senator TESTER. That is correct. So I guess there are a lot of things out there that are cruising along as we look at it, and I will tell you that the infusion of $1 trillion off the credit card every year into this economy I would say has a pretty significant effect on its ability to grow. You give me $20,000 a year extra, I guarantee you I am going to spend more money and things are going to happen. But I have got to pay that off at some point in time. Does the debt come into this equation at all? And then if you want to address the debt limit, potentially playing games with that, you could address that, too. Mr. POWELL. Household debt is actually—— Senator TESTER. I am talking about national debt. Mr. POWELL. National debt, that is different. I would say the United States Federal budget is on an unsustainable path. I think we all know that, and it is something that will have to be ad- dressed. At the same time, we are the world’s reserve currency. We borrow very cheaply, and there is no competitor really at the cur- rent timeframe in terms of another reserve currency. So what will happen, I think, is we will just spend more and more of our pre- cious resources paying interest on debt as opposed to investing in the stuff that we really need. Senator TESTER. OK. I am out of time. Thank you very much. I do have some questions for the record, and I want to talk about the impact that these tariffs are having on ag and what you are seeing with the bigger banks and the smaller banks. Thank you for being here, Chairman Powell. Senator BROWN [presiding]. Senator Cotton. Senator COTTON. Welcome back, Mr. Chairman. Mr. POWELL. Thank you. Senator COTTON. The last time you were here, we spoke about the labor share of income and why more profits are not going down to regular workers. Today I would like to explore a related concept on economic mobility. On that front, I would like to say that I am pleased to be chairing next week a hearing of the Economic Policy Subcommittee with Senator Cortez Masto, the Ranking Member, on economic mobility and whether the American Dream is in crisis. There was an interesting article today in the Wall Street Jour- nal, based in part of your semiannual report, that mentions the record expansion surprise winner—the low-skilled—and it talks about how so many people who had been on the sidelines have got- ten back into the economy, including some of the groups that you 18 mentioned that traditionally have been hurt the worst in reces- sions—minorities or the youth, the disabled, and so forth. But it also says that it takes on average 8 years for less educated workers to recover the wages they lost in the recession. It is much shorter for college-educated or even those more highly educated. So, Mr. Chairman, I want to get your take on whether upward mobility depends in part on strong economic recoveries making it all the way into the eighth or even the ninth inning, so to speak. And are we currently in that state of this recovery, the eighth or the ninth inning, maybe even in extra innings? Mr. POWELL. The good news is I think that we are in those in- nings, and we are seeing that, and it is very gratifying to speak to people in low- and moderate-income communities who work there or live there or both and have them say that they have not seen a labor market like this really ever. It is very, very tight, and that means employers are looking through all kinds of blemishes on re- sumes and hiring people and they are training people up and things like that. So that is really good. That is the good news. The bad news is, as that box indicates, that started about 8 years into this recovery, so that is not really a great national strategy as to wait 8 years into it. We do not have that many recoveries—or expansions, rather. You know, we need a better strategy than that. It is working now, but ultimately the last time we had an expan- sion this long was 50 years ago. They do not tend to last this long. It also underscores again how important it is for us to keep this going, because a couple of more years of this, it is going to be very beneficial to those communities. Senator COTTON. I want to highlight your remarks a couple months ago at a Federal Reserve conference. You noted that the widening gap in economic status and prospects between those with a college degree and those without one, and I will quote more di- rectly from your speech to illustrate just how wide that gap has be- come. ‘‘In the 1960s, well over 90 percent of working-age men held a job, and there was very little difference in employment between those with or without a college degree.’’ ‘‘While the share of college-educated working-age men with a job has fallen from more than 95 percent in 1967 to around 90 percent in 2017, it has plunged for others. Ninety-five percent of male high school graduates were working in 1967, but only about 80 percent of them were working in 2017. Among working-age men without a high school diploma, about 90 percent had a job in 1967 versus a bit more than 70 percent in 2017.’’ That is a pretty stark difference between men with a college de- gree on one hand and men without one on the other hand. What, in your opinion, explains this new situation, Mr. Chairman? Mr. POWELL. The way I think about this is that what is really— a couple of major, you know, trends have been happening, and those are really globalization and the advance of technology. And for many of us, both of those things are advantages. If you are on the right side of those trends, probably this is the best time in human history for you. But there are people who, because they do not have the training and the skills and the background to benefit from advancing technology, then they fall on the other side of the 19 divide, and that is what you are seeing. You are seeing similar pat- terns, maybe not as extreme but similar patterns in other advanced economies that have faced these same challenges. So at the end of the day, it comes down to an educational system and a society that produces people who have the skills and apti- tudes to benefit from technology, increasing technology, more com- plicated technology. And when you have that, you can have declin- ing inequality and widespread prosperity. Without it, it will be very hard to achieve. Senator COTTON. It sounds to me like if, say, China had had a completely open market for American manufactured goods for the last 30 years but completely foreclosed the American market in in- vestment banking and management consulting, we might be hear- ing a different tune, kind of those who are on the right side of globalization right now. I will not ask you to comment on it, though. I will note, though, that I think immigration plays an important role here. In the period of time you were talking about from the 1950s to the late 1990s, less than 10 percent of the American work- force was foreign born. Right now we are reaching a point of our highest in over a century, and I think it is important that we focus on immigration policy, too, the role that it plays in blue-collar, working-class jobs, something we will explore next week on the Economic Subcommittee. Thank you. Senator BROWN. Senator Warner. Senator WARNER. Thank you. Mr. Chairman, it is good to see you again. I will make an editorial comment first. I was proud to support you when you became Chair. You made a commitment to me that you would realize this job and role re- quired an independent Fed Chair that would not be subject to polit- ical lobbying and haranguing, whether it comes from this end of Pennsylvania Avenue or the other end. I think you have stuck to your guns so far, but I want you to keep sticking to your guns. I would like to turn to some questions about Facebook and its proposed cryptocurrency Libra. I am a supporter of innovation in the financial sector, and if done right, this notion of a cryptocurrency could really deliver, I think, real benefits for in- creased friction, more access for consumers. But I have also got to tell you, as somebody who has spent a lot of time in the last couple years dealing with social media, and Facebook in particular, I think it would be safe to say—and, frankly, for people on both sides of the aisle—that Facebook has developed something of a trust def- icit, and that the kind of Silicon Valley mindset of move fast and break things maybe works when you are just thinking about it in a technology framework, but when we are thinking about the kind of implications social media has had around consumer privacy, pub- lic discourse, that break things and move fast, no regulation, does not always work. Now, yesterday, I think at the House Financial Services Com- mittee, you noted that Libra posed many serious concerns, ‘‘includ- ing potential risk of the stability of the financial system.’’ And, again, while I am open to the public benefits, I share your concerns about systemic risks, money laundering, privacy, other items. 20 This past week, former FDIC Chair Sheila Bair called on the Fed to exercise additional oversight over Libra, the possibility if this currency is fully built out, particularly if Calibra, which would be the Facebook wallet in Libra, the ability to have credit disruptions, consumer losses, foreign currency risks, financial mismanagement of the Libra reserve. The truth is we could be creating a system without the kind of regulatory oversight that led to the gaps that the crisis that took place, as Senator Tester pointed out. I think back about when the reserve fund broke the buck. We did not think that was going to be the thing that potentially brought down the system, but you could end up with the same circumstances around Libra. Could you expand a little bit on what you see around these regu- latory risks? And do you basically share Sheila Bair’s concerns re- garding the liquidity risks presented by Libra? Mr. POWELL. I do. I think the risks are—I think we need to do a very careful, patient, thorough assessment of what the risks real- ly are, and I think that is going to take a little bit of time. The idea that this would be going into implementation within 12 months I think is not going to be proven right. I think we are going to take more time than that. And as I mentioned earlier, one of the key issues really is that there is not a single, credible regulatory authority that can be responsible for oversight and held account- able for its oversight. It falls into many, many pockets—State, Fed- eral, international. So we are going to be looking at that. I did see that op-ed. I thought that was an interesting idea. I would not want to prejudge what we do or where we come out. We really have not even kind of gotten to the basics yet, but—— Senator WARNER. My hope would be, though, that you would— we have not been great recently at getting things across the finish line. My hope would be that you would, you know, take a serious look here. I think back to concerns I had back in the late 1990s when social media was set up. I was a telecom guy, and the rules of the road that were set up were basically thinking social media, these are just dumb pipes, we are not going to put any regulatory structure around it. We are now 20 years later; 65 percent of Amer- icans get their news from Facebook and Google. We have the abil- ity to disrupt our democratic processes. We see hate speech from either end of the political spectrum being brought forward. I would be really concerned, as we think about the innovation that comes from this space, that we do not make the same exact mistakes back in the late 1990s, that if we do move forward with this innovation, that we ensure—whether it is Facebook or any other dominant players, that we make sure that there really is going to be access for third-party wallets, not just a Facebook prod- uct; that we really think about the ability for third-party devel- opers to plug into this new financial system. You know, getting this right on the front end is so terribly impor- tant, and I look forward to trying to work with you and the other regulators to make sure we get it right. Mr. POWELL. Thank you. And I will just say this has gotten peo- ple’s attention in a way that is very—I hope that is very clear, not 21 just ours but the other regulatory agencies and Governments and similar bodies around the world. Senator WARNER. I will say—my time is up, but Facebook has taken advantage of the gaps within the current system, and we have got to make sure we do not have those gaps if we are going to talk about a whole new financial system. Thank you, Mr. Chairman. Senator BROWN. Senator Rounds. Senator ROUNDS. Thank you, Mr. Chairman. Chairman Powell, first of all, thank you very much for being here today. Before I begin my questions, I just wanted to comment on the insurance capital standard being developed by the IAIS. I think my colleague from Wisconsin, Congressman Steil, hit the nail on the head yesterday in his conversation with you in which he made it very clear that any version of the ICS that fails to recognize the aggregation method in the United States is simply unacceptable. And I appreciated your comments basically agreeing with that, that it has got to work for us, too. I also appreciated the response from Vice Chairman Quarles to the Senate letter that I led on this issue, but I remain concerned that the EU is using the ICS as a back door to implement its Sol- vency II insurance capital framework worldwide. The EU’s insur- ance regulator took a victory lap at the end of the latest annual report saying that they have achieved their goal of having, and I quote, ‘‘Solvency II as the practical implementation of the ICS.’’ So moving forward, it is imperative that we see a very strong, asser- tive response from the Fed and from Team USA to the IAIS activ- ity. My first question concerns the capital plans that banks are re- quired to develop under the CCAR framework. The CEO of JPMorgan, one of the banks required to participate in CCAR, said something about CCAR in his annual shareholders letter that I found rather striking. According to Mr. Dimon, and I quote, ‘‘Under the Fed’s most extreme stress-testing scenario, where 35 of the largest American banks bear extreme losses . . . , the combined losses are about 6 percent of the total loss absorbing resources of those 35 banks. JPMorgan Chase alone has nearly three times the loss absorbing resources to cover the projected losses of all of these 35 banks.’’ Mr. Chairman, it seems a little absurd to me that we are forcing an institution like JPMorgan to hold not just enough capital to cover its own losses, but also the losses of the other 35 largest in- stitutions three times over. This is coming at a tremendous oppor- tunity cost in my opinion. The capital tied up under CCAR is cap- ital that could be deployed to help first-time homebuyers purchase a home or budding Main Street entrepreneurs start a small busi- ness. Vice Chairman Quarles said at a conference in Boston earlier this week that capital stress tests need to be more predictable and easier for firms to pass. I guess my question would be: Do you agree that CCAR frame- work should be revised? Is it an item which is up for debate? Mr. POWELL. Well, I think that we are going to have to continue to change—well, the tests will have to evolve over time, or they will 22 inevitably, like anything else, become out of touch with reality. So we are committed to making appropriate changes. I would say, though, that the banks’ obligation is to have a min- imum level of capital post stress, and they are going to want to have a buffer on top of that. That is the test they have to pass. And we do not want them to be able to go—you know, we have made a pretty good judgment about what that minimum amount would be. I think the level of capital in the system is just about right. I do not think that it should be less, particularly for the largest banks. I do not believe that. I think there is lots of work going on on CCAR, though, and it was the subject of that conference in Boston on, I guess, Monday or Tuesday, lots of changes. But, again, we are going to preserve the overall strength and power of them while making them more transparent. Senator ROUNDS. Yeah, and look, I appreciate that, and I under- stand that capital requirements are important. It just seemed a lit- tle surprising to me what the current guidelines would do in terms of the amount of capital that they are, and I think there is a cost when you maintain that versus being able to put that back out in terms of loans to places that need it. I recognize that this is something which is ongoing, but I just want to point out that seems to me to be a little bit larger than what I would ever have expected it to be in terms of the capabili- ties today. Mr. POWELL. Well, again, I think the level of capital that we have required of the largest institutions in particular is about right, and it is high. It is high. It has not even been 10 years since the financial crisis. We have not even been through a downturn. So I think it is early to be talking about reducing those standards. Senator ROUNDS. OK. One other question. In the semiannual Monetary Policy Report, you point out that credit provided by com- mercial banks to fund businesses as well as commercial and resi- dential real estate continued to grow in 2019 and that bank profit- ability remained solid in the first quarter of 2019. I was encour- aged to read this because the pressures that farmers are facing due to our trade disputes and other headwinds have led to questions about whether or not banks will continue to be able to make loans in the ag sector. Given your view of the economy, should banks be in a position to continue to provide credit to farmers and ranchers during this time in which net farm income is down 50 percent in the last 5 years? Mr. POWELL. Well, the answer is yes to that. I think our farm belt banks have had a lot of experience in dealing with the issues that farmers are confronting right now. I know the whole agricul- tural sector is in a difficult place. It is a tough time. And I know that banks are trying to work through those difficulties with farm- ers. Senator ROUNDS. Very good. Thank you, Mr. Chairman. I appre- ciate the work you are doing. Thank you, Mr. Chairman. Mr. POWELL. Thank you. Chairman CRAPO [presiding]. Senator Schatz. Senator SCHATZ. Thank you, Chairman. 23 Chairman Powell, thank you for being here. I am going to ask you a series of questions about severe weather and climate change, and the first thing I want to say is that I do not expect monetary policy to solve a public policy problem. But I do think it is impor- tant in your prudential supervision capacity that you measure risk accurately and completely. And so the first question I have is: Does increased severe weath- er pose a risk to the institutions that you supervise? Mr. POWELL. Yes, I mean, we—and you know this, Senator. We do require financial institutions that we supervise to have a plan and an understanding to deal with severe weather events, particu- larly those that are in areas that are exposed to increased risk of severe weather. Senator SCHATZ. Is severe weather increasing due to climate change? Mr. POWELL. I believe it is, yes. Senator SCHATZ. Has the Fed changed the approach that it uses in assessing severe weather risk over the last 10 or 20 years? Mr. POWELL. We have had a policy in place. I would tell you there has been quite a lot of research done at the Fed around se- vere weather and its effect on the economy, and we do incorporate that into our supervision of these institutions. So it has definitely evolved. I think we have, you know, a cutting-edge understanding of the effect of severe weather events on the economy, and we do incorporate that into our supervision. Senator SCHATZ. But has the process changed? Mr. POWELL. Has the process changed? You know, I would have to go back and look. Senator SCHATZ. And the reason I am asking this specific ques- tion is that severe weather, generally speaking, over the last 10 or 20 years has been treated sort of force majeure; it cannot be helped, and to a certain extent it cannot be accounted for except that there is this sort of outside risk. But when that risk, say, of a 500-year storm rises 10 times in, say, 15 years, then the question becomes: Are your systems adequate to the conditions on the ground? And I can take that for the record if you do not want to puzzle through it—— Mr. POWELL. No, I can—— Senator SCHATZ. Go ahead. Mr. POWELL. One way to get at that is to go back to Superstorm Sandy. In a world where you have water lapping at the foot of the New York Fed, which is not that close to the water, in downtown Manhattan, you know that you are going to need robust plans and redundancy and all those things to deal with severe weather events. And that happened in, what, 2013 or 2014. So we know that, and we do apply very high standards to the key payment util- ities and other financial institutions. Senator SCHATZ. Let me read you something from the Bank of England: ‘‘The costs of climate change are having a devastating ef- fect. As financial policymakers and prudential supervisors, we can- not ignore the obvious risks before our eyes. We must integrate the monitoring of climate-related financial risks into the day-to-day su- pervisory work, financial stability monitoring, and board risk man- agement.’’ 24 Do you agree with the Bank of England? Mr. POWELL. You know, I guess I see climate change as a longer- run issue. I do not know that incorporating it into the day-to-day supervision of financial institutions would add much value. We have lots of things to supervise them for. Senator SCHATZ. Let me make the case for day-to-day super- vision, especially prudential supervision. You measure cybersecu- rity risk, political risk, balance sheet risk. You measure risk. This risk is accelerating. And I understand the desire for the Fed to sort of stay out of the political fray and even to stay out of the public policy fray. But this risk is accelerating, and I am not quite—I am satisfied that you are puzzling through this and that the staff is trying to get this right. But I am not satisfied that you are drawing the correct distinctions between weather and climate and that you are adequately accounting for the increased frequency and severity of severe weather events due to climate change. And there is one other part of climate change. It is not just indi- vidual events. It is changes in weather patterns that could cause individual portfolios to be more at risk. And so do I have your com- mitment to continue to work with our office on this problem, espe- cially given that, as you know, more than a dozen central banks around the planet are working really hard on this, and, again, without an ideological lens but just to try to adequately measure the risk? Mr. POWELL. Yes, and I will also say there is really nothing going on in the other central banks that we are not quite well aware of, as I think you know. Senator SCHATZ. Thank you. Mr. POWELL. Thank you. Chairman CRAPO. Senator Perdue. Senator PERDUE. Mr. Chairman, good to see you again. Mr. POWELL. Nice to see you. Senator PERDUE. Thank you for your forbearance, your second day going through this. I would like to go back to a topic that we covered just a little bit earlier. Today we have in the world about $60 trillion of sov- ereign debt. The United States has about 22 of that. Corporate debt since 2008 in the United States between—the last decade, between 2008 and 2018, about doubled, but still only represents about 4 percent of more than $60 trillion in overall U.S. capital market as- sets. My question is, basically, after reviewing all the data around cor- porate debt, sovereign debt, and particularly the increase in cor- porate debt, do you believe that leveraged lending has reached the point where it is beginning to be a systemic risk? If so, could you explain what information you are using to look at that? Mr. POWELL. So as far as corporate debt is concerned, I would tell you I do not see it as rising to the level of a systemic risk or a financial stability risk, which we think of as something that could threaten the functioning of the financial system. And the reason is a couple of things. First, the risk is really held in—more than half of the risk in le- veraged lending is held in collateralized loan and debt obligations, and those are market-based vehicles. They are not on the balance 25 sheet of banks, and they are not runnable. I mean, it was runs dur- ing the crisis that caused a lot of damage. The funding for those vehicles actually has longer life, expected life, than the assets that they own. So that is an important thing. The next biggest holder of that paper is mutual funds, and those in theory could be subject to accelerated withdrawals and that kind of thing. We monitor that very carefully. There is a risk there, but we have seen them weather lots of downturns. So just empirically, we have seen them weather, you know, spikes in volatility and that kind of thing. We are not in any way backing away from this and saying it is not a problem. I think we are very focused on monitoring it and confirming that it does not evolve into something that could threat- en the system. And in the meantime, it clearly can be an amplifier to an unexpected macroeconomic downturn. Senator PERDUE. You know, I tried to buy a couple of carefully in China last year with a credit card and with cash, and you just could not do it. So it was all, you know, AliPay, WePay, et cetera. With the cryptocurrency question you had earlier, in all the tech- nology that is coming, it just seems to me that technology is run- ning ahead of us in our ability to look at how currency is managed around the world, how cash-flows are managed, and the impact that it could have on how we for the last 100 years or so have used reserve currency in the world, and we have benefited that in the United States. The ability to borrow $22 trillion of debt and poten- tially $10 trillion more over the next decade depends heavily on our ability to be the reserve currency, have the dollar as the reserve currency. What risk to the structure itself and then also to the fact that the dollar has enjoyed for over 100 years now, or about 100 years, being the reserve currency? Mr. POWELL. You know, I think being the reserve currency does confer benefits and costs. One of the potential costs is that you are a little bit immune from market discipline because everyone wants to be in the most liquid asset. And it tends to be a pretty stable equilibrium, so there tends to be one reserve currency, or two, and it tends to last for a long time. But if you are going to keep that role, you have to run your fiscal house successfully. You have to be running up a sustainable fiscal policy. And we are not. I do not think in the near term there is anything to threaten our status such as a reserve currency, but in the medium and longer term, we will have to address our fiscal issues. Senator PERDUE. With $30 trillion in a decade—and that would be approaching probably 40 to 50 percent of all sovereign debt in the world at that point, because a lot of other countries are de- leveraging to some degree. All of a sudden then that does—your medium to long term—I am not trying to get you to quantify that, but if you look at the next decade and we are going to add 50 per- cent—if we were to add 50 percent more, that near- to long-term definition could fall in within the next decade or so, could it not? Mr. POWELL. Well, you have to have another reserve currency that has more attractive features. We have the best—we have the rule of law. We have institutions. We are a trading Nation. We are open to trade. And we have a highly developed financial system. 