Congressional Testimony

S. HRG. 116–387 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CONGRESS HEARING BEFORETHE COMMITTEE ON BANKING, HOUSING, ANDURBANAFFAIRS UNITED STATES SENATE ONE HUNDRED SIXTEENTH CONGRESS SECOND SESSION ON OVERSIGHT ON THE MONETARY POLICY REPORT TO CONGRESS PURSU- ANTTOTHEFULLEMPLOYMENTANDBALANCEDGROWTHACTOF1978 FEBRUARY 12, 2020 Printed for the use of the Committee on Banking, Housing, and Urban Affairs ( Available at: https://www.govinfo.gov/ U.S. GOVERNMENT PUBLISHING OFFICE 42–742 PDF WASHINGTON : 2021 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 CATHERINE FUCHS, Counsel BRANDON BEALL, Professional Staff Member ELISHA TUKU, Democratic Chief Counsel COREY FRAYER, Professional Staff Member 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 WEDNESDAY, FEBRUARY 12, 2020 Page Opening statement of Chairman Crapo ................................................................. 1 Prepared statement .......................................................................................... 38 Opening statements, comments, or prepared statements of: Senator Brown .................................................................................................. 3 Prepared statement ................................................................................... 39 WITNESS Jerome H. Powell, Chairman, Board of Governors of the Federal Reserve System ................................................................................................................... 6 Prepared statement .......................................................................................... 40 Responses to written questions of: Senator Brown ........................................................................................... 43 Senator Scott ............................................................................................. 46 Senator Cotton ........................................................................................... 49 Senator Perdue .......................................................................................... 50 Senator Tillis ............................................................................................. 52 Senator Reed .............................................................................................. 53 Senator Menendez ..................................................................................... 56 Senator Tester ........................................................................................... 57 Senator Warren ......................................................................................... 59 Senator Schatz ........................................................................................... 73 Senator Cortez Masto ................................................................................ 81 Senator Jones ............................................................................................ 89 Senator Sinema ......................................................................................... 94 ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD Monetary Policy Report to the Congress dated February 7, 2020 ....................... 95 LISCC Guidance response letter submitted by Chairman Crapo ........................ 161 (III) THE SEMIANNUAL MONETARY POLICY REPORT TO THE CONGRESS WEDNESDAY, FEBRUARY 12, 2020 U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. The Committee met at 9:32 a.m., in room SD–538, Dirksen Sen- ate Office Building, Hon. Mike Crapo, Chairman of the Committee, presiding. OPENING STATEMENT OF CHAIRMAN MIKE CRAPO Chairman CRAPO. The hearing will come to order. Senator Brown has been delayed a little bit, but I am going to go ahead because, as I think most people realize, we had to readjust the time of this hearing so that we could accommodate the fact that votes have been called on the floor at 10:30. That means that Senators are going to need to really stick to their 5 minutes, and even then we may not get through for everybody, and I apologize for that. I am sure Senator Brown and I will stick around for 15 or 20 minutes into the first vote so we can go as long as we possibly can. I will waive my questions. I will not waive my introductory state- ment, though, and I will start with that right now. Welcome, Chairman Powell. Today Federal Reserve Chairman Jerome Powell will update the Committee on monetary policy developments and the state of the U.S. economy. The U.S. economy continued to expand in 2019, exceeding 2 per- cent growth for the third straight year, as the American people enjoy the longest continued economic expansion in American his- tory. The labor market is strong, with the labor force at an all-time high of 164 million people, and the most recent jobs report shows that employers added 225,000 jobs in January alone, with the un- employment rate at 3.6 percent, remaining near a half-century low. Wages also grew in January by 3.1 percent from a year earlier— and this is important—making it 18 consecutive months that pay has grown at an annualized pace of 3 percent or more. Americans’ view on their personal financial situations are in- creasingly optimistic, according to Gallup trends. Nearly six in ten Americans, or 59 percent, now say they are better off financially than they were a year ago, up from 50 percent last year. Tax reform in 2017 and right-sizing regulations—including under the Economic Growth, Regulatory Relief, and Consumer Protection (1) 2 Act in 2018—have undoubtedly helped fuel this strong economy and labor market. Americans are set to benefit even more when considering the ef- fects of the USMCA and the Phase One Trade Deal with China. Despite this substantial progress, there are several external fac- tors that could have a meaningful impact on economic activity and our financial markets that need to be better understood, including: The Fed’s decision to maintain a significantly larger balance sheet in the future, including its recent decision to purchase Treas- ury bills in response to volatility in short-term borrowing rates; The Fed’s future plans to maintain stability in short-term bor- rowing rates, including potential structural, market-based fixes; The risks of the transition away from LIBOR to an alternative reference rate and steps that should be taken to ensure a smooth transition and curb risks to businesses and financial markets; And, finally, the potential impact of the coronavirus on global commerce and growth. The Fed has also taken a number of important supervisory and regulatory actions that merit attention. The Fed and other Federal financial agencies recently proposed amendments to the Volcker Rule that would improve, streamline, and clarify the covered funds portion of the rule. That proposal builds on the agencies’ simplification of the Volcker Rule in 2019, standing to improve market liquidity and preserve diverse sources of capital for businesses while striking the appropriate balance with safety and soundness. Additionally, many Banking Committee Republicans and I have raised serious concerns in the past with the agencies’ supervisory and examination processes, including the use of guidance as rules. In January, Fed Vice Chairman Quarles offered a road map to foster transparency, accountability, and fairness in bank super- vision, including: Tailoring the supervisory framework to better align with the cat- egories developed under the Fed’s domestic and foreign bank tai- loring rules; Putting significant supervisory guidance out for public comment and submitting it to Congress under the Congressional Review Act; And other commonsense improvements to the supervisory proc- ess, such as a rulemaking that would cover the agencies’ use of guidance in the supervisory process. This road map is greatly encouraging, and I urge the Fed to take steps to put it into motion. Finally, there is constant innovation, including in the financial services industry, to increase resources to unbanked and under- banked populations, reduce friction in payments, and increase effi- ciency in the delivery of financial products and services. Some re- cent examples are: Facebook’s announcement of Libra, a new stable digital cryptocurrency backed by a reserve of real assets and leveraging blockchain technology; Work by global Governments and central banks to explore the development of central bank digital currencies, especially amid ru- mors that China’s launch of a digital yuan is imminent; 3 The numerous applications of distributed ledger technologies, in- cluding in clearing and settlement, identity verification, and cross- border transactions; And some financial institutions’ adoption of public cloud tech- nologies. As I have stated in past hearings, it seems to me that techno- logical innovations in this space are inevitable and that the U.S. should lead in developing what the rules of the road should be. During this hearing, I look forward to hearing your thoughts, Mr. Chairman, on these important issues and about work that the Fed is engaged in to appropriately address them. And, again, thank you for joining us today. Senator Brown. OPENING STATEMENT OF SENATOR SHERROD BROWN Senator BROWN. Thank you, Mr. Chairman. Chairman Powell, nice to have you back and thank you for your accessibility and the conversations you have with all of us in both parties on this Com- mittee. Before we start, I want to stay a few words about what happened last night, when we got word that Jessie Liu’s nomination had been withdrawn. She was to appear in front of this Committee or was going to appear in front of the Senate when President Trump with- drew her nomination. She was going to appear in front of this Com- mittee tomorrow. I heard some of you, my colleagues and my friends, say that the President would be chastened by impeachment. Some of you told me you knew what the President did was wrong. Some of you pri- vately told me how much you think he lies. But you also said pub- licly that was not enough to rise to the level of removal from office, and many of you asserted that he had learned his lesson, he would not do these things again, he would not, through illegal means, try to change the 2020 election. It is pretty clear the President of the United States did learn a lesson: the lesson he can do whatever he wants, he can abuse his office, he will never, ever be held accountable by this Senate. That was the lesson. He has now, since acquittal, gone on a retribution tour, starting at the prayer breakfast—a prayer breakfast, mind you—continuing through the East Room, where many of you were in the audience and applauded him as he personally attacked people who have served this country. He removed Colonel Vindman, a patriot and Purple Heart recipient who spent his life serving our country. He mocked his accent, his accent from—his Ukrainian accent. He removed Ambassador Sondland, a Trump appointee, after he testified to the quid pro quo. And yesterday—and the reason I bring this up today—he contin- ued the tour, interfering at the Department of Justice, strong-arm- ing political appointees to overrule career prosecutors. Those attor- neys withdrew in protest, those professionals. I have no idea of their political party. They are professionals. They withdrew in pro- test from the case and, in at least one case, resigned entirely from the Department. 4 We cannot give him a permanent license to turn the Presidency and the Executive branch into his own personal vengeance oper- ation. You all know what is happening. Even the Senator that just walked out knows that it is happening. I am afraid that is what we are seeing, a personal vengeance operation. No one should be above the law. If we say nothing—and I include everybody on this Committee; I include myself. If we say nothing, it will get worse. His behavior will get worse. The retribution tour will continue. We all know that. Mr. Chairman, now on to the issue at hand. I welcome Chairman Powell back. Earlier this week, Bloomberg reported on a profitable and fast- growing Spanish company. Grifols has opened up branches in 36 States. They buy and sell plasma—a nice, clinical-sounding word that means ‘‘blood,’’ as we know. Americans who are struggling to make ends meet are lining up to sell their blood to put food on the table. The blood-harvesting business is booming. Grifols stock is doing great. It is hard to think of a better metaphor for the Trump economy. On Monday, the S&P 500 and Nasdaq both reached record highs. In 2019, JPMorgan Chase had the best year for any U.S. bank in history, with $36 billion—36 thousand million dollars—in profits. Big corporations are spending hundreds of billions of dollars on stock buybacks and dividends. On paper, the economy has been ex- panding uninterrupted for over 10 years, although the growth the last 3 years of the Obama administration has been greater than the growth of the first 3 years of the Trump administration. We know that, too. But if you talk to the vast majority of people who rely on pay- checks, not investment portfolios, to earn a living, you get a very different story. They have been bleeding for years. Most families do not understand why the harder they work, sometimes at more than one job, the harder it gets to afford pretty much everything—childcare, health care, rent, college tuition. The people in this room may remember last September, when the financial industry went into a panic over a benchmark interest rate passing 10 percent. Wall Street faced uncertainty, so we responded. The Fed leapt into action. Smart Government employees came up with a plan that led to the Federal Reserve lending about $200 billion every day into financial markets through a mechanism that has not been used since the financial crisis—$200 billion every day. Let me be clear: I do not think it is wrong for the Fed to be cre- ative and make sure the economy keeps working. It is in everybody’s interest, Mr. Chairman, for banks to keep lending money and credit to keep flowing so businesses can invest and manufacture, consumers can buy houses and cars. My problem is this: When Main Street faces uncertainty, no one at the Fed jumps to action or gets creative. The President does not criticize by tweet by name the Chairman of the Federal Reserve when he says—he never demands corporations raise wages for their workers. That is not ever his criticism of Chairman Powell. 5 It is hard for families to understand why Wall Street gets worked up about a 10-percent interest rate when so many families are lucky if the payday lender down the street charges them less than 400 percent. Small businesses who are having trouble making payroll do not have access to so-called repo funding at their local Fed branch. The Fed does not take action when its own research has found that 40 percent of Americans do not have the cash—think about that. Prob- ably not many people in this hearing room, but 40 percent of Amer- icans do not have $400 in cash when their car breaks down to get to work to be able to fix. So they go to the payday lender, and then things spiral downward. Nobody raises alarm bells when 40 million Americans predict they will miss at least one credit card payment, which means $1.2 billion in late fees will flow from the pockets of struggling families to help JPMorgan Chase earn $36 billion last year. ‘‘Serious people’’ have not dropped everything to bring down the cost of housing or raise wages once they found out that one in four are paying more than half their income toward housing. One thing goes wrong in their life, their lives turn upside down. People look at that and they see two different economies and two different responses. We hear a lot about the divides in this country between red and blue, between rural and urban, the coasts and the heartland, the people who watch MSNBC and the people who watch Fox. But people in all those places feel like no matter how hard they work, they cannot maintain any real economic security. The real divide I see is between those whose problems are consid- ered an ‘‘emergency’’ and those whose struggles Wall Street and large parts of Washington have decided they can ignore. The Fed needs to get creative for the people who make this coun- try work, particularly because it has become pretty clear that the President and the Majority Leader are simply not about to. President Trump brags about a soaring stock market that he has pumped up with deficit-busting, trillion dollar tax breaks for bil- lionaires. Deficits exceeding $1 trillion, do not hear much about that anymore. And now he wants to pay for those tax cuts—sorry, we have got a big deficit, we have got to pay for those tax cuts, as he said in Davos and he is saying in his budget—by cutting Medicare and Medicaid and Social Security. He lies about a ‘‘blue-collar boom’’—I heard it at the State of the Union that night; I was fairly incredulous—when in my own State of Ohio, job growth has been anemic or nonexistent, and manufac- turing jobs are stalling compared to when he took office. And now in his budget, after promising workers in Lordstown, Ohio, ‘‘Do not sell your homes. We will bring those jobs back,’’ he wants to kill the loan program that was giving the community of Lordstown a little bit of hope that some manufacturing jobs actually would come back. Chairman Powell, you and your highly capable staff at the Fed have been proactive and creative in protecting Wall Street and the money markets from the President’s erratic behavior, and I am glad you have. We are all appreciative of that. 6 But what I hope to hear from you today is how you are going to be proactive and use that same level of creativity to make this economy work for everyone else. Thank you. Chairman CRAPO. Chairman Powell, I for one commend you for the work that you are doing. I think that there are tremendous re- sults that I expect you will discuss with us today from the efforts that you have undertaken. You may now make your statement, and then we will proceed. STATEMENT OF JEROME H. POWELL, CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Mr. POWELL. Thank you very much. Chairman Crapo, Ranking Member Brown, Members of the Committee, I am pleased to present the Federal Reserve’s semiannual Monetary Policy Report. My colleagues and I strongly support the goals of maximum em- ployment and price stability that Congress has set for monetary policy. Congress has given us an important degree of independence to pursue these goals based solely on data and objective analysis. This independence brings with it an obligation to explain clearly how we pursue our goals. Today I will review the current economic situation before turning to monetary policy. The economic expansion is well into its 11th year, and it is the longest on record. Over the second half of last year, economic activ- ity increased at a moderate pace, and the labor market strength- ened further, as the economy appeared resilient to the global headwinds that had intensified last summer. Inflation has been low and stable but has continued to run below the FOMC’s symmetric 2-percent objective. Job gains averaged 200,000 per month in the second half of last year, and an additional 225,000 jobs were added in January. The pace of job gains has remained above what is needed to provide jobs for new workers entering the labor force, allowing the unem- ployment rate to move down further over the course of last year. The unemployment rate was 3.6 percent last month and has been near half-century lows for more than a year. Job openings remain plentiful. Employers are increasingly willing to hire workers with fewer skills and train them. As a result, the benefits of a strong labor market have become more widely shared. People who live and work in low- and middle-income communities are finding new op- portunities. Employment gains have been broad based across all racial and ethnic groups and levels of education. Wages have been rising, particularly for lower-paying jobs. GDP rose at a moderate rate over the second half of last year. Growth in consumer spending moderated toward the end of the year following earlier strong increases, but the fundamentals sup- porting household spending remain solid. Residential investment turned up in the second half, but business investment and exports were weak, largely reflecting sluggish growth abroad and trade de- velopments. Those same factors weighed on activity at the Nation’s factories, whose output declined over the first half of 2019 and has been little changed, on net, since then. The February Monetary Pol- icy Report discusses the recent weakness in manufacturing. Some of the uncertainties around trade have diminished recently, but 7 risks to the outlook remain. In particular, we are closely moni- toring the emergence of the coronavirus, which could lead to dis- ruptions in China that spill over to the rest of the global economy. Inflation ran below the FOMC’s symmetric 2-percent objective throughout 2019. Over the 12 months through December, overall inflation based on the price index for personal consumption expend- itures was 1.6 percent. Core inflation, which excludes volatile food and energy prices, was also 1.6 percent. Over the next few months, we expect inflation to move closer to 2 percent, as unusually low readings from early 2019 drop out of the 12-month calculation. The Nation faces important longer-run challenges. Labor force participation by individuals in their prime working years is at its highest rate in more than a decade. However, it remains lower than in most other advanced economies, and there are troubling labor market disparities across racial and ethnic groups and across regions of the country. In addition, although it is encouraging that productivity growth, the main engine for raising wages and living standards over the longer term, has moved up recently, produc- tivity gains have been subpar throughout this long economic expan- sion. Finding ways to boost labor force participation and produc- tivity growth would benefit Americans and should remain a na- tional priority. I will now turn to monetary policy. Over the second half of 2019, the FOMC shifted to a more accommodative stance of monetary policy to cushion the economy from weaker global growth and trade developments and to promote a faster return of inflation to our symmetric 2-percent objective. We lowered the Federal funds rate target range at our July, September, and October meetings, bring- ing the current target range to 11⁄ 2 to 13⁄ 4 percent. At our subse- quent meetings, with some uncertainties surrounding trade having diminished and amid some signs that global growth may be stabi- lizing, the Committee left the policy rate unchanged. The FOMC believes that the current stance of monetary policy will support continued economic growth, a strong labor market, and inflation re- turning to the Committee’s symmetric 2-percent objective. As long as incoming information about the economy remains broadly con- sistent with this outlook, the current stance of monetary policy will likely remain appropriate. Of course, policy is not on a preset course. If developments emerge that cause a material reassessment of our outlook, we would respond accordingly. Taking a longer view, there has been a decline over the past quarter-century in the level of interest rates consistent with stable prices and an economy operating at its full potential. This low in- terest rate environment may limit the ability of central banks to reduce policy interest rates enough to support the economy during a downturn. With this concern in mind, we have been conducting a review of our monetary policy strategy, tools, and communica- tions practices. Public engagement is at the heart of this effort. Through our Fed Listens events, we have been hearing from rep- resentatives of consumer, labor, business, community, and other groups. The February Monetary Policy Report shares some of what we have learned. The insights we have gained from these events have informed our framework discussions, as reported in the min- 8 utes of our meetings. We will share our conclusions when we finish the review, likely around the middle of this year. The current low interest rate environment also means that it would be important for fiscal policy to help support the economy if it weakens. Putting the Federal budget on a sustainable path when the economy is strong would help ensure that policymakers have the space to use fiscal policy to assist in stabilizing the economy during a downturn. A more sustainable Federal budget could also support the economy’s growth over the long term. Finally, I will just briefly review our planned technical oper- ations to implement monetary policy, and the February Monetary Policy Report provides details of our operations to date. Last Octo- ber, the FOMC announced a plan to purchase Treasury bills and to conduct repo operations, and these actions have been successful in providing an ample supply of reserves to the banking system and effective control of the Federal funds rate. As our bill pur- chases continue to build reserves toward levels that maintain ample conditions, we intend to gradually transition away from the active use of repo operations. Also, as reserves reach durably ample levels, we intend to slow our purchases to a pace that will allow our balance sheet to grow in line with trend demand for our liabil- ities. All of these technical measures support the efficient and effec- tive implementation of monetary policy. They are not intended to represent a change in the stance of monetary policy. As always, we stand ready to adjust the details of our technical operations as con- ditions warrant. Thank you. I am happy to take your questions. Chairman CRAPO. Thank you, Chairman Powell. And as I said before, I will not use my 5 minutes for questions. In fact, I will not use much of my 5 minutes at all, trying to set a standard for the record of the Members of this Committee. Before I turn the time to Senator Brown, however, and yield my time, I wanted to indicate that it has been brought to my attention that Senator Shelby, who unfortunately is not able to be here right now, recently became the longest-serving Member of the Senate Banking Committee in history. He began his service on the Committee on January 6, 1987, and has now served approximately 33 years 1 month and 6 days. That surpasses Senator Sparkman—interestingly, also of Alabama—who previously served on the Banking Committee between January 6, 1947, and January 3, 1979, almost 32 years. Senator Shelby has clearly seen dramatic changes in the financial services industry over those years and himself has had a meaningful impact on fi- nancial institutions, markets, and consumers during his tenure on the Committee, including as Chairman. I take this opportunity to thank him for his service on this Committee and congratulate him on this significant milestone. Senator Brown. [Applause.] Senator BROWN. Is he here? Chairman CRAPO. He is not here. I yield my time to you. Senator BROWN. We will clap again when he comes. Thank you, Mr. Chairman. Thanks. 