26 That is really important because when you are the reserve cur- rency, you can have inflows and outflows, and you have to have a financial sector that can absorb and manage that, or you will have spikes in inflation and currency volatility and that kind of thing. So another currency would have to emerge that could take over that role, and there really is not one right now that could check all of those boxes. So it could be a long time. Senator PERDUE. And the market basket concept has no more ap- peal today than it did a decade ago when they started talking about that? Mr. POWELL. It has not really taken off yet, if you are talking about special drawing rights. Senator PERDUE. Agree. Yes, sir. Right. Mr. POWELL. But, nonetheless, we should not assume that it will last forever, because it will not. Senator PERDUE. Yes, sir. Thank you for being here. Thank you, Mr. Chairman. Chairman CRAPO. Thank you. Senator Smith. Senator SMITH. Thank you, Chair Crapo, and thank you so much, Chair Powell, for being here today. I very much appreciate your service, and I want to just note that I believe in the first 30 sec- onds of your testimony this morning, you used the word ‘‘independ- ence.’’ I believe that I heard colleagues on both sides of the aisle pay tribute to how important it is to have an independent Fed, so I want to thank you for that, for your steadfast defense of that. I also want to just quickly follow up on comments that my col- leagues Senator Tester and Senator Schatz said. You know, Sen- ator Tester asked, What is going to tip the scale to bad when it comes to our long-term economic prospects? And I would like to just for the record say that I do really believe that our increasingly volatile climate, climate change, is on the same scale as the long- term threats to a growing national debt in terms of the stability of our economy. And trust me, the farmers in Minnesota who are looking at lost yields and a complete shake-up of the world in which they operate, for them this is a short-term and an immediate issue. So I wanted to just add my thoughts to that point. Speaking of issues that are long-term challenges to the economy, you mentioned housing and sort of the lagging of housing construc- tion. You know, what we are seeing all over the country and cer- tainly in Minnesota is that housing costs are growing faster than wage growth, and the market is producing, so we have shortages of housing at price points that people can afford. And we are see- ing, of course, more high-end homes being built but not homes that people can actually afford. So I would like to have you just talk a bit more about the impact of this. This has impacts on employment in rural areas, impacts on long-term economic prospects for the country, and what you see the Fed’s role could be and what our role should be. Mr. POWELL. I think what we hear from the home builders is that it is a series of factors that are really holding them back and driving—and challenging affordability. And it is in many cases that there was a big home-building sector in 2005, and a lot of those people retired in 2007, 2008, 2009, 2010, and 2011, and now you 27 have a shortage of skilled labor, so it is hard to get people on the job—electricians, plumbers, carpenters, and other people. That is one issue, just to get the people. No matter what you pay them, just finding people who can do that work expertly. Senator SMITH. Would you say our immigration policy might have something to do with that? Mr. POWELL. I think that—that is what we hear from home builders. Senator SMITH. Me, too. Mr. POWELL. That is part of it for sure. It is also hard to get lots. You know, in many metropolitan areas, you have a lot of homes and traffic and that kind of thing, and the rules for creating new lots are challenging. Material costs too have gone up, and some of that is tariffs for sure. So the home builders feel almost like they have been hit by a perfect storm here. I think with rates on mort- gages having dropped quite significantly over the course of the year, we do expect a turn-up there. But these longer-run challenges I think are going to be there, and affordability is going to be a chal- lenge. Senator SMITH. What I hear from businesses and communities, especially in rural Minnesota but really all over the State, is that the lack of workforce housing, affordable housing for people who have good jobs is actually a real limit on economic growth. I am doing a series of roundtables around the State to try to get at this, so I appreciate your comments on that. Thank you. Let me just ask you on another topic, Senator Shelby was talking about the relationship, maybe the shifting relationship between in- terest rates and growth. You are under political pressure, which I do not approve of, to lower interest rates. I am not asking you what you are going to do, but I want to look at the lesson of what we are seeing in the EU. So in Europe, the central bank essentially has negative interest rates. Economic growth is only about 1.2 per- cent a year, and inflation is also below target. So my question is: What can we learn from the experience in Europe? It looks to me or some could conclude that you end up losing many tools in your toolbox when you—that seems to be sort of the challenge that they have. Now, obviously, some of this is monetary policy and some of it is fiscal policy. But could you comment on that? Mr. POWELL. I will, and it is really the same lesson that we have learned, I think, from Japan that you see that in a less extreme form in Europe, and that is that you do not want to let—you do not want to get behind the curve and let inflation drop well below 2 percent, because what happens is you get into this unhealthy dy- namic, potentially, where lower expected inflation gets baked into interest rates, which means lower interest rates, which means less room for the central bank to react, and that becomes a self-rein- forcing thing. We have seen it in Japan. We are now seeing it in Europe. And that is why we think it is so important that we defend our 2-percent inflation goal here in the United States, and we are committed to doing that. Senator SMITH. Thank you. Chair Crapo, I have several other questions that I would like to submit for the record. I am especially interested in submitting a question around Deutsche Bank. Last night, the New York Times 28 reported that Deutsche Bank’s private banking managers urged the bank to retain Jeffrey Epstein as a client, even after the compli- ance officers recommended that the bank drop him as a client be- cause of reputational risks. So I am going to submit a question about what type of customer does represent a reputational risk, and if not Epstein, then who? Thank you. Chairman CRAPO. Thank you. Senator Kennedy. Senator KENNEDY. Thank you, Mr. Chairman. And thank you, Mr. Chairman. Mr. Chairman, what is the economic impact, in your judgment, of illegal immigration on America’s economy? Mr. POWELL. I would have to answer it in generalities. I have not tried to quantify that. But people who come in legally or illegally, they add to our workforce, and they contribute to GDP certainly. So that is part of it. I think that part of growth—you can really boil growth down into labor force growth and productivity increases, and immigration, total immigration, has contributed more than half of the growth to our workforce in the last few years. So it is important. Senator KENNEDY. What about illegal immigration? Does it have an impact on wages? Mr. POWELL. You know, there has been a lot of research on that, and it has really not reached a clear conclusion. There is research that finds no visible impact, and there is research that finds it has a modest impact. Senator KENNEDY. Well, do you think illegal immigration is a good thing? Mr. POWELL. You know, it is really not in our—it is really not at all in our say-so. It is like trade or guns or some other things that we do not really take part in. Senator KENNEDY. Well, in part it is, and let me explain my per- spective. We welcome about a million of our world’s neighbors to become American citizens every year. I think that makes our coun- try stronger. I think we can probably agree on that. Unfortunately, we have a lot of folks that come into our country illegally. I think part of the reason that so many people want to come to America is because we have rights and we cherish them and we protect them. I mean, when is the last time you heard of somebody trying to sneak into China. They want to come to Amer- ica. But with rights go responsibilities. One of our responsibilities is to abide by the rule of law. Federal law is not an a la carte menu. You cannot pick and choose which laws you want to abide by. And to come into our country illegally is a violation of Federal law. And it would seem to me that we would want to do everything we can, if you believe, as I said, that people respond to incentives, not to give people an incentive to violate the law. Now, that is kind of my perspective on it. Properly vetting people who come into your country, in my judg- ment, is not racist. It is prudent, in the interest of public safety. Are you familiar with the program called ‘‘Directo a Mexico’’? Mr. POWELL. I am not, at least by that name. 29 Senator KENNEDY. I understand it is a program under the Fed. It facilitates remittances from people in America to other countries with low transaction and exchange fees. Mr. POWELL. This must be part of our ACH operation, and we do some remittance business through our ACH internationally. Senator KENNEDY. OK. Will you make it easier for people in our country to send money to another country? Mr. POWELL. Very, very limited. Most of that happens in the commercial banking system—almost all of it. But I think we do— see, we have something called—this is complicated, but ‘‘automated clearing house’’ is really set up to do things like payrolls, and we do that internationally. It is not a great tool at all for sending back remittances. Senator KENNEDY. OK. But you do have a program—you are just not familiar with it—called ‘‘Directo a Mexico’’? Mr. POWELL. I am not familiar with it. Sorry. I will look into it. Senator KENNEDY. OK. Do you know if U.S. citizenship is a pre- requisite to being able to use the program? Mr. POWELL. I do not. I would have to check on that. Senator KENNEDY. Do you know the impact of your program on the American economy? What does it do for us? Mr. POWELL. I would have to look into all those things, and I would be glad to do it. Senator KENNEDY. OK. You are aware that remittances form a huge portion of the GDP in other countries, like Mexico, for exam- ple? Mr. POWELL. Yes, I think a number of countries rely on remit- tances from relatives usually who work in the United States and send money back home. Senator KENNEDY. Right. And if someone is here illegally, this program could be an incentive, could it not? Mr. POWELL. In principle, yes. Again, I am completely unfamiliar with it, so I should really—— Senator KENNEDY. OK. That is fair. I do not want to catch you off guard. I will be calling you. I would like to visit more about this. Mr. POWELL. Good. Senator KENNEDY. And whether this is a good idea or whether it improperly incents people to break the law. OK? Mr. POWELL. Thank you, Senator. Senator KENNEDY. Thanks for your good work. Chairman CRAPO. Senator Van Hollen. Senator VAN HOLLEN. Thank you, Mr. Chairman. And welcome, Mr. Chairman, and thank you for your leadership. As you know from previous questions I have asked you at these hearings, I have been very frustrated—very frustrated—about the lack of the development of a real-time payment system at the Fed- eral Reserve. There were some questions in the House yesterday about this. As you acknowledged, the Fed has been looking at this for 5 or 6 years. In the meantime, every day that goes by, the lack of a real-time payment system is costing millions of Americans lots of money. And over the course of a year, we are talking about mil- lions of Americans losing billions of dollars, especially those who are going paycheck to paycheck. 30 At the same time, other countries—Great Britain, the EU coun- tries, lots of other countries—have gotten there before us, and there is no reason we should not have gotten there a long time ago. In the meantime, because of lack of progress, there has been more momentum for a de facto private sector version of a consor- tium of big banks, The Clearing House, and there are lots of con- cerns about that system. Mr. Hoenig, who is formerly the Vice Chair of the FDIC, and Bruce Summers, formerly at the Fed, re- cently wrote an editorial about their concerns with the largest banks in the country controlling the payment system. I just want to quote from their article, and they say: ‘‘The needs of consumers and businesses, and the depository institutions nationwide that provide them services, will be best served by the Federal Reserve continuing to play its role as a payments processor. The alter- native, we believe, is to award The Clearing House a de facto mo- nopoly, resulting in a less competitive and less efficient market for immediate payments.’’ Question: Do you share the concerns they expressed in that edi- torial? Mr. POWELL. Senator, as you, I am sure, know, we actually have a proposal out to provide a real-time settlement system, 24/7/365, and asked the public to comment on it. We sent it out late last year. We have got several hundred—900, I think—comment letters and all that, and there has been—this proposal came out of our Faster Payments Initiative. We chose to pull people together. As you know—— Senator VAN HOLLEN. Not to cut you off, but when do you expect to get this done? I mean, again, other countries have done this. It is not that complicated. It is really just a question of making a de- cision. So do you share the concerns that were expressed by those two individuals in their editorial? And as you think about your an- swer, I want to point out that 21⁄ 2 years ago, when the big bank consortium was preparing to launch a real-time payment system, they told the Department of Justice that they would charge the same price to all depository institutions regardless of their size. About a year later, the Justice Department cited that assurance when it told The Clearing House that it had no intention to take any antitrust action against them. But last month, The Clearing House added a big caveat to its pledge. They said that they would only maintain that commitment if there was no other competition, meaning the Federal Reserve. And community bankers are very worried about this. Here is a quote from Bob Steen. He is the CEO of a $93 million asset Bridge Community Bank in Mount Vernon, Ohio, talking about the Fed, ‘‘If they do not take that as a dare, then I do not know what it takes for the Fed to serve as a central bank role.’’ So we have just got to make a decision here because the lack of the Fed making a decision is essentially putting in place the de facto clearing house. Now, if that is the result of a deliberate deci- sion, that is one thing. But if it is the result of inaction, then there are real risks at stake here. Mr. POWELL. We are working our way through the comments and approaching a decision, and we have to weigh this very carefully 31 under the law, under the Monetary Control Act and under our reg- ulations. You are absolutely right that the smaller institutions are strong- ly in favor of our doing this, but there is a range of commentary. We have a process we need to go through. We have been going through it and, you know, expect to reach a decision. Senator VAN HOLLEN. All right. I would just be concerned with providing the biggest banks a monopoly over this big an area of transactions. Very quickly, you have indicated how important it is for the Fed to be independent, but the President does give you a call from time to time, right? Mr. POWELL. He has. Senator VAN HOLLEN. Has he ever raised the issue of Deutsche Bank in those conversations? Mr. POWELL. By longstanding practice, of course, I respect the privacy of my conversations with any elected official, including the President. Senator VAN HOLLEN. Right. There is no executive privilege, though, between the President and the Federal Reserve, is there? Mr. POWELL. This is—— Senator VAN HOLLEN. It is an independent body, right? Mr. POWELL. That is correct. It is not a legal matter. It is just out of respect for—I would give you the same respect. Senator VAN HOLLEN. Well, as you know, a group of Senators on this Committee have written to you about the Deutsche Bank situ- ation where senior executives at Deutsche Bank overruled one of their experts who wanted to issue a suspicious activity report with respect to certain Trump entities, financial entities. That was over- ruled. Deutsche Bank has under your regulatory purview. How can you provide us assurances that that will be looked into when you have a whistleblower case like that? Mr. POWELL. As you know, we have an enforcement action in place against Deutsche Bank for its system and money-laundering issues, and, you know, we are providing absolutely standard over- sight to that at this time. Senator VAN HOLLEN. OK. Can you provide us assurances that that kind of situation would come under that purview and inves- tigation? Mr. POWELL. That kind of situation, yeah. Senator VAN HOLLEN. Thank you, Mr. Chairman. Chairman CRAPO. Senator Jones. Senator JONES. Thank you, Mr. Chairman. And, Chairman Pow- ell, thank you for being here and thank you for your testimony. One of the short-term risks to the economy that I fear and I think you have highlighted are the ongoing negotiations in Con- gress over both Government spending and the debt ceiling. In the June FOMC minutes, for example, it was written that participants generally agreed that a downside risk was a sharp reduction in Government spending, and all told, if Congress does not reach an agreement, there is a potential for a $120 billion immediate reduc- tion in Federal spending for national security and a host of domes- tic programs. 32 Would you just elaborate a little bit on what you believe what kind of risk does this represent to the economy and how is the Fed processing this risk? Mr. POWELL. I think that it is essential that Congress raise the debt ceiling in a timely way, by which I mean in a way that allows the U.S. Government to pay all of its bills when and as they are due. That is essential. Any other outcome is unthinkable. We have always paid our bills, and it simply must happen that Congress raises the debt ceiling in time to allow that to happen. The con- sequences of failing to do so would be highly unpredictable, and no one should assume that the Fed or any other agency can be relied upon to shield our economy from the short-, medium-, and long- term negative consequences of such an act. Senator JONES. Is there risk in protracted negotiations? I mean, if we are in the 11th hour of discussions—and, you know, so many times we have seen, like last year with the Government shutdown, with disaster relief, there is all this political posturing and, you know, dueling press conferences, and we end up getting down the road and getting close, and then they fall apart. Is there risk just in the protracted negotiations and waiting until the 11th hour to do something? Mr. POWELL. I think markets have seen this movie, and I think they think they know how it ends. And so they tend to look through that. You do see some of the Treasury securities that are maturing; they might trade and they are now trading a bit off be- cause they—on the theory that there might be some delay in pay- ments. But, clearly, everyone is assuming that this will get worked out. And if that were not to happen, that would be, I think, a big surprise and not a good one. Senator JONES. Well, I appreciate your answer. Maybe Congress and the President can take a lesson from that and just go ahead and get it done now instead of going through the protracted, you know, ‘‘Who shot John?’’ kind of things and where we are. I want to go back to a question my colleague Senator Shelby talked about just a little bit with regard to trade and the apparent progress in trade. And I want to kind of couple that a little bit with what you have talked about with regard to so many sectors of the economy that are not feeling the buoyancy of their jobs, of their wages, and things like that. Our manufacturers in my State and farmers in my State, I am not sure they have seen the apparent progress that was initially seen that you talked about. But, regard- less, they are certainly feeling the pain of the uncertainty, and those challenges are broad in scope. We have got uncertainty with China. There is uncertainty with Canada and Mexico. There are steel tariffs. There are potential auto tariffs. There are retaliatory tariffs on farmers. And yesterday we heard there may be French tariffs, and even our Eximbank needs reauthorization. In my State, that seems to be affecting folks in those rural areas, the African American folks probably more than most. It has not hit directly the consumer, I do not think just yet with the tariffs, but it is going to happen. I mean, we are seeing now—we are seeing now that in the short term we are going to see tariffs that are going to cause an increase in depletion and supply of things like 33 Bibles and artificial fishing lures, which are fairly standard staples in Alabama, most Alabama households. Can you elaborate for me on which of all of this in particular is the thing that concerns you most about the current situation with tariffs? What are the concerns that you have most? Because they are all over the board, and we seem to be going this alone. Mr. POWELL. I would just say I think it is general uncertainty on the part of businesses, and you do not really see that—as you noted, you do not really see that in household confidence surveys and things like that. I think you do see it in business confidence surveys now. And the concern would be that over time it will just be—it will weigh on the economic outlook, and it is a concern. I think we have been hearing that all year long from our business contacts. Senator JONES. In particular, let me ask about—the President right now has on his desk a report from the Commerce Department about whether or not foreign automobiles and suppliers are a na- tional security threat. That has been sitting on his desk since Feb- ruary. It has not been released despite many of us on this panel, including Senator Toomey and I, have been asking. Is the fact that that is sitting there and the President is not even releasing it pub- licly, does that add to the uncertainty? Mr. POWELL. You know, I would be reluctant to comment on any particular aspect of trade policy, which is clearly not our job. At the same time, we try to call out the things that we are seeing. We owe that to the public, and so I would just leave it at the level of high uncertainty. Senator JONES. Well, I appreciate the answer. It is really more of a comment from me than anything else. Thank you, Mr. Chair- man, so much for being here. And thank you, Chairman Crapo. Chairman CRAPO. Thank you, Senator Jones. And as you can see, Mr. Chairman, we do not have any other here, but we have Sen- ators coming. So we are in the second vote at this point. Senator Brown will be back in a few moments. He and I are switching out. And while we wait for some of the other Senators who want to have a chance to ask you some questions, I get to ask a few more of my own. I would like to go back for just a moment to the cryptocurrency issue. You indicated before, as you start to look at the new Libra proposal, that you have been in communication with some of the other central banks and other regulators, as well as the United States regulator. Are you aware of any other cryptocurrency pro- posals that are out there other than Libra, something else globally that is being developed? Mr. POWELL. I mean, not really. There are companies that are looking at internal stable coin-type ideas to use with their cus- tomers, but nothing that—I am not aware of anything that could potentially be quite so scalable so quickly as this given the existing network that the company has. Chairman CRAPO. All right. And to return to the question that Senator Perdue had asked you about, the impact of a cryptocurrency system on our reserve currency in the world, par- ticularly in the United States reserve currency, which, as