9 When the Fed says it is nearing maximum employment and the labor market is strong, it could mean workers have one good-pay- ing job, or it could mean that a worker is working under 40 hours at three part-time jobs at minimum wage. I think this highlights how the economic recovery has not benefited nearly everyone. You hear these statistics, 40 percent, 50 percent of—I am sorry, 25 per- cent of people pay half their income in rent, 40 percent of Ameri- cans cannot come up with $400. So, clearly, it is not reaching ev- eryone. If you have to work three jobs or if you are working at a job in one of the ten fastest-growing professions—seven out of ten of those jobs are this—you still cannot afford rent. Something is wrong. I appreciate you have been on a listening tour and I am looking forward to your report, but I want to know, who do you have at the Fed working on bold and creative ways to use the Fed’s author- ity—some tools we probably do not know about—using your au- thorities to help working families that are not benefiting from eco- nomic growth? What can you do to make sure that most of our eco- nomic growth, not a sliver of it but most of our economic growth, ends up in workers’ pockets? Mr. POWELL. Well, our tools are not focused on distributional ef- fects, really. They are focused on aggregate effects. We do not have those tools. Other agencies do, and, of course, elected officials hold really the power to address those issues. But I will say that, you know, the thrust of our review of mone- tary policy, the first we have done of this nature, is to assure that we have the tools to carry out the mandate you have given us of maximum employment and stable prices in a world where inflation is trending lower, where the Phillips curve is very flat, so that the connection between inflation and tightness in the economy is very, very low now, and also where interest rates are quite low, which creates a very challenging environment for us to carry out the job you have given us, and that is why we are doing a deep dive on issues around our strategy, tools, and communications. Senator BROWN. OK. I would ask you to—and these conversa- tions can take place individually, too, but I would ask you to be as creative as the Fed was. I just have a list here of extraordinary Federal actions that did not require Congress. I am not arguing Congress has done its job. Senator McConnell and the President have refused to raise the minimum wage. It has been stuck for 11 years at under $8. They took away overtime for about 2 or 3 mil- lion Americans because of truncating the overtime rule, tax cuts for the rich, and now cuts for Medicare—we know Congress is not doing its job to redistribute income in any way that is fair to hun- dreds of millions of Americans. We know that, but just this list quickly: the Maiden Lane direct purchase of assets, the Primary Dealer Credit Facility, converting investment banks to bank hold- ing companies so they could borrow from a discount window. The Fed has been very creative to the country’s benefit when Wall Street has reached difficult times, has run into difficult times, sometimes of their own making, but the Fed is—I am a supporter of the Fed. Some people with my political philosophy are not. And I think that you have stepped up in many ways. I ask you to be as creative in thinking of ways that this wealth is shared beyond 10 the 1 or 2 or 5 or 10 percent who are doing very well, who are thrilled with the economy the way it is, and it just does not reach so many. One other question, Mr. Chairman. I am worried about risks in our economy. I am glad the Fed is taking leveraged lending seri- ously, incorporating it into stress tests. At the same time, we are seeing the financial system get more and more exotic. JPMorgan Chase through a supposedly unaffiliated fund wants to buy an elec- tric plant in El Paso, also owns a stake in a nuclear power plant. That means that JPMorgan Chase could likely own a nuclear power plant. The Japanese equivalent of Amazon wants to form an industrial loan company in Utah so it can get the benefits of being a bank without the regulation. And, recently, you voted with other bank regulators to weaken the Volcker Rule by reversing protec- tions in the 2013 rule allowing for more risky and leveraged invest- ments. Are we going in the right direction? It seems the financial system again is getting more complex, more exotic, things people do not understand. Shouldn’t we be focusing on simplifying it? Mr. POWELL. Well, what we are focused on is maintaining much higher capital, much higher liquidity requirements, stress tests, as you pointed out, that keep the banks on their toes and do address in a timely way the issues of the day, and also resolution planning. So those are the big four important measures broadly that we put into place after the financial crisis, and we are focusing on sus- taining those, making them more effective, and keeping them strong. Chairman CRAPO. Senator Toomey. Senator TOOMEY. Thanks very much, Mr. Chairman. Welcome back, Mr. Chairman. Good to see you again. I have sev- eral somewhat technical questions I would like to go over with you, and some of them we have discussed to varying degrees in the past. But one is the Fed’s real-time payment system. As you may recall, I was never convinced that this was a great idea for the Fed to pur- sue this since we have a private sector system in place up and run- ning and really encouraged by the Fed back in the day. But I get the Board of Governors has made its decision. Here is my question for you: A number of constituents have ex- pressed the concern that we are going to end up with two systems that are not fully interoperable. And to the extent that employers and financial institutions and other participants would be plugged into different systems, if they are not fully interoperable, there is a real concern that that is going to at a minimum diminish the ability to innovate in these systems going forward. So I guess I am wondering if you could—just briefly, because I do have several other topics—just address the question of whether it is a priority of the Fed to ensure that the FedNow system will be fully interoperable with the clearinghouse system. Mr. POWELL. Full interoperability is the goal. It will be chal- lenging to reach it, but it is a high priority to assure interoper- ability. It is something we are very focused on in the design stage. Senator TOOMEY. OK. And as I am sure you are aware, the clear- inghouse system is committed to having flat fees and not providing discounts for volume and the size of transactions, provided that the 11 FedNow system does not provide those kinds of discounts. Can the Fed commit that it will have uniform pricing on this platform? Mr. POWELL. We have not made that commitment, and it is not clear that that is what our—that the banks who really wanted us to do this are looking for. Senator TOOMEY. Well, this is often cited as a reason why the Fed needed to do this, is because the private system might dis- criminate on the basis of price. So I think it is important that the clearinghouse system has volunteered—clearly, they are happy to be regulated if need be to ensure that this would occur. It would be really ironic and a shame if it turns out that it is, in fact, the Fed that makes it more expensive for small banks to participate. Let me move on to SOFR. As we have discussed, you know, one of the challenges of replacing LIBOR is that LIBOR has an embed- ded credit risk element, it is an interbank rate; whereas, SOFR is a risk-free rate because it is essentially a repo rate. And that mis- match could conceivably create some problems, especially to the ex- tent that banks are funding themselves in an interbank market that is subject to spreads that SOFR may not reflect. And so a mis- match in assets and liabilities could become problematic. So my question is, I think yesterday you may have—and I did not see the transcript, so correct me if I am wrong. But you may have suggested that there is a thought of trying to introduce a credit component, some kind of credit spread or credit risk compo- nent to, as either a complement or an alternative or somehow inte- grate that with SOFR, and I am just wondering. Did I get that right? Is that something you guys are thinking about? Are you con- cerned about it at all? Mr. POWELL. I will just quickly say that LIBOR itself, we cannot assume that it will be published past the end of 2021. So that has not changed, and everyone needs to take that on board. SOFR is going to be the rate that a lot of the derivatives go to and many, many across the broad financial system will go to. But a number of banks have come forward and said that they want to work on a separate rate, which would not replace SOFR but would be credit sensitive. And so they are doing that now, and we are working with them to support that process. So, you know, we are open to that, but it does not mean that the transition away from LIBOR to SOFR will stop. It has to go forward. Senator TOOMEY. OK. The last thing on my list here, the glitch in the repo market. As you and I discussed briefly, my concern is when banks choose to earn less than 2 percent on excess reserves when they could be earning up to 10 percent, at least briefly, in the repo market. It suggests that there is something going on here, right? They could have put their money into the repo market. They chose not to. I am not aware of an explicit rule that required that during the episodes when these rates spiked, but, nevertheless, it happened. And so I wonder, and I am a little concerned that there might be some kind of unspoken pressure on the part of regulators to favor cash on deposit with the Fed over liquidity in the form of repo transactions that goes beyond what is actually in the rules. And I am wondering, if you share that concern, what you think about it. I know the Fed’s response has been to provide liquidity, and that 12 works in a given moment. But if there is an underlying problem that has not been fixed, then isn’t there the risk that the spike in repo rates could recur and you have to provide liquidity again. Could you address that? Mr. POWELL. Sure. So there is not a preference for reserves over Treasurys in the LCR, but there is in the internal liquidity stress tests in the sense that, you know, it takes 1 day to turn a Treasury into liquidity, just inherently there is. And I think the idea of put- ting Treasurys and reserves on an equal footing in terms of their treatment so that they can achieve liquidity is a good goal because we would—we do not want to tilt banks in the direction of having to have more reserves than they really need. As long as the overall level of liquidity is at the appropriate level, we do not want to tilt them in that direction. It may well be that we are doing that. You may have seen Vice Chair Quarles give a speech on this, and he talked about this issue at some length. So we are looking at ways to address that, one of which is just to assume that the discount window is available in that stress test, which is a reasonable assumption to make. But I do think there are things to do there, and the reason is, as you mentioned, there was liquidity but it did not flow, so it was not liquid. And so the ques- tion is why not, and we are looking at ways to address that that will not undermine safety and soundness but that will make the markets operate better. Senator TOOMEY. Thank you. Chairman CRAPO. Senator Reed. Senator REED. Well, thank you very much, Mr. Chairman. Let me thank you, Chairman Powell, for your leadership. Thank you for joining us in Providence. It was a wonderful evening. I think it is important, too, your efforts to ensure the independ- ence of the Federal Reserve. Without an independent Federal Re- serve, our national policymaking is, in my view, severely flawed, so keep up your efforts, please. You mentioned that we have had an expanding economy for 11 years. By my count, that would be 8 years under President Obama, and 3 years under President Trump. The expansion is good, but there are still some issues I think we should address. The Pew Center put out a report in January, and they indicated that the share of wealth held by middle-income families has been falling for roughly 20 years, and I would like you to comment on whether it continues to fall despite this expanding economy. And in addition to that, they point out that income inequality in the U.S. has in- creased since 1980. If it is still increasing, please comment on that. And it is greater than in peer countries, other countries that are similar to us in many other aspects. So despite this expanding economy, if we are seeing a shrinkage of wealth in the middle class, and income inequality, those are so- cial, political, and economic trends that I do not think are sustain- able over time. They go to the fabric of the country. So are those trends continuing? And what policies can we adopt, both fiscal and monetary to change them? Mr. POWELL. Those are longer-term trends that I think are driv- en by important underlying factors, many of them global. So I think that—I would assume that the data will continue to move in 13 that direction. I think what they show is that incomes have been moving up across the income spectrum, particularly if you look at benefits and if you look at after-tax effect, it gets more even that way. But it has been a particularly good time to be at the top end of the income spectrum. I would point to two key problems I think we ought to address. One is low mobility. We actually have lower mobility from, say, the bottom quintile to the middle quintile or the top quintile than many other advanced economies. This is not our self-image as a country, and it is something we need to address. The other is just that the relative stagnation of those incomes in the middle and the low end, you know, we want, of course, pros- perity to be broadly shared, and it comes down to really education and training and things like that that enable people to do well in the modern economy, which is a globalized economy that is less about manufacturing—and the manufacturing jobs are more tech- nical than they were. So we need a workforce that can benefit from technology and globalization, and those are policies that the Fed does not have our hands on. Senator REED. No, you do not have those policies, but if we just sit back, those trends will continue and they will cause even fur- ther divergence between the vast majority of Americans and a very small group of Americans. So it is incumbent upon Congress and the Executive to start taking steps. Is that fair? Mr. POWELL. I think so. And I also think U.S. businesses get this very much now. If you talk to business leaders, they see the work- force and the need for, you know, widely shared—we want pros- perity to be as widely shared as possible. You hear that all the time from business leaders and certainly Government leaders as well. I do think it is an important national priority. Senator REED. Thank you. Just switching gears here, the Community Reinvestment Act is being massaged by both the Office of the Comptroller of the Cur- rency and the FDIC, and there have been some comments critical of their efforts, not just by, you know, affordable housing advocates but by some banking institutions, that they are not doing a proper cost-benefit analysis and that their proposal unintentionally could discourage revitalization of neighborhoods that really do need it most. Can you let us know what role you might play and how you can help get it right? Mr. POWELL. Sure. So, first of all, we are not going to comment on their proposal. And it is out for a proposal. I think all of us, in- cluding the FDIC and the OCC, are looking forward to seeing those comments and learning more. I think we do share the goal of modernizing CRA. Technology and demographics have really changed the delivery of banking services, particularly in rural areas, for example, but everywhere. So it is time to do that. That has not been done in 25 years. I think we agree on the goal, which is we want it to be more effective, and it would help that if it were transparent, more objective. So I think we share objectives with those agencies, and we worked closely with them for a long time to try to get completely on the same page. We developed our own approach, which was slightly different, a bit different, and we were not able to get together in the end. But 14 I think we should look at it as an ongoing process where we will continue to learn, and that is going to be our approach. Senator REED. Again, thank you, Mr. Chairman. And I will stress independence one last time. Chairman CRAPO. Senator Sasse. Senator SASSE. Thank you, Chairman. Chairman Powell, thanks for being here. We are grateful for your work. You have been consistently raising warning bells about what you have called ‘‘the greatest threat’’ to the financial system. You talk to many of us in private about cyberissues, and you said it yester- day over on the House side. I do not think it is breaking through. Can you summarize for us why you are awake at night worried about cyberattacks on our financial system? Mr. POWELL. Sure. So they kind of pay us to be awake at night worrying about things, and I would say that if you look at what happened in the financial crisis, we had a game plan there; we im- plemented it over the course of 10 years. I will not say that it is perfect or anything like that, but we have a plan that is meant to address those kinds of things. What is new in the threat environment is, you know, the ongoing level of cyberthreat and the increasing sophistication of it, and so that is what we—we spend a ton of time worrying about that, and, you know, the Treasury Department has really been taking the lead on that, and I think, you know, we have—so we are very fo- cused on it. We are focused on making sure that the financial insti- tutions that we supervise are doing the best that they can to stay at the state-of-the-art, good cyberhygiene. It turns out that a lot of these things are just people failing to implement updating their software and things like that. That is where a lot of breaches hap- pen. So, I mean, it is an intense focus by supervisors and by finan- cial institutions, also by nonfinancial institutions. Companies that are in, you know, all kinds of businesses are having this now. It is an enormous focus. We will never say that we have—it never feels like we have done enough, but it is just something we keep trying to get better and better at, lots of resources on it in all the agencies and all the companies. Senator SASSE. And if you would concretize for us, give us maybe two examples of a way that you think this attack could have, you know, spillover efforts. How do the dominoes work without giving somebody a template or road map? You have talked in private a few times about ways that this could cause bigger consequences than 2008 and 2009. How would that happen? Mr. POWELL. Without wanting to get too much into it, I would just say that confidence in the financial system is really important. The public has to have confidence in the financial system. And so a successful cyberattack on a payments utility, for example, would be challenging. We could address that. We could isolate it. We could fix it. But you would want to avoid somehow broader blows to confidence. Because when confidence weakens, people will take their money out. They will stop acting and things like that. Uncer- tainty and lack of confidence are the enemy of economic activity and growth. Senator SASSE. I think we need to also recognize that the many different conversations we have with the Chinese Government tend 15 to have a benign diplomatic flavor. I think we should underscore what has happened this week, with the Equifax hack having new headlines, so the 2017 hack of Equifax which compromised the per- sonal financial records of more than 30 percent, 35 percent of all Americans. The Justice Department earlier this week indicted four Chinese Communist Party officials affiliated with military intel- ligence in China. This is not an accident. This is the same Com- munist Party that hacked the OPM records and now has moved on to Equifax. Can you envision scenarios where the Chinese Community Party was hacking into the U.S. banking system? Mr. POWELL. Well, we need to be resilient against all cyberthreats, and certainly, you know, State actors are a big part of that. And so we are well aware of those. By the way, we have help from the intelligence agencies and others in the Government in keeping our eyes out for that. Senator SASSE. Shifting gears a little bit, the President’s budget came out this last weekend, and some of us are going to be in the Finance Committee later today discussing the larger budget. We tend to have headlines that focus on whatever the discretionary programs are that tend to be more hot button and current in the news. But you have talked consistently about health entitlements and its challenge to the—or maybe more broadly than health enti- tlements, the inefficiencies of our health care delivery system. For a developed Nation, we have very mediocre health outcomes, and we have ridiculously high price tags. Can you talk a little bit about the consequences of U.S. health on competitiveness, on our larger economy? Mr. POWELL. I would be happy to. Of course, I should start by saying that it is not really—we do not do fiscal policy, and we do not give you advice on fiscal policy. But since you ask, really, the budget—the biggest issue of our Federal budget is just its health care spending. And it is not that our benefits are too generous. It is that we deliver them in a way that is measured by the outcomes. The outcomes are perfectly average for a First World Nation, but we spend 6 or 7 percent of GDP more than other countries do. And so it is about the delivery, and that is a lot of money every year that you are effectively spending and getting nothing. And I have to leave it with you there. It is not for us or for me to prescribe, you know, fixes. But I think that really is what it is about. Those discretionary things, of course, are very high profile and they get a lot of reporting, but ultimately that is what is driving it. Again, I would stress it is not that these benefits are fabulously generous. They are just what people get in Western economies. But we deliver them at the cost of, you know, 17, 18 percent of GDP, and others do it at 11 percent of GDP. That is what we should be focusing on. Senator SASSE. Thank you, Chairman. Chairman CRAPO. Senator Tester. Senator TESTER. Well, thank you, Mr. Chairman and Ranking Member Brown, for having this hearing. And I want to thank you, Chairman Powell, for your work. I did not hear all of Senator Reed’s questions, but if it has to do with independence of the Fed, count me on that bloc, too. I think it is critically important you 16 maintain that independence and hang to it, and I applaud you on your efforts thus far. Both the Fed, through lower rates, and Congress, through in- creased spending, through increased debt, have been taking actions to boost the economy during a long stretch of growth. I am con- cerned that if we do approach a downturn—and there are a num- ber of indicators out there that are concerning to me—that our op- tions to address a downturn are limited. I want to hear your per- spective on what the Fed has, its ability to react to an economic downturn, the tools. Mr. POWELL. Thank you. So our traditional tool, of course, is in- terest rates, and low rates are not really a choice anymore. They are a fact of reality, and they are likely to remain. So we will have less room to cut. That means it is much more likely that we will have to turn to the tools that we used in the financial crisis when we hit the lower bound. Senator TESTER. Which is? Mr. POWELL. Which is forward guidance, which says that we will keep rates low, and then it is also large-scale asset purchases of longer-term securities to drive longer-term rates down and support the economy. We will use those tools. I believe we will use them aggressively should the need arise to do so. There is no need to do that now. But we will use those tools aggressively. The sense of the review that we are undertaking of our strategy, tools, and communications right now and which we think we will announce our conclusions on in midyear is that we are looking to make sure that in this low rate environment, difficult environment for central banks and for those who we work for, that we are using our tools as best we can, that we have explored every possible way to find, you know, every scrap of policy space, if you will, to be able to support the economy. And then, finally, I would just stress that it is important that fis- cal policy be in a position, as it always has been, to support the economy in a downturn as well. Senator TESTER. So let me ask you this: The debt is at $23 tril- lion right now? Is that about right? Something like that. Mr. POWELL. Yes. Senator TESTER. At what point in time do you get concerned? I mean, I think the budget the President just put out adds another $1 trillion to the debt. Mr. POWELL. It is very hard to say at what level you get con- cerned. I would say I would be concerned now. It is really the rate of increase. What we need to do is have the debt grow slower than the economy is growing. If the economy is growing faster than the debt, then effectively leverage is going down, so debt to GDP will not be—what is happening is debt to GDP is going up and going up fairly quickly as these things move. Other countries have man- aged to get to very high levels, much more than ours, but what it means is that 20 years from now we will be spending those tax dol- lars, our children will be spending those tax dollars on servicing the debt rather than on the things that they really need. We are sending them those bills. Senator TESTER. And the debt does not go down if the economy downturns? 17 Mr. POWELL. No, no, not at all. Quite the opposite. Senator TESTER. Exactly right. It becomes much bigger of an issue. Mr. POWELL. Yeah. Senator TESTER. I want to talk about housing because it is a big issue I think everywhere, rural America and urban America. From your position, what do you see the housing challenge and impact on individuals and the economy? Mr. POWELL. Housing is generally facing difficulties in afford- ability. The housing industry is doing better and building more houses and is profitable and housing starts are going up. But I think from the standpoint of the public, you have a squeeze going on which has to do with difficulty in getting lots; you know, there are just supply side constraints which are keeping the quantity of housing down, lack of skilled labor, regulations of various kinds. And so what you see many, many places, not just in big cities, you see housing affordability challenges, and it is a fairly wide-scale problem. Senator TESTER. And I just want to ask this really quickly, be- cause there has been a lot of debate for a number of years, much of it started by the Senator to my left, on GSE reform. Does GSE reform or lack of GSE reform have any impacts on the housing sit- uation? Mr. POWELL. I think in the long run it is very important that GSE reform happen, that we move forward with that. I think that is a big unfinished piece of business from the financial crisis. It is not really ideal to have the entire housing finance system riding on the Federal Government. In the long run, it would be better to move forward with something, I think. And I think in the long run that is a more sustainable basis for housing finance. Senator TESTER. Thank you for your work. I have some other questions on agriculture. I will put them in the record. Thank you very much for your service. Mr. POWELL. Thank you. Senator BROWN [presiding]. Senator Rounds. Senator ROUNDS. Thank you, Mr. Chairman. Mr. Chairman, first of all, welcome. And I just want to echo what some of my colleagues have said about the independence of the Fed, and I think on both sides of the aisle you will find strong sup- port for an independent Fed. I would like to begin by asking you about a rule that I recently filed a comment letter on, and that is the Fed’s building blocks ap- proach. As I mentioned in my letter, it does not seem to make sense for the Fed to resurrect the original Section 171 calculation from Dodd–Frank. I understand that this particular calculation un- intentionally imposed bank-centric capital rules on insurance sav- ings and loan holding companies, which have a totally different business model. Congress spoke very clearly through the passage of the Insurance Capital Standards Clarification Act that its intent was for banks to be regulated like banks and for insurance companies to be regu- lated like insurance companies. Given the clear intent of Congress, why has the Fed chosen to revisit Section 171? How does the Fed intend to move forward? 18 Mr. POWELL. Thank you for your comment. We got a number of comments on that issue, and we are looking at it. And, of course, we have looked at the law change, and the question we are asking is whether there is—you know, what is the nature of the change made in the law and does it apply here? So we will be reviewing those comments and, you know, considering them in getting to a view on that. Senator ROUNDS. As you know, one of the reasons for having these open discussions is to bring attention to it, and, in fact, I think it is a very serious issue, and I think it does need the full attention of the Fed, and hopefully you will get it resolved as quickly as possible to avoid any questions that may be lingering out there. Mr. POWELL. Will do. Senator ROUNDS. I would also like to talk a little bit about—Vice Chair Quarles recently remarked that business fixed investment continues to be weak, having declined over the course of 2019. Do you think it is fair to say that a large part of this is driven by un- certainty with regards to trade and that businesses are waiting to see how trade tensions are resolved before they are prepared to make further investments? Mr. POWELL. You know, I would say there are a bunch of factors that we need to look at. One is just the global growth slowdown, particularly in manufacturing. Another is lower oil prices. In the United States, a big swing factor in business fixed investment is drilling. Our work and that of many outside economists does sug- gest that there is also a role for trade policy, and uncertainty around trade policy. So, I mean, the short answer to your question would be yes, I do think there is upside there, to the extent busi- nesses see uncertainty around the trade situation as having de- clined. Senator ROUNDS. OK. Recently, I understand that there has been a discussion about groupthink and about how the Fed approaches it within the meetings. Do you think it is important for the Fed Board to reject groupthink and consider a variety of different view- points? Mr. POWELL. I do. In fact, I very much do. I am strongly inclined to think that you need to hear all sides of a case. In fact, when I was a private equity investor, I used to speak against my own deals just to force people to defend them, so I would, you know, really get a sense that I believe in things. So it is critical to have diverse perspectives. I really think we do, though, particularly through the—if you think about it, the Reserve Bank System guar- antees from an institutional standpoint that we will always have diverse perspectives on monetary policy. On regulation, you know, where we get it is from the comments and from the disparate group of people who are on the Board. If you look at who is on the Board, a number of us have primarily private sector backgrounds, and we bring that to the table. Senator ROUNDS. Pretty fair to say that you can have people from varying points of view that can have very lively discussions, and yet at the end of the day still be a part of a very strong team. 19 Mr. POWELL. Absolutely. I really think it just makes you strong- er. I do. I feel that way. And, of course, we have had plenty of dis- sent at the Fed over the years. Senator ROUNDS. Thank you. One last question. When the Board voted on its rule for tailoring resolutions plans last fall, Vice Chair Quarles gave a statement essentially saying that there is more that could be done when it comes to tailoring from a supervisory stand- point. Can you elaborate on how the Fed intends to move forward with this? Mr. POWELL. So Vice Chair Quarles, as I am sure you know, gave a speech on that and laid out really quite a number of aspects of that. You know, so we are going to be—these were ideas. They are not quite at the stage of being proposals yet, but we are going to be looking at those. Senator ROUNDS. How will they be manifest? Are they going to come out as a rulemaking? Or are they going to come out as guid- ance? Mr. POWELL. Some of it will be rulemaking; some of it will be guidance; some of it will be changes to guidance. If you look, there are many, many different ideas. I think the key thing is he high- lights the tension between, you know, the right to due process and clarity that we depend upon from our Government. Right? But also with supervision, there is also a role for discretion and for confiden- tiality. So I think it is a very thoughtful process of looking at that and asking how can we make it more transparent with more due process, but still effective because supervision has to be firm but fair. Senator ROUNDS. Thank you. Thank you, Mr. Chairman. Chairman CRAPO [presiding]. Thank you. Senator Warner. Senator WARNER. Thank you, Mr. Chairman. Chairman Powell, great to see you again. Thank you for your good work. I want to make a couple quick comments, echoing what Senator Rounds and Senator Reed and others have said. I think there are a lot of our institutions’ independence under assault these days. I share some of the concerns of Senator Brown about the independ- ence of the Justice Department. I fight on a regular basis to try to make sure the intelligence community can maintain their inde- pendence. I would ask and frankly plead with you that, if you see efforts made to undermine the Fed’s independence, you keep this Com- mittee fully abreast. I think the Fed’s independence is more impor- tant than ever at this point. I am going to also follow up on my good friend Senator Sasse’s comments about Equifax. I share with you the belief the challenge that China poses. But I also think, particularly in the case of Equifax and the credit rating agencies broadly, none of us choose to be an Equifax customer, or any credit rating agency. That break- in, that cyberattack was due to sloppy behavior by Equifax, and the fact that we have not put in place, frankly, any enhanced rules of liability around these credit reporting agencies is something I hope—I know I have talked with the Chairman at times—that we would come back to, because I think while we have to be on guard, 20 if we do not have at least de minimis standards and they can bake this kind of obscene break into the cost of business, I do not think that is good for anyone. And, again, I hope we are able to come back to that. I do have a bunch of questions for you as well, Chairman Powell. Yesterday in your testimony, you talked about this movement to- ward digital currency, something I am very interested in, and you indicated, you know, it is possible that there might be a United States-backed digital currency. We have the possibility of doing that. My question is: Would that be desirable? I get the component parts around it. A digital currency might provide convenience and potentially even lower friction costs in terms of credit to consumers. But how do we weigh in privacy and cyberconcerns? How would that deal with our retail banking system? And do you think the Fed has the capacity to do this without congressional approval? Go at it a little bit more, and then I have got one last question about China’s role in this space. But talk to me first about the domestic implications. Mr. POWELL. Sure. So you have listened the potential costs and benefits. The benefits would include, you know, perhaps greater fi- nancial inclusion, lower costs, more convenience, and all those things. Their risks or costs would include cyberrisk and fraud risk and privacy risk and things like that. So I think there is a lot to weigh and a lot to work on there. Every major central bank in the world right now is doing a deep dive on digital currencies, and we think it is our responsibility to be at the very forefront of knowledge and thinking about a central bank digital currency. Senator WARNER. Would you take a positive action on that with- out congressional input? Do you feel like you have that authority? Mr. POWELL. So it would depend a lot on the design choices. It is a good question, one that we are working on. I would say we are working very broadly, including working with other central banks around the world, on this. There is just a lot of thinking and ex- perimentation and understanding that we are gaining. And if there is a need for—if we conclude that we need more authority and that this is something appropriate to do, then we will ask for the au- thority. Senator WARNER. One of the things you mentioned yesterday— and I and Senator Sasse and a number of us who are on the Intel- ligence Committee are concerned about the rise of China in a series of areas. And I think it is clear that China may move quicker than us on a digital currency. You said you have got some visibility into what China might be doing on digital currency. I would love you to spell that out a little bit. Do you think they will use their influ- ence through kind of Belt and Road investment strategy and the number of countries that have kind of bought into that system, that they might be then, you know, also buying into that Chinese digital currency? What would that do in terms of cross-border? What would that do in terms of dollar supremacy? You know, any further guidance you might have on your insight into China’s ac- tions in this space would be helpful. Mr. POWELL. I would just say we have to assume that—what would that mean? We have to ask the question: What would it 21 mean if China had a digital currency that had fairly wide adoption, including to other countries? We have got to ask that. I think we have also got to ask what if a private sector entity, you know, a large company with a large network of users, has a digital cur- rency? So we are looking—— Senator WARNER. That has already popped out, and I think we have pretty bipartisan concerns on that one. Mr. POWELL. That is why we are doing all this work. We under- stand. I would say Libra was something that lit a bit of a fire. This is something—we have been focusing on digital currencies for, you know, a couple decades, but it has really lit a fire around the world right now, so we are doing a great deal of work. Senator WARNER. My time is up. I just want to say I would urge, having seen China’s ability to move aggressively in a series of other areas, that you start forging that coalition of the willing amongst other central banks sooner rather than later. Thank you, Mr. Chairman. Chairman CRAPO. Senator Perdue. Senator PERDUE. Thank you, Chair. Mr. Chairman, thank you for being here again. It is good to see you. I just have one quick question in light of the time. You know, we have two dynamics right now that are driving the economy in different directions potentially. Labor is now a limiting factor in terms of we have got roughly 7 million job openings and about 5 million people looking for work. So it a phenomenon right now that is a limiting factor. On the other hand, we have low energy costs. Since 2007, we have doubled our output of oil such that now we are a net exporter of oil and gas, the largest producer in the world. Eight percent of our economy is energy; 15 percent of our CapEx is going to that today. We produce 50 percent more barrels of oil a day than Saudi Arabia and about 18 percent of the world’s output. My question is: Are we in a low energy price environment? And what assumptions are you making then over the next decade? And what impact do you think that will have on inflation, deflation? I know you have talked about deflationary concerns in the past. Where are we today on that big factor in our economy—energy? Mr. POWELL. So it has been transformational. If you think back when we were in college, if energy spiked, inflation went up, people got out of work, there were long lines at the gas pump. We now have a very large domestic energy industry which amounts to a shock absorber. When that happens, U.S. drilling goes up with the price of oil. It puts people back to work. It controls prices. It con- trols inflation. So we are in a situation where that particular mechanic for infla- tion going up is just not happening anymore because the supply re- sponse from the U.S. industry is quick and large, so you will not see that having sustained effects on inflation, and also you will not see it having sustained negative effects on growth, because it kind of offsets, roughly offsets the effect of lower energy prices at the pump. That will slow the economy down a bit. But the new supply that comes on will put people to work. It will be different people, but overall, it is a very different and better place to be. 22 Senator PERDUE. Are you concerned about the workforce partici- pation rate? With the growth of jobs over the last 3 years, work- force participation recently has bumped up a little bit, but it really has not moved as much as one might have thought. Mr. POWELL. It is greatly a surprise to the upside, which is a great thing. But, remember, the prediction—basically, labor force, just because of demographics, participation should drop by about a quarter-of-a-percent a year. It has now been flat since 2013. We think there is more upside. So what is happening is labor is tight everywhere, but, actually, there is a supply response from the pub- lic, which is a very positive thing. We never thought we would see 63.4 percent labor force participation again. Nobody had that in their model 7 years ago. But that is what we have, and it is really a very positive thing. Senator PERDUE. Good. Thank you, Mr. Chairman. In light of time, Mr. Chair, thank you very much. I yield back. Chairman CRAPO. Thank you. Senator Schatz. Senator SCHATZ. Thank you, Mr. Chairman. Thank you, Chair- man Powell, for being here. First question: How does income inequality impact economic growth? There is a lot of talk on the policymaking side of the im- pact on families. How does it hit your analysis? And what can be done on your side of the shop? Mr. POWELL. Well, obviously people who are at the bottom end of the income spectrum whose incomes are not growing, their con- sumption will be constrained. You know, their consumption will be constrained, and their marginal propensity to consume out of new dollars will be high. To the extent gains are going to the people at the top, their marginal propensity to consume out of wealth will be low, so that it will not be hitting GDP; it will be going into savings. But those are effects that will show up quite gradually over time. Inequality is a gradually moving phenomenon. Senator SCHATZ. Talk to me about the relationship between pro- ductivity and unemployment. Is there a new relationship that is emerging? Is there any new thinking along those lines? Because I think the traditional analysis is as productivity goes up, that is ba- sically good for the economy; but it seems to me that at least the way people perceive it is that those two things are decoupled, that productivity goes up, that does not mean wages go up. And I am wondering whether that is a change or if that is sort of more of a political overlay to say, hey, look, things may look good but we are still on the bottom eating your scraps. I am wondering whether it is more than that and that there is actually a change in the way you analyze this. Mr. POWELL. Well, I think we are always learning. We are al- ways learning, and we have seen relatively low productivity in the wake of the financial crisis. And it appears to be persistent, and that is going to mean lower wages. Ultimately, you need rising productivity to create rising stand- ards of living. It just has to be that way. It does not mean in any given year you will see that. But you do see a pretty tight connec- tion between—if you add in benefits, not just wages, but look at the 23 full cost of employment, you see—I will not call it ‘‘tight,’’ but you see a connection between rising productivity and rising wages. Senator SCHATZ. I guess the question is they are no less cor- related than they used to be? Mr. POWELL. I would not say that, no. I would say, if you look at the moment, if you think of wages as being right around 3 per- cent, productivity growth has been low, has just recently moved up. It recently moved up close to 2 percent. And inflation is 2 percent. Senator SCHATZ. The other thing I would add is that if you are doing total compensation, if most of the increase in total comp is just that the employer absorbed a 7-percent increase in health care costs, you know, that is not really an increase in wages in the tra- ditional sense. I get that from the employer’s standpoint it sure feels like an increase in wages. But if you are trying to maximize compensation, it means nothing to a regular person who says, ‘‘OK, I have got no more money, but it cost my employer more, so I should be happy about that.’’ Let me just move on to climate. I have a couple of questions. What is the Fed doing in regard to climate-related financial disclo- sures? I know you are making some progress. I would like you to talk about that. Mr. POWELL. I think, like others, other central banks, we are at the beginning of the process of understanding how climate change affects our work. I think one way we know that it will affect our work is that the public will count on us to make sure that financial institutions that we regulate—central counterparties, banks, things like that—will be robust to the risks that come from climate change. And we are at, as I said, the beginning of understanding exactly what all that means. In terms of disclosure, you know, it is more really an FDIC issue. They are the ones who regulate appropriate disclosure, and I think they have been doing some work on this lately. Senator SCHATZ. You had an exchange with a Member of the House, I think it was yesterday, and the question was whether we ought to be stress-testing for climate risks, and you said you are watching the Bank of England. I am wondering if you can elabo- rate on that. Mr. POWELL. So they are doing stress tests which are not at all connected to CCAR, what would be the CCAR process, which is the one that relates to the amount of dividends, distributions that a company can have. This is more just exploratory. They are explor- atory scenarios, and we are very closely monitoring that. You know, we have good relationships with all the major central banks, especially the Bank of England and others. So we will be looking at that, and it is something we will be thinking about. We have not made any decisions, but as I said, these are early days. We are ac- tually doing, you know, a fair amount of work all through the Fed- eral Reserve System on understanding this emerging risk. Senator SCHATZ. Thank you. Senator KENNEDY. Mr. Chairman, thanks for being here. I think you are doing a great job. Senator BROWN [presiding]. Senator Kennedy. Mr. POWELL. Thank you. Senator KENNEDY. Thank you, Mr. Chairman. 