you both indicated in your conversation, has—I think the United States has 34 benefited from our currency being the world’s reserve currency. If a cryptocurrency system were to become prevalent throughout the globe, would that diminish or remove the need for a reserve cur- rency in the traditional sense? Mr. POWELL. I think things like that are possible, but we really have not seen them. We have not seen widespread adoption. I mean, bitcoin is a good example. Really almost no one uses bitcoin for payments. They use it more as an alternative to gold, really. It is a store of value. It is a speculative store of value like gold. So we do not have—and people, of course, have been talking about this since cryptocurrencies emerged. But we have not seen it. But that is not to say we will not see it. And if we do see it, yes, you could see a return to an era in the United States where we had many different currencies, and, you know, in the so-called, I guess, national banking era. Chairman CRAPO. All right. Thank you. I do have more ques- tions, but some of our Senators are returning now, and I will turn to Senator Tillis. Senator TILLIS. Thank you, Mr. Chairman. Chair Powell, thank you for being here. A quick question on payments, maybe a couple of questions. Do you think that the current private sector payment systems are bro- ken? Mr. POWELL. I would not say they are broken. Senator TILLIS. Then what part of the problem exists out there that is prompting the Fed to move forward with a payments plat- form? Mr. POWELL. Well, we have not decided to do that, although we do, of course, play an active role in the payment system in a num- ber of ways already. Where the U.S. lags is real-time payments broadly available on an equitable basis. Other countries are way ahead of us on that, and so for the last 5 years, the Fed has been trying to push us—we do not have plenary authority in this area— trying to push us generally into a place where that will be avail- able to people, as it is in many other countries around the world. Senator TILLIS. How do we go about funding it, funding the im- plementation of the ongoing operation? Mr. POWELL. Of? Senator TILLIS. If you decide to move forward with a Fed pay- ment system. Mr. POWELL. Ah. So anything that we do in the way of a pay- ment service is subject to the Monetary Control Act, and the Mone- tary Control Act requires that we—a couple of things. One is—and I will not get the language exactly right, but the sense of it is that it must pay for itself on a basis that is comparable to a private pro- vider, meaning, including the cost of capital and taxes. Senator TILLIS. I have got a series of questions that I will submit for the record on the decision process and going forward. But I for one hope that we can get to a point to where perhaps we can facili- tate a private sector solution that addresses some of the things that I think you rightly point out, but not necessarily take on that. First off, I should have thanked you for the great work you are doing. I think you are doing great work as Chair, and I appre- ciate—— 35 Mr. POWELL. Thank you. Senator TILLIS. ——everything that you do in some, I think, of the most confusing times for somebody in your position, and I ap- preciate it. I think someone mentioned earlier when I was out—I apologize. We have got multiple committees and multiple votes going on right now. But I think that we had some of the folks on the other side of the aisle that are concerned that as Deutsche Banks takes itself apart, that the bigger banks will pick up those assets and maybe even get bigger. But I do not necessarily think that that is going to happen. What I think is probably going to happen is we are going to see that move into private equity where they are probably chomping at the bit to buy things for pennies on the dollar. What is your view? Mr. POWELL. You know, as you know, as you remember, that is exactly the kind of thing I used to spend my time doing. But I hon- estly have not looked at the company with that question in mind. I will come back to you on that. Senator TILLIS. Thank you. Another area that I am kind of curious about, you know, if you were in the private sector and you had a 10-year yield that was close to 2 percent, would you extend your maturity profile and lock in financing based on today’s market conditions? Mr. POWELL. I mean, as a general matter, I think this would be a nice time to lock in. This is a low rate—— Senator TILLIS. So as we take a look at our own debt, is it time to potentially consider—I know there are some short-term transi- tion costs, but potentially consider what other countries are doing on longer-term bonds up to and including I think more recently 100-year bonds? Mr. POWELL. This one is squarely in the wheelhouse of the Treasury Department which does the debt management. I know they looked carefully, as you obviously know, at doing very long bonds. Senator TILLIS. Do you have any view on the pros and cons of doing it? Mr. POWELL. I really do not. You know, I think they looked quite carefully at it. When I was at Treasury 25 years ago, we looked at it and concluded that the market would—there might or might not be a market to do it, so we did not get it done, anyway. Senator TILLIS. The last thing I will leave you with, because I want to make sure that the other Members get in their questions, is we will be submitting additional questions for the record for some of my age-old priorities in terms of regulatory work that you are doing specifically around interaffiliate margin, Volcker, recali- brating the G–SIB surcharge, and a number of other things. We really believe that these are things that are very positive that we need to see progress on, so we will be submitting questions for the record so that we can see what the progress is and timelines for results. Thank you for being here. Mr. POWELL. Thank you. Senator BROWN [presiding]. Senator Reed, are you ready? Or should I go with Senator Cortez Masto? 36 Senator REED. Go ahead, please. Senator BROWN. Senator Cortez Masto. Senator CORTEZ MASTO. Thank you. Chairman Powell, thank you. It is good to see you again. Mr. POWELL. Good to see you. Senator CORTEZ MASTO. And thank you for all the good work that you are doing. At yesterday’s hearing, you said that American workers have missed 10 years of wage growth. You said the Federal Reserve needs to do a better job of calling out the declining returns to work- ers, and you also said more business owners realize that an econ- omy where the richest 1 percent of families control 40 percent of the Nation’s wealth is problematic. And yet you said one answer was for workers to increase their education, and you said this be- fore. I think last time you were before us we had this conversation. And correct me if I am wrong. I am looking at the Fed’s data, and I think it is on page 8—it is on page 8 of the Monetary Policy Re- port that just came out. If I read this correctly, it shows that wages have barely increased for both high school and lower-educated workers and college-educated workers. So if you look at that graph, how I am reading it—and correct me if I am wrong—from 2007 to 2017 wages were basically flat for both. In the past year and a half, wages have gone up by about 1.5 percent over 2007 levels for both college-educated and high school-educated workers. Am I reading that correctly? So it has been flat for both. Mr. POWELL. These are real wages after inflation. That is what the trick is here. If you added inflation back in, nominal wages, of course, have increased. Senator CORTEZ MASTO. But for both categories, it has pretty much been flat. There has been a nominal increase for both cat- egories. Is that correct? Mr. POWELL. So if you look at the table on the right, the picture on the right, what you see is that you had declines in real wages and then you see them increasing. Around 2015 it became positive for college-plus, but, generally speaking, yeah, that is the picture. Senator CORTEZ MASTO. Yeah, and so would you agree that at least what I see here, that the 1.5 wage increase over a decade is completely inadequate? Mr. POWELL. I was actually referring to the first decade of this century when I made that comment. Senator CORTEZ MASTO. OK. Mr. POWELL. So what happened beginning in about 2000, the share of profits going to labor declined. It had sort of oscillated around a particular level for a long time, and then around the year 2000 it went gradually down over a period of 10 years. So my point was, when we talk about wage growth, we are talking about 3-per- cent wage growth, which is a pretty healthy level of wage growth. The problem is not the change. It is the level in the sense that we missed that period where workers were losing ground in wages against what they would have gotten traditionally. So it is kind of a complicated point, but that is what I was referring to. Senator CORTEZ MASTO. So can I ask you this, because you touch on—I am going to go back to this idea that somehow increasing one’s education will lead to higher wages for them. Do you agree? 37 Because you have said that a couple of times, and I heard the con- versation you had with Senator Cotton as well. Is that something you are saying to address and increase higher wages for individ- uals as to ensure that they get a better education? And what do you mean by that? Mr. POWELL. Well, I think people with higher education tend to have substantially higher compensation in their jobs. The value of a college degree compared to not having a college degree in terms of lifetime earnings is enormous, and it has never been bigger—— Senator CORTEZ MASTO. Yeah, so let me just—— Mr. POWELL. By the way, I am not saying—— Senator CORTEZ MASTO. No, and I appreciate that. But here is the problem and concerns I have with these numbers and these categories. Come to my State of Nevada. High-skilled labor, orga- nized labor, individuals graduate high school but they do not get a college degree. They go get a skilled—go through an apprentice- ship and learn a skill or a trade, and they are making good money, sometimes better than some of the folks that go to college. So what I see in these numbers is not a reflection of the true demographic of who we are as a country. That is my concern. And this idea that we are categorizing people as whether they are low-income or high- income, I think it is a false narrative. I think people with a high school education can make good jobs. They may not be destined to go to a college or university, but they can go through an appren- ticeship program. They can be that skilled labor that we need in this country. And it goes back to this issue, because you have iden- tified the weaknesses we have in housing manufacturing and trade. And I will tell you housing is the number one issue in the State of Nevada. Part of that issue is we have lost all the skilled trade because of the downturn in the economy. So we should be investing in those individuals and getting them back to a level where they can go through those apprenticeship programs. And the final thing is with this unemployment market. I do see and I agree with you that because we have low unemployment, that has increased the wages a little bit because it has forced these companies to say, ‘‘Wow, it is a really competitive market now, and I am going to have to pay more to get more people in.’’ But that should not be the only condition for increasing wages for individ- uals across this country. And the other thing you need to know—if you do not know, come to my State—whether you are a single mother or you are a two- parent family, these families are working more than one job. I think one job should be enough, don’t you? I do not think you should have to work two jobs just to be able to make minimum wage. And, by the way, a minimum wage of $7 an hour is poverty level. So my concern with these statistics is I want to see you get into the true demographics of who we are as a country and what is going on with these false narratives that I keep hearing even from this President who keeps arguing that somehow unemployment for African Americans and Latinos is wonderful, and you even show it right here, so I appreciate that. But it is not. We have got to do a better job. And so that is all I am asking for. Let us look at the true numbers that we have in this country, because that is the 38 challenge that I see here and not these false narratives that keep being thrown out there. So I appreciate the hard work you are doing, and I thank you for that. I look forward to working with you in the future, but I ask you and invite you to come in and let us have a further con- versation on the data itself. Mr. POWELL. Great. Senator CORTEZ MASTO. Thank you. Senator BROWN. Senator Scott. Senator SCOTT. Thank you, Ranking Member Brown. Chairman, thank you for being here this morning—or now this afternoon, basically. I do want to continue perhaps that current narrative because it does draw my attention. I listened to your tes- timony earlier this morning. I had meetings in the office and I had a chance to listen to your exchange with Senator Cotton on the labor force participation rate, frankly, that the labor force partici- pation rate has been ticking up slightly. One of the reasons why we saw the 3.6 percent unemployment got to 3.7 percent is because more folks were coming back to the workforce, which is a positive development. As it relates to the power of education and wages, I was raised by a single mother who had a high school education, and I thank God that she had the skills necessary to support her two sons. But one of the things I think we could take away from the numbers specifically as it relates to education is that there is power in edu- cation. These numbers that I remember are 3 or 4 years old, maybe 2 or 3 years old, but the person who does not finish high school has an average wage around $19,000; the high school graduate has an average wage around $29,000; the person who has a college edu- cation has an average wage around $58,000; and if you go on to a postgraduate degree, you have closer to a six-figure income. So you multiply that over a 40-year work life, the numbers are so drastic and undeniable that, without question, consistently speaking throughout this Nation, one of the fastest ways forward is, in fact, education. Your comment—do you agree or disagree with that? Mr. POWELL. I totally agree with that. Senator SCOTT. Well, your comment with Senator Cotton that got my attention was that part of the challenge that we have with up- ward mobility in our society, which I think pinned or put the focus on education, is the importance of understanding globalization and technology and the chasm that it creates in our workforce for those on the one side are going to be detrimentally impacted by this growing technology and technological gap that is being created. This gig economy requires perhaps even a different type of edu- cation. So it may not be the formal education that we are all used to, and those figures that I talked about from the high school drop- out to the person with an advanced degree, that still works. In ad- dition to that, one of the reasons why myself and Cory Booker and others have focused on apprenticeships is because our Nation, com- paratively speaking to someplace like Germany, we are woefully behind on using apprenticeships as a mechanism or vehicle to help those folks who may not want the 4-year track to still achieve the type of income that Senator Cortez Masto wants for her constitu- ents and that I need for mine as well. Is that an accurate depiction 39 of the comment with Senator Cotton around globalization, tech- nology, and the importance of education? Mr. POWELL. Yes, and I would just say education for me is a shorthand term that includes things like apprenticeship programs and trade schools and things like that. It just means things that enable you to get skills and aptitudes and succeed in the economy. Senator SCOTT. So in a technologically advancing society, a life- long learner will do better than one who is not. Mr. POWELL. Absolutely. Absolutely, yes. Senator SCOTT. Pat Toomey talked about the Goldilocks economy, which I thought was—I like the term. Sometimes I want to com- pare that as the ‘‘woe is me’’ economy that we seem to hear a lot about. I have a question as it relates to the number of Americans who actually work multiple jobs. My understanding is that it is somewhere around 7 to 8 percent of Americans have more than one job, one in 15. I read an article recently in the Wall Street Journal that said the number was closer to 5 percent. Can you help me un- derstand what is the number? Is there a way for us to discern it? Mr. POWELL. Yes, we can run that number down for you. Senator SCOTT. OK. Is it less than 10 percent? Mr. POWELL. I do not know. Senator SCOTT. OK. Mr. POWELL. I think there is a way to know that. It may be just the difference between the household survey and the establishment survey. We can get that number for you. Senator SCOTT. I think it is important for the American people to understand and appreciate what the number is and how many folks are actually working more than one job. I think both sides of this aisle have a strong passion to make sure that upward mobility is, in fact, still alive and well and a part of the American Dream. And a part of that American Dream is being able to achieve a standard of living that is comfortable without two jobs. It would be important, I think, to both side for us to, A, figure out what the number is; B, see if there are solutions, be it a lifelong learner or the standard college track. I would love to have more information on that. My final thought is on trade. You answered the question on trade. You have been very clear on what your role is and what your role is not. When you look around the world, GDP activity is tough, whether it is Japan at 0.6 percent or the U.K. at 0.4 percent; Ger- many is at 0.5 percent. That plus tariffs and this trade volatility, how does that impact a State like mine where 1 in 11 employees are connected to the exports of our State? Mr. POWELL. Well, I would guess that those companies and peo- ple are feeling that weak global growth and uncertainty around trade are weighing on their outlook. And, currently, things are OK, but businesses are beginning to hold back on investment. For ex- ample, we see business investment having weakened. After having been quite strong in 2017 and most of 2018, business investment is critical. It has really slowed down here, and one of the reasons is uncertainty around trade and global growth. Senator SCOTT. Thank you. Mr. POWELL. Thank you. Senator SCOTT. Thank you, Mr. Ranking Member. 40 Senator BROWN. Senator Reed. Senator REED. Thank you very much. Thank you, Mr. Chairman. I apologize. We had a hearing with the Chairman of the Joint Chiefs of Staff simultaneously, so forgive my late arrival. Mr. Chairman, how much economic uncertainty has the Presi- dent delivered as he constantly moves the goal posts and tweets about trade, about the debt ceiling, about multiple issues? Does that help? Mr. POWELL. So I would not comment on trade policy as though we were responsible for it. We do not comment on it in any way. I will say that trade policy uncertainty, as you can see from one of our charts in the Monetary Policy Report is quite elevated, and many U.S. manufacturing companies have supply chains that reach across national borders around the world, and those companies are facing an uncertain situation. A natural thing to do is to hold back, and so I think we are seeing some of that and not making invest- ments and that sort of thing. Senator REED. And there is a correlation between the day-to-day tweets, comments, advances, movements that the President—— Mr. POWELL. What we have been hearing really for more than a year now is uncertainty is going up and down, and it went up quite a bit in May. May was a real month where we saw trade un- certainty spike around various events, and I think that will show up in the data. Senator REED. The economy is doing well, but why does Wall Street expect you to cut rates? Typically in a booming economy, rates are either stable or go up. Mr. POWELL. Well, we do see an economy that is in a good place, but what we see is a number of things that are weighing on the outlook. I mentioned global weakness. Around the world you do see really weak economic performance. You see that in Asia; you see it in Europe. And you see central banks beginning to address that by providing more accommodation. And we see that as a downside risk here in the United States. We also see subdued inflation. We are in our 11th year of this expansion, I am happy to say, and we are at 3.7 percent unemploy- ment. We have been there for 15 months. And yet inflation is below our target. So I think many of my colleagues on the FOMC have come to the view that a somewhat more accommodative monetary policy may be appropriate. Senator REED. Let me just change this topic to one issue of im- portance, I think, to all of us, and that is, recently, more so than the past, the independence of the Fed has been questioned, and even your role has been questioned. And as the Federal Reserve’s own website points out, your policy decisions have to be based on data and your judgment, not political pressures that could lead to undesirable outcomes. So what are some of those undesirable out- comes that would be produced if, in fact, the Fed became less inde- pendent and more adjunct to political forces? Mr. POWELL. We have, you know, a pretty narrow set of protec- tions that amount to what we call our ‘‘independence,’’ and we think that those institutional arrangements have served the public and served the economy well over a period of time. 41 What we see in countries or in areas in the United States when those protections are not in place is we have seen bad outcomes happening. In particular, the high inflation that the United States experienced in the 1960s and really in the 1970s was a failure on the part of the Fed to do what needed doing. Paul Volcker came in and did it. It was incredibly unpopular as you will recall, but it really put the United States in a great place really for a long pe- riod of time, having inflation under control. So those are the kinds of things. Senator REED. Right, but I think that comes back to my initial question, which is, you know, the agitation by the President for lower interest rates to keep the economy going is as much political as it is monetary policy. Does that influence your decision to lower rates? Mr. POWELL. Not at all. I would want the public—it is critical that the public understand that we are always going to do our work objectively based on data, with transparency, and we are going to do what we think is right for the U.S. economy. That is what we are going to do, and that is what we are always going to do. Senator REED. So with that data you are prepared to raise rates, if necessary? Mr. POWELL. Absolutely. We will do what we think is right. Senator REED. Thank you. Just a final quick question, and one only someone who was here for the Sarbanes–Oxley legislation would ask. The Federal Reserve banks are subject to several levels of audit and review, and the Reserve banks’ financial statements are audited by independent public accountants retained by the Board of Governors. The question is: Do you believe it is important for the Board of Governors to know whether the auditor has been disciplined in the past for poor performance before you select them? Mr. POWELL. It is important, and we do demand all relevant in- formation on that question, including just about any kind of a ques- tion that has been raised. We get that information before we make a hiring decision. Senator REED. Thank you, Mr. Chairman. Thank you for your service. Mr. POWELL. Thank you. Chairman CRAPO [presiding]. Senator Brown would like to ask another couple questions, and then we will be done, Mr. Chairman. Senator BROWN. Thank you. Thanks for your patience as you sit through this, Mr. Chairman. Two brief questions, and then a short statement. During the debate of passage of S. 2155, we repeatedly heard from the Fed and the sponsors of the bill that Section 401 would not weaken the prudential standards on foreign G–SIBs operating in the U.S. Yet the Fed released an implementing proposal in April that appeared to do just that. What led to that about-face? Mr. POWELL. I think that that proposal is just a matter of pro- viding national treatment to banks that do business in our country. We try to treat similar banks similarly, whether they are foreign banks or U.S. banks. And we expect the same for our banks in for- eign countries. 42 Senator BROWN. I understand, Mr. Chairman, that is the argu- ment for it now, but it is not what we were hearing from many peo- ple prior to this because we made the argument this could increase systemic risk, and they either consented to that belief or that then seemed to change their minds, you all seemed to change your mind after this happened, but I will leave it at that. A couple other things. The last financial crisis was caused in part by huge financial institutions, Wall Street banks that largely were given free reign to take big risks with entire sectors of our econ- omy, as Senator Warner said, taking advantage, as he termed it, of gaps in the regulatory system. You have raised concerns about the ability to regulate Facebook, that what would be the best—I would like to ask you what would be the best, most effective way to regulate a complex Internet-based company like Facebook with billions of users and a digital currency based on a Swiss bank ac- count. How will you look at doing that? Mr. POWELL. That is a question we are just beginning to address. We certainly do not want to regulate their social media activities. That is not at all something we would have any interest in. And I do not know what the right way to get at this is, but I do think that this is a question we are going to have to get our arms around. It is the reason we are working on that now. Senator BROWN. OK. Listening to your comments, both Senator Scott’s comments and Senator Cortez Masto, both interchanges, interactions that you had with each of them, I want to just—this is not a question. I just want to make a point about how important this is, that we know that unemployment rates for African Amer- ican and Latino American workers are consistently higher than those for white workers. One economist, Algernon Austin, said the experience of black America is one of permanent recession. One of the benefits of aggressively pursuing a high-employment economy is that job opportunities improve substantially for workers who face the largest barriers. You said a few minutes ago that waiting 8 years for that in a recovery is just simply not acceptable public pol- icy. You are, of course, right about that. You go on to say the black rate of unemployment in the best of times is not much better than the white rate in the worst of times in the economic situation of workers. So you had talked about sub- dued inflation, and I think we miss opportunities when there seems to be—I do not think I have seen that in you; I have seen it in the past—a bias toward fighting inflation over fighting unemployment, and I think this disparity in unemployment rates between white workers and workers of color is another strong argument for weigh- ing the benefits of a high-employment economy and assessing max- imum employment, especially with the likelihood of an outbreak of unacceptable inflation as it remains remote. So I hope you will keep that focus as you think about interest rates, as you think about your role in this economy. Mr. POWELL. Thank you. Chairman CRAPO. Thank you, Chairman Powell. I told you those were the last two questions, but Senator Brown’s question about Senate bill 2155 has prompted me to ask a follow-up. And I think this is self-evident, but I just want to be sure and let this be made part of the record. 43 The proposal that the Fed is looking at right now in terms of how to treat foreign banks or the subsidiaries of foreign banks that op- erate in the United States will not introduce systemic risk or in- crease systemic risk, will it? Mr. POWELL. No. No, these are—remember, they only apply to the U.S. entities, and they are not of that size or caliber. Chairman CRAPO. And it is the same standards that we apply to our U.S.—— Mr. POWELL. Our own, that is right. Chairman CRAPO. Our U.S. banks. Mr. POWELL. That is right. Chairman CRAPO. Did you want to follow up on that at all? All right. We will debate this between ourselves later. [Laughter.] Chairman CRAPO. Well, Chairman Powell, thank you again for being here with us today. That concludes our questioning for the hearing. For the Senators who wish to submit questions for the record, those questions are due to the Committee by Thursday, July 18th. We ask you, Chairman Powell, to please respond to those questions as promptly as you can. With that, again, thank you for being here, and this hearing is adjourned. Mr. POWELL. Thank you. [Whereupon, at 12:15 p.m., the hearing was adjourned.] [Prepared statements, responses to written questions, and addi- tional material supplied for the record follow:] 44 PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO We welcome Chairman Powell back to the Committee for the Federal Reserve’s Semiannual Monetary Policy Report to Congress. In this hearing, the Banking Committee will evaluate the current state of the U.S. economy, the Fed’s implementation of monetary policy, and discuss its supervisory and regulatory activities. In the last semiannual Monetary Policy Report, Chairman Powell provided addi- tional clarity on the Fed’s plans to normalize monetary policy, including how the size of the balance sheet would be driven by financial institutions’ demand for re- serves, plus a buffer. Since then, the Fed has provided additional information and continued receiving feedback on its monetary policy strategy, tools, and communication, all of which I look forward to hearing an update on today. The U.S. economy is still strong, growing at 3.1 percent in the first quarter of 2019, according to the Bureau of Economic Analysis, and the unemployment rate remains low at 3.7 percent, as of June, according to the Bureau of Labor Statistics. Wages have continued rising, as well, with average hourly earnings 3.1 percent higher in June compared to a year earlier, which is the 11th straight month in which wage growth exceeded 3 percent, according to the Bureau of Labor Statistics. In fact, the U.S. is officially in its longest expansion of economic growth since 1854, according to the National Bureau of Economic Research. In order to continue this positive economic trajectory, regulators must continually evaluate their regulatory and supervisory activities for opportunities to tailor regu- lations and to ensure broad access to a wide variety of financial products and serv- ices. With respect to regulation and supervision, it has been over a year since the en- actment of S. 2155, the Economic Growth, Regulatory Relief and Consumer Protec- tion Act. Mr. Chairman, as you move forward finalizing certain rules required under S. 2155 and consider proposing new ones, I encourage you to consider carefully the fol- lowing: Simplify capital rules for smaller financial institutions while ensuring they main- tain significant capital by setting the Community Bank Leverage Ratio at 8 percent; Simplify the Volcker Rule, including by eliminating the proposed accounting prong and revising the ‘‘covered funds’’ definition’s overly broad application to venture cap- ital, other long-term investments and loan creation, to improve market liquidity and preserve access to diverse sources of capital for businesses; Harmonize margin requirements for interaffiliate swaps with treatment by the CFTC by quickly making a targeted change to your margin rules to enhance end users’ ability to hedge against risks in the marketplace; Examine whether the recent proposal that applies to U.S. operations of foreign banks is appropriately tailored and whether regulations on intermediate holding companies should be applied based on the assets of the intermediate holding com- pany alone, rather than the assets of all U.S. operations. I also encourage you to align the foreign bank proposal with the domestic bank proposal and exclude inter- affiliate transactions from each of the risk-based indictor calculations; Index any dollar-based thresholds in the tailoring proposals to grow over time to improve the rules’ durability; and Modernize the Community Reinvestment Act (CRA) to ensure banks are not ig- noring their mandate to serve their ‘‘entire communities,’’ which should include legal businesses that banks disfavor operating in their communities. A bank responding to political pressure or attempting to manage social policy by withholding access to credit from customers and/or companies it disfavors is not meeting the credit needs of the entire community. These approaches would promote economic growth by ensuring that rules are bal- anced, work for all stakeholders, and do not unnecessarily impede access to financial products and services in the marketplace. On a different topic, Facebook announced it is partnering with both financial and nonfinancial institutions to launch a cryptocurrency-based payments system using its social network. The project has raised many questions among U.S. and global lawmakers and reg- ulators, including about its potential systemic importance, consumer privacy, data privacy and protection, and more. I am particularly interested in its implications for individuals’ data privacy. The Bank of England Governor Mark Carney said, ‘‘Libra, if it achieves its ambi- tions, would be systemically important. As such, it would have to meet the highest 45 standards of prudential regulation and consumer protection. It must address issues ranging from anti–money laundering to data protection to operational resilience.’’ I look forward to hearing more about how the Fed, in coordination with other U.S. and global financial regulators, plans to engage on important regulatory and super- visory matters with Facebook throughout and after the project’s development. While Libra’s systemic importance depends on several factors in its future devel- opment, there are already some too-big-to-fail institutions that must be addressed: Fannie Mae and Freddie Mac. They continue to dominate the mortgage market and expose taxpayers in the case of an eventual downturn. In a 2017 speech, Chairman Powell, you publicly referred to Fannie and Freddie as ‘‘systemically important.’’ Although my strong preference is for comprehensive legislation, the Banking Com- mittee recently explored one option for addressing Fannie and Freddie, which is for the Financial Stability Oversight Council to designate Fannie and/or Freddie as ‘‘systemically important financial institutions,’’ and to subject them to Fed super- vision and enhanced prudential standards. Chairman Powell, I appreciate you joining the Committee today to discuss many important issues. PREPARED STATEMENT OF SENATOR SHERROD BROWN Mr. Chairman, welcome. The stock market is soaring—but most American fami- lies get their money from a paycheck, not an account statement from their stock broker. A critical part of your job is measuring and evaluating the economy, and those measurements need to take into account workers, not just wealth. Talk to workers who haven’t had a meaningful raise in years, who have seen their retirement cut, who watch their health care premiums rise, who have seen the cost of child care and college and paying off their own student loans go up and up. To those workers—to most Americans—the idea that a stock market rally means more money in their pockets is laughable. As the Fed’s own data reveals, the recovery hasn’t helped most Americans—cor- porate profits go up and up, but workers don’t share in the growth they create. The top 1 percent of have an average net worth of almost 24 million dollars, while the bottom half of all Americans have only about 20 thousand dollars. That’s less than one one-thousandth of their wealthiest neighbors. Meanwhile the share of workers who have been unemployed for over 26 weeks continues to climb. Mitch McConnell and Donald Trump responded by giving the wealthiest Ameri- cans and multinational corporations a two trillion dollar bonus. And those corpora- tions turned around and funneled the money back to their executives through record stock buybacks. We are in the midst of the longest economic expansion in modern times and inter- est rates are low, and yet it’s worrying that interest rate-sensitive sectors of the economy that provide good-paying jobs, like the auto industry, are not doing better. Employment in auto manufacturing—which is critical to Ohio—continued to fall in June. The Fed’s policies should ensure that everyone who contributes to our economy also shares in growth they create. All work has dignity, and we need an economy that rewards work, not just wealth. Some of the challenges facing our economy can only be addressed by Congress. Millions of Americans struggle to pay for prescription drugs, which are increasing at five times the rate of inflation. And too many feel the squeeze of rising housing costs, with more than a quarter of renters spending over half their income on hous- ing. The Fed can’t fix all of these issues on its own. But there are things that you can and should do to help the economy work for the vast majority of Americans, through careful monetary policy and doing your job of policing Wall Street. I appreciate your recent recognition that this expansion has the potential to ben- efit communities that have missed out on prior economic expansions. And I hope your comments expressing frustration that wages haven’t increased as much as you expected means you will take action. I urge you to continue with policies that both lower unemployment while increasing wages. In previous hearings, I have raised my concerns about threats to the financial sys- tem, including the Fed’s steps to weaken the rules on the largest banks, the failure to activate the Countercyclical Capital Buffer to prepare for the next financial crisis, 46 and the lack of action to address risks posed by leveraged lending. As you know, those concerns remain. However, today I can add a new worry to the list—private corporations, Facebook in this case, that have gotten carried away with their own power and are now at- tempting to ape the role of Government, creating their own currencies, monetary policy, and payment systems. So now, in addition to complex and risky Wall Street banks, we face new risks from unregulated, giant tech companies—armed with vast amounts of personal data—with the intent, as far as I can tell, of conducting monetary policy on their own terms. You and I have a duty to serve the American people, but these private corpora- tions have no duty to the broader economy or consumers. They’re motivated by one thing: their own bottom lines. Allowing big tech companies to take over the pay- ments system or position themselves to influence monetary policy would be a huge mistake, and undermine our democracy. Too many times, when the stock market is soaring and banks are making money hand over fist, regulators have been complacent. But as we have seen in the past, bank profitability is not a reliable indicator of a bank’s true health, and the stock market is not a reliable indicator of the real economy’s performance. I hope this is not another example of the Fed taking a pass from its responsibil- ities to protect Americans from corporations taking big risks with our entire finan- cial system. It is your responsibility to use your tools over monetary policy, the pay- ment system, and prudential regulation to protect the financial system and make our economy work for all Americans, not just wealthy stockholders and huge cor- porations. Thank you Chairman Powell for being here, and I look forward to hearing your testimony. PREPARED STATEMENT OF JEROME H. POWELL CHAIRMAN, BOARDOFGOVERNORSOFTHEFEDERALRESERVESYSTEM JULY11, 2019 Chairman Crapo, Ranking Member Brown, and other Members of the Committee, I am pleased to present the Federal Reserve’s semiannual Monetary Policy Report to Congress. Let me start by saying that my colleagues and I strongly support the goals of maximum employment and price stability that Congress has set for monetary policy. We are committed to providing clear explanations about our policies and activities. Congress has given us an important degree of independence so that we can effec- tively pursue our statutory goals based on objective analysis and data. We appre- ciate that our independence brings with it an obligation for transparency so that you and the public can hold us accountable. Today I will review the current economic situation and outlook before turning to monetary policy. I will also provide an update of our ongoing public review of our framework for setting monetary policy. Current Economic Situation and Outlook The economy performed reasonably well over the first half of 2019, and the cur- rent expansion is now in its 11th year. However, inflation has been running below the Federal Open Market Committee’s (FOMC) symmetric 2 percent objective, and crosscurrents, such as trade tensions and concerns about global growth, have been weighing on economic activity and the outlook. The labor market remains healthy. Job gains averaged 172,000 per month from January through June. This number is lower than the average of 223,000 a month last year but above the pace needed to provide jobs for new workers entering the labor force. Consequently, the unemployment rate moved down from 3.9 percent in December to 3.7 percent in June, close to its lowest level in 50 years. Job openings remain plentiful, and employers are increasingly willing to hire workers with fewer skills and train them. As a result, the benefits of a strong job market have been more widely shared in recent years. Indeed, wage gains have been greater for lower- skilled workers. That said, individuals in some demographic groups and in certain parts of the country continue to face challenges. For example, unemployment rates for African Americans and Hispanics remain well above the rates for whites and Asians. Likewise, the share of the population with a job is higher in urban areas than in rural communities, and this gap widened over the past decade. A box in the July Monetary Policy Report provides a comparison of employment and wage gains over the current expansion for individuals with different levels of education. 47 Gross domestic product increased at an annual rate of 3.1 percent in the first quarter of 2019, similar to last year’s pace. This strong reading was driven largely by net exports and inventories—components that are not generally reliable indica- tors of ongoing momentum. The more reliable drivers of growth in the economy are consumer spending and business investment. While growth in consumer spending was weak in the first quarter, incoming data show that it has bounced back and is now running at a solid pace. However, growth in business investment seems to have slowed notably, and overall growth in the second quarter appears to have mod- erated. The slowdown in business fixed investment may reflect concerns about trade tensions and slower growth in the global economy. In addition, housing investment and manufacturing output declined in the first quarter and appear to have de- creased again in the second quarter. After running close to our 2 percent objective over much of last year, overall con- sumer price inflation, measured by the 12-month change in the price index for per- sonal consumption expenditures (PCE), declined earlier this year and stood at 1.5 percent in May. The 12-month change in core PCE inflation, which excludes food and energy prices and tends to be a better indicator of future inflation, has also come down this year and was 1.6 percent in May. Our baseline outlook is for economic growth to remain solid, labor markets to stay strong, and inflation to move back up over time to the Committee’s 2 percent objec- tive. However, uncertainties about the outlook have increased in recent months. In particular, economic momentum appears to have slowed in some major foreign economies, and that weakness could affect the U.S. economy. Moreover, a number of Government policy issues have yet to be resolved, including trade developments, the Federal debt ceiling, and Brexit. And there is a risk that weak inflation will be even more persistent than we currently anticipate. We are carefully monitoring these developments, and we will continue to assess their implications for the U.S. economic outlook and inflation. The Nation also continues to confront important longer-run challenges. Labor force participation by those in their prime working years is now lower in the United States than in most other Nations with comparable economies. As I mentioned, there are troubling labor market disparities across demographic groups and dif- ferent parts of the country. The relative stagnation of middle and lower incomes and low levels of upward mobility for lower-income families are also ongoing concerns. In addition, finding ways to boost productivity growth, which leads to rising wages and living standards over the longer term, should remain a high national priority. And I remain concerned about the longer-term effects of high and rising Federal debt, which can restrain private investment and, in turn, reduce productivity and overall economic growth. The longer-run vitality of the U.S. economy would benefit from efforts to address these issues. Monetary Policy Against this backdrop, the FOMC maintained the target range for the Federal funds rate at 21⁄4to 21⁄2percent in the first half of this year. At our January, March, and May meetings, we stated that we would be patient as we determined what fu- ture adjustments to the Federal funds rate might be appropriate to support our goals of maximum employment and price stability. At the time of our May meeting, we were mindful of the ongoing crosscurrents from global growth and trade, but there was tentative evidence that these crosscur- rents were moderating. The latest data from China and Europe were encouraging, and there were reports of progress in trade negotiations with China. Our continued patient stance seemed appropriate, and the Committee saw no strong case for ad- justing our policy rate. Since our May meeting, however, these crosscurrents have reemerged, creating greater uncertainty. Apparent progress on trade turned to greater uncertainty, and our contacts in business and agriculture report heightened concerns over trade de- velopments. Growth indicators from around the world have disappointed on net, raising concerns that weakness in the global economy will continue to affect the U.S. economy. These concerns may have contributed to the drop in business con- fidence in some recent surveys and may have started to show through to incoming data. In our June meeting statement, we indicated that, in light of increased uncertain- ties about the economic outlook and muted inflation pressures, we would closely monitor the implications of incoming information for the economic outlook and would act as appropriate to sustain the expansion. Many FOMC participants saw that the case for a somewhat more accommodative monetary policy had strength- ened. Since then, based on incoming data and other developments, it appears that uncertainties around trade tensions and concerns about the strength of the global 48 economy continue to weigh on the U.S. economic outlook. Inflation pressures remain muted. The FOMC has made a number of important decisions this year about our frame- work for implementing monetary policy and our plans for completing the reduction of the Fed’s securities holdings. At our January meeting, we decided to continue to implement monetary policy using our current policy regime with ample reserves, and emphasized that we are prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments. At our March meeting, we communicated our intention to slow, starting in May, the decline in the Fed’s aggregate securities holdings and to end the reduction in these holdings in September. The July Monetary Policy Report provides details on these decisions. The July Monetary Policy Report also includes an update on monetary policy rules. The FOMC routinely looks at monetary policy rules that recommend a level for the Federal funds rate based on inflation and unemployment rates. I continue to find these rules helpful, although using these rules requires careful judgment. We are conducting a public review of our monetary policy strategy, tools, and com- munications—the first review of its kind for the FOMC. Our motivation is to con- sider ways to improve the Committee’s current policy framework and to best posi- tion the Fed to achieve maximum employment and price stability. The review has started with outreach to and consultation with a broad range of people and groups through a series of Fed Listens events. The FOMC will consider questions related to the review at upcoming meetings. We will publicly report the outcome of our dis- cussions. Thank you. I am happy to respond to your questions. 49 RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM JEROME H. POWELL Q.1. Capital—You have said that capital levels at the largest banks are much higher than they were before the financial crisis. Do you think that using capital levels during the financial crisis is the cor- rect benchmark from which to analyze what is the appropriate level of capital? Do you agree that we should not lower capital lev- els for the largest banks? A.1. The Federal Reserve Board considers a number of factors in assessing current capital levels, including the findings of research- ers and studies since the financial crisis on optimal capital levels. I believe that the current overall level of bank capital is about right. Maintaining the safety and soundness of the largest banking firms is fundamental to maintaining the stability of the U.S. finan- cial system and the broader economy. The banking agencies have substantially strengthened regulatory capital and liquidity require- ments for large banking firms. The increase in requirements has significantly increased the financial resiliency of these firms. At the same time, regulation and supervision should be tailored according to banking firms’ size, complexity, and risks posed to the financial system. I do not expect that refinements to the postcrisis regu- latory regime will result in meaningful changes to capital levels, particularly for the largest, most systemically important banks. Q.2. Stress Capital Buffer—At the Fed’s recent stress test con- ference, Vice Chair for Supervision Randal Quarles indicated that the Fed would soon finalize the stress capital buffer proposal. You have said that the overall level of capital, particularly at the larg- est firms, is about right.1 If this proposal leads to lower capital lev- els at the largest banks, however, will the Fed adjust the super- visory and CCAR stress tests to offset that reduction and how? A.2. As noted in the response to Question 1, I believe that the cur- rent overall level of bank capital is about right, and I do not expect that refinements to the postcrisis regulatory regime will result in meaningful changes to capital levels, particularly for the largest, most systemically important banks. Q.3. Stress Tests: Qualitative Objection—The Fed recently eased the qualitative portion of the stress test regime and removed the qualitative objection, which allowed the Fed to prevent banks from making capital distributions based on the quality of their risk man- agement and internal controls. Without a strong qualitative component and qualitative objec- tion, what incentive does a bank have to understand how capital distributions would reduce the amount of capital needed to survive another financial crisis? Before the 2008 financial crisis, existing examination and supervision tools were not enough to identify and correct mismanagement of capital risk. Please explain how the Fed will address these risks without the qualitative objection. A.3. Given the importance of effective capital planning to safety and soundness, we will continue to assess annually the largest firms’ capital planning practices through the rigorous, horizontal 1Monetary Policy and the State of the Economy Before the Hous. Comm. on Fin. Servs., 116th Cong. (Feb. 27, 2019). 