24 Our labor force participation rate is much better, but compared to other OECD countries, we lag. Why? Mr. POWELL. That is a great question. So it is a combination of things, no doubt. It is that educational attainment in the United States, which was once the highest, has really fallen relative to our peers, and particularly among lower- and middle-income people, the level of educational attainment has really plateaued. Senator KENNEDY. Right. Mr. POWELL. And that is the key thing for keeping in the labor market—— Senator KENNEDY. What else? Mr. POWELL. That is one. I would say the opioid crisis is not helping. I would say, you know, if you think about it, both globalization and technology probably advantage people of rel- atively high education and do not advantage people, for example, in manufacturing. So if you think about what has happened to the manufacturing base in many, many countries, a lot of those jobs have either been automated or moved abroad. The manufacturing that we have now is very efficient and does not use as many peo- ple. Senator KENNEDY. What else? Has trade played an impact? Mr. POWELL. Sorry? Senator KENNEDY. Trade tariffs. Mr. POWELL. Well, I would say trade tariffs—well, through this period, we really have had declining tariffs since World War II until lately here. Senator KENNEDY. Right. Mr. POWELL. And we have had increasing labor force participa- tion here because of the underlying strength—— Senator KENNEDY. Does the richness of our social programs play a part? Mr. POWELL. It is very hard to make that connection, and I will tell you why. If you look in real terms, adjusted for inflation, at the benefits that people get, they have actually declined. During this period of declining labor force participation, they have not gone up in real terms. So it is not better or more comfortable to be poor and on public benefits now. It is actually worse than it was. Senator KENNEDY. All right. It seems to me—and there is going to be a question in here, I promise. I know sometimes you never get one. Mr. POWELL. That is OK. Senator KENNEDY. It seems to me that any fair-minded person would have to conclude that our economy is better. I am biased, of course, but I think the Tax Cuts and Jobs Act worked. And we have seen wage increases, including, but not limited to, the bottom quartile. And we have seen unemployment go down. But we still have a problem in America, and a lot of anger, and I think the root—this is one person’s opinion, but the root of a lot of that anger is that we still have too many people in this country who are not participating in the great wealth of this country, not economically, not socially, not culturally. I think Sanders supporters and Trump supporters have more in common than they realize. The American Dream has become the 25 American Game to them, and they think it is fixed. Now, the man- agerial elite is doing fine, but I am talking about ordinary people. What, if any, role do you think the Fed should play in helping us address that? Mr. POWELL. First of all, I think there is a lot in what you said. The single most important thing we can do is take seriously your order to us to achieve maximum employment. ‘‘Maximum employ- ment,’’ that is what the law says. And that is what we are doing. We are using our tools to keep an eye on maximum employment, and I think there is no reason why the current situation of low un- employment, rising wages, high job creation, there is no reason why that cannot go on. There really is not. There is nothing about this economy that is out of kilter or imbalanced. That is the main thing that we can do. We do other things that are in the nature of convening. You know, we do a lot of research in your State and others. The Federal Reserve Bank will have an operation where they are trying to con- vene resources around issues of education and poverty and things like that in poor communities. We do not have the ability to spend money on it. We get community people around a table and try to organize things that help the community, as I am sure you know. So it is not really something we can do a lot about other than research and do our jobs on monetary policy. Senator BROWN. Thank you, Senator Kennedy. Senator Cortez Masto. Senator KENNEDY. If I could have another 10 seconds, Mr. Chair- man? I was distracted because you were talking. Stay independent. I think you are doing a great job, and all of us in politics are going to give you plenty of advice. But call them like you see them. Thank you. Senator BROWN. Senator Cortez Masto. Senator CORTEZ MASTO. Thank you, Chairman Powell. It is great to see you again. Thank you so much for being here and always being responsive. Let me follow up on this line of discussion of maximum employ- ment, and I so appreciate the conversation. You keep talking about a level of educational attainment that is so important. What do you define as that education? When you talk about that, what does that mean? Mr. POWELL. Anything that gives you skills that would work in the workplace. That could include internships; that could include the kind of training that people are getting now who go right out of high school into a program. It is not meant to be limited to, you know, college as such or, you know, getting a liberal arts degree. It is really the acquisition of skills in society. Senator CORTEZ MASTO. So do you think we have changed in so- ciety, that it is very difficult now to just graduate from high school and get a job that pays a decent wage for your family without get- ting some sort of additional education? Mr. POWELL. Yes, it is. I think you see that very much. For peo- ple with high school degrees, their incomes have stagnated badly for a long time. What happens with technological change is that it wants higher and higher levels of skill, and if society provides 26 those people and those skills, then incomes can go up across the board and inequality can go down. That was the American story for a long, long time. Senator CORTEZ MASTO. Sure, but isn’t part of that—and this is why I am curious your thoughts on this. Part of that also has to do with the wages and the increase in wages and the level of wage that you are paying. Are you saying just because you graduate from high school and you want that job, whatever that job is that you are able to do, it should be a minimum level of wage and should never increase, even with the gains in productivity that we have seen over the years? Mr. POWELL. No, I am not saying that at all. Senator CORTEZ MASTO. OK, good, because I agree with you. Be- cause I think there are also people in this country—and I so am pleased with the high unemployment rate, but I also think—and they live in my State—that are working two jobs. They are actually working two jobs because the wages are so low. And I think there is a disparity that we have to do a better job of understanding. I was looking through the Monetary Report that you gave, and I am curious. Do you identify—because I did not see it here, but do you identify those individuals who are actually working two jobs? Mr. POWELL. Those are identified in the data collected by the Bu- reau of Labor Statistics, yes, and—— Senator CORTEZ MASTO. And that is what you utilize here? And is that data that you can provide that gives us a better under- standing—— Mr. POWELL. Sure. Senator CORTEZ MASTO. ——of how many Americans across this country are actually working two jobs just to make ends meet? Mr. POWELL. Very high level right now. Senator CORTEZ MASTO. Yeah, and that is what I would like to see. I think that would be helpful—— Mr. POWELL. We can share that with you. Senator CORTEZ MASTO. ——for us as we work with you moving forward. Just one final question because I know the votes have been called. You note in your opening remarks that there are troubling labor market disparities across racial and ethnic groups and across regions of the country. Can you go into more specifics with that statement? Mr. POWELL. Sure, and we actually had a box in our Monetary Policy Report I think a year ago about rural and urban disparities, which are just getting wider and wider and wider, and it talked about, you know, what might be causing that. You really have a long-term trend here that is challenging for people in rural areas. In terms of racial and ethnic disparities, the African American unemployment rate is roughly twice that of the overall unemploy- ment rate, and, you know, you see different groups. So it is trou- bling that these things would persist in this way. We do not have the ability to operate directly on that other than, again, by carrying out our mandate of maximum employment and stable prices. Senator CORTEZ MASTO. But as you study it, what are you find- ing? Why is there that disparity? What can you point to? 27 Mr. POWELL. Which disparity? Senator CORTEZ MASTO. The racial disparity that you just talked about. Mr. POWELL. You know, I think it is tied into history, to our his- tory, and there are higher levels of poverty in the African American community, as you know, and that is because of our history. But we would like to see those gaps declining more than they are. Senator CORTEZ MASTO. OK. Mr. POWELL. Those are not tools that we have. Tools that you have to do that. Senator CORTEZ MASTO. But there is nothing—and what I am looking for is the data. There is no data or no data points that you are collecting that helps us identify that racial disparity, why it is occurring and how we can address it? Mr. POWELL. Oh, there is lots and lots of research on that. We would be happy to—— Senator CORTEZ MASTO. That you have? That you have access to? Mr. POWELL. Sure. Senator CORTEZ MASTO. Perfect. That is what I am looking for. Mr. POWELL. OK. Senator CORTEZ MASTO. Thank you. Senator SCOTT [presiding]. Senator Tillis. Senator TILLIS. Thank you. Chair Powell, welcome back. Thank you for a lot of the good work you are doing over in your lane. I do have a couple of questions. The first one that I want to talk about, we have seen particularly in the FDIC, a real stepped-up ef- fort to take a look at guidance and other actions short of an APA promulgated rule to rethink and revise or rescind. Can you give me an idea of how that is going on in the Fed? Mr. POWELL. Sure. So, you know, we have forthrightly said that guidance is not a rule; guidance is not binding; it is not the basis for enforcement actions and things like that. And we have made that very clear to our supervisors. So I think we are—you may have seen Vice Chair Quarles’ speech where he addressed some of these issues, so we are working on that as well. Senator TILLIS. If we drill down, I know you are aware of the GAO ruling on LISCC. There is a lot of talk here, I happen to agree with the discussion, that you all need to remain independent, but there is something that concerns me that came out after you re- ceived the word from the GAO or OMB, and it relates back to, I think, a letter your general counsel wrote back in June of last year, which I have it in front of me now. It says that you are continuing to assess the scope of the Federal Reserve’s obligation to send su- pervisory guidance documents to Congress under the CRA. Does that mean you are exempt from that oversight? Mr. POWELL. So the question is whether we are required to send guidance. We do send some guidance up, and, again, this is another one that Vice Chair Quarles—— Senator TILLIS. So what is the current position on the LISCC consultation from the GAO? Is it taking LISCC down? Mr. POWELL. On LISCC, no, what we are going to do with LISCC is we are going to, I think, articulate clear standards for what firms should be in LISCC. In fact, Vice Chair Quarles has already laid out an approach which I think makes a lot of sense, which is 28 LISCC should be for the U.S. G–SIBs, and really try to tie the whole approach more to the tailoring categories that we set up. Senator TILLIS. Now to the other, CRA, the Community Reinvest- ment Act. I have one question. Rumors swirl around this building probably the way they do in the Fed and the whole of Government. So the question that I have relates to the Fed’s plans for either joining with the FDIC and the OCC on the rulemaking. Some have said that you have provided an assurance to Waters that, without Governor Brainard’s support, you would not join into that. Is that just a rumor or an assurance you have given Chair Waters? Mr. POWELL. That is not how we are looking at it. What we are doing is we are trying to develop—we developed our own thinking on CRA reform, as did the OCC. They took a lot of our ideas, but in the end we were not able to get on the same page. And I am very comfortable with where we are now. Senator TILLIS. What would be the rational basis for two stand- ards? Mr. POWELL. There are going to be two standards, anyway. Under the FDIC/OCC proposal, about 70 percent of their institu- tions will be able to opt out of that standard. So there is going to be the existing standard, and then there will be the new standard, assuming that they go forward with it. So there will be two sys- tems, and if we do not do anything, then we will just be like the 70 percent of the institutions that they supervise. Senator TILLIS. Is Vice Chair Quarles on point for this? Mr. POWELL. Is he on point for this? He is—— Senator TILLIS. Wouldn’t the Community Reinvestment Act be within his lane? Mr. POWELL. It is certainly broadly within all of our lanes on the Board. We will all have to vote on this. This actually has always been handled by a different group, which is DCCA, which Governor Brainard chaired, and I asked her to take the lead on this. But, ul- timately, it comes down—I am very comfortable with where we are on this. Senator TILLIS. Thank you. I was going to ask some questions similar to Senator Toomey’s—I will not—on FedNow. But I am going to submit some questions for the record that are just basi- cally about the mechanics of the FedNow implementation, five straightforward questions. Thank you. Senator SCOTT. Thank you, Senator Tillis. Senator Jones. Senator JONES. Thank you, Mr. Chairman. Chairman Powell, thank you for being here. Let me echo other colleagues on both sides of the aisle regarding the independence of the Fed. I concur that it is extremely important that we maintain that independence. I want to ask you a little bit about home ownership. It kind of follows up a little bit with what Senator Kennedy was talking about, wealth gaps between so many Americans. It seems that na- tionwide home ownership is relatively stable, but there are also massive disparities in home ownership by age, race, and ethnicity. The African American home ownership rate fell to a 50-year low in 29 2016 at just 41.7 percent. It remains about 30 points below white home ownership. Similarly, the Hispanic home ownership rate is just 48 percent. Again, far below the white or average home ownership rate. Millennials are less likely to own a home by age 34 than their parents and grandparents, and I am concerned that if trends con- tinue—and by that I mean to some extent we have got relatively— wages are rising, but they have not been rising as fast as we would like. Home ownership costs are increasing at a greater rate. So I am concerned that if these trends continue, a growing number of Americans are just going to get locked out of home ownership. So my question: What are the economic consequences in terms of both wealth building for minorities and the broader economy of leaving the disparity in the realm of home ownership unaddressed? And do you have suggestions of how we in Congress or the Fed can address home ownership? Mr. POWELL. Let me say first I would agree with you that there are pressures on affordability which are very widespread that have to do with difficulty in getting land zoned and difficulty in acquir- ing workers and just costs, regulatory costs, material costs, that are really putting pressure on house prices, upward pressure. And it is, as I said, quite widespread around the country. You know, in terms of the level of home ownership, I think we do not want to be back in a situation where we push the idea of home ownership past what is financially sustainable for people. We kind of did that in the precrisis era. So what has happened is that credit is much less available now for people without spotless credit records, and that is a lot of what is behind some of the data you cited. And I think it is a good question. Did we move too far? I do not have a view that we did, but I think it is a good question to be asking on that, making sure that people who should have access to credit and can handle borrowing of that size get it. Senator JONES. I know Senator Cortez Masto was asking—I would like to get some of that same information, by the way, about the racial disparities because I assume there is some connection with that in economics as well. Let me, in the short time I have got left, go back to the lower rate of labor force participation. How can we just encourage that? How can we get more participation and get those numbers up? What can we do, what can you do, if anything, to try to get more folks in that participation in the market? Mr. POWELL. So what we can do is continue to use our tool to support a strong labor market, and it is very good to see those par- ticipation rates rising to the levels that people did not—I mean, economists did not think we would see those levels again, and we are seeing them, which is a really positive thing. But, you know, longer term, that is not really a strategy. We need policies that will—ultimately, people have to have skills and aptitudes that will keep them in the labor force and ways that they can take part in the labor force. And I think that is where other Government policies come into effect. You know, it is a lot of edu- cation and training and also policies that will support attachment to the labor force. You know, we would be happy to sit down with you and talk about that, but that is important. Other countries 30 that have leapfrogged us do more of those kinds of things and also have had more rising educational attainment, which I think all of those things will help. Senator JONES. Great. Well, thank you for that, and I look for- ward to the discussion about that a little bit. Thank you, Mr. Chairman. I yield back. Chairman CRAPO [presiding]. Thank you. Senator McSally. Senator MCSALLY. Thank you, Mr. Chairman. Chairman Powell, on February 2nd, the American Banker pub- lished an article that was titled, ‘‘When a Small Town Loses Its Only Bank’’. The article mentions Duncan, Arizona, which had only one bank and recently closed its doors. The residents of Duncan are now forced to drive approximately 40 miles to conduct any banking. Local businesses no longer have a place to make daily deposits or get change, and any customer service issues require driving long distances. The article states that, ‘‘The economic implications are enough of a concern that the Federal Reserve has been studying what hap- pens in areas where residents no longer have access to a local branch.’’ So my first question is: What has the Fed learned in that study? And why do you think this is happening? It is not just happening in Duncan, Arizona, but really across rural Arizona and rural America. Mr. POWELL. So we published the study, as you mentioned. We had meetings all around the country and did research, and I think we did find that the loss of a branch, particularly in these rural communities, can be a serious blow. It is the availability of finan- cial services, but it is also that a bank is an important civic citizen and contributes in many ways to that town. Actually, I think Duncan—I think we had an event in Duncan. I think that was one of our events, now that I think of it. So we learned that, and you see it happening—bank branches are going down in—have been reduced in a number of jurisdictions, but you see it more in rural—— Senator MCSALLY. Right. Mr. POWELL. And, also, the people who are in rural areas are more likely to—more inclined to use a bank branch rather than electronic banking—— Senator MCSALLY. Exactly. Mr. POWELL. ——so the effects are really significant. So we saw that, and it is quote a negative effect. Senator MCSALLY. You know, these are banking deserts. How does the Fed define a ‘‘banking desert’’? Is it just about geographic distance needing to travel or the number of customers or any other economic statistics for this? And you are absolutely right. More people in urban areas may be using online banking. Rural areas have two challenges: one is they are possibly less inclined to do that, that is not part of the culture; but also we have connectivity challenges without rural broadband. So those two things further hurt rural communities. So how do you guys define ‘‘banking deserts’’? And what else can be done to address this issue? 31 Mr. POWELL. There is no accepted definition, but I think it is one of those things where you know it when you see it. So it is a place where people do not have access to basic banking services. Duncan would be a classic example. The fact that you would have to drive 40 miles to get there, that is a banking desert. It turns out that many of these banking deserts are actually in the high desert, by the way, so that is another indicator. Senator MCSALLY. Go figure. Mr. POWELL. But it is a real issue in rural America, principally. Senator MCSALLY. Do you have any ideas within your role and our role on how we can address this issue? Mr. POWELL. So, you know, we cannot be in the business ulti- mately of telling banks that, you know, they cannot close branches. Senator MCSALLY. Right. Mr. POWELL. But we can find incentives for them to support rural areas, and CRA reform may be one vehicle for that where we can move—and this is a constructive aspect of the other agencies’ proposal, is moving to support more activity of a CRA nature in rural areas. So that is one idea. It is challenging, though. As you know, for quite a while now, people have been leaving rural areas and moving to the cities, so these are longer-term demographic pressures. Senator MCSALLY. Great. I appreciate it. I look forward to maybe following up with you to talk more about this issue. Mr. POWELL. Glad to do it. Senator MCSALLY. Thanks. I also want to touch on the labor force participation and wage growth issue. I know many Members have already asked you about it, but it is really great to see so many Americans and Arizonans coming off the sidelines and get- ting back into the workforce, and we are starting to see, you know, wages go up as well, especially for the lower levels of the economic spectrum. Can you just touch on a little bit more the dynamics that you are seeing, the positive nature of that, and, you know, where you are seeing people coming off the sidelines and how wage increases are impacting? Mr. POWELL. Sure. So it is a combination of people just not leav- ing as much and people actually coming back in. As you may have seen, unusually, at this point, most of the people who are newly employed do not come out of unemployment. They come from out of the labor force. So we break down everybody into different cat- egories. The biggest flow I think by far now is from out of the labor force to employment, which is clearly a sign of relatively low unem- ployment. There are just fewer people that are unemployed, but also just that there are people who are outside the labor force who are having job opportunities. So that is very positive. The thing is we did not expect this. It is very positive, and we just want to do whatever we can to continue to foster this trend, because, you know, there is nothing like a job to get people’s lives right and get them on a good track, so it is very good to see this, and we are using our tools to make sure that we can foster that. Senator MCSALLY. Great. Thank you. I am out of time. Thank you, Mr. Chairman. Chairman CRAPO. Senator Van Hollen. 32 Senator VAN HOLLEN. Thank you, Mr. Chairman. And thank you, Chairman Powell, and like my colleagues, I want to thank you for your accessibility, and I always appreciate the opportunity to have a fact-based conversation here. Before I get to some of my questions, I just want to thank you and the Fed for moving ahead on the FedNow system. I think it will save millions of Americans billions of dollars when it is imple- mented. Now, we passed a huge tax cut back in December of 2017. It dra- matically increased the annual deficits and the long-term debt. And at that time, in December 2017, here is what President Trump tweeted out. He said that his tax cuts were going to rock the econ- omy to growth rates of 4 percent, 5 percent, and maybe even 6 per- cent. Mr. Chairman, the economy has not gotten anywhere near 6 per- cent growth in the last 3 years, has it? Mr. POWELL. No. We have had continued moderate growth of a little better than 2 percent. Senator VAN HOLLEN. Right, and we have not had growth at 5 percent or 4 percent, and, in fact, the Trump administration has not ever hit 3 percent annual growth, has it? Mr. POWELL. So 2018 was marked at 3 percent, but then got marked down actually to 21⁄ 2 percent. You never know. Maybe it will get—— Senator VAN HOLLEN. But we are having a reality-based con- versation, so the answer is no, right? It has not hit 3 percent; is that right? Mr. POWELL. According to the current statistics. Senator VAN HOLLEN. Yeah. And if you look at the budget that was just submitted by the Trump administration, they are pre- dicting 2.8 percent growth for the coming year—again, very far from what President Trump was talking about, 4, 5, 6 percent. But even at that number, 2.8 percent, that is higher than the most opti- mistic projections for the 2020 GDP from the 17 FOMC members, right? Mr. POWELL. We do not have, you know, a unified forecast. We do not adopt or vote on a forecast. But we do show a dot plot—of disclose data—and I think the median forecast would be in the low 2s for FOMC participants for this year. Senator VAN HOLLEN. Yeah, if I look at the median forecast, it is actually 2 percent, and the most optimistic bullish was 2.3 per- cent, still a full half percent of GDP below the President’s projec- tions. So let me now turn not from the aggregate numbers but to the real wages, because there has been a lot of hype lately, but I want to get a sense of where people really are. And, obviously, it is good news that the unemployment numbers have continued to come down on the trajectory they were following when President Trump was sworn in. But if you actually look at real compensation—and I recall from an earlier hearing your view is that the Employment Cost Index, ECI, is probably the best measure of compensation. Is that right? Mr. POWELL. In a sense it is. They all have their little virtues, though. 