50 Comprehensive Capital Analysis and Review’s exercise, as we have done since the last financial crisis. To the extent a firm exhibits capital planning deficiencies that call into question their ability to determine their capital needs under normal or stressed financial conditions, the Federal Reserve will use its full complement of su- pervisory tools—including deficient capital ratings, enforcement ac- tions, and capital directives—to ensure prompt and thorough reme- diation of identified weaknesses by the firm. Q.4. Distributional Financial Accounts—The Federal Reserve re- cently introduced distributional financial accounts, a new set of sta- tistics on the distribution of wealth in the United States. These es- timates once again confirm the clear increase in wealth inequality in recent decades. I want to express my appreciation to the Board for your attention to this issue and for the hard work of the team that put this together. Tell us, what do you see as the key findings from this new re- search? A.4. The distributional financial accounts (DFAs) provide a new tool for monitoring quarterly changes in the distribution of wealth in the U.S. Like other studies of the wealth distribution, the DFAs show a substantial difference between the amount of wealth held by the top of the distribution and the bottom. For example, the wealth of the top 1 percent is considerably larger than that of the bottom 50 percent, with this difference increasing significantly over the last 30 years. In terms of shares, the top 1 percent owned about 31 percent of total wealth in the first quarter of 2019, while the bottom half owned about 1 percent. Looking at the components of wealth in DFAs, another key find- ing is that business equity, which includes both corporate stock and unincorporated business ownership, is an important driver of in- creasing wealth concentration. Business equity as a share of total wealth has increased, on net, over the last 30 years, and the share of business wealth held by the top of the wealth distribution also has increased. Q.5. How does this research, coupled with low interest rates, guide your efforts to push for both job and wage growth? A.5. The DFAs show that the bottom half of the wealth distribution holds a very small slice of aggregate U.S. wealth. This suggests that, for many of these households, good jobs are crucial to their well-being and their ability to save for the future. Our goal is to sustain the current expansion, with a strong labor market and sta- ble prices, for the benefit of all households. RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS FROM JEROME H. POWELL Q.1. At our hearing, a number of my colleagues had the oppor- tunity to ask you about the future path for interest rates and I ap- preciate your thoughts on that issue. I concur that the Fed shouldn’t exhaust all of the tools in its toolbox and leave our econ- omy unprepared for a response from the central bank in a future downturn. 51 I’d like to ask a related question about the Fed’s balance sheet. You announced earlier this year that the Fed will end its balance sheet runoff at some point in 2019. One point that you have yet to address is what kind of Treasury securities that the Federal Re- serve will hold once the runoff is complete. I understand that hold- ing short-term notes will give the Fed more flexibility in the event you need to respond to a downturn in the economy. What kind of Treasury securities will the Fed hold in the future? If you can’t say for certain at this point, what will factor into your thinking on that front? A.1. Since the Federal Open Market Committee (FOMC) ended bal- ance sheet runoff in August 2019, the Federal Reserve has begun purchasing Treasury securities across the maturity spectrum. As a result, the Federal Reserve is holding Treasury securities with ma- turities from a few days to 30 years. These purchases reflect two factors. First, at the conclusion of its July 2019 meeting, the FOMC announced that it intended to cease the runoff of its securities portfolio, noting that beginning in Au- gust 2019, principal payments received from agency debt and agen- cy mortgage-backed securities (MBS) up to $20 billion per month would be reinvested in Treasury securities to roughly match the maturity composition of Treasury securities outstanding; principal payments in excess of $20 billion per month would continue to be reinvested in agency MBS. Also beginning in August, all maturing treasury securities in the Federal Reserve’s portfolio would be rolled over at Treasury auctions following usual practices; matur- ing and prepaying securities are reinvested. Second, in light of in- creases in the Federal Reserve’s nonreserve liabilities, in early Oc- tober, the FOMC determined it would purchase Treasury bills at least into the second quarter of next year in order to maintain over time an ample level of reserve balances at or above the level that prevailed in early September. This action is consistent with the FOMC’s intention to implement monetary policy in a regime in which an ample supply of reserves ensures that control over the level of the Federal funds rate, and other short-term interest rates, is exercised primarily through the setting of the Federal Reserve’s administered rates, and in which active management of the supply of reserves is not required. These recent purchases are purely tech- nical measures to support the effective implementation of the FOMC’s monetary policy, and do not represent a change in the stance of monetary policy. The FOMC has also begun discussions about the longer-run com- position of the Federal Reserve’s holdings of Treasury securities, but has not made any decisions. The FOMC is considering numer- ous factors that will influence its deliberations. Some factors in- clude how the portfolio composition would interact with the setting of the target range for the Federal funds rate, how the portfolio composition could allow the FOMC to use balance sheet policy in a future economic downturn, and how the portfolio composition would interact with the Treasury and broader financial markets. Any decision the FOMC ultimately reaches will be implemented with considerable advance notice to the public and in a manner that allows for smooth adjustment in financial markets. 52 Q.2. I would also like to understand your views on the yield curve for Treasury securities and what that means for the potential for a recession in the future. At an event for Congressional staff in March, the Fed’s Director of the Division of Monetary Affairs, Thomas Laubach, said that he, quote, ‘‘would not draw too much’’ from an inverted yield curve for a few reasons. Among the reasons that Dr. Laubach cited were asset purchases from central banks in the U.S., EU, and Japan that have caused a decrease in return premiums. In years past, when monetary pol- icy was tighter, an inverted yield curve would indicate that a reces- sion was ahead. Now, thanks to those asset purchases, the yield curve is more indicative of where the market sees interest rates re- maining in the short term. Do you share Dr. Laubach’s thinking? In your opinion, is the in- verted yield curve still cause for concern? A.2. Measures of long-term yield spreads, such as the difference be- tween the yield on a 10-year Treasury note and the yield on a 3- month Treasury bill were negative in recent months. Some aca- demic research has documented that, in the past, such inversions have often preceded recessions. Some of these studies have further speculated that this pattern arises because long-term yields tend to fall, inverting the curve, precisely when market participants have come to believe that that risk of recession is elevated and that the central bank will soon reduce interest rates to support economic ac- tivity. However, there are reasons to suspect that long-term rates may be lower now than in years past for reasons that are unrelated to expectations of a recession. For instance, strong demand among in- vestors around the world for long-term risk-free assets likely has depressed long-term yields. In addition, purchases of long-term sov- ereign bonds by central banks have lowered long-term yields around the world, making inversions of the yield curve more likely. For these and other reasons, inversions of the yield curve are by no means flawless predictors of recessions. In evaluating the out- look for economic activity and inflation in order to achieve its goals as mandated by Congress, the yield curve is just one of many indi- cators that the FOMC considers. The Committee expects that sus- tained expansion of economic activity, strong labor market condi- tions, and inflation near the Committee’s symmetric 2 percent ob- jective are the most likely outcomes, but uncertainties about this outlook remain. Q.3. The Coalition for Derivatives End Users pointed out that the rule implementing SA–CCR—as it is proposed—disproportionately burdens bank counterparties by increasing the capital they have to hold with respect to transactions with end-user counterparties. Those end-user counterparties are currently exempt from posting margin, so if the proposed rule moved forward, bank counterparties would have to reset the imbalance by passing through the cost of capital fees to the end-user counterparties in the form of higher transaction fees or by dropping out of market making activities. This means that our markets would become less liquid and that farmers and Main Street consumers would pay more for simple commodities like corn, wheat, or gas. 53 Can you tell me more about why the Fed designed the SA–CCR rule this way and what impact you believe this will have on every- day Americans? A.3. The Federal Reserve Board (Board) proposed the implementa- tion of standardized approach for counterparty credit risk (SA– CCR) to provide important improvements to risk sensitivity and calibration relative to the current exposure methodology (CEM), a standardized approach that uses supervisory provided formulas to determine capital requirements for the counterparty credit risk of derivative contracts. In particular, the implementation of SA–CCR is responsive to concerns that CEM, developed a few decades ago, has not kept pace with certain market practices used predomi- nantly by large and sophisticated banking organizations. The agen- cies anticipated that the proposal would not materially change the amount of capital in the banking system. Rather, any change in a particular banking organization’s capital requirements, through ei- ther an increase or a decrease in regulatory capital, would reflect the banking organization’s own derivative portfolio, the enhanced risk sensitivity of SA–CCR relative to CEM, and market conditions. Commenters have raised concerns regarding how SA–CCR could af- fect commercial end-users’ ability to access the derivatives market, and the Board is considering carefully these comments, along with all other comments submitted, in formulating a final rulemaking that would implement SA–CCR. Q.4. Wire fraud through email poses tremendous risks to our con- stituents, especially homebuyers, and their confidence in our pay- ment system’s ability to safely transfer large amounts of money as part of the homebuying process. How is the Federal Reserve addressing criminal exploitation of weaknesses in the U.S. wire system? Which Federal agencies has the Federal Reserve coordinated with on the issue of wire fraud? A.4. The Federal Reserve has taken a number of steps to address criminal exploitation of the U.S. wire system. The Board, jointly with the Financial Crimes Enforcement Network, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Cor- poration, and the National Credit Union Administration, promul- gated the Customer Identification Program (CIP) rule. The CIP rule requires banks to obtain sufficient information from their cus- tomers in order to form a reasonable belief regarding the identity of each customer.1 The CIP rule requires verification procedures designed to ensure that financial institutions know their customers and to assist in identifying potential bad actors. Such procedures are important in combating wire fraud related to real estate, and other transactions. Additionally, the Federal Reserve has been engaged in efforts to reduce fraud more broadly in wire payments. We have worked col- laboratively with other central banks as part of the efforts by the Bank for International Settlement’s Committee on Payments and Market Infrastructures (CPMI) to reduce the risk of wholesale pay- ments fraud related to endpoint security with the broader objective 1See 31 CFR §1020.220. 54 of supporting financial stability.2 As a result, the Federal Reserve and CPMI member central banks have developed a strategy to en- courage and focus industry efforts to reduce the risk of fraud re- lated to endpoint security.3 The strategy includes key elements that payment system and messaging operators should consider as part of their efforts to mitigate payments fraud, and it encourages a holistic approach to address all areas relevant to preventing, de- tecting, responding to and communicating about fraud. Domesti- cally, the Federal Reserve has collaborated with payment system stakeholders through its Secure Payments Task Force (Task Force) to advance information sharing for the mitigation of payment fraud.4 In 2018, the Task Force published a number of rec- ommendations aimed at standardizing fraud definitions, setting re- quirements for fraud data collection and formatting, implementing a framework for sharing fraud information domestically, and facili- tating fraud information sharing internationally. Q.5. An effort by the Federal Reserve to develop a real time pay- ments (RTP) system would not be an easy undertaking. An existing RTP infrastructure already exists and is operated in the United States today. On its face, this would conflict with provisions in the Monetary Control Act that prohibit the Federal Reserve from com- peting with the private sector. In addition, should the Fed move forward, it would transmit and hold a tremendous amount of sen- sitive data. Please tell me more about what the Fed is planning for real time payments. A.5. The Board announced on August 5, 2019, that the Reserve Banks will develop a new real-time payment and settlement serv- ice, called the FedNow(SM) Service, to support faster payments in the United States.5 In making this decision, the Board adhered to the requirements of the Monetary Control Act of 1980 (MCA) and long-standing Federal Reserve policies and processes.6 The FedNow Service would operate alongside private-sector real-time gross settlement (RTGS) services for faster payments. This service is consistent with the operations of most other payment systems in the United States, such as funds transfers, checks, and automated clearinghouse payments, whereby the Reserve Banks operate pay- ment and settlement services alongside and in support of similar private-sector services. The MCA requires that Federal Reserve services be priced com- petitively and made available equitably to depository institutions. The MCA encourages competition between the Reserve Banks and the private sector through an expectation that the Reserve Banks will recover costs of services, both actual expenses associated with providing the services as well as certain imputed costs, including the taxes and cost of capital that would be paid by a private-sector competitor. 2See https://www.federalreserve.gov/newsevents/pressreleases/other20180508a.htm. 3See https://www.bis.org/cpmi/publ/dl-78.pdf. 4See https://fedpaymentsimprovement.org/payments-security/secure-payments-task-force-ar- chive/. 5See https://www.federalreserve.gov/newsevents/pressreleases/other20190805a.htm. 6Board of Governors of the Federal Reserve System, ‘‘The Federal Reserve in the Payments System’’ (Issued 1984; Revised 1990). 55 The Board also adheres to internal policy criteria established in 1984 and revised in 19907 for the provision of new or enhanced payment services that specify the Federal Reserve must expect to (1) achieve full cost recovery over the long run, (2) provide services that yield a public benefit, and (3) provide services that other pro- viders alone cannot be expected to provide with reasonable effec- tiveness, scope, and equity. The Board’s August 2019 Federal Reg- ister Notice provides a full analysis of how the FedNow Service meets the requirements of the MCA as well as the Board’s policy criteria for the provision of new or enhanced services. Also in support of real-time payments, the Federal Reserve an- nounced its intention to explore the expansion of hours for the Fedwire® Funds Service and the National Settlement Service, up to 24x7x365, to support a wide range of payment activities, includ- ing liquidity management in private-sector services for faster pay- ments. Subject to the outcome of additional risk, operational, and policy analysis, the Board will seek public comment separately on plans to expand Fedwire Funds Service and National Settlement Service hours. RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS FROM JEROME H. POWELL Q.1. Traditionally, the Federal Reserve Board (Fed) has not been subject to audit, for fear of the audit undermining the independ- ence of its monetary policy function. There appears to be no similar justification with respect to a business run by the Fed in competi- tion with the private sector, and where budgets need to be re- viewed for compliance with the Monetary Control Act. Assuming the Fed proceeds in this area, would you relax your traditional op- position to Fed audits if all monetary policy functions were exempt? A.1. Currently, the Federal Reserve is subject to several levels of audit and review. Under existing law, the financial statements of the Federal Reserve Board (Board) and the Reserve Banks are au- dited annually by an independent accounting firm (under the su- pervision of the Office of the Inspector General of the Board and the Board’s Division of Reserve Bank Operations and Payment Sys- tems, respectively). Our audited financial statements are made publicly available and provided to Congress annually. In addition, the Congress and the Government Accountability Of- fice (GAO) may conduct financial and operational audits of the Fed- eral Reserve and have done so on many occasions. In particular, for non- monetary policy activities undertaken by the Federal Reserve, such as banking supervision and regulation, the GAO already has full audit review authority. As of the end of June 2019, nearly 170 audits have been conducted since the financial crisis. The GAO also has reviewed specifically the Federal Reserve’s role in providing payment services such as check, automated clear- inghouse (ACH) transactions, and wire, and concluded that the payment system and its users have benefited over the long run 7See https://www.federalreserve.gov/paymentsystems/pfs-frpaysys.htm. 56 from the Federal Reserve’s operational involvement and competi- tion with other providers.1 Q.2. You have indicated that the Fed is considering a new business of providing a real-time payments service in competition with the existing RTP system operated by The Clearing House, and poten- tially other private sector actors. The Monetary Control Act re- quires the Fed to establish a fee schedule for Reserve Bank pay- ment services that are based on the basis of all direct and indirect costs actually incurred in providing the priced services, including imputed costs (including taxes) that would be incurred by a pri- vate-sector provider. A.2. Please see the responses to Questions 4 and 5. Q.3. What is the Fed’s estimate of how much it would cost to build such a system, and operate it annually? A.3. Based on what we have learned from central banks in other countries and our own experience with building and modernizing our existing Federal Reserve payment services, we expect the costs to be within a range that would allow us to achieve cost recovery over the long run. The exact costs of building the FedNow(SM) Service would be predicated on its specific features and functionality, which we will specify after receiving and considering public comment as part of our normal process for new services or major service enhance- ments, and other factors, such as technical architecture and build- versus-buy decisions. Q.4. How would the Fed fund the initial outlay, for example, would you increase prices on your existing payments system products to fund it? Would these outlays reduce Fed remittances to the Treas- ury in the years they are made? A.4. FedNow Service outlays would be funded in a similar manner as all Reserve Bank outlays. Our practice is to recover development costs over the long run much like a private-sector firm. This in- cludes imputing capital and certain other costs, for example taxes, to priced services as required by the MCA. As with any Federal Reserve service, remittances to the Treasury may fluctuate based on the Federal Reserve’s cost recovery. Q.5. Can you commit that before incurring any start-up costs, you would have in place a business plan that envisioned pricing con- sistent with the Monetary Control Act, and share that plan with this Committee prior to any decision to move ahead? A.5. The MCA requires that ‘‘(o)ver the long run, fees shall be es- tablished on the basis of all direct and indirect costs actually in- curred in providing the Federal Reserve services.’’2 In addition, the MCA requires the Federal Reserve to ‘‘give due regard to competi- tive factors and the provision of an adequate level of such services nationwide.’’ Reflecting the MCA requirement also to give due regard to both competitive factors and the provision of an adequate level of serv- 1See GA0-16-614, ‘‘Federal Reserve’s Competition With Other Providers Benefits Customers, but Additional Reviews Could Increase Assurance of Cost Accuracy’’ (2016), https:// www.gao.gov/products/GA0-16-614. 212 U.S.C. 226. 57 ices nationwide, the Board’s longstanding policy (since 1980) recog- nizes that, during an initial start-up period, new operational re- quirements and variations in volume may temporarily change unit costs for a service. Our intention is to match revenues and costs as soon as possible and monitor progress in meeting this goal. We would be happy to discuss the progress on the FedNow Service with the Committee. Q.6. My understanding is that with regard to the existing ACH services provided by the Fed, small banks are charged more than large banks. The discount is used in order to attract the greater volume provided by the large banks. Will you commit, and con- struct your business plan on the assumption that the Fed will never do volume discount pricing for any real-time payment serv- ice? A.6. The Federal Reserve has not yet determined the pricing struc- tures or levels that will be applicable to the FedNow Service. Be- fore the FedNow Service is launched, the Board will announce the service’s fee structure and fee schedule. Based on prevailing mar- ket practices, the Board expects that the fee structure would in- clude a combination of per-item fees, charged to sending banks and potentially, to receiving banks, and fixed participation fees. The ul- timate fee structure and schedule would be informed by the Board’s assessment of market practices at the time of implementation, which could evolve from today’s practices. Separate per-item fees could also be charged for other message types that may be offered in the future. This approach is consistent with the approach cur- rently taken with respect to other priced services provided by the Federal Reserve. Q.7. The Clearing House is owned by the Nation’s largest banks, which are already participating in the RTP system, and have built all the necessary connections to it. It seems exceedingly unlikely therefore—whether with volume discounts or without them—that those banks will abandon the RTP system to join any Fed system in the future. Is part of the Fed plan to require the largest banks to join the Fed System—in effect, outlawing a private sector op- tion? If not, please explain (and include in your business plan an explanation of) how the Fed could price in compliance with the Monetary Control Act when its system does not process the volume of any of the large banks. What would pricing have to look like in order to recoup start-up and operating costs if only small banks, representing a fraction of total volume, were participating in the Fed system? A.7. Many banks today, particularly large ones, have signed up for Federal Reserve and private-sector services in other payment sys- tems. We expect large banks would benefit from joining the FedNow Service both from a business perspective, in order to ex- tend reach to a broader array of banks, and from a resiliency per- spective to have a back-up option. We expect these benefits would outweigh the costs of joining two services, as is the case today for other payment services. Q.8. How many Fed employees (at the Board and the Reserve Banks) are employed to operate the ACH network? How many em- 58 ployees do you roughly estimate would be employed to operate a real-time network? Would Reserve Banks need to add staff or would they be transitioned from ACH (as the move towards real- time could lead to fewer employees devoted to ACH)? A.8. Approximately 70 employees work on day-to-day operations of the Federal Reserve’s FedACH service in order to support the serv- ice’s approximately 10,000 financial institution customers. Staff from across the Federal Reserve System provide additional support functions for various Federal Reserve services, including FedACH, such as technology development. The FedNow Service is a priority for the Federal Reserve, and as such we will devote the necessary resources required to deliver the highest quality service in a timely manner. Resources will likely come both from existing staff within the Federal Reserve as well as new staff. Staff will not be drawn exclusively from any single service or other Reserve Bank function. The Board requires all Fed- eral Reserve services, including FedACH and FedNow Service, to recover the actual and imputed long-run costs, which includes staff- ing costs, associated with operating the service. Q.9. If the Fed offers real-time payments, why should it continue to also be the regulator of the payments system? Should that re- sponsibility be conferred to another agency who could more dis- passionately assess the Fed’s compliance with the provisions of the Monetary Control Act and all other applicable laws? A.9. The Board does not have plenary regulatory or supervisory au- thority over the U.S. payment system. Rather, the Board has lim- ited authority to influence private-sector payment systems in spe- cific circumstances. For example, the Bank Service Company Act grants the Board (and the other Federal banking agencies) the au- thority to regulate and examine third party service providers, but only for the performance of certain covered services and only when services are performed for depository institutions under the agen- cy’s supervision. Under the Federal Reserve Act, the Board supervises the activi- ties of the Reserve Banks through rules, policies, and examina- tions. The decision to build the FedNow Service adheres to the MCA and the longstanding Federal Reserve policies and proc- esses.3 Q.10. In January 2015, the Fed stated in its Strategies for Improv- ing the U.S. Payment System that they ‘‘would not consider ex- panding its service provider role unless it determines that doing so is necessary to bring about significant improvements to the pay- ment system and that actions of the private sector alone will likely not achieve the desired outcomes for speed, efficiency, and safety in a timely manner.’’ While you have stated that no final decisions have been made, the request for comments issued clearly states that the Fed is in fact considering expanding its role, despite the significant improvements made by the private sector. In the future, how can you expect the private sector to respond to the Fed’s calls for innovation, when the Fed fails to hold itself to its commit- ments? 3See https://www.federalreserve.gov/paymentsystems/pfslpolicies.htm. 59 A.10. The decision to build the FedNow Service is responsive to re- quests from the Faster Payments Task Force (FPTF) and a rec- ommendation from the U.S. Department of the Treasury (U.S. Treasury). Through the Strategies for Improving the U.S. Payment System (SIPS) initiative, the Federal Reserve and industry stake- holders worked together to identify desirable improvements to the U.S. payment system and the most effective way to achieve those improvements. The FPTF, a diverse group of more than 300 industry stake- holders convened as part of the SIPS initiative, issued in 2017 a final report with 10 consensus recommendations intended to ad- vance the goal of ubiquitous, safe, faster payments in the United States.4 Among those recommendations was a request for the Fed- eral Reserve to provide a 24x7x365 settlement service for faster payments. The request was intended to ‘‘enable a needed infra- structure to support faster payments.’’ At that time, the members of the FPTF were aware of and anticipated the launch of the pri- vate-sector service. The U.S. Treasury made a similar recommendation in its 2018 report on financial innovation: ‘‘Treasury recommends that the Federal Reserve move quickly to facilitate a faster retail payments system, such as through the development of a real-time settlement service.’’5 The FPTF request and U.S. Treasury recommendation reflect the foundational role that the Federal Reserve, as the Na- tion’s central bank, has served since its inception in providing pay- ment and settlement services to banks. Q.11. The FHFA has currently proposed a Conservatorship Capital Framework that provides capital credit for Enterprise Credit Risk Transfer (CRT) transactions in strong structures and/or with strong counterparties which seems appropriate at a high level. In a speech in July 2017 you expressed support for the GSEs’ credit risk trans- fer efforts, and I believe there is a fair amount of consensus that these transactions have helped reduce taxpayer risks and introduce more private capital in support of the U.S. housing market. Among the often-cited objectives of housing finance reform is to level the playing field for private capital willing to price and invest in mort- gage credit risk. Also, one of the overarching principals of the postcrisis regulatory environment has been that similarly situated companies should be regulated similarly regardless of charter type. With those objectives in mind, it seems appropriate to me that banks should have a similar opportunity to receive capital relief for CRT transactions that are fully collateralized and/or insured by strong counterparties. This could expand mortgage options for con- sumers, allowing banks to retain the AAA risk on a mortgage, maintain the consumer relationship, and sell off the credit risk to entities better equipped to hold that risk given the duration mis- match for banking institutions. Would you commit to taking a fresh look with your fellow bank- ing regulators at the circumstances under which banks should be 4See https://fasterpaymentstaskforce.org/. 5See https://home.treasury.gov/sites/default/files/2018-08/A-Financial-System-that-Creates- Economic-Opportunities-Nonbank-Financials-Fintech-and-lnnovation-O.pdf. 60 allowed capital credit for bona fide credit risk transfer transactions that involve sound structures and counterparties? A.11. The Federal Housing Financing Agency’s (FHFA) proposal on ‘‘Enterprise Capital Requirements’’ is specifically designed for Fannie Mae and Freddie Mac and their specialized lending niche. The FHFA has calibrated its proposed capital requirements and tailored its credit risk mitigation rules to two specific categories of exposures: single-family home loan and multifamily loan portfolios. These products have standardized characteristics that are incor- porated in the FHFA’s proposed approach for risk weighting these exposures. Banks have a wider variety of exposures than Fannie Mae and Freddie Mac. Thus, banks require a different calibration of capital requirements and a more general set of rules governing the rec- ognition of credit risk mitigation. The banking agencies’ approach for recognizing credit risk trans- fer through a securitization needs to be flexible enough to accom- modate a wide variety of securitized asset classes without stand- ardized characteristics. The approach may require more capital on a transaction-wide basis than would be required if the underlying assets had not been securitized, in order to account for the com- plexity introduced by the securitization structure. Furthermore, the agencies’ capital rule requires banking organizations to meet cer- tain operational requirements. An inability by a banking organiza- tion to meet these operational requirements may lead to higher risk weighting, relative to the FHFA’s proposed approach. That said, you raise a number of important considerations, and we are reviewing policies related to credit risk transfers. Q.12. What are you doing to ensure that examiners are not down- grading ratings, issuing enforcement actions, or imposing Matters Requiring Attention and Immediate Attention (MRAs and MRIAs) based on guidance or informal standards? Banks are probably going to be reluctant to raise these issues publicly, so given the lack of transparency, how do we know that examiners are really basing their ratings and findings on rules and not guidance? A.12. In September 2018, the Federal financial regulatory agencies issued an Interagency Statement Clarifying the Role of Supervisory Guidance (Interagency Statement). The Interagency Statement re- affirmed that supervisory guidance, unlike laws and regulations, is not legally enforceable, and therefore supervisory actions cannot be based on supervisory guidance. Where appropriate and helpful to explain the identified issue and possible remediation steps to the firm, examiners may, as the statement indicates, refer to guidance. The Board issues guidance to increase the transparency of our supervisory expectations. We have reminded our examiners to be clear when communicating with financial institutions in order to minimize possible confusion between the principles and sound practices described in guidance and the requirements of regulations. Since the issuance of the Interagency Statement, the Federal Re- serve has taken several steps to ensure that System supervisory staff understand its content and are acting consistent with it. These steps include: 61 • Issuing internal talking points, FAQs, and training materials after publication of the Interagency Statement; • Conducting a mandatory training session for all supervisory staff on the Interagency Statement, with examples of accept- able language for supervisory communications, as well as addi- tional, more targeted training sessions with staff; • Instituting a greater use of templates for supervisory commu- nications to firms to ensure consistency in messages, including related to guidance; • Confirming with all Reserve Bank supervisory staff and staff of all portfolio management groups that they have imple- mented the Interagency Statement in their respective Districts and portfolios; • Coordinating with the other Federal banking agencies so that any interagency guidance is consistently applied; and • Indicating to firms that if they have concerns about how super- visory guidance is being applied, they should feel free to reach out to Federal Reserve staff, either at their local Reserve Bank or to Board staff directly. In addition, an appeals process exists for firms who wish to chal- lenge supervisory findings, including MRAs and MRIAs. RESPONSES TO WRITTEN QUESTIONS OF SENATOR MORAN FROM JEROME H. POWELL Q.1. As you mentioned, our economic expansion continues, as evi- dent in the 3.7 percent unemployment rate and average of 172,000 jobs added to the economy each month. But we aren’t seeing the economic boom to the same degree in rural areas. Farmers have seen their net income plummet by half since 2013 and are now expected to hold nearly $427 billion in debt this year—the most since the farm crisis in the 1980s—while many seg- ments of the ag industry continue struggling to fill jobs. Aside from trade, where does the Federal Reserve’s incoming data indicate Congress should focus its efforts on to avoid another farm crisis, and what are the Fed’s future considerations for pro- viding support to this segment of the economy? A.1. Federal Reserve data suggest that the U.S. farm economy has weakened since 2013 and is expected to remain relatively weak in the coming months. Farm income declined sharply from 2013 to 2015 and has remained relatively flat in the years since. The de- cline in farm income primarily has been due to persistently low ag- ricultural commodity prices and elevated input costs. The weakness in farm income has led to gradual but persistent declines in work- ing capital due to ongoing cash flow shortages. This has, in turn, led to increased financing needs and a modest increase in financial stress in recent years in the U.S. farm sector. The root cause of the suppressed U.S. farm economy has been persistently low farm income due to an ongoing environment of low agricultural commodity prices. The weakness in agricultural com- modity prices has come about primarily from slower growth in the global demand for U.S. agricultural commodities and an increase in supply relative to previous years. The supply of agricultural prod- 62 ucts from one year to the next tends to respond to the broad under- current of global demand. The Federal Reserve monitors all aspects of the U.S. economy and incorporates developments in each segment of the economy into its key mission areas. When evaluating the appropriate stance of monetary policy, for example, developments in the agricultural economy are regularly included in its deliberations, in addition to an evaluation of conditions in other areas of the U.S. economy. The Federal Reserve also works to ensure that commercial banks are evaluated properly in the provision of credit to the agricultural sec- tor. Finally, the Federal Reserve also interacts regularly with the public, including agricultural stakeholders, to share insights on the farm sector and gather information in an effort to enhance decision making on matters related to agriculture. Q.2. It is disappointing to see final rules implementing 2155 provi- sions that are no different than the rule proposals despite input from this body after the initial proposal; with the short form call report final rule being a prime example after hearing from a sig- nificant portion of the Senate. Can you provide me with any vote of confidence that the same thing won’t happen with the final rule of the Community Bank Le- verage Ratio? A.2. The Federal Reserve Board of Governors, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation (the agencies) recently adopted a community bank le- verage ratio (CBLR) framework that is consistent with the Eco- nomic Growth, Regulatory Relief, and Consumer Protection Act’s objective of reducing the regulatory burden on community banking organizations while maintaining safety and soundness. The agen- cies carefully considered the public comments on the proposal and actively consulted with State bank supervisors in developing the final rule.1 Relative to the proposal, the final rule incorporates a number of changes advocated by commenters, notably including a ‘‘grace period’’ for films which temporarily fail to meet certain qualifying criteria and removal of the proposal’s separate prompt corrective action framework specific to the CBLR framework. Q.3. I understand that the Federal Reserve buys the majority of the GSE’s debt. As the largest creditor for Fannie Mae and Freddie Mac, are you concerned that the GSEs have not been designated as SIFIs by FSOC—and wouldn’t at least going through the SIFI designation process help ensure that the GSEs have a strong prudential frame- work? A.3. Both the direct obligations issued by, and the mortgage-backed securities (MBS) guaranteed by, Fannie Mae and Freddie Mac are eligible for purchase by the Federal Reserve because they are fully guaranteed as to principal and interest by Fannie Mae and Freddie Mac. During the financial crisis and subsequent recession, the Fed- eral Reserve purchased agency debt and agency MBS to help re- duce the cost and increase the availability of credit for the pur- chase of houses. 1See: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20191029a.htm. 63 In late 2014, the Federal Open Market Committee (Committee) stopped increasing its holdings of MBS and in late 2017 announced plans for the gradual reduction of the Federal Reserve’s securities holdings. Moreover, as part of its 2014 statement on policy normal- ization principles and plans, the Committee stated that ‘‘it will hold primarily Treasury securities, thereby minimizing the effect of Fed- eral Reserve holdings on the allocation of credit across sectors in the economy.’’ As of August 2019, Federal Reserve holdings of agency securities are approximately $1.5 trillion, down from their October 2017 level of $1.8 trillion. The Federal Reserve Board (Board) recognizes that the Govern- ment-sponsored enterprises (GSEs) are important entities in the mortgage markets and in the financial system generally. Whether or not the Financial Stability Oversight Council (FSOC) should designate the GSEs would depend on the FSOC’s consideration of the required statutory factors to determine whether the GSEs are systemically important. It is important to note that the GSEs already have a consolidated prudential regulator with substantial regulatory authorities. In- deed, following enactment of the Housing and Economic Recovery Act of 2008 (HERA), the Federal Housing Finance Agency (FHFA) came into existence with an enhanced array of supervisory tools. These tools include explicit authority to: • impose and enforce prudential standards, including capital standards; • conduct targeted and full scope examinations; • obtain reports from parties on a regular and on an as-re- quested basis; • oversee executive compensation, including incentive compensa- tion and golden parachutes; • require remedial actions; and • undertake a full range of enforcement actions. In addition, as part of HERA, Congress granted the Director of FHFA the discretionary authority to appoint FHFA as conservator or receiver of Fannie Mae, Freddie Mac, or any of the Federal Home Loan Banks upon determining that specified criteria had been met. This authority was used in September 2008 to avoid mortgage financing and financial market disruptions that may have resulted from the failure of Fannie Mae or Freddie Mac at that time. Q.4. How important do you think it is for Congress to reform the housing finance market and take action to end the conservatorship of Fannie Mae and Freddie Mac? A.4. A robust, well-capitalized, well-regulated housing finance sys- tem is vital to the stability of the financial system and to the long- run health of our economy. We need a system that provides mort- gage credit in good times and bad to a broad range of creditworthy borrowers. While reforms have addressed some of the problems of the precrisis system, there is broad agreement that the job is far from done. Today, the Federal Government’s role in housing fi- nance is even greater than it was before the crisis. The over- whelming majority of new mortgages are issued with Government 64 backing in a highly concentrated securitization market. That leaves us with both potential taxpayer liability and systemic risk. It is im- portant to learn the right lessons from the failure of the old sys- tem. Above all, we need to move to a system that attracts ample amounts of private capital to stand between housing sector credit risk and taxpayers. We should also use market forces to increase competition and help to drive innovation. Q.5. One of the most common sentiments I have heard from farm- ers over the years is that whether the rest of the economy is boom- ing or struggling, the opposite occurs in the ag economy. Do you and the Federal Reserve have an explanation for these disparities, and where do we need to focus our efforts to ensure our economic expansion benefits the ag economy and the economy as a whole? A.5. Cycles in the agricultural economy may differ from those of the broader U.S. economy due, in part, to differences in the time required for production to fully respond to underlying changes in demand. The strength of the U.S. farm sector depends crucially on the price of agricultural commodities, which is significantly deter- mined by global supply and demand conditions. As global demand for agricultural products strengthens, the price of agricultural com- modities tends to increase, which boosts farm income. Agricultural producers, both in the U.S. and globally, tend to respond to these higher prices by increasing production. However, unlike other eco- nomic sectors, history has shown that it often takes a number of years for agricultural production to fully adjust to the increase in demand. Likewise, as global demand growth slows, it may take a number of years for agricultural production to adjust, resulting in persistently low agricultural commodity prices. In the mid-2000s, two primary drivers of demand for agricultural commodities were economic growth in China and growth in U.S. biofuels (i.e., ethanol). This increase in demand for agricultural products caused agricultural commodity prices to increase signifi- cantly from 2006 to 2013. Although agricultural production re- sponded to the increase in prices, it took several years for supply to meet the increased demand. Since 2013, the pace of growth in these components of demand appears to have slowed. In general, however, the production of agricultural commodities, has remained relatively high. The slower demand growth, coupled with elevated supplies of agricultural commodities, has been a primary factor in keeping agricultural commodity prices relatively low. Q.6. Does the Federal Reserve have any monetary policy tools to help offset the disparities between the benefits of an expanding economy as a whole and the ag economy specifically? A.6. In conducting monetary policy, the Federal Reserve incor- porates information on all aspects of the U.S. economy into its reg- ular policy deliberations. These deliberations take into account the strengths and weaknesses of various sectors, including agriculture. The Federal Reserve’s monetary policy tools are powerful, but blunt, and not intended to address individual sectors of the econ- omy. Rather, the Federal Reserve sets policy to achieve its overall aggregate goals of maximum employment and stable prices. 65 Q.7. In its report last year on nonbank financials, FinTech, and in- novation, the Department of the Treasury made specific policy rec- ommendations to the financial regulatory agencies, including the Federal Reserve, that were designed to ensure that the U.S. finan- cial system keeps pace with financial systems abroad. One of the key areas of focus was the need to assure consumers and small businesses that they own their own financial data and should have the ability to grant permission to third parties to provide products or services that rely on customer data. What steps has the Federal Reserve taken since the Treasury re- port was published last July to meaningfully improve consumer and small businesses digital financial data access? A.7. As the Department of Treasury recently highlighted, ‘‘[t]he only express statutory provision regarding access to a consumer’s own financial account and transaction data is Section 1033 of the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd–Frank).’’2 Section 1033 provides the Consumer Financial Protection Bureau (CFPB) with the authority to prescribe rules re- garding consumer rights in data related to financial products and services obtained from a financial institution. The CFPB identifies policy work related to this authority in its Spring 2019 release of ‘‘Long-Term Actions.’’3 As the Department of Treasury also indicated, other regulators have a role to play as well. FinTech innovators generally rely on connections to banks for access to consumer deposits or related ac- count data, access to the payment system, or credit origination. Ac- cordingly, as banks explore advances in FinTech products and serv- ices, the Federal Reserve has a responsibility to ensure that insti- tutions we supervise operate in a safe and sound manner and that they comply with applicable statutes and regulations, including consumer protection laws. The Federal Reserve coordinates our activities on digital finan- cial access with those of other regulators in a number of fora, in- cluding the Federal Financial Institutions Examination Council (FFIEC) Task Force on Supervision and the FFIEC Task Force on Consumer Compliance. This calendar year, the Federal Reserve has also organized a number of meetings with industry actors, trade associations, and consumer advocates in a variety of FinTech areas, including finan- cial account aggregation, which have included joint participation from a number of relevant regulators, including the Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Cor- poration (FDIC), CFPB, the Federal Trade Commission, and the Conference of State Bank Supervisors. We will continue to facili- 2U.S. Department of the Treasury (U.S. Treasury), ‘‘A Financial System That Creates Eco- nomic Opportunities—Nonbank Financials, FinTech, and Innovation’’ (July 2018), https:// home.treasury.gov/sites/default/files/2018-08/AFinancial-System-that-Creates-Economic-Oppor- tunities-Nonbank-Financials-Fintech-and-Innovation.pdf. As described by the U.S. Treasury, the statute states that, subject to rules prescribed by the CFPB, ‘‘financial services companies sub- ject to the Bureau’s jurisdiction as covered persons are required to make available to a con- sumer, upon request, certain financial account and transaction data concerning any product or service obtained by the consumer from that financial services company.’’ 3See https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=201904&RIN=3170-AA78 (Consumer Access to Financial Records [as described in section 1033 of the Dodd–Frank Act]). Other consumer laws and regulations might also be relevant to the CFPB’s policy response to issues involving account aggregation. See, e.g., https://www.reginfo.gov/public/do/ eAgendaViewRule?pubId=201904&RIN=370-AA79 (Regulation E Modernization). 