33 Senator VAN HOLLEN. I just was looking at the numbers, and compensation grew by an average of 0.94 percent per year during President Obama’s second term, and that compares to 0.63 percent per year. This is in inflation-adjusted terms, 0.63 percent growth in compensation under President Trump. So, in fact, the real com- pensation that workers are getting in the workforce was actually higher during Obama’s last term compared to now. Is this a reflection of how difficult it has been to actually trans- late overall economic growth into higher real wages for Americans? Mr. POWELL. Yes, it is. I mean, part of that really is that infla- tion has moved back up a little bit, which is something we have been actually trying to accomplish. But I think more broadly, though, wages have moved up from about 2 percent to about 3 per- cent now, and if you look at other expansions, even adjusting for productivity, you would have expected them to move higher than that. So it is a bit of a surprise that we have not seen real unit labor costs move up, which is to say that people are getting paid more than productivity and inflation in what should be a tight labor market but is not showing up as tight in wages. Senator VAN HOLLEN. Exactly. And you say inflation went up, and that was the intention, but, of course, when it comes to real purchasing power for Americans, that is what they care about, whether their wages are able to make purchases. We do not have time to get into it, but the budget did just come up here. The Chairman of the Senate Budget Committee has an- nounced he does not want to have a hearing on the budget. I hope he will change his mind. But a lot of the cuts that were made there include cuts to student loan opportunities and some of the things that you mentioned that actually could lead to higher productivity in the economy. So I will follow up with some written questions on that. Senator VAN HOLLEN. Thank you. Mr. POWELL. Thank you. Chairman CRAPO. Thank you. Senator Cotton. Senator COTTON. Thank you, Mr. Chairman, for joining us again. I want to speak today about the coronavirus and its potential im- pact on the U.S. and the global economy. Yesterday Senator Menendez and I and a couple other Senators introduced a resolu- tion honoring Dr. Li Wenliang, a Chinese doctor who died last week of coronavirus. What makes him unusually notable among the now more than 1,000 victims of the coronavirus is he was one of the first persons to blow the whistle on the Wuhan coronavirus in early December. He was silenced by the Chinese Communist Party. In fact, he was summoned in the dark of night and forced to sign a statement denouncing his warnings. And, unfortunately, he contracted it and died, leaving behind, as I understand, a wife, a small child, and another child on the way. Another example of these kind of practices I want to cite is the Chinese lawyer and journalist Chen Quishi. He was known for re- porting on the conditions in Wuhan. He has since disappeared. I raise these examples, and I could multiply them at great length, as just simple illustration of Chinese dishonesty and lack of transparency in trying to handle the effects of this outbreak. Ob- 34 viously, that has a most important impact on our ability to under- stand the virus and develop effective tests and a vaccine for it. But what kind of effects does it have on you and the Fed’s ability to try to understand the economic impact of it, dealing with such untransparent conditions coming out of Beijing, as you get a grasp of what the possible impact could be for China, for the United States, and for the global economy? Mr. POWELL. So as you point out, the real question for the Fed is: What is the likely effect on the U.S. economy? And I think we will begin to see it in economic data coming out fairly soon, and we do not—it is too uncertain to even speculate about what the level of that will be and whether it will be persistent or whether it will lead to a material change in the outlook. But we do expect that there will be some effects, and the effects should be substan- tial in China, important but maybe less substantial in their imme- diate trading partners. And we will know—we will be looking at the economic data, and I cannot really comment on the other kinds of data. We look at that, too, of course, carefully. Senator COTTON. And, of course, I would not expect that from the Federal Reserve. We get that from HHS and CDC and other agen- cies like that. Are Chinese economic or central bank officials in con- tact with the Federal Reserve or their other counterparts around the world to try to help you and your counterparts understand that economic impact, though, recognizing the dishonesty and lack of transparency of health officials and political leaders? Mr. POWELL. I am absolutely sure that will be the case. You know, there have been some conversations, but I think it is too early to say. I think no one really knows. I think their focus now— the big focus there is containing the outbreak. And, of course, the central bank and the Government itself, the rest of the Govern- ment, have been undertaking lots of measures to support economic activity. I think certainly as they know more, we will know that, too. We, of course, have that kind of a relationship with their central bank. Senator COTTON. OK. I want to commend the Trump administra- tion for taking decisive action a couple weeks ago to stop travel from China and the other steps they have done in terms of contact tracing and trying to get testing kits out to the front lines. Right now, as of this morning, I think we only have 13 confirmed cases in the United States. I think we can be confident there is more than that, but hopefully there will not be many more. If that re- mains the case, if there is not a widespread outbreak in the United States because of the actions the U.S. Government took, is the main economic risk to the United States the fragility of supply chains that originate in China? And what happens at the very be- ginning of those chains in factories which may not have any or suf- ficient workers? Mr. POWELL. You are right, supply chains is an important issue. We do get a lot of—we import a lot of sort of intermediate goods from China and final goods, too, and that will be an issue. It will also be—our own exports there, of course, will be suppressed dur- ing this period. We will not get as much Chinese tourism. And then the other channel I would mention is just financial markets, which 35 can create their own transmission into the economy to the extent there are really strong reactions in financial markets. So we will be looking at all of that, and, again, we do expect to start to pick it up relatively soon. Senator COTTON. OK. Thank you, Mr. Chairman. Of course, far and away the top priority of our Government must be the health and safety of our people, but we do not want to lose sight of the potential economic harm to our people’s well-being and prosperity, so I appreciate your attention to this important matter. Chairman CRAPO. Senator Menendez. Senator MENENDEZ. Thank you. Thank you, Chairman Powell, for your service. Let me ask you something. The Northeast Corridor where I come from—New Jersey, New York, that region—generates about 20 per- cent of GDP for the entire Nation. If we had a major infrastructure failure, for example, the closing of one or both of the Trans-Hudson tunnels into New York City, the end of the Portal Bridge, which is the linchpin that takes Boston to Washington throughout the Northeast Corridor, would that not create a significant economic risk? Mr. POWELL. If it were sustained, yes. If you are talking about a sustained closing, that could. Things happen and then we fix them, and they do not show up much in GDP. But if they are sus- tained, then yes. Senator MENENDEZ. Well, let me just share with you something I would like to bring to your attention as you look at these issues. Amtrak estimates that a shutdown of the Northeast Corridor for a single day—for a single day, talk about sustained issues—would cost our economy $100 million. Again, that is just in 1 day. So if we cannot get this infrastructure to ultimately be sustained—and we saw from Superstorm Sandy tremendous damage to the Trans- Hudson tunnel. They are both a century old. We have a century- plus bridge that does not close correctly, that stops the entire traf- fic across the Northeast Corridor, so every lawyer, every medical patient, every business that does intercity rail travel across from Boston to Washington get stopped and loses time, and if it cannot be closed successfully, they take sledgehammers to close it. That has a significant economic impact. And I would urge the Fed to look at that as a question about our infrastructure needs. That is why I am so frustrated by the Administration not seeing the importance of what we call the ‘‘Gateway Project’’, two new Trans-Hudson tunnels, the rebuilding of the 109-year-old Portal Bridge. We just got some good news on that, but overall, this is a project of national significance in a region of the country that gen- erates 20 percent of GDP for which intercity rail traffic is incred- ibly important. Let me turn to the Community Reinvestment Act, which I think is an essential tool as one of the minority Members on this Com- mittee and in the Senate against discrimination, about curbing red- lining, meeting the needs of low- and moderate-income families. However, instead of strengthening this important civil rights law, the OCC and the FDIC released a proposed rule that relies heavily on a dollar ratio metric for measuring all of the banks’ CRA activi- ties and gives little value to community input. 36 Mr. Chairman, why is it important for an updated CRA rule to focus on loan count rather than on dollar value of a loan? Mr. POWELL. In our thinking, loan counts are important because they go to the very purpose of the statute, which is to assure the provision of credit to low- and moderate-income individuals and to their communities. So we think that loan counts are an important aspect of that, in fact. Senator MENENDEZ. Do you agree with Governor Brainard that focusing on loan value, as the updated OCC and FDIC proposal does, ‘‘runs the risk of encouraging some institutions to meet expec- tations primarily through a few large community development loans or investments rather than meeting local needs’’? Mr. POWELL. I think it is a risk, and, you know, really, as you know, we worked to try to get aligned, fully aligned with that pro- posal. We were not able to get there. They were not able to get to our proposal either. So we are going to be looking to see the com- ments on all those provisions which will be coming in. We will be carefully looking at those as we think about our path forward. Senator MENENDEZ. So when you say that, did you, the Reserve, share its concerns about emphasizing metrics that place too much value on loan volumes and not on the community input? Mr. POWELL. Yes, we shared all of our work, and we tried to— and they took many of our ideas, by the way. They incorporated a lot of our ideas. So—— Senator MENENDEZ. They did. Mr. POWELL. Yes, they did. But we were not able—— Senator MENENDEZ. Will you send us what particular items were incorporated that you shared with them? Mr. POWELL. Sure, and Comptroller Otting has identified many of them in his testimony in the House a couple weeks ago as ideas that they had incorporated from our work. Senator MENENDEZ. But the key concern seems to have been ig- nored, in particular, the one that—— Mr. POWELL. So I think their proposal looks at both counts and dollars, but there are a number of differences, and—— Senator MENENDEZ. So a final question. Have either you or Gov- ernor Brainard taken the CRA proposal to the Federal Reserve Board yet? Mr. POWELL. No, we have not. Really, our focus was on trying to get aligned around one proposal with the OCC and the FDIC, and now we see ourselves as waiting to learn more from that proc- ess. Senator MENENDEZ. Well, for those communities of color, this is critically important, and I hope the Fed will show leadership in this regard and make sure that the community participation con- tinues to be a hallmark of what the CRA is all about. Chairman CRAPO. Thank you, and that concludes the questions, although I am going to come back and ask one quick question that was not on my list to start with. You have been asked a lot, Mr. Chairman, today about wages, and I just want to verify a statistic with you that I am familiar with. My understanding is that wage growth was 3.1 percent last year. Mr. POWELL. That is average hourly earnings for the 12 months ended December 31. 37 Chairman CRAPO. And did that make 18 straight months that the wage rate was above 3 percent, the wage growth rate? Mr. POWELL. I would have to check that. It certainly—it takes you back—you really are not looking at each month. You are look- ing at it over the last—the level is 3.1 percent higher. We could fact-check it. That sounds right, though. That sounds right. Chairman CRAPO. I think so. Well, if you would fact-check that and let me know, I would appreciate it. Mr. POWELL. Will do. Chairman CRAPO. That does now conclude the questioning, and for the Senators who wish to submit questions for the record, those questions are due to the Committee by Wednesday, February 19th. Chairman Powell, we ask that you respond to those questions as promptly as you can. Again, we thank you for being here. I am late for a vote, and I am sure you have other business to conduct, so this Committee is adjourned. Mr. POWELL. Thank you, Mr. Chairman. [Whereupon, at 11:23 a.m., the hearing was adjourned.] [Prepared statements, responses to written questions, and addi- tional material supplied for the record follow:] 38 PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO Today, Federal Reserve Chairman Jerome Powell will update the Committee on monetary policy developments and the state of the U.S. economy. The U.S. economy continued to expand in 2019, exceeding 2 percent growth for the third straight year, as the American people enjoy the longest continued eco- nomic expansion in American history. The labor market is strong, with the labor force at an all-time high of 164 million people, and the most recent jobs report shows that employers added 225,000 jobs in January with the unemployment rate at 3.6 percent, remaining near a half-cen- tury low. Wages also grew in January by 3.1 percent from a year earlier, making it 18 con- secutive months that pay has grown at an annualized pace of 3 percent or more. Americans’ view on their personal financial situations are increasingly optimistic, according to Gallup trends. Nearly six in 10 Americans, or 59 percent, now say they are better off financially than they were a year ago, up from 50 percent last year. Tax reform in 2017, and right-sizing regulations—including under the Economic Growth, Regulatory Relief and Consumer Protection Act (S. 2155) in 2018—have un- doubtedly helped fuel this strong economy and labor market. Americans are set to benefit even more when considering the effects of USMCA and the Phase One Trade Deal with China. Despite this substantial progress, there are several external factors that could have a meaningful impact on economic activity and our financial markets that need to be better understood, including: The Fed’s decision to maintain a significantly larger balance sheet in the future, including its recent decision to purchase Treasury bills in response to volatility in short-term borrowing rates; The Fed’s future plans to maintain stability in short-term borrowing rates, including potential structural, market-based fixes; The risks of the transition away from LIBOR to an alternative reference rate, and steps that should be taken to ensure a smooth transition and curb risks to businesses and financial markets; and The potential impact of the coronavirus on global commerce and growth. The Fed has also taken a number of important supervisory and regulatory actions that merit attention. The Fed and other Federal financial agencies recently proposed amendments to the Volcker Rule that would improve, streamline, and clarify the covered funds por- tion of the rule. That proposal builds on the agencies’ simplification of the Volcker Rule in 2019, standing to improve market liquidity and preserve diverse sources of capital for businesses while striking the appropriate balance with safety and soundness. Additionally, many Banking Committee Republicans and I have raised serious concerns in the past with the agencies’ supervisory and examination processes, in- cluding the use of guidance as rules. In January, Fed Vice Chairman Quarles offered a roadmap to foster transparency, accountability, and fairness in bank supervision, including: Tailoring the supervisory framework to better align with the categories de- veloped under the Fed’s domestic and foreign bank tailoring rules; Putting significant supervisory guidance out for public comment and sub- mitting it to Congress under the Congressional Review Act; and Other commonsense improvements to the supervisory process, such as a rulemaking that would cover the agencies use of guidance in the super- visory process. This roadmap is greatly encouraging and I urge the Fed to take steps to put it into motion. Finally, there is constant innovation, including in the financial services industry, to increase resources to unbanked and underbanked populations, reduce friction in payments and increase efficiency in the delivery of financial products and services. Some recent examples are: Facebook’s announcement of Libra, a new stable digital cryptocurrency backed by a reserve of real assets and leveraging blockchain technology; Work by global Governments and central banks to explore the development of central bank digital currencies, especially amid rumors that China’s launch of a digital Yuan is imminent; 39 The numerous applications of distributed ledger technologies, including in clearing and settlement, identity verification and cross-border transactions; and Some financial institutions’ adoption of public cloud technologies. As I have stated in past hearings, it seems to me that technological innovations in this space are inevitable and the U.S. should lead in developing what the rules of the road should be. During this hearing, I look forward to hearing your thoughts on these important issues, and about work the Fed is engaged in to appropriately address them. Chairman Powell, thank you for joining us today. PREPARED STATEMENT OF SENATOR SHERROD BROWN Thank you, Chairman Crapo. Chair Powell, welcome back to the Committee. Before we start, I want to stay a few words about what happened last night, which culminated with President Trump withdrawing the nomination of Jessie Liu, who was scheduled to appear before this Committee tomorrow. I heard some of you, my colleagues and my friends, say that the President would be chastened by impeachment. Some of you told me you knew what he did was wrong, you admit he lies, but that this wasn’t bad enough to rise to the level of re- moval from office—he’d learned his lesson. It’s pretty clear he’s learned a lesson—the lesson he can do whatever he wants, abuse his office, and he’ll never, ever be held accountable. He’s gone on a retribution tour—starting at the prayer breakfast—a prayer break- fast if you can believe that—continuing through the East Room, where many of you were in the audience. He removed Col. Vindman, a patriot and Purple Heart recipi- ent who spent his life serving our country. He removed Ambassador Sondland, a Trump appointee, after he testified to the quid pro quo. And yesterday he continued the tour, interfering at the Department of Justice and strongarming political appointees to overrule career prosecutors. Those attorneys withdrew in protest—from the case, and in at least one case, resigned entirely from the Department entirely. We cannot give him a permanent license to turn the presidency and the Executive branch into his own personal vengeance operation. I’m afraid that is what we’re see- ing. No one should be above the law. Now, turning to the matter at hand. Welcome, Chair Powell. Earlier this week, Bloomberg reported on a profitable and fast-growing Spanish company. ‘‘Grifols’’ has opened up branches in 36 States. They buy and sell plas- ma—a nice, clinical sounding word that means ‘‘blood.’’ Americans who are strug- gling to make ends meet are lining up to sell their blood to put food on the table. The blood harvesting business is booming, and Grifols stock is doing great. It’s hard to think of a better metaphor for Trump’s economy. On Monday, the S&P 500 and Nasdaq both reached record highs. In 2019, JPMorgan Chase had the best year for any U.S. bank in history, with $36 billion in profits. Big corporations are spending hundreds of billions of dollars on stock buybacks and dividends. On paper, the economy has been expanding uninterrupted for over 10 years. But if you talk to the vast majority of people who rely on paychecks, not invest- ment portfolios to earn a living, you get a very different story. They’ve been bleeding for years. Most families don’t understand why the harder they work, sometimes at more than one job, the harder it’s getting to afford pretty much everything—childcare, health care, rent, college tuition. The people in this room may remember last September, when the financial indus- try went into a panic over a benchmark interest rate passing 10 percent. Wall Street faced uncertainty, so the Fed leapt into action. Smart Government employees came up with a plan that led to the Federal Reserve lending about $200 billion every day into financial markets through a mechanism that hasn’t been used since the financial crisis. That’s right—$200 billion. Let me be clear—I don’t think it’s wrong for the Federal Reserve to be creative and make sure the economy keeps working. It’s in everybody’s interest for banks to keep lending money, and credit to keep flowing so businesses can invest and manufacture, and consumers can buy houses and cars. My problem is this—when Main Street faces uncertainty, no one at the Fed jumps to action or gets creative. And we certainly don’t see tweets from the President de- manding corporations raise wages for their workers. 