66 tate and to engage in collaborative discussions with other relevant financial regulators in these and other settings. We also are reviewing how our guidance relates to expectations regarding the way banks should engage with FinTech firms, includ- ing data-sharing agreements between banks and data aggregators. For example, the Federal Reserve often receives questions about the applicability of our vendor risk management guidance. Staff are reviewing this guidance to determine whether any adjustments or clarifications would be helpful to promote responsible innovation. Q.8. As you know, the United Kingdom began deploying its Open Banking regime—designed to empower consumers and small busi- nesses to choose any financial services provider they like, be they an incumbent or challenger—in January of last year. Since then, a number of other countries, including Australia, New Zealand, Canada, Singapore, Hong Kong, Mexico, and South Africa—just to name a few—have signaled their intentions to implement similar regimes. Is there a risk that the U.S. falls behind if we don’t start consid- ering what a U.S. version of Open Banking should look like? A.8. As regulators, we have a responsibility to ensure that the in- stitutions subject to our supervision are operated in a safe and sound manner and that they comply with applicable statutes and regulations, including consumer protection laws. We have a strong interest in permitting responsible innovations to flourish, but first must ensure the risks that they may present are appropriately managed, consistent with relevant legal requirements. With regard to open banking, the Federal Reserve has continued to monitor closely developments in other jurisdictions and analyze potential opportunities and challenges posed by the adoption of open banking models in the United States.4 From our study of these overseas directives, several important considerations for adopting a United States’ version of open bank- ing via regulation have emerged. For example, certain approaches in other jurisdictions to address attendant data-security and con- sumer-protection risks, by and large, are not readily available pol- icy options to Federal banking regulators in the United States. Moreover, third parties that access bank accounts are often subject to licensing and registration requirements, as well as associated capital and insurance requirements. Likewise, overseas directives may also require that electronic payments (both bank and nonbank) be authorized by two-factor authentication. Perhaps most importantly, the jurisdictions that have moved for- ward with open banking requirements have less diverse banking systems materially, where the rules may impact fewer than ten very large institutions. In contrast, a U.S. version of open banking would impact a more diverse set of financial institutions, including thousands of small and community financial institutions. For insti- tutions with limited resources, the necessary investments in appli- cation programming interface technology and in negotiating and 4For example, Board members have spoken about some of these issues. See, e.g., Lael Brainard, ‘‘Where Do Banks Fit in the FinTech Stack’’ (April 28, 2017), https:// www.federalreserve.gov/newsevents/speech/files/brainard20170428a.pdf. See also Lael Brainard, ‘‘Where Do Consumers Fit in the FinTech Stack’’ (Nov. 16, 2017), https:// www.federalreserve.gov/newsevents/speech/files/brainard20171116a.pdf. 67 overseeing data-sharing agreements with data aggregators and third-party providers may be beyond their reach, especially as they usually rely on service providers for their core technology. Accordingly, U.S. efforts to craft approaches that enhance the connectivity of banks with nonbanks have benefited from the en- gagement of multiple agencies, along with input from the private sector and other stakeholders. In that regard, the private sector is continuing to experiment actively with a variety of different ap- proaches to the connectivity issue and may itself move toward one or more widely accepted standards. We support ensuring that connectivity issues are appropriately addressed in a way that allows community banks to participate in innovative platforms, and that this should be an important priority. Q.9. Should a financial institution retain the ability to restrict the ability of one of its customers to permission access to their data for any reason other than an imminent security threat? A.9. In light of the CFPB’s authority in this area (see response to Question 7), the Board has not articulated an independent position regarding consumer-permissioned data access. Board members have, however, articulated general concerns about appropriate risk management relating to safety and soundness and consumer pro- tection, as described in the response to Question 8. Q.10. The proliferation of bilateral contractual agreements between large financial institutions and data aggregators has been heralded by some policymakers as a positive development for innovation. But isn’t this model of disparate, opaque agreements between fi- nancial institutions and the facilitators of technology-powered tools on which millions of American consumers and small businesses rely likely to lead to a markedly uneven playing field, with out- comes for end users dependent entirely on with which institutions they conduct their banking business? A.10. We are aware that large data aggregators and financial insti- tutions are seeking to negotiate the appropriate balance of trade- offs for various issues relating to consumer data access, including data security and other prudential concerns, in bilateral contrac- tual agreements. We are monitoring these and other collaborative efforts involving data aggregators and financial institutions that seek to establish industrywide norms that could be used by a broader array of participants. The Federal Reserve regularly organizes meetings with industry actors, trade associations, and consumer advocates in a variety of FinTech areas, including financial account aggregation to track de- velopments. These meetings include joint participation from a num- ber of relevant regulators, including the OCC, FDIC, CFPB, the Federal Trade Commission, and the Conference of State Bank Su- pervisors to ensure information sharing and maximize the oppor- tunity for regulatory cooperation on these issues. Throughout these discussions, we have consistently stressed the importance of involving relevant stakeholders, including smaller fi- nancial institutions and consumer advocates. We will continue to facilitate and engage in collaborative discussions with other rel- evant financial regulators in these and other settings. 68 Q.11. Is the Federal Reserve concerned about this outcome? A.11. Please see the response to Question 10. Q.12. What is the Federal Reserve doing to facilitate a more level playing field across the industry for financial institution cus- tomers? A.12. Please see the response to Question 10. Q.13. The OCC is working diligently to modernize the Community Reinvestment Act, and I understand that FDIC Chairman McWilliams is also working jointly with Comptroller Otting. Is the Federal Reserve engaged in this process and will you be part of any coordinated joint rulemaking effort? A.13. We are working closely and diligently with the FDIC and the OCC to determine how best to modernize the regulations imple- menting the Community Reinvestment Act (CRA). While the tim- ing of a proposal is uncertain, we continue to discuss important as- pects of reform with them and are committed to actively engaging in interagency discussions. We agree on the goals of improving the regulations by establishing more clarity about where and how CRA activities will be considered. We continue to discuss various ideas about how best to accomplish those goals. Q.14. If the Federal Reserve does not engage in a joint rulemaking with the OCC and FDIC, will you undertake a separate rulemaking and what are the key aspects of the Community Reinvestment Act would you like to address? A.14. Given our significant engagement in the interagency rule- making process, I will refrain from speculating on what would hap- pen if the Federal Reserve does not sign on to a joint rulemaking with the OCC and FDIC. Q.15. Technological advancements within banking are helping to transform the industry to suit the needs of customers in the digital space. What are the Federal Reserve’s thoughts regarding what changes are needed to modernize the Community Reinvestment Act since customers are less reliant on branches? A.15. The Board understands the need to update the CRA regula- tions’ approach to delineating assessment areas in order to reflect how technology and other advancements have significantly changed the manner in which financial services are accessed and delivered. Industry consolidation and adoption of new technologies have re- sulted in an increasing provision of banking services beyond geo- graphic areas where banks have branches. No matter how the agencies define a bank’s assessment area in the future, a modernized CRA regulatory framework needs to be designed and implemented in a way that encourages banks to help meet the credit needs of all the communities that they serve, in- cluding those areas that are not major markets for the bank. Q.16. I have heard a number of concerns from commercial end users about the notice of proposed rulemaking published by the Board of Governors of the Federal Reserve System, the Federal De- posit Insurance Corporation and the Office of the Comptroller of the Currency, which would implement the standardized approach for counterparty credit risk in derivative contracts (SA–CCR). One 69 area of particular concern is the proposed 1.4 calibration of the alpha factor applied to transactions with commercial end users. Is there empirical analysis or justification for this alpha factor which conflicts with policy objectives of ensuring commercial end users can use derivatives to hedge and mitigate their commercial risk? A.16. The alpha factor was included in the proposal to implement the standardized approach for counterparty credit risk (SA–CCR) to ensure that SA–CCR, a standardized approach for determining capital requirements for the counterparty credit risk of derivative contracts, does not produce lower exposure amounts than the exist- ing internal models methodology (IMM). IMM is a models-based approach that certain large and internationally active banking or- ganizations may use to calculate their risk-weighted assets under the capital rule. In particular, IMM includes an alpha factor of 1.4 to add a level of conservatism to the model-based calculation and to address certain risks, such as wrong-way risk (meaning the ex- posure amount of the derivative contract increases as the counter- party’s probability of default increases). As part of the SA–CCR rulemaking process, the Board is carefully considering commenters’ concerns regarding the effect the application of the alpha factor will have on commercial end-user counterparties. RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM JEROME H. POWELL Q.1. In a speech earlier this year, you stated that any revision to the Community Reinvestment Act (CRA) should ‘‘more effectively encourage banks to seek opportunities in underserved areas.’’ Re- cently, the Urban Institute found that 60 percent of CRA-qualifying loans in low- and moderate-income census tracts are made to middle- and upper-income borrowers, including 29 percent to high- er income borrowers. While lending to middle- and upper-income borrowers in low- and moderate-income communities can encourage community diversity, it should not be the predominant form of CRA lending. Chair Powell, how is the Federal Reserve planning to ensure that the majority of CRA qualifying loans are being made to low- and moderate-income borrowers? A.1. The Federal Reserve currently is working with the Office of the Comptroller of the Currency (OCC) and the Federal Deposit In- surance Corporation (FDIC) to consider improvements to modernize the existing Community Reinvestment Act (CRA) regulatory frame- work. As part of that review, we are considering evaluation ap- proaches that would ensure that banks are meeting the credit needs of both low- and moderate-income households and low- and moderate-income communities. Q.2. What other steps is the Fed taking to ensure banks ‘‘seek op- portunities in underserved areas?’’ A.2. There are several options that the Federal Reserve staff have discussed with the FDIC and the OCC to encourage banks to seek opportunities in underserved areas. In our outreach with banks, community organizations, and other stakeholders, the Federal Re- 70 serve has heard support for updating the CRA regulations as they relate to a bank’s assessment area(s) so there is more clarity re- garding where banks may get CRA consideration for activities. Spe- cifically, we are considering an approach that would retain assess- ment areas around a bank’s branches in order to keep the CRA’s focus on nearby local communities, including low- and moderate-in- come neighborhoods, while adding assessment areas where banks conduct significant activity apart from branches. In addition, we are considering whether to more clearly define a separate, larger assessment area for the purposes of evaluating a bank’s community development activities. A larger, more clearly defined area for community development activities could mitigate the artificial competition for investments in areas served by many banks and benefit perennially underserved rural areas or small metropolitan areas. We are also exploring ways to adjust the defi- nition of low- and moderate-income in high-poverty rural areas where incomes overall may be low, relative to Federal benchmarks. This type of adjustment could be helpful in encouraging more CRA activity in underserved rural areas. Q.3. Our country’s affordable housing crisis is making it increas- ingly hard for working families to find an affordable place to live anywhere near economic opportunity. The percentage of housing stock available for rent or sale has fallen sharply since the finan- cial crisis and is now as low as it has been in more than 30 years. The current annual supply of new housing units is running an esti- mated 370,000 units below the trend for new housing demand. Chair Powell, are you concerned that the affordable housing cri- sis is reducing labor mobility? What impact does reduced labor mo- bility have on the broader economy? A.3. Housing has indeed been a growing share of household budg- ets in recent years. Between 2000 and 2017, the share of house- holds spending more than 30 percent of their income on rent in- creased from 39 percent to 49 percent. Families with lower incomes tend to spend much larger shares of their incomes on housing, and their share of income spent on rent has risen by an even larger amount.1 Increases in rent expenditure shares have been wide- spread across the country, with four out of five metropolitan areas experiencing an increase of at least five percentage points since 2000. Migration across States and metropolitan areas has trended down over the past several decades across all segments of the pop- ulation.2 Additionally, migration rates continue to be lower among people without a college degree, and highly educated workers have become more geographically concentrated. Furthermore, there was little migration out of the hardest-hit areas after the Great Reces- sion.3 Many have raised concerns that a lack of affordable housing 1Jeff Larrimore and Jenny Schuetz, ‘‘Assessing the Severity of Rent Burden on Low-Income Families’’, FEDS Notes (Washington: Board of Governors of the Federal Reserve System, Decem- ber 22, 2017), https://www.federalreserve.gov/econres/notes/feds-notes/assessing-the-severity-of- rent-burden-on-low-income-families-20171222.htm. 2Raven Molloy, Christopher L. Smith, and Abigail Wozniak, ‘‘Internal Migration in the United States’’, Journal of Economic Perspectives 25, no. 3 (2011): 173–196. 3See the following studies for more information on these phenomena: Abigail Wozniak ‘‘Are College Graduates More Responsive to Distant Labor Market Opportunities?’’ Journal of Human Resources 45, no. 4 (2010): 944–970; Enrico Moretti, ‘‘Real Wage Inequality’’, American Economic 71 in areas with the strongest employment opportunities has impeded labor mobility and prevented migration from workers who would benefit from moving to these areas—particularly workers without a college education. Economic theory can predict very large effects of a lack of afford- able housing on aggregate productivity, by preventing workers from moving to locations where skills would be most productive.4 How- ever, evidence on the connection between housing affordability and migration has not been clear cut. Some research has found that high house prices reduce migration,5 but other research has found little effect.6 Other factors outside of a lack of affordable housing also are like- ly responsible, in part, for the decline in migration. Research has suggested that the decline in migration may reflect a decline in labor market dynamism more generally, since fewer workers change employers each year even when they do not move. There is also some evidence that there are fewer opportunities in large cities for workers without a college degree, and that part of the decline in migration also reflects workers staying longer in central cities into middle age.7 And, consistent with the possibility that the lack of affordable housing is not driving low-income households out of expensive cities, lower income workers in areas with high rents are about equally satisfied with the quality of their housing as lower income workers in other areas.8 Ultimately, the impact of declining migration depends on its cause. If declining migration is due to a Jack of affordable housing, then we might expect reduced economic output and increased eco- nomic inequality as fewer people move to economic opportunities. If declining migration is due to lower fluidity in the labor market more generally, then declining migration could be a symptom, not a cause, of other difficulties in the labor market. And, if declining migration is due to workers increasingly believing that their cur- rent job best matches their skills and interests—reducing the need to move elsewhere for employment—then it could be a positive de- velopment. Q.4. If the affordable housing crisis reduces labor mobility, affect- ing the entire economy, what role does the Federal Reserve have in addressing the affordable housing crisis in the U.S.? A.4. A wide range of factors and policies outside of the purview of the Federal Reserve affect the availability and affordability of Journal: Applied Economics 5, no. 1 (2013); and Danny Yagan, ‘‘Employment Hysteresis From the Great Recession’’, NBER Working Paper No. 23844 (Cambridge, MA: September 2017). 4Chang-Tai Hsieh and Enrico Moretti, ‘‘Housing Constraints and Spatial Misallocation’’, American Economic Journal: Macroeconomics 11, no. 2 (2019): 1–39; and Peter Ganong and Daniel Shoag, ‘‘Why Has Regional Income Convergence in the U.S. Declined?’’ Journal of Urban Economics 102 (2017): 76–90. 5Relevant studies finding an effect of house prices on migration include: Jelle Barkema and Tam Bayoumi, ‘‘Stranded! How Rising Inequality Suppressed U.S. Migration and Hurt Those Left Behind’’, IMF Working Paper No. 19/122 (2019); Matthew Notowidigdo, ‘‘The Incidence of Local Labor Demand Shocks’’, NBER Working Paper No. 17167 (Cambridge, MA: 2011); Andrew Plantinga, Cecile Detang-Dessendre, Gary Hunt, and Virginie Piguet, ‘‘Housing Prices and Inter- urban Migration’’, Regional Science and Urban Economics 43, no. 2 (2013), 296–306. 6Studies finding limited effects include Molloy, Smith, and Wozniak, ‘‘Internal Migration in the United States’’; and Jeffrey Zabel, ‘‘Migration, Housing Market, and Labor Market Re- sponses to Employment Shocks’’, Journal of Urban Economics 72 (2012): 267–284. 7David Auter, ‘‘Work of the Past, Work of the Future’’, American Economic Association Rich- ard T. Ely Lecture (2019). 8See https://www.federalreserve.gov/consumerscommunities/shed.htm. 72 housing in the United States. The Federal Reserve monitors devel- opments in housing and labor markets to assist in our under- standing of the broader economy. With respect to our regulatory and supervisory responsibilities, we are committed to promoting a fair and transparent consumer financial services marketplace and effective community development, including for traditionally under- served and economically vulnerable households and neighborhoods. As discussed in my response to Question 1, the Federal Reserve is actively engaged in an interagency effort to modernize the CRA to encourage lending in low- and moderate-income communities. Ac- cess to credit by households and businesses is certainly a factor that contributes to the availability and affordability of housing. RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN FROM JEROME H. POWELL Q.1. Over the past year, we have discussed the risks to the finan- cial system from leveraged lending several times. In your press conference following the June 19, 2019, Federal Open Markets Committee meeting, you said that you ‘‘feel like’’ the safety and soundness risk from leveraged lending to the banks is ‘‘in a good place,’’ and that the paper ‘‘is pretty stably funded, in the sense that there’s no run risk, but there’s still macroeconomic risk.’’1 Does the 2013 leveraged lending guidance still reflect the Fed’s thinking about the prudent levels of debt, understanding that guid- ance by definition does not have the force of law? A.1. The leveraged loan market continues to warrant attention. We are closely monitoring how risks are evolving and the potential im- pact of these risks on the broader financial system, as well as as- sessing the adequacy of bank risk management and controls. The 2013 guidance remains in effect, but, as you note, it does not have the force and effect of law. Supervised banks can continue to par- ticipate in leveraged lending activities, provided such activities, as with all lending activities, are conducted in a prudent manner, con- sistent with safety and soundness standards. Although banks originate the majority of leveraged loans, a large percentage of leveraged loans are sold to investors outside the reg- ulated banking system. While these loan sales allow the risks to be shared more broadly, we continue to evaluate whether some of that risk diversification is being diluted by banks increasing their expo- sure to collateralized loan obligations (CLOs) and other holding ve- hicles to which the loans are sold. We will continue to monitor the evolution of the nature and risk profile of these holding vehicles. Q.2. In 2018, the D.C. Circuit overturned 2014 rules mandate by Dodd–Frank that exempted collateralized loan obligations from risk retention rules that apply to other asset classes. Have the rules been successful in aligning the incentives of the managers and in- vestors with respect to asset classes where they’re in effect? A.2. The credit risk retention rule for securitization, introduced in the 2010 Dodd–Frank Wall Street Reform and Consumer Protec- tion Act and finalized by regulators in 2014, is designed to curtail 1The Federal Reserve, ‘‘Chairman Powell’s Press Conference’’, June 19, 2019, https:// www.federalreserve.gov/mediacenter/files/FOMCpresconf20190619.pdf. 73 risky lending and securitization practices. The rule has had the biggest impact on commercial mortgage-backed securities (CMBS) and CLOs, where the lowest equity tranche of a deal (the riskiest part of the security) was historically held by a party other than the issuer. In contrast, issuers historically took the first-loss risk in many other types of asset-backed securities, including by retaining risk in excess of the requirement. CMBS deals issued after the rules took effect generally have bet- ter credit characteristics than deals issued before the effective date of the rules.2 Investors and industry professionals have also re- layed anecdotally that risk retention has been among the factors that has contributed to the improvement in CMBS underwriting, and that they believe risk retention aligns the interests of securitization sponsors and investors.3 Meanwhile, the private-label residential mortgage backed securi- ties new-issue market remains relatively small, and so discerning the longer-term effects of risk retention is more difficult. Q.3. Would the reimposition of risk retention requirements with re- spect to CLOs improve their quality and lessen the macroeconomic risk you cited? A.3. The decision in the U.S. Appeals Court in February 2018 ex- empted open-market CLOs—the most common type of CLOs, which acquire their assets from arms-length negotiations and trading on the open market—from adhering to risk retention.4 Because the rule was changed early in 2018, it is instructive to compare some statistics from 2017 and 2018 to glean evidence of effects. For in- stance, overall issuance of new CLOs was robust in 2017 and in- creased only slightly from that amount in 2018. Looking at pricing, the spreads on highly rated CLO debt increased in mid-2017 and remained about at that level in 2018, hence investors do not seem to have priced in additional risk as a result of the change in risk retention rules. Q.4. According to the industry’s trade group, private equity-owned companies employ 5.8 workers in the United States. Are these jobs more vulnerable to a recession than jobs in an industry less reliant on debt? A.4. We are not aware of research that has systematically studied the employment sensitivity to downturns for private equity-owned firms. There is, however, ample theoretical and empirical evidence that employment at more highly leveraged firms is more sensitive to macroeconomic fluctuations and to changes in financial-market conditions.5 The typical business model followed by private equity 2See ‘‘Credit Metrics Comparison: Risk Retention Versus Non-Risk Retention’’, DBRS, June 13, 2017; and Sean Flynn, Andra Ghent, and Alexei Tchistyi, ‘‘Informational Efficiency in Securitization after Dodd–Frank’’, May 21, 2019. 3See Paul Fiorilla, ‘‘No Joke. It Really Is Different This Time . . . Right?’’ Commercial Prop- erty Executive, January 15, 2018. 