40 It’s hard for families to understand why Wall Street gets worked up about a 10 percent interest rate when so many families are lucky if the payday lender down the street charges them less than 400 percent. Small businesses who are having trouble making payroll don’t have access to so- called repo funding at their local Fed branch. The Fed doesn’t take action when its own research has found that 40 percent of Americans don’t have the cash to cover a $400 expense in an emergency. Nobody raises alarm bells when 40 million Americans predict they’ll miss at least one credit card payment, which means $1.2 billion in late fees will flow from the pockets of struggling families to ultraprofitable banks. ‘‘Serious People’’ haven’t dropped everything to bring down the cost of housing or raise wages once they found out that one-in-four renters are paying more than half their income toward housing. People look at that and they see two different economies—and two different re- sponses. We hear a lot about the divides in this country between Red and Blue, rural and urban, the coasts and the heartland—but people in all those places feel like no matter how hard they work, they can’t maintain any real economic security. The real divide I see is between those whose problems are considered an ‘‘emer- gency,’’ and those whose struggles Wall Street and large parts of Washington have decided they can ignore. The Fed needs to get creative for the people who make this country work—par- ticularly because it’s become pretty clear that the President and the Majority Leader aren’t about to. President Trump brags about a soaring stock market that he’s pumped up with deficit-busting, trillion dollar tax breaks for billionaires—and now he wants to pay for those tax cuts by cutting Medicare and Medicaid and Social Security. He lies about a ‘‘blue collar boom,’’ when in my own State of Ohio, job growth has been anemic or nonexistent, and manufacturing jobs are stalling compared to when he took office. And now he wants to kill a loan program that was giving the commu- nity of Lordstown a little bit of hope that manufacturing jobs would come back. Chairman Powell, you and your highly capable staff at the Fed have been proactive and creative in protecting Wall Street and the money markets from this President’s erratic behavior. And we’re all appreciative of that. But what I hope to hear from you today is how you’re going to be proactive and use that same level of creativity to make this economy work for everybody else. Thank you, Mr. Chairman. PREPARED STATEMENT OF JEROME H. POWELL CHAIRMAN, BOARDOFGOVERNORSOFTHEFEDERALRESERVESYSTEM FEBRUARY12, 2020 Chairman Crapo, Ranking Member Brown, and other Members of the Committee, I am pleased to present the Federal Reserve’s semiannual Monetary Policy Report. My colleagues and I strongly support the goals of maximum employment and price stability that Congress has set for monetary policy. Congress has given us an important degree of independence to pursue these goals based solely on data and objective analysis. This independence brings with it an obligation to explain clearly how we pursue our goals. Today I will review the current economic situation before turning to monetary policy. Current Economic Situation The economic expansion is well into its 11th year, and it is the longest on record. Over the second half of last year, economic activity increased at a moderate pace and the labor market strengthened further, as the economy appeared resilient to the global headwinds that had intensified last summer. Inflation has been low and sta- ble but has continued to run below the Federal Open Market Committee’s (FOMC) symmetric 2 percent objective. Job gains averaged 200,000 per month in the second half of last year, and an ad- ditional 225,000 jobs were added in January. The pace of job gains has remained above what is needed to provide jobs for new workers entering the labor force, allow- ing the unemployment rate to move down further over the course of last year. The unemployment rate was 3.6 percent last month and has been near half-century lows for more than a year. Job openings remain plentiful. Employers are increasingly willing to hire workers with fewer skills and train them. As a result, the benefits of a strong labor market have become more widely shared. People who live and work in low- and middle-income communities are finding new opportunities. Employment 41 gains have been broad based across all racial and ethnic groups and levels of edu- cation. Wages have been rising, particularly for lower-paying jobs. Gross domestic product rose at a moderate rate over the second half of last year. Growth in consumer spending moderated toward the end of the year following ear- lier strong increases, but the fundamentals supporting household spending remain solid. Residential investment turned up in the second half, but business investment and exports were weak, largely reflecting sluggish growth abroad and trade develop- ments. Those same factors weighed on activity at the Nation’s factories, whose out- put declined over the first half of 2019 and has been little changed, on net, since then. The February Monetary Policy Report discusses the recent weakness in manu- facturing. Some of the uncertainties around trade have diminished recently, but risks to the outlook remain. In particular, we are closely monitoring the emergence of the coronavirus, which could lead to disruptions in China that spill over to the rest of the global economy. Inflation ran below the FOMC’s symmetric 2 percent objective throughout 2019. Over the 12 months through December, overall inflation based on the price index for personal consumption expenditures was 1.6 percent. Core inflation, which ex- cludes volatile food and energy prices, was also 1.6 percent. Over the next few months, we expect inflation to move closer to 2 percent, as unusually low readings from early 2019 drop out of the 12-month calculation. The Nation faces important longer-run challenges. Labor force participation by in- dividuals in their prime working years is at its highest rate in more than a decade. However, it remains lower than in most other advanced economies, and there are troubling labor market disparities across racial and ethnic groups and across re- gions of the country. In addition, although it is encouraging that productivity growth, the main engine for raising wages and living standards over the longer term, has moved up recently, productivity gains have been subpar throughout this economic expansion. Finding ways to boost labor force participation and productivity growth would benefit Americans and should remain a national priority. Monetary Policy I will now turn to monetary policy. Over the second half of 2019, the FOMC shift- ed to a more accommodative stance of monetary policy to cushion the economy from weaker global growth and trade developments and to promote a faster return of in- flation to our symmetric 2 percent objective. We lowered the Federal funds target range at our July, September, and October meetings, bringing the current target range to 11⁄2 to 13⁄4 percent. At our subsequent meetings, with some uncertainties surrounding trade having diminished and amid some signs that global growth may be stabilizing, the Committee left the policy rate unchanged. The FOMC believes that the current stance of monetary policy will support continued economic growth, a strong labor market, and inflation returning to the Committee’s symmetric 2 per- cent objective. As long as incoming information about the economy remains broadly consistent with this outlook, the current stance of monetary policy will likely remain appropriate. Of course, policy is not on a preset course. If developments emerge that cause a material reassessment of our outlook, we would respond accordingly. Taking a longer view, there has been a decline over the past quarter-century in the level of interest rates consistent with stable prices and the economy operating at its full potential. This low interest rate environment may limit the ability of cen- tral banks to reduce policy interest rates enough to support the economy during a downturn. With this concern in mind, we have been conducting a review of our mon- etary policy strategy, tools, and communication practices. Public engagement is at the heart of this effort. Through our Fed Listens events, we have been hearing from representatives of consumer, labor, business, community, and other groups. The February Monetary Policy Report shares some of what we have learned. The in- sights we have gained from these events have informed our framework discussions, as reported in the minutes of our meetings. We will share our conclusions when we finish the review, likely around the middle of the year. The current low interest rate environment also means that it would be important for fiscal policy to help support the economy if it weakens. Putting the Federal budg- et on a sustainable path when the economy is strong would help ensure that policy- makers have the space to use fiscal policy to assist in stabilizing the economy dur- ing a downturn. A more sustainable Federal budget could also support the econo- my’s growth over the long term. Finally, I will briefly review our planned technical operations to implement mone- tary policy. The February Monetary Policy Report provides details of our operations to date. Last October, the FOMC announced a plan to purchase Treasury bills and conduct repo operations. These actions have been successful in providing an ample supply of reserves to the banking system and effective control of the Federal funds 42 rate. As our bill purchases continue to build reserves toward levels that maintain ample conditions, we intend to gradually transition away from the active use of repo operations. Also, as reserves reach durably ample levels, we intend to slow our pur- chases to a pace that will allow our balance sheet to grow in line with trend demand for our liabilities. All of these technical measures support the efficient and effective implementation of monetary policy. They are not intended to represent a change in the stance of monetary policy. As always, we stand ready to adjust the details of our technical operations as conditions warrant. Thank you. I am happy to take your questions. 43 RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM JEROME H. POWELL Q.1. In 2016, the Board of Governors, along with the FDIC and OCC, released a report to Congress and FSOC on the activities and investments banking entities may engage in under State and Fed- eral law. That report states that supervisory oversight for FHCs engaging in physical commodities activities can include ‘‘review of the management of risks of those activities to the FHCs’’ and an assessment of ‘‘adequacy of the firms’ controls relating to physical commodities activities.’’ The report also mentions supervisory scru- tiny related to merchant banking activities, complementary activi- ties, and investments. The report also makes recommendations to Congress, including repealing the authority of FHCs to engage in merchant banking and commodities activities, and eliminating the ILC exemption. An investment vehicle with significant ties to JPMorgan Chase has filed an application with FERC to purchase an El Paso fran- chise utility. Has the Board reviewed potential risks, pursuant to the supervisory activities referenced in the 2016 report, of this pur- chase to JPMC? Has the board shared any of its supervisory documents related to reviews of JPMorgan Chase or the Infrastructure Investment Fund with FERC? Does the Board stand by its 2016 recommendations to Congress? Would IIF’s purchase of the El Paso utility help or hinder Fed- eral banking agencies’ stated desire to reduce safety and soundness concerns raised by financial holding companies’ exposure to risks related to physical commodities, merchant banking, covered invest- ments, and complementary activities? What authorities does the Board have related to the approval of this merger and/or the permissibility of JPMC’s relationship with IIF? A.1. The Federal Reserve’s supervisory responsibility is to oversee the financial soundness of financial holding companies (FHC) and their adherence to applicable banking laws. To this end, the Fed- eral Reserve monitors the largest of these institutions on a contin- uous basis and routinely conducts inspections and examinations of all of these firms to encourage their safe and sound operation. This supervision includes institutions’ activities, including merchant banking and physical commodities activities. To conduct physical commodities activities pursuant to section 4(k) of the Bank Holding Company Act (e.g., trading on the spot market), a financial institu- tion must obtain prior approval of the Federal Reserve Board (Board). However, pursuant to the Gramm–Leach¢liley Act, a FHC may make a merchant banking investment in a company that en- gages in physical commodities activities without prior approval. In addition, some firms are permitted by law to engage directly in a broad range of physical commodity activities, including the extrac- tion, storage, and transportation of commodities. Specifically, sec- tion 4(o) of the Bank Holding Company Act may permit a certain FHCs to own, operate, or invest in facilities for the extraction, transportation, storage, or distribution of commodities, or to proc- ess or refine commodities, if certain statutory conditions are met regarding eligibility. To date, only two banking organizations— 44 Goldman Sachs and Morgan Stanley—have qualified to engage in physical commodities activities under section 4(o). The Board began its review of the physical commodities activities of FHCs after an increase in these activities among FHCs during the financial crisis. The Board’s review included an advance notice of proposed rulemaking in January of 2014, followed by a notice of proposed rulemaking in September 2016. The Board received a large number of comments from a variety of perspectives in re- sponse to both notices. The Board continues to consider the pro- posal in light of the many comments received and, as discussed above, continues to monitor the physical commodities activities of FHCs. The Board believes that the strong postcrisis regulatory and supervisory regime helped address financial risks from merchant banking activities, including market, liquidity, and credit risks. In terms of the 2016 recommendation in the section 620 report, I would need to discuss those recommendations with the current members of the Board and consider that recommendation in light of developments since the report was issued, as well as current facts and circumstances. Q.2. On December 17, 2019, the Board and the FDIC announced they had found ‘‘no deficiencies’’ in the resolution plans required under 165(d) of the Wall Street Reform Act. Do you believe that Bank of America, Bank of New York Mellon, Citigroup, Morgan Stanley, State Street, Wells Fargo, Goldman Sachs, and JPMorgan Chase could each be resolved in an orderly bankruptcy without af- fecting financial stability? Do you believe that Bank of America could be resolved in an or- derly bankruptcy without affecting financial stability? Do you believe that Bank of New York Mellon could be resolved in an orderly bankruptcy without affecting financial stability? Do you believe that Citigroup could be resolved in an orderly bankruptcy without affecting financial stability? Do you believe that Morgan Stanley could be resolved in an or- derly bankruptcy without affecting financial stability? Do you believe that State Street could be resolved in an orderly bankruptcy without affecting financial stability? Do you believe that Wells Fargo could be resolved in an orderly bankruptcy without affecting financial stability? Do you believe that Goldman Sachs could be resolved in an or- derly bankruptcy without affecting financial stability? Do you believe that JPMorgan Chase could be resolved in an or- derly bankruptcy without affecting financial stability? A.2. The identified banking organizations have made substantial gains in their resiliency and resolvability since the financial crisis, in part due to the work that the Federal Reserve and the Federal Deposit Insurance Corporation have done on resolution plans. An important aspect of enhancing the resiliency and resolvability of banking organizations is making resolution planning an ongoing in- stitutional aim. The development of resolution plans has resulted in firms rationalizing their structures, creating resolution strate- gies and mechanisms for their successful implementation, identi- fying and marshaling necessary resources, and considering resolv- ability as part of day-to-day decision-making. While these measures 45 cannot guarantee that a firm’s resolution would be simple or smoothly executed, the preparations have significantly improved the chances that any of the firms could be resolved under bank- ruptcy without Government support or imperiling the broader fi- nancial system. Nevertheless, given the uncertainties around how financial crises unfold, the Dodd–Frank Wall Street Reform and Consumer Protection Act’s orderly liquidity authority remains a valuable backstop resolution framework. Q.3. When the Committee was considering S. 2155, you stated that the bill wouldn’t require deregulating foreign banks. But in the Fed’s October 2019 rule, you state that the Fed was required to weaken requirements for foreign banks because the law requires you to treat them similarly to domestic banks (‘‘ . . . the Dodd– Frank Act directs the Board to give due regard to the principle of national treatment and equality of competitive opportunity . . . ’’ and ‘‘the final rule facilitates a level playing field between foreign and U.S. banking organizations operating in the United States, in furtherance of the principle of national treatment and equality of competitive opportunity’’). When you testified in front of the Banking Committee, were you or your staff aware of the Dodd–Frank directive requiring the Board to give ‘‘due regard to the principle of national treatment and equality of competitive opportunity’’? If so, how did that direc- tive factor into your interpretation that S. 2155 would not require the Board to weaken regulations for foreign banks? A.3. Section 165 of the Dodd–Frank Act was enacted in response to the financial crisis and directed the Board to establish enhanced prudential standards for large bank holding companies and foreign banking organizations. As you observed, in applying enhanced pru- dential standards to foreign banking organizations, section 165(b)(2) of the Dodd–Frank Act directs the Board to ‘‘give due re- gard to the principle of national treatment and equality of competi- tive opportunity’’ The Board recognizes the important role that for- eign banking organizations play in the U.S. financial sector. The provision of the Dodd–Frank Act concerning national treatment did not mandate that the Board make any changes to the enhanced prudential standards as applied to foreign banking organizations in light of the Economic Growth, Regulatory Relief, and Consumer Protection Act. In issuing the final tailoring rule concerning the ap- plication of the enhanced prudential standards to foreign banking organizations, the Board took into account the risks posed by those organizations as well as how the rule treated similarly situated do- mestic organizations. The final tailoring rule appropriately applies requirements based on the nature of those risks. The Board re- mains committed to the principle of national treatment and equal- ity of competitive opportunity between the U.S. operations of for- eign banking organizations and U.S. banking organizations. In particular, the enhanced prudential standards applied to the U.S. operations of foreign banks under the Board’s final tailoring rule are consistent with the standards applicable to U.S. bank holding companies. The standards take into account the extent to which a foreign bank is subject, on a consolidated basis, to home country standards that are comparable to those applied to financial 46 companies in the United States. Specifically, the final rule con- tinues the Board’s approach of tailoring the application of pruden- tial standards to foreign banks based on the foreign bank’s U.S. risk profile. For foreign banks with significant U.S. operations, the tailoring final rule applies a framework that is consistent with the framework applied to U.S. banking organizations. By using con- sistent indicators of risk, the final rule facilitates a level playing field between foreign banks and U.S. banking organizations oper- ating in the United States, in furtherance of the principle of na- tional treatment and equality of competitive opportunity. RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT FROM JEROME H. POWELL Q.1. Last week we all heard the President lay out all the ways this economy is booming and most importantly, working for everyone and not just the few at the top. Unemployment for minorities is down, unemployment for veterans is down, wage growth is rising faster for those at the bottom than for those at the top, labor force participation is rising, and household income has never been high- er. In particular, black home ownership (4Q 2008 46.8 percent; 4Q 2016 41.7 percent; 4Q 2019 44.0 percent) and black labor participa- tion (Dec 2018 63.5 percent; Dec 2016 61.9 percent; Jan 2020 62.9 percent) have also increased! This doesn’t even begin to touch on all the other important metrics that show how tax cuts and deregulation have helped pro- pel American families into a time of economic prosperity. Ensuring not only my constituents in South Carolina, but those coast-to-coast, have the ability and access to more affordable credit is paramount. Often times, this is to purchase things like a home, a car, or an education. Things that require larger loans in order to invest in yourself. But, there are also times when Americans need access to credit in order to just make ends meet. This could be a $500 loan to pay rent or $1000 for an unexpected car repair. Small-dollar loans are an instrument of good and we should work to keep the access for those loans available while increasing their affordability and soundness. I understand that the FDIC has been working together with the Fed and OCC to find ways to improve access to small-dollar loans at a more reasonable cost. Please answer the following with specificity: Do you believe that affordable access to small-dollar loans could help a significant number of Americans? A.1. On May 20, the Federal Reserve, along with the Office of the Comptroller of the Currency, Federal Deposit Insurance Corpora- tion, and National Credit Union Administration (the agencies), issued small-dollar lending principles for financial institutions of- fering small-dollar loans in a responsible manner to meet cus- tomers’ short-term credit needs. In issuing the principles, the agen- cies recognized the important role that responsibly offered small- dollar loans can play in helping customers meet their ongoing needs for credit from temporary cash-flow imbalances, unexpected 47 expenses, or income shortfalls, including during periods of economic stress, natural disasters, or other extraordinary circumstances such as the public health emergency created by COVID–19. The prin- ciples follow a statement issued on March 26, 2020, by the agencies and the Consumer Financial Protection Bureau (CFPB) encour- aging banks, savings associations, and credit unions to offer re- sponsible small-dollar loans to consumers and small businesses in response to COVID–19. Q.2. I am focused on finding ways we can encourage small-dollar lending to give Americans needed access to credit through respon- sible products that do not trap them in a cycle of debt. I was en- couraged to see that Federal Reserve Governor Bowman raised an important issue this week, talking about the importance of the Fed implementing clear third party guidance that is consistent across all of the Federal regulatory agencies. Can you give us an update on the work you have been doing with the FDIC and OCC on this and what you believe possible regu- latory outcomes might look like in order to encourage banks to pro- vide these small-dollar loans, and the benefits that community bankers see by innovating and working with FinTech platforms? A.2. The small-dollar lending principles referred to above that were issued by the agencies on May 20, encourage supervised banks, savings associations, and credit unions to offer responsible small- dollar loans to customers for both consumer and small business purposes. The agencies recognize that financial institutions are well suited to meet small-dollar credit needs and some already offer these products, consistent with safe and sound principles and sub- ject to applicable laws and regulations. Further, the principles state that small-dollar lending programs could include effectively managed deployment of innovative technology or processes for cus- tomers who may not meet a financial institution’s traditional un- derwriting standards, and that programs can be implemented in- house or through effectively managed third-party relationships. And finally, that any products offered through effectively managed third-party relationships would also reflect the core lending prin- ciples, including returns reasonably related to the financial institu- tion’s risks and costs. Q.3. Governor Bowman talked about the need to implement guid- ance; can you explain the pros and cons of using guidance in this area versus a rulemaking? And, how do we balance the need to cre- ate real rules of the road to encourage the small-dollar lending we need without creating barriers to entry? A.3. The Federal Reserve has long supported responsible small-dol- lar lending to meet customers’ needs. Consistent with that view, we believe the principles issued on May 20 give financial institutions flexibility to structure their program in a manner that is safe and sound, fair to borrowers, and consistent with applicable laws and regulations. We also note that the CFPB has consumer rulewriting authority, and we are actively monitoring the status of the CFPB’s open payday rulemaking proposal. Q.4. I’m sure you’re familiar with my continued interest in the International Association of Insurance Supervisors’ work on the 48 ICS. I’ve made the point to Vice Chair Quarles that the U.S. insur- ance market fulfills a vastly different purpose than the European market—it doesn’t make sense to regulate our insurers with for- eign rules of the road. Doing so will compromise the ability of my constituents to plan for their retirement or manage their finances over the long term. There’s now a concrete path for the U.S. insurance solvency sys- tem to be deemed equivalent to the ICS. Given all of the hard work you are doing at the Fed on the Build- ing Block Approach (BBA) and the State Insurance Commissioners are doing on the Group Capital Calculation (GCC)— Please answer the following with specificity: How do you plan on ensuring the standards being developed in the U.S. will be deemed equivalent by the IAIS given the continued resistance you are facing from the Europeans? A.4. The Federal Reserve has consistently maintained that the Eu- ropean insurance capital regulation is not appropriate for the U.S. insurance markets, particularly our market for long-term products. Instead, we advocate for the U.S. approach to insurance regulation at the International Association of Insurance Supervisors (IAIS). As part of this advocacy, the U.S. members of the IAIS are devel- oping an aggregation alternative to the Insurance Capital Standard (ICS), which builds on our work on the Building Block Approach and the National Association of Insurance Commissioner’s work on the Group Capital Calculation. During the recent IAIS negotiations in Abu Dhabi, we agreed to a plan that creates a concrete path for the U.S. system to be recognized as equivalent. Under this plan, the IAIS will consult on the approach for assessing comparability in 2020 and 2021, finalize the approach in 2022, and then conduct the comparability assessment of the aggregation alternative. The Federal Reserve will continue to advocate for the U.S. approach at each of these decision points. Q.5. I think we can agree that less unnecessary regulation