4Balance-sheet CLOs, which are less common, are created by originators of loans to transfer the loans off their balance sheets and into a securitization vehicle. They are still subject to risk retention as per the Agencies’ rule. 5See Steven Sharpe (1994), ‘‘Financial Market Imperfections, Firm Leverage, and the Cycli- cality of Employment’’, American Economic Review, Vol. 83, No. 4, pp. 1060–1074. Recent cor- roborating empirical evidence is also provided by Xavier Giroud and Holger Mueller (2017), ‘‘Firm Leverage, Consumer Demand, and Employment Losses During the Great Recession’’, Quarterly Journal of Economics, Vol. 132, No. 1, pp. 271–316. Using microlevel data from the Continued 74 firms tends to involve leveraged buyouts.6 Other things equal, higher leverage could drive greater employment variability. None- theless, leverage is not the only characteristic relevant for assess- ing employment sensitivity to business cycle fluctuations. For in- stance, recent research that has attempted to measure the quality of management practices has highlighted that private equity-owned firms tend to have very strong management practices relative to other ownership groups. Although this research has not scrutinized the effect of management practices on employment variability, it seems plausible that better management practices could influence the sensitivity of employment to business cycle fluctuations. More- over, private equity-owned firms may be better positioned to obtain external funding during credit market disruptions.7 Accordingly, absent further study of private equity owned firms, it is unclear whether better management or other characteristics could more than offset the effects of leverage on employment sensitivity to a recession. Q.5. I continue to be concerned with the lack of a real-time pay- ments system operated by the Federal Reserve—in my view, it’s not question of whether the United States will have a real time payments system, it’s a question of whether it will be operated by the Fed, the big banks or big tech. In my view, it’s imperative that the Fed provide a competitive system, quickly. Last fall the Fed released a plan to establish a real-time pay- ments system for comment. The comment period closed more than 7 months ago. When does the Fed intend to announce its next steps toward establishing a real-time system? A.5. The Federal Reserve Board (Board) announced on August 5, 2019, that the Reserve Banks will develop a new real-time pay- ment and settlement service, called the FedNow Service, to support faster payments in the United States.8 In making this decision, the Board adhered to the requirements of the Federal Reserve Act, the Monetary Control Act (MCA), and longstanding Federal Reserve policies and processes.9 The Board’s assessment of the planned FedNow Service pursuant to the requirements of the MCA and the Board’s criteria for new services and major service enhancements, proposed features and functionality for the service, and initial competitive impact analysis of the service can be found in our August 2019 Federal Register No- tice.10 U.S. Census Bureau, Giroud and Mueller find that establishments of more highly levered firms experienced significantly larger employment losses in response to declines in local consumer de- mand. 6See Steven Davis, John Haltiwanger, Kyle Handley, Ron Jarmin, Josh Lerner, and Javier Miranda (2014), ‘‘Private Equity, Jobs, and Productivity’’, American Economic Review, Vol. 104, No (12), pp. 3956–3990. 7A recent study of firms based in the United Kingdom found that during the 2008 crisis, firms backed by private equity investors decreased investments less than did their peers and experienced greater equity and debt inflows, higher asset growth, and increased market share. See Shai Bernstein, Josh Lerner, and Filippo Mezzanotti (2019), ‘‘Private Equity and Financial Fragility During the Crisis’’, The Review of Financial Studies, Vol. 32, No. 4, pp. 1309–1373. 8https://www.federalreserve.gov/newsevents/pressreleases/other20l90805a.htm 9See the Federal Reserve Act, https://www.federalreserve.gov/aboutthefed/fract.htm; Deposi- tory Institutions Deregulation and Monetary Control Act of 1980, Pub. L. No. 96-221 (Mar. 31, 1980), https://fraser.stlouisfed.org/title/1032; Board of Governors of the Federal Reserve Sys- tem, ‘‘The Federal Reserve in the Payments System’’, (Issued 1984; revised 1990), https:// www.federalreserve.gov/paymentsystems/pfs-frpaysys.htm. 10https://www.federalreserve.gov/newsevents/pressreleases/files/other20190805a1.pdf 75 Q.6. When does it expect a real-time system to be operational? A.6. The Federal Reserve recognizes that establishing FedNow Service would need to be carried out as soon as practicably possible and that time-to-market is an important consideration for many in- dustry participants. However, the achievement of true nationwide reach, as opposed to initial availability of a service, is a critical measure of success for faster payments. Pending engagement be- tween the Federal Reserve and the industry to inform the final service design, the FedNow Service is expected to be available in 2023 or 2024. However, it will likely take longer for any service, whether the FedNow Service or a private-sector service, to achieve nationwide reach regardless of when the service is initially avail- able. In advance of the service’s availability, the Federal Reserve will work closely with banks and their technology partners to pre- pare for expeditious onboarding. Q.7. Have market developments, including the announcement by Facebook and other companies that they intend to launch a digital currency for payment, expedited the Fed’s timeframe. A.7. See Question 6. RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM JEROME H. POWELL Q.1. How much of the wage gains reported by the Federal Reserve researchers, especially those of those with a high-school education are less, are due to increases in the minimum wage at the State and local level and how much to market forces? A.1. Many factors affect the wages of individuals with differing lev- els of education. There is no consensus regarding their relative im- portance, but some of the factors cited by economists include min- imum wages, the strength of unions, globalization, demographic change, hidden labor market slack (that is, the low labor force par- ticipation rate), rising employer concentration (which gives an em- ployer more bargaining power in a given labor market), and an in- crease in the prevalence of noncompete and antipoaching agree- ments. As a result, it is difficult to determine with any precision how much of the increase in wages of less educated workers over the past few years is due to an improving labor market and how much is due to increases in minimum wages or other factors. Q.2. Does the Federal Reserve have data showing the wage gain impacts for workers with less than a college degree by State? If so, does that wage data differentiate between States with higher min- imum wages and/or stronger unions? A.2. Yes, the wage data for workers with less than a college degree, which are collected as part of the Current Population Survey con- ducted by the Census Bureau and the Bureau of Labor Statistics, are available by State.1 Comparing wage changes across States can be difficult, given the many variables that affect wages. Q.3. Press reports that Federal bank regulators have formed an interagency working group to consider increasing their coordination 1See https://www.census.gov/programs-surveys/cps/data-detail.html. 76 in assessing cybersecurity at large banks. Are these press accounts accurate? What do the bank regulators plan to do to assess cyberse- curity at large banks? A.3. The acceleration of cybersecurity risk management is a top su- pervisory priority for Federal regulatory agencies, as it has implica- tions for the safe and sound operations of financial institutions as well as financial stability. To that end, an interagency goal is to improve regulatory harmonization and the supervision of cyberse- curity through better coordination of examinations at large finan- cial institutions and to be more efficient with the use of resources. As such, a joint interagency cybersecurity examination is being planned. The Federal Reserve is currently working with the Office of the Comptroller of the Currency (OCC) and Federal Deposit In- surance Corporation (FDIC), and we are in early stages of devel- oping an approach for a joint risk-based assessment of cybersecu- rity at large financial institutions. Q.4. The Federal Reserve Board has said it would consider on a case-by-case basis whether to allow a recipient of the OCC FinTech charter to obtain direct access to the Federal Reserve payment sys- tems. But the Federal Reserve Act requires national banks to be- come members of the Federal Reserve System and to become in- sured by the FDIC. Given that the recipient of a FinTech charter would not be eligible for and could not obtain FDIC insurance, why would the decision as to whether to allow a FinTech charter recipi- ent to obtain a master account be made on a case-by-case basis? A.4. As Governor Brainard has indicated in prior remarks,2 the OCC’s proposal raises interpretive legal and policy issues for the Federal Reserve regarding whether chatter recipients would be- come Federal Reserve members or have access to Federal Reserve accounts and services. As you note, the Federal Reserve Act does require national banks to become members of the Federal Reserve System and to be insured by the FDIC. Currently, however, certain types of national banks that do not accept insurable deposits, such as trust banks, are members. Given the breadth of potential appli- cants for the OCC’s special purpose chatter, each applicant receiv- ing such a chatter would require the Board to determine, as a threshold question, whether the facts and circumstances of that particular applicant should cause the applicant to be eligible for membership or Reserve Bank services under the Federal Reserve Act. RESPONSES TO WRITTEN QUESTIONS OF SENATOR JONES FROM JEROME H. POWELL Q.1. A reality of our economic system is that unemployment rates for African Americans are stubbornly and consistently higher than for white workers. There are innumerable structural and historical reasons for this reality, but the fact is that it is true, and it is persistent. 2See, e.g., Lael Brainard, ‘‘Where Do Banks Fit in the FinTech Stack’’ (April 28, 2017), https://www.federalreserve.gov/newsevents/speech/files/brainard20170428a.pdf; Lael Brainard, ‘‘Where Do Consumers Fit in the FinTech Stack’’ (Nov. 16, 2017), https:// www.federalreserve.gov/newsevents/speech/files/brainard20171116a.pdf. 77 Knowing this, do you believe it is appropriate for the Federal Re- serve to consider this disparity when developing monetary policy and especially when determining proper metrics for ‘‘full employ- ment,’’ especially at a time when inflation risk has waned? A.1. The benefits of the current economic expansion have been broadly shared, and the long expansion in economic activity has also lessened the employment disparities across demographic groups. For example, the unemployment rate for African Ameri- cans, although still above the rate for other groups, has noticeably narrowed its gap with the white unemployment rate and is now near the lowest readings since the Bureau of Labor Statistics began publishing this data series in the early 1970s. That said, there are long-standing disparities in unemployment rates across different segments of the population that the Federal Reserve does not have the tools or the mandate from Congress to address. Progress to fur- ther narrow these long-standing disparities in labor market out- comes by race and ethnicity are more likely to be found in struc- tural policies that promote education, training, and equality of op- portunity across all segments of our society. Monetary policy can best help by focusing on our dual mandate of fostering full employ- ment and low inflation. In setting monetary policy, the Federal Reserve has a statutory goal to promote maximum employment and stable prices. Because the Federal Reserve’s policy actions affect the economy as a whole, it cannot directly target particular groups of workers. However, by fulfilling the maximum employment component of our dual man- date, 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 turn 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 earn- ings. Indeed, a highlight for me of our Fed Listens events have been the panels focusing on the real world experiences of diverse groups in labor markets and in accessing credit. These panels un- derscore the importance of looking beyond the traditional macro- economic statistics in gauging the effects of monetary policy and make clear what the Federal Reserve’s mandate to promote max- imum employment and stable prices really means in people’s lives. Q.2. Do you believe the Federal Reserve possesses the monetary policy tools available to continue to lower unemployment in com- munities that have been historically left behind in our labor mar- kets? A.2. In setting monetary policy, to be consistent with the dual man- date of maximum employment and price stability for the economy as a whole, the Federal Open Market Committee (FOMC) considers a range of experiences and economic outcomes across the country. For example, prior to every meeting, Reserve Banks prepare sum- maries of economic conditions in their districts that are compiled and published in the Federal Reserve’s ‘‘Beige Book.’’1 In addition, at every FOMC meeting, Reserve Bank presidents regularly de- scribe economic conditions in their Districts. That said, monetary policy is a broad tool that cannot directly target particular commu- 1See https://www.federalreserve.gov/monetarypolicy/beige-book-default.htm. 78 nities. Despite that limitation and as stated above, the Federal Re- serve, through our maximum employment mandate, can ensure that the conditions are in place to keep labor demand high and sta- ble for as many workers as possible, which in turn helps workers in lower income communities to more easily find employment. In addition to our monetary policy tools, we regularly work with an array of partners—from nonprofits, bankers and academics to prac- titioners and policymakers—to help strengthen and revitalize com- munities through housing and other place-based strategies. Q.3. I believe an important question with critical importance to my constituents is if the nature of inflation has in any way changed in our modern economy. I understand there may be no perfect measure of inflation, but for millions of people, young and old, official inflation measures do not seem to align with their view of the economy. Inflation, officially, is low and steady. But for three of the largest expenses in a modern family’s budg- et—housing, health care, and education—there have been year after year of cost growth that outpace our official inflation meas- ures. I know that policymakers at the Federal Reserve are aware of these trends, but do you believe our current inflation measure- ments are accurately capturing cost increases in these critical areas? A.3. The measurement of inflation is challenging, but U.S. statis- tical agencies do a good job and I think our measures of inflation are reasonably accurate. One of the greatest challenges in price measurement is capturing the effect of changes in product quality. New or improved varieties of goods and services can give con- sumers more (or less) for their money, in a way that is often quite hard to measure—though our statistical agencies do attempt to do so. This challenge is particularly acute for health care, where it is very difficult to quantify the benefits that come from advances in treating disease. Notwithstanding the issue of quality change, it is true that prices of housing, health care, and education have all risen faster than overall inflation. Those faster-than-average price increases have been offset by other prices, such as for apparel, cars, and tele- visions and other electronics, which have risen more slowly than overall inflation. Q.4. And what are the consequences in the long term of these core items continually outpacing overall inflation? A.4. Some households, especially lower-income households, likely spend an above-average share of their income on necessities. If the prices of necessities rise faster than average, one would want to take this fact into account when assessing the economic situation of these households. Q.5. In the bipartisan Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155), one of the provisions directed at relieving regulatory burden for community institutions allowed for small depository institutions to file streamlined Call Reports. As the Federal Reserve and other prudential regulators have worked to finalize these rules, we have heard concerns from Ala- 79 bama institutions that the final rules do not ultimately streamline the reports in a meaningful manner—and many of the reporting re- quirements that were removed had little impact on small institu- tions. What input from community institutions did the Federal Reserve take while finalizing the rule, and does the Federal Reserve have plans to revisit and further streamline the call reports, consistent with S. 2155? A.5. The Board of Governors (Board), Office of Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) (the agencies) considered all comments received on the pro- posal to implement section 205 of S. 2155 and streamline regu- latory reporting requirements for small institutions. Finalizing the proposal was one step in the agencies’ efforts to meaningfully streamline reporting requirements. The agencies are committed to actively exploring additional revisions to Call Reports in an effort to further reduce any unduly reporting requirements. Q.6. As you know, the Federal Reserve has begun the process of reviewing and fine-tuning the regulation of the U.S. operations of international banks. I believe the Federal Reserve’s initial efforts are largely positive, and in many aspects, show an appropriate un- derstanding of the importance of international banks to our domes- tic economy, while balancing the need to effectively regulate these institutions based on their individual risks. However, there are certain aspects of the proposed rules which I believe deserve further attention. First, when considering whether to include interaffiliate trans- actions as part of the risk-based factors that the Federal Reserve considers for international institutions, given that these trans- actions are conducted wholly within the bank, what are the risk factors that led Federal Reserve to the decision to exempt these transactions for domestic institutions, but not international institu- tions? A.6. The tailoring proposals issued by the Board, along with the OCC and the FDIC (the agencies), would apply prudential require- ments to large domestic and foreign firms based on the risk profile of the firms using risk-based indicators. Under the proposals, standards would be applied and calibrated to U.S. firms at the global parent, where interaffiliate transactions are eliminated in consolidation. Standards applied to foreign banks would be tailored based on the foreign bank’s operations in the United States, rather than the global parent. As a result, trans- actions between the U.S. operations and the foreign parent gen- erally would be included in the calculation of the risk-based indica- tors for foreign banks. To address the structural differences be- tween foreign and domestic films, the proposal would exclude inter- affiliate liabilities and certain collateralized claims with affiliates from the measure of cross-jurisdictional activity. The agencies requested comment on the treatment of interaffil- iate transactions and the methodology for computing the risk-based indicators under the tailoring proposals, and are currently evalu- ating those comments. 80 Q.7. Second, when considering the proper measure of a U.S. Inter- mediate Holding Company’s (IHC) overall domestic profile, what factors led the Federal Reserve to determine that both the IHC’s assets, as well as the assets of the international institution’s U.S. branch, should be combined for purposes of applying liquidity re- quirements? As you know, IHC’s are purposefully structured as a legal entity that is separate than the U.S. branch. A.7. The foreign bank tailoring proposals would generally apply the same framework to foreign banks as would apply to domestic firms, with certain adjustments to reflect the structure of foreign banks’ operations in the United States. Most significantly, the proposals would determine regulatory requirements for a foreign bank based on the risk profile of the foreign bank’s U.S. operations, rather than on the risk profile of the global consolidated firm. For liquid- ity, the proposals would assign a foreign bank a category of stand- ards based on the risk profile of the firms’ combined U.S. oper- ations, including any U.S. subsidiaries (such as a U.S. intermediate holding company) and any U.S. branches. The proposed approach for the calibration of liquidity require- ments reflects the fact that a foreign bank’s U.S. intermediate hold- ing company and U.S. branch network are both part of a single firm, and is consistent with the Board’s current enhanced pruden- tial standards framework for liquidity risk management, stress testing, and buffer requirements. The Board is carefully consid- ering all comments on the proposals, including with respect to tai- loring of liquidity standards, as we work to develop a final rule. RESPONSES TO WRITTEN QUESTIONS OF SENATOR SMITH FROM JEROME H. POWELL Q.1. On July 10, the New York Times reported that Deutsche Bank private banking managers retained notorious child predator Jeffrey Epstein as a client, even after Deutsche Bank’s compliance officers recommended that the bank drop him as a client because of reputational risks to the bank. In general, what type of customer presents reputational risks to a bank? How does the Fed assess a bank’s reputational risks, and how does the Fed account for reputational risks in its supervision of banks? A.1. The Federal Reserve expects firms to consider reputational risks in their interactions with potential and existing clients. In the examination process, supervisors assess whether firms have ade- quate processes in place to detect and address reputational risks. In general, the Federal Reserve will focus on whether any risks, in- cluding reputational risks, present safety and soundness concerns for the firm or present a risk of noncompliance with a law or regu- lation. Q.2. Could having Jeffrey Epstein—one of the most well-known sex offenders in the world—present a reputational risk to a bank? A.2. Any individual client engaging in illegal or unethical behavior potentially could present reputational risks for an institution de- pending on the severity of the infraction or behavior. The Federal Reserve does not comment on specific individuals. 81 Q.3. If a bank doesn’t think Jeffrey Epstein presents a reputational risk, then what sort of customer would be notorious enough that a bank should be concerned about reputational risk? A.3. Please see response to Question 2. RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA FROM JEROME H. POWELL Q.1. According to the Fed’s 2019 Consumer and Community Con- text report, from 2005 to 2014 over 400,000 young Americans were unable to buy a home due to the rise in student loan debt. Accord- ing to Freddie Mac’s June 2019 survey, 89 percent of millennials made different housing choices specifically to afford student loan payments, including postponing the purchase of a home. This sur- vey also found that majorities of renters and homeowners in the West feel home ownership has become less accessible. Many Arizo- nans plan on selling their homes to retire. Are you concerned about the implications that a decline in home ownership by younger Americans will have on existing homeowners? Are you concerned about the implications of this trend for the housing market more broadly? A.1. It is true that young Americans today have a notably lower home ownership rate than previous generations did at the same stage of life. This could reflect a variety of factors including chang- ing preferences and demographic trends, reduced credit access for some borrowers, and insufficient income or savings for downpayments given the cost of renting, house prices, and student loan debt. Federal Reserve Board researchers have specifically ex- amined the potential role of student loans and found it could only explain a small portion of the decline in home ownership.1 It is too soon to say for certain whether the low home ownership rate among millennials reflects a permanent shift or a delay in first home purchases. For instance, a recent survey by Fannie Mae sug- gests that most millennials plan to become homeowners eventu- ally.2 Moreover, the current environment of relatively low mort- gage rates, a strong labor market, a return to more accessible mort- gage credit, and generally healthy household balance sheets should encourage home ownership going forward and support the housing market more broadly. Another promising sign is that household for- mation rates have recovered since the depths of the recession. If the home ownership rate of millennials were to remain low, the implications for existing home owners are unclear. The future value of existing homes will be determined not only by the demand for housing by younger generations but also by the housing supply, which will depend in large part on construction of new homes. 1Mezza, Alvaro, Daniel Ringo, and Kamila Sommer (January 2019), ‘‘Can Student Loan Debt Explain Low Home Ownership Rates for Young Adults?’’ Consumer and Community Context, Board of Governors of the Federal Reserve System, Vol 1., No. 1. 2Betancourt, Kim, Steven Deggendorf, and Sarah Shahdad (September 2018), ‘‘Myth Busting: The Truth About Multifamily Renters’’, Fannie Mae, available at https://www.fanniemae.com/ resources/file/research/emma/pdf/MFlMarketlCommentaryl091718.pdf. 82 ADDITIONALMATERIALSUPPLIEDFORTHERECORD 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132

Jerome H. Powell (2019, July 10). Congressional Testimony. Testimony, Federal Reserve. https://whenthefedspeaks.com/doc/testimony_20190711_chair_the_semiannual_monetary_policy_report

@misc{wtfs_testimony_20190711_chair_the_semiannual_monetary_policy_report,
  author = {Jerome H. Powell},
  title = {Congressional Testimony},
  year = {2019},
  month = {Jul},
  howpublished = {Testimony, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/testimony_20190711_chair_the_semiannual_monetary_policy_report},
  note = {Retrieved via When the Fed Speaks corpus}
}