is al- ways better. But what’s best for everyone is smart regulation. Reg- ulations intended to appropriately capture and capitalize risk. We continue to hear that with regards to the FRTB (the capital treat- ment for trading instruments) the Fed has taken their goal of sim- plicity as license to remove risk sensitivity and increase capital. The U.S. capital markets are core to the economic fabric and our global prowess; in fact the capital markets fund 65 percent of eco- nomic activity in the U.S. Please answer the following with specificity: Can you ensure that U.S. regulators will right size this in the U.S. rulemaking? A.5. The 2007–2008 financial crisis revealed weaknesses in the U.S. financial system—too little capital, not enough liquid assets, and poor risk management. Since that time, the Federal Reserve Board (Board) and the other Federal banking agencies have sub- stantially strengthened regulatory capital and liquidity require- ments for large banks, which has significantly increased the finan- cial resiliency of these firms and the financial system as a whole. For example, firms subject to the Comprehensive Capital Analysis and Review in 2019 increased their aggregate ratio of common eq- 49 uity capital to risk-weighted assets from 4.9 percent in the first quarter of 2009 to 12.3 percent in the fourth quarter of 2018. This change reflects a total increase of approximately $660 billion in common equity capital, bringing total CET1 capital at these firms to over $1 trillion in the fourth quarter of 2018. In October 2019, the Board finalized its tailoring rule, which more closely matches the regulations applicable to large banking organizations with their risk profile. We agree that regulations should evolve to keep pace with changes in the financial system and changes in risk. The revised Basel III framework, including the Fundamental Review of the Training Book (FRTB), is intended to deliver credible capital out- comes by increasing the robustness and risk sensitivity of the over- all capital framework, and to promote consistent implementation of the standards across jurisdictions. Board staff is currently working on a proposal to implement FRTB. As we further develop this pro- posal, we will consider the benefits of increased risk sensitivity, as well as the important objectives of simplicity, transparency, effi- ciency, and safety and soundness. We will also aim to ensure that the proposal is appropriately tailored to the risk profile of banking organizations. RESPONSES TO WRITTEN QUESTIONS OF SENATOR COTTON FROM JEROME H. POWELL Q.1. In today’s hearing, you spoke about the transition from LIBOR and how a number of banks have said they’d like to work on a rate that is separate from SOFR, i.e., a rate that is credit sensitive (as is LIBOR). I was glad to hear you mention that the Federal Re- serve is working with those banks to support their efforts to use a credit-sensitive rate. Is Ameribor appropriate to use for institu- tions for whom it more accurately represents their cost of funding? Put another way, does the Fed support alternative benchmark in- terest rates to SOFR such as Ameribor—for the replacement of Libor? A.1. The Federal Reserve convened and supports the work of the Alternative Reference Rates Committee (ARRC) and views SOFR as a robust alternative that will help many market participants in the transition away from LIBOR. However, we have been clear that the ARRC’s recommendations and the use of SOFR are voluntary and that market participants should seek to transition away from LIBOR in the manner that is most appropriate given their specific circumstances. Ameribor is a reference rate created by the American Financial Exchange based on a cohesive and well-defined market that meets the International Organization of Securities Commission’s (IOSCO) principles for financial benchmarks. While it is a fully appropriate rate for the banks that fund themselves through the American Fi- nancial Exchange or for other similar institutions for whom Ameribor may reflect their cost of funding, it may not be a natural fit for many market participants. 50 RESPONSES TO WRITTEN QUESTIONS OF SENATOR PERDUE FROM JEROME H. POWELL Q.1. Fed Inflation Targeting—Since 2012, the FOMC has adopted an inflation target of 2 percent as part of its Longer-Run Goals and Monetary Policy Strategy. But as you mentioned in your opening statement, PCE inflation, which the Federal Reserve targets, was 1.6 percent last year, under your 2 percent target once again. It has been running under this 2 percent target for almost a decade now. As part of the motivation for the review of the Federal Re- serve’s policy strategy, many Governors, including yourself, have expressed concern over the disinflationary pressures occurring across the globe. If inflation expectations are anchored persistently lower, your interest rate policy could become less effective and give the Federal Reserve less room to cut in the face of future recession. As the Federal Reserve continues their review, are you consid- ering alternative monetary policy frameworks, such as NGDP tar- geting, that would allow for more variability in inflation around the 2 percent target, including above that target? A.1. Consideration of alternative monetary policy frameworks has certainly been part of our ongoing review of monetary policy strat- egy, tools, and communication practices. This review is concerned with considering ways in which the Federal Open Market Com- mittee (FOMC) can best achieve its dual mandate goals of max- imum employment and 2 percent inflation in the modern-day envi- ronment—in which interest rates are likely, for structural reasons, to be lower, on average, than in past historical experience. With regard to the alternative strategies considered during the review, the published minutes for the FOMC meetings of the past year have described the strategies on which the FOMC has been briefed by Federal Reserve staff and which it has discussed in its deliberations in connection with the review. We have not discussed nominal GDP (NGDP) targeting in detail during this review proc- ess, as NGDP has a very imperfect relationship with our statutory goals of maximum employment and price stability. Q.2. Do you believe any of these alternative approaches outside your current 2 percent inflation target would allow the Federal Re- serve to better achieve your congressional mandate and to help mitigate the lower bound problem? A.2. The proximity of the neutral policy interest rate to the effec- tive lower bound (ELB) in the past decade was a key motivation for the Federal Reserve’s monetary policy framework review of the past year. In the course of the FOMC’s discussions during this re- view, we have considered how the choice among different strategies affects the Federal Reserve’s ability to provide the desired amount of monetary policy accommodation at or near the ELB. The FOMC has not yet reached any conclusion about changes to our strategy that might arise from the review process. All the alternative strate- gies that we have considered, however, are premised on our con- tinuing to have a 2 percent longer-run inflation objective as our price-stability goal, alongside our maximum-employment goal. This review is concerned with considering ways in which the FOMC can best achieve these dual-mandate goals in the environment of per- sistently low interest rates. 51 In terms of achieving the FOMC’s dual mandate goals, it is also important to stress that when the policy rate is in the vicinity of the ELB, the set of monetary policy tools available, and not just the choice of monetary policy strategy, is important. During the frame- work review of the past year, the FOMC has discussed its experi- ence with its two main monetary policy tools at the ELB: forward guidance regarding the policy rate; and asset purchases (or balance sheet policy). We have considerable confidence in the effectiveness of these tools. We believe that they have proven their worth as val- uable and useful means of providing additional monetary policy ac- commodation in ELB conditions. Q.3. Also, do you believe the current framework properly allows for productivity and commodity shocks or would an alternative system allow for broader flexibility? A.3. A recognition of the importance of productivity shocks and commodity shocks, and a consideration of their implications for the economy, are important for the appropriate formulation of mone- tary policy. The current monetary policy framework takes these shocks into account satisfactorily. Any alternative framework that the FOMC might consider would similarly need to take appropriate account of these types of shocks. Q.4. Basel III Revisions—Chair Powell, in the postcrisis world, the U.S. banks have worked to improve both their capital and liquidity standards. With the Federal Reserve now working to incorporate Basel III revisions into the U.S. regulatory framework, I am con- cerned that if the implementation is not done with a holistic view, these changes could have a compounding effect, placing far greater capital and liquidity constraints on financial institutions. For example, one of my greatest concerns is that the new revi- sions would have a lasting impact in terms of capital markets ac- tivity and the cost of raising capital for U.S. firms. This is particu- larly significant because unlike our European counterparts on the BCBS (Basel Committee on Banking Supervision), roughly two- thirds of all U.S. lending occurs in our capital markets. Further- more, we have a deeper and more sophisticated capital markets structure than our counterparts around the world. Would you share your views on how capital requirements on cap- ital markets activities could impact the balance between bank-driv- en and market-driven finance in the U.S. financial system? A.4. The financial crisis revealed weaknesses in the U.S. financial system—too little capital, not enough liquid assets, and poor risk management. Since the financial crisis, the banking agencies have increased the financial resiliency of banking organizations by sub- stantially strengthening their regulatory capital and liquidity re- quirements. The final Basel III framework, which includes stand- ards for market risk and capital market activities, is designed to produce a more robust regulatory framework for the largest firms and to promote consistent implementation of the standards across international jurisdictions. The Board of Governors (Board) recognizes the importance of capital markets and market-based finance in supporting economic activity in the United States. Because there is a close link between market liquidity and banking organizations’ funding liquidity, ro- 52 bust capital and liquidity requirements help ensure that banking organizations can maintain their financial intermediation functions in times of financial distress. Consistent with the banking agencies’ efforts to tailor the appli- cation of prudential rules to the risk profiles of firms, the Board will consider the implementation of the Basel III standards in light of its objectives to enhance the simplicity, transparency, and effi- ciency of the overall regulatory framework. The Board will consider the impact of any future rulemakings on firms and the markets to ensure that the Board’s capital and liquidity framework continues to support the safety and soundness of banking organizations and U.S. financial stability. Q.5. Additionally, would you please outline the specific steps that the Fed is taking to ensure that these provisions are not done piecemeal and that overall capital is not meaningfully changed or increased—as you have repeatedly stated that you believe current capital levels are ‘‘about right.’’ A.5. The Board is paying close attention to the overall coherence of the regulatory capital framework. The Board recently finalized the stress capital buffer requirement, which simplifies the capital regime by integrating the Board’s stress test and point-in-time cap- ital requirements while maintaining the current strong levels of capital. Board staff are also actively considering how the final Basel III standards could be implemented in a way that maintains overall capital and liquidity requirements at large banking organi- zations, avoids additional burden at smaller banking organizations, and supports the principles of transparency and due process. It is important for the Board to consider the remaining elements of the Basel III framework (especially the operational risk element and the fundamental review of the trading book) as a whole, and then examine that whole in the context of the existing framework. RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS FROM JEROME H. POWELL Q.1. I am encouraged that Federal Reserve staff are working to up- date the rules governing margin eligibility of certain over-the- counter securities to better reflect developments in the OTC mar- ketplace since Nasdaq became an exchange. Please provide me with an update on the progress to date, how the Federal Reserve is con- templating updates to the rules, and the expected timing of changes to the rules. A.1. Federal Reserve staff are developing a proposal that would make certain domestic and foreign over-the-counter (OTC) securi- ties marginable at broker-dealers under the Federal Reserve Board’s (Board) Regulation T. Board staff will consult with other securities regulatory authorities before the Board publishes a pro- posal for public comment. Q.2. HSBC has just announced a major restructuring that includes a significant reduction in its U.S. presence, and as a result a sig- nificant reduction in the capital it will provide U.S. corporations and the services it will provide U.S. consumers. On the global mar- kets side, HSBC has determined that its U.S. returns are unaccept- 53 ably low relative to what it can earn in other markets, primarily Asia, and announced that it will reduce its U.S. risk-weighted as- sets in those businesses by 45 percent; it will increase its presence in Asia in a corresponding amount. On the retail side, it will focus in the United States only on international, affluent, and globally mobile clients; it will continue to provide retail services to the U.K., Hong Kong, and Mexico. Do you believe this outcome is a good one for the United States? Given that HSBC is the world’s largest trad- ing bank, what do you believe the economic significance will be of its shift from the U.S. market to Hong Kong, where its primary cli- ents will be in China? What role did the regulatory regime you im- pose on HSBC play in its decision? A.2. The Federal Reserve promotes the safety and soundness of in- dividual banking institutions, including foreign banking organiza- tions (FBOs) operating in the United States, and monitors their im- pact on the financial system as a whole. In supervising the U.S. operations of FBOs, the Federal Reserve monitors and reviews their U.S. business strategies in order to en- sure that they comply with applicable U.S. laws and regulations, and are commensurate with each institution’s risk appetite and risk management capabilities. As you are aware, the global oper- ations of FBOs are supervised by their respective home-country regulators. The presence of FBOs in the United States brings competitive benefits to U.S. markets, as these firms serve as a source of credit to U.S. households and businesses as well as contribute to the strength and liquidity of U.S. financial markets. However, given that the large population of FBOs still represent only a segment of the U.S. financial system, and is structurally and characteristically diverse, any strategic shift of a single FBO would not necessarily impact the availability of banking services to U.S. households and businesses. RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED FROM JEROME H. POWELL Q.1. Since 2019, the Federal Reserve has been engaged in a review of its monetary policy, strategy, tools, and communications prac- tices. Could you please share what you have learned so far? What can I share with my constituents back home who are looking for jobs, especially those Rhode Islanders who are looking for jobs that pay fair and livable wages? A.1. An important aspect of the Federal Reserve’s review of mone- tary policy strategy, tools, and communication practices has been a series of Fed Listens events during which policymakers heard from a broad range of stakeholders in the U.S. economy about labor market conditions, inflation, and interest rates. From these events, we have learned that the tight labor market conditions in 2019 were important for providing job opportunities to individuals who had had difficulty finding employment in the past. We have also learned that the tight labor market conditions were leading to cre- ative solutions between employers, on the one hand, and workforce development groups and educational institutions, on the other hand, to provide requisite training and skills to new employees. As 54 we saw in 2019, tight labor market conditions are important for de- livering training and employment opportunities to disadvantaged communities and for achieving the Federal Reserve’s maximum employment goal. Since the outset of the COVID–19 pandemic, the reported unem- ployment rate has moved up to 13.3 percent and total employment has fallen by about 20 million. The economic environment is com- pletely different from what we were experiencing during the origi- nal Fed Listens events. With that in mind, on May 21, we held our most recent Fed Listens to learn how the new economic reality is affecting the public. For this event, we focused on the disparity of the burden from this crisis that households and businesses face, particularly in low- and moderate-income communities. We heard from a wide range of individuals who offered first-hand perspec- tives and ways in which they are working to address the recent problems through workforce development; advocacy for workers, the elderly, and affordable housing; academia; community develop- ment financial institutions; small-businesses; and nonprofits. Q.2. Can you comment on whether prior extensions of unemploy- ment insurance have made it easier for workers to bounce back from a recession? Could stabilizers, such as unemployment insur- ance, be more successful if they are automatically triggered by a recession? A.2. As a general rule, however, I do not comment on specific fiscal policy or labor market policy proposals, as judgments about those policies that are most appropriate for the United States are best decided by Congress and the Administration. Accordingly, only Congress and the Administration can decide if making the Unem- ployment insurance (UI) system more automatically responsive to economic downturns is appropriate. Speaking broadly, though, increasing unemployment insurance benefits in recessions is generally thought to provide a significant boost to economic activity per additional dollar spent.1 UI benefits are an important source of income for workers who become involun- tarily unemployed. Research has shown that UI benefits buffer in- come and consumption losses for the families of those laid off; some estimates show that each additional dollar of unemployment insur- ance benefits boost consumption of its recipients by roughly $0.30– 0.60 on average.2 As we have seen during the COVID–19 pandemic, more than 36 million Americans are seeking unemployment benefits. Under the Coronavirus Aid, Relief and Economic Security (CARES) Act, for example, the Government expanded the scope of unemployment in- surance, increasing both the amount and duration of assistance. The amount and length of pay varies by State, but the CARES Act added an additional 13 weeks to every State’s maximum pay pe- riod. The bill also created a new, temporary Pandemic Unemploy- ment Assistance program through the end of this year to help indi- 1See the Congressional Budget Office’s ‘‘Unemployment Insurance in the Wake of the Recent Recession’’, November 2012 for a summary of these estimates. 2See Chodorow-Reich, Gabriel, and John Coglianese. 2019. ‘‘Unemployment Insurance and Macroeconomic Stabilization’’, Recession Ready: Fiscal Policies to Stabilize the American Econ- omy, edited by Heather Boushey, Ryan Nunn, and Jay Shambaugh, 153–179. Brookings Institu- tion. 55 viduals who lose work as a direct result of the public health emer- gency. Q.3. Taken together, how are global events—such as the coronavirus outbreak, Boeing’s production slowdown, and trade tensions—impacting U.S. supply chains and the economic outlook, especially from the perspective of the average American household? A.3. Trade developments—including tariffs, countertariffs, and un- certainty about future trade policy—coincided with a softening in the U.S. manufacturing sector last year. While it is difficult to pre- cisely determine the effects of these various forces on the economy, a number of studies have found evidence that these trade issues have restrained output and employment in the U.S. manufacturing sector, mostly notably by raising the prices of the goods manufac- turers import as inputs to their production process and also, to some extent, by lowering their exports. Historically, the manufac- turing sector in the United States has been a source of economic strength and of good jobs for workers at all levels of education. In addition to trade issues, part of the softness in manufacturing is attributable to the slowing last year of the assembly pace of Boeing’s 737 Max aircraft due to safety issues and, more recently, to the temporary cessation of the production of the aircraft. The production of civilian aircraft and of aircraft parts accounts for about 21⁄ 2 percent of domestic manufacturing, with supply chains that extend throughout the entire country and that provide jobs for many thousands of Americans. While Boeing and their suppliers appear to have kept the great majority of the workers related to the 737 Max on their payrolls during this period, continuing to do so could prove more difficult if the cessation of 737 Max production extended far into the future. As for the coronavirus, the economic effects are still coming into focus. Early on, as the coronavirus hit China hard, the global sup- ply chain was negatively affected, with China abruptly halting the production of materials and supplies used as inputs by U.S. fac- tories. The coronavirus outbreak occurred during the period when U.S. manufacturers typically stockpile Chinese inputs, which at this time, blunted, or at least delayed, the full effect of the Chinese shutdowns. In March, Chinese factories restarted production, but they have been running somewhat below their full capacity even as U.S. producers are running through their stocks of Chinese inputs; the speed with which Chinese producers get back to full capacity before U.S. stockpiles run down will determine the degree to which shortages emerge or price spikes for critical inputs arise. Moreover, the cessation of Chinese exports also snarled the intricate web of cargo vessels, which also has affected both importers and exporters in the United States. In addition, a drop in Chinese tourism af- fected U.S. tourist destinations. The coronavirus outbreak has evolved into a global health crisis. While supply chain disruptions remain an issue, an enormous con- traction in the U.S. economy has occurred that reflects a sharp pullback in spending by households as result of people engaging in both mandatory and voluntary ‘‘social distancing.’’ For example, consumers have severely reduced spending on items consumed in public social settings, on travel, or on items purchased in shopping 56 malls or large showrooms. Job losses in April that exceeded 20 mil- lion are a stark reflection of the economic contraction that is un- precedented in living memory. RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM JEROME H. POWELL Q.1. The FDIC will allow some of the banks it regulates the choice of opting into the new OCC led Community Reinvestment Act (CRA) regulatory framework or continue to be examined under the current system. One of reasons the OCC and FDIC decided to move forward with their own CRA proposal was to clarify CRA standards and reduce confusion. However, by creating a three-tiered system (the OCC and FDIC joint rule, the opt-in option, and a potential new Federal Reserve rule), the OCC and FDIC seem to be creating more confusion about the CRA and its implementation. Are you concerned the OCC/FDIC rule, with the opt-in option, will increase confusion among banks and communities about how the CRA is im- plemented and what qualifies as a CRA activity? A.1. While the Federal Reserve Board (Board) did not join the Fed- eral Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) in their Notice of Proposed Rulemaking (NPR) revising elements of Community Reinvestment Act (CRA) regulation, the Board shared detailed analysis and pro- posals on CRA reform with our counterparts at the OCC and FDIC in the preparation of the NPR, and the NPR reflected considerable input from the Board. We are reviewing the comments that were submitted to the FDIC and OCC on the NPR, and expect to learn much—including important insights related to the aspects of the NPR that reflect our own input—from the review. As you may be aware, on May 20, the OCC separately issued a final rule to mod- ernize CRA regulations that applies only to OCC-supervised banks. In light of this development, our ongoing analysis of CRA mod- ernization issues, and our review of comments to the NPR, we are assessing a path forward. Q.2. Please describe what the aspects of the Fed’s CRA proposal the OCC and FDIC satisfactorily incorporated into their joint pro- posal. A.2. We support efforts to use clear metrics to guide CRA perform- ance assessments. Although the NPR put forth by the OCC and FDIC included a metrics approach that differed in a number of ways from the approach that Board staff discussed with the other agencies as part of our interagency discussions, the NPR incor- porated an element of the retail metrics approach that Board had raised with the other agencies. Specifically, the proposal included retail lending metrics for evaluating each assessment area based on: (1) the proportion of loan originations that are made to low- and moderate-income (LMI) borrowers or small business customers; and (2) the proportion made in LMI communities. These retail dis- tribution metrics would measure the number, rather than the dol- lar value, of loans that a bank has made. The OCC’s overall metrics approach in their final rule, issued on May 20, continues to differ in a number of ways from the approach 57 that Board staff discussed with the other agencies as part of CRA interagency discussions. Still, the final rule maintains retail lend- ing metrics similar to those discussed by Board staff that are based on the distribution of a bank’s loans to LMI borrowers and LMI communities in its assessment areas. RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER FROM JEROME H. POWELL Q.1. Agriculture and Rural Lending—I asked your colleague Vice Chairman Quarles, and Chairs McWilliams and Hood, about this when they were before this Committee in December. I have been hearing for the last year or more from community bankers in Mon- tana that examiners seem more concerned lately when that their bank or credit union may be overly concentrated in ag. This is a hard issue for rural communities—we don’t want to further jeop- ardize these farmers who are already fighting to survive against Trump’s trade disaster and difficult growing seasons, but we can- not let these challenges take community banks down with them. Access to banks in these rural areas is critical to communities, and we’ve already seen too many close. I’m focused on making sure that we support our farmers and ranchers and their families through the current challenges facing the agriculture sector, while continuing to prioritize the safety and soundness of our community financial institutions. What are the risks to these banks as farmers are increasingly overleveraged and continue to struggle with the repercussions of these ongoing trade wars, extreme weather happening more and more frequently because of our changing climate, and persistently low commodity prices? Does this pose a threat to rural America? What can and should we be doing in these communities? From a banking perspective, are you concerned about how this will effect community banks across rural America? A.1. Agricultural producers and the banks that serve them are fac- ing many challenges due to weather and trade issues that are now exacerbated by the Coronavirus Disease 2019 (COVID–19). The fi- nancial stress experienced by many farmers and ranchers due to these challenges, and stresses facing banks serving the agricultural sector, particularly community banks, continue to be a priority for regulators. Agricultural conditions have remained weak for the past several years and financial stress in the sector has continued to increase at a gradual pace. Although agricultural loan delinquencies have increased gradually in recent years, borrower stress has not yet led to a significant increase in the volume of nonperforming loans. Asset quality and overall safety and soundness at most agricultural banks were satisfactory as of December 31, 2019. While most of the institutions currently remain in satisfactory condition, the impact of COVID–19 on the safety and soundness of agricultural banks has not fully materialized and is being monitored. Agricultural community banks have in-depth knowledge and ex- perience in their market area that allows them to make well-in- formed credit decisions to meet the needs of their communities and 58 manage risks that are associated with agricultural credit. We have seen agricultural lenders take a number of prudent steps to man- age this increasing risk in light of persistently weak agricultural conditions. For example, as land values increased, these lenders re- viewed their internal policy limits around loan-to-value under- writing requirements. In some instances, banks have required larg- er downpayments on new farm real estate loans or set internal lim- its on the amount they were willing to lend per acre, and relied more on historical values for underwriting when they observed local land values had skyrocketed. Additionally, some agricultural lenders are using credit enhancements such as loan guarantee pro- grams through the U.S. Department of Agriculture’s Farm Service Agency to appropriately mitigate credit risk to the bank. Moreover, agricultural banks today, compared to those of the 1980s, report stronger aggregate financial metrics, including more capital and re- serves. The Federal Reserve continues to monitor agricultural State member banks to assess their risk management processes and to ensure prudent steps are being taken during these periods of weak- ness. In 2011, the Federal Reserve issued guidance1 to the indus- try on key risk factors in agricultural lending and supervisory guidelines for a financial institution’s risk management practices. With consideration given to this guidance, examiners continue to encourage financial institutions to work constructively with bor- rowers, including agricultural borrowers, and consider prudent loan modifications consistent with safe and sound lending practices to strengthen the credit and mitigate credit risk. More recently, the Federal Reserve joined other regulatory agen- cies in issuing an interagency statement encouraging financial in- stitutions to work constructively with borrowers affected by COVID–19 and providing additional information regarding loan modifications. The agencies encourage financial institutions to work with borrowers, will not criticize institutions for doing so in a safe and sound manner, and will not direct supervised institu- tions to automatically categorize loan modifications as troubled debt restructurings. Recognizing the potential for further increases in financial stress among agricultural borrowers and banks, and the direct ties to the broader communities in which they are located, the Federal Re- serve will continue to monitor conditions as they evolve. We con- tinue to receive input on agricultural conditions from business con- tacts across the country through our boards of directors at Regional Reserve Banks, various advisory councils, and surveys, in addition to reports from staff who track developments in U.S. agriculture, and will respond accordingly. 1See SR letter 11-14 ‘‘Supervisory Expectations for Risk Management of Agriculture Credit Risk’’. 59 RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN FROM JEROME H. POWELL Q.1. Monetary Policy—In 2018, the Fed began a review of the strat- egy, tools, and communications it uses to conduct monetary policy.1 Describe the implications of the apparent decline in the neutral rate of interest for future recessions and economic downturns. Do you believe the Fed’s current monetary policy tools will be sufficient to alleviate an economic downturn? A.1. The Federal Reserve’s response to COVID–19 pandemic has been guided by our mandate to promote maximum employment and stable prices for the American people, along with our responsibil- ities to promote the stability of the financial system. As I reported in recent testimony, in March we lowered our policy interest rate to near zero, and we expect to maintain interest rates at this level until we are confident that the economy has weathered recent events and is on track to achieve our maximum-employment and price-stability goals. In addition to monetary policy, we took forceful measures in four areas: open market operations to restore market functioning; ac- tions to improve liquidity conditions in short-term funding mar- kets; programs in coordination with the Treasury Department to facilitate more directly the flow of credit to households, businesses, and State and local governments; and measures to allow and en- courage banks to use their substantial capital and liquidity levels built up over the past decade to support the economy during this difficult time. Turning to your question regarding changes in the estimates of the neutral Federal funds rate, though there continue to be a wide range of estimates, over the past two decades most estimates have declined significantly. A lower neutral rate implies that the level of the Federal funds rate consistent with the Federal Reserve’s dual mandate of maximum employment and price stability is lower than in the past and hence closer to its effective lower bound. As a result, there likely will be less room to reduce the Federal funds rate to support the economy in economic downturns. However, the Federal Reserve has at its disposal other tools to provide economic stimulus, including forward guidance about the likely course of monetary policy and balance sheet policies (most notably large-scale asset purchases). Deployment of these other tools in response to the 2007–2008 financial crisis put significant downward pressure on the longer-term borrowing rates of Amer- ican families and businesses, thus supporting the labor market re- covery and pursuit of price stability. Overall, the Federal Open Market Committee (FOMC) judges that its existing toolkit has served the U.S. economy well over the past decade. The experience acquired with the use of forward guid- ance and balance sheet policies has led to an improved under- standing of how these tools operate. Therefore, the FOMC can pro- ceed more confidently and preemptively than in the past in using them when warranted by economic circumstances. The Federal Re- 1Board of Governors of the Federal Reserve System, ‘‘Review of Monetary Policy Strategy, Tools, and Communications’’, June 25, 2019, https://www.federalreserve.gov/monetarypolicy/re- view-of-monetary-policy-strategy-tools-and-communications.htm. 60 serve also has important liquidity provision authority to improve confidence in the economy and restore calm to financial markets, thus supporting achievement of its maximum employment and price stability goals. In addition to its usual liquidity-provision au- thority for depository institutions, the Federal Reserve has, as you know, under section 13(3) of the Federal Reserve Act, the authority to provide broad-based liquidity to nondepository institutions in ‘‘unusual and exigent circumstances.’’ Restoring well-functioning fi- nancial markets through the prompt and broad-based deployment of liquidity provisions was a central to the Federal Reserve’s re- sponse to the 2007–2008 financial crisis and is also a cornerstone of our response to the economic challenges caused by the COVID– 19 pandemic. That said, the relatively low level of the neutral rate poses chal- lenges for the conduct of monetary policy, and the FOMC is mind- ful of the risks posed by the effective lower bound in its policy de- liberations. In part for this reason, the FOMC launched a review of its monetary policy strategy, tools, and communication practices in November 2018 to ensure that it has the right tools to fight re- cessions and that it deploys those tools promptly and effectively. The Federal Reserve also has tools to support liquidity provision and market functioning. For example, to support market func- tioning, recently we made use of the discount window more attrac- tive, deployed open market operations, and opened three liquidity facilities2 with the approval of the Secretary of the U.S. Depart- ment of the Treasury pursuant to our ‘‘emergency and exigent’’ au- thority under section 13(3) of the Federal Reserve Act. Using our section 13(3) authority we also established eight facilities3 to pro- vide more direct support for the extension of credit across the econ- omy. This authority had been a cornerstone of our response to the economic challenges caused by the COVID–19 pandemic. Q.2. What role do you believe fiscal policy will need to play in the next downturn? A.2. The decline in the neutral rate of interest presents the Federal Reserve with a more challenging environment to achieve our dual mandate. Specifically, we face heightened risks of lengthy periods in which our policy interest rate is near zero. To address this prob- lem we are conducting a review of our monetary policy strategies, tools, and communications. One valuable tool for stabilizing the economy during a downturn is fiscal stimulus. Of course, that is not part of our toolkit, it is the responsibility of Congress and the Administration. We have seen that fiscal stimulus has been helpful in restoring growth during many of the recessions over the past 50 years. It was certainly helpful during the Great Recession when the Federal funds rate was near zero, and the fiscal measures taken thus far in response to the current crisis—the fastest and largest response for any postwar downturn—have provided impor- 2The market functioning facilities include: the Commercial Paper Funding Facility, the Money Market Mutual Fund Liquidity Facility, and the Primary Dealer Credit Facility. 3These include (1) the Primary Market Corporate Credit Facility, (2) the Secondary Market Corporate Credit Facility, (3) Term Asset-Backed Securities Loan Facility, the (4) Municipal Li- quidity Facility, (5) the Main Street Lending Program which is comprised of the Main Street New Loan Facility, the Main Street Priority Loan Facility, and the Main Street Expanded Loan Facility, and (6) the Paycheck Protection Program Liquidity Facility. 61 tant support. While the overall policy response to date has provided a measure of relief and stability, and will provide some support to the recovery when it comes, COVID–19 raises longer-term concerns as well. We know that deeper and longer recessions can leave be- hind lasting damage to the productive capacity of the economy through unnecessary insolvencies on the part of households and businesses and long-term unemployment. If it helps avoid long- term economic damage and leaves us with a stronger recovery, ad- ditional fiscal support though costly, could be worth it. This trade- off is one for elected representatives, who wield powers of taxation and spending. Q.3. President Trump has repeatedly advocated for negative inter- est rates, arguing that they would boost economic growth.4 Do you agree? Describe the implications of negative interest rates. A.3. The FOMC has discussed negative rates a number of times in the past and has judged that the setting of negative rates is not an attractive monetary policy tool in the United States. For exam- ple, as part of our ongoing review of monetary policy strategy, tools, and communications, the FOMC considered the possibility at our October 2019 meeting. As was noted in the minutes for the meeting, all FOMC participants judged that negative rates ‘‘cur- rently did not appear to be an attractive monetary policy tool in the United States.’’ The FOMC sees forward guidance and balance sheet policies as preferable tools to provide additional policy stim- ulus when the policy rate is near zero percent. In reaching this con- clusion, policymakers have noted that they see limited scope to bring the Federal funds rate into negative territory and that the evidence on the beneficial effects of negative interest rates abroad is mixed. Moreover, the implications of such a policy are difficult to anticipate, given that it is unclear what effect negative rates might have on the willingness of financial intermediaries to lend and on the spending plans of households and businesses. FOMC participants have further noted that negative interest rates entail risks of introducing significant complexity or distortions to the fi- nancial system. In particular, the U.S. financial system is consider- ably different from those in economies that implemented negative interest rate policies, so that negative rates could have more sig- nificant adverse effects on market functioning and financial sta- bility here than abroad. Q.4. Former Fed Chair Bernanke has argued that the decline in the rate may be partly due to structural factors such as demo- graphic and technological change.5 Do you agree? If so, is the Fed proactively thinking about the trends in these structural factors and how they could impact the effectiveness of monetary policy in the future? A.4. The decline in the neutral rate likely reflects the effects of sev- eral domestic and global structural factors, including population 4NBC News, ‘‘Trump Keeps Pushing ‘Negative’ Interest Rates. What Would That Mean for Your Wallet?’’ Ben Popken, September 23, 2019, https://www.nbcnews.com/business/consumer/ trump-keeps-pushing-negative-interest-rates-what-would-mean-your-n1056546. 5The Brookings Institution, ‘‘The New Tools of Monetary Policy’’, Ben Bernanke, January 4, 2020, https://www.brookings.edu/blog/ben-bernanke/2020/01/04/the-new-tools-of-monetary- policy/. 62 aging, a step down in the pace of productivity growth, and lower risk tolerance. Identifying structural transformations and their ef- fects on the neutral rate of interest in an economy constantly buf- feted by shocks is an inherently challenging task. Accordingly, there remains substantial uncertainty about the neutral rate of in- terest and the respective contributions of structural factors. Inde- pendently of its origins, however, the decline in the neutral rate of interest poses challenges for the conduct of monetary policy by call- ing for the use of tools other than lowering the target for the Fed- eral funds rate to provide monetary stimulus once the policy rate has been lowered near zero percent. The Federal Reserve actively seeks to identify structural changes and their implications for the conduct of monetary policy. FOMC participants routinely discuss structural transformations during their monetary policy deliberations, drawing on extensive research and analysis conducted by Federal Reserve staff, academics, pri- vate-sector analysts, and other sources. Federal Reserve officials frequently address structural transformations in speeches, media interviews, and other public communications. The Federal Re- serve’s staff has released extensive research on structural trans- formations and their policy implications over time in working pa- pers, policy notes, academic publications and presentations, and other public communications. Recently, the FOMC has discussed the policy implications of key structural transformations as part of its review of its monetary policy strategy, tools, and communication practices.6 Q.5. In response to developments in overnight lending markets in September 2019, the Fed began conducting repo operations to ‘‘sta- bilize money markets and provide reserves to keep the Federal funds rate within its target range.’’7 Some have pointed to the repo market concentration, with the largest banks being almost exclusively responsible for engaging in transactions with the Fed and lending that money out.8 Can you describe the implications of the concentration levels of the current repo market structure and how the concentration of participants has impacted the Fed’s recent interventions? A.5. In the last few months of 2019 and into early 2020, the Fed- eral Reserve’s reserve management purchases of Treasury bills and the Open Market Desk’s repurchase agreement operations (repo) kept the aggregate quantity of reserve balances above the level that prevailed in early September 2019. These operations therefore ensured an ample supply of reserves to the banking system as a whole and so contributed to relatively calm money market condi- tions during the end of the 2019 and early 2020. Notably, these op- erations likely contributed to stable conditions in short-term fund- ing markets in the period immediately preceding the recent eco- nomic and financial turbulence. Thus, our repo operations have 6For an example of policymakers’ discussion of structural transformations and their monetary policy implications, see the minutes of the July 2019 FOMC meeting. 7Board of Governors of the Federal Reserve System, ‘‘Monetary Policy Report’’, February 7, 2020, https://www.federalreserve.gov/monetarypolicy/Files/20200207mprfullreport.pdf. 8Wall Street Journal, ‘‘Big Banks Loom Over Fed Repo Efforts’’, Daniel Kruger, September 26, 2019, https://www.wsj.com/articles/big-banks-loom-over-fed-repo-efforts-11569490202. 63 contributed to the orderly functioning of U.S. financial markets as a whole. Q.6. If the Fed were to adopt a standing repo facility, as it has been considering even before the market disruption in September,9 what factors would the Fed use to determine which counterparties would be eligible? A.6. The minutes for the January 2020 FOMC meeting indicated that several FOMC participants had suggested at that meeting that the FOMC might resume before long its discussion of the longer-run role played by repo operations in its ample-reserves op- erating framework, and that this new discussion should cover the possible creation of a standing repo facility. However, the FOMC has not yet had such a further discussion, and no decision or ex- tended FOMC deliberation has occurred regarding the possibility of a standing repo facility. Q.7. Financial Stability—In previous questions regarding the Fed’s response to climate change, you have claimed that the Fed uses ‘‘its authorities and tools to prepare financial institutions for severe weather events.’’10 At the same time, science has clearly dem- onstrated that extreme weather events are becoming increasingly common as a result of climate change.11 To the extent that these weather events continue becoming more common and having a greater impact on the business cycle itself, do you believe that it would be appropriate for the Fed to more ex- plicitly consider the risks associated with climate change in its de- cision making? A.7. For the Federal Reserve’s near-term analysis, we do take into account information on the severity of weather events. When a se- vere weather event occurs, we closely monitor the effects on local economies, assess the implications for broader measures of eco- nomic production and employment, and adjust our economic fore- casts accordingly. For example, our staff has relied on data from the Federal Emer- gency Management Agency and the Department of Energy to gauge the disruptions to oil and gas extraction, petroleum refining, and petrochemical and plastic resin production in the wake of hurri- canes that have affected the Gulf region. Our staff regularly uses daily measures of temperatures and snowfall from National Oce- anic and Atmospheric Administration weather stations to better understand how severe weather may be affecting measured and real economic activity in specific areas. Our understanding of how economic activities will be affected by a severe weather event depends critically on data produced by the Federal statistical agencies, such as the Census Bureau’s County Business Patterns data, which provide information on economic ac- tivity across geographic locations. In addition, our staff uses credit 9Board of Governors of the Federal Reserve System, ‘‘Minutes of the Federal Open Market Committee’’, June 18–19, 2019, https://www.federalreserve.gov/monetarypolicy/ fomcminutes?0190619.htm. 10Letter from Federal Reserve Chairman Jerome H. Powell to Senator Elizabeth Warren, April 18, 2019. 11National Oceanic and Atmospheric Administration, ‘‘Report: Climate Change Is Making Specific Weather Events More Extreme’’, December 9, 2019, https://www.noaa.gov/news/re- port-climate-change-is-making-specific-weather-events-more-extreme. 64 and debit card transactions data for gauging how unusual or severe weather might be affecting consumer spending. At present, we do not directly model how changes in tempera- tures over long periods of time affect economic activity. However, as the evidence of effects of climate change on the dynamics of eco- nomic activity accumulates, this evidence will influence our anal- ysis and forecasts of macroeconomic dynamics and financial sta- bility risks. And to the extent that climate change affects the eco- nomic data on which our models are built—including the trends and the cyclical behavior of investment, consumption, production, and employment—climate change will be incorporated in our anal- ysis over time. Q.8. Do you believe it would be appropriate for the Fed to hire economists that specialize in climate economics to address these changes? Should the Fed hire natural scientists to inform economic models? Do you have any plans to do so? A.8. Addressing climate change directly is an important issue that Congress has entrusted to other agencies. A large body of natural science research on the climate implications and risks from the ris- ing level of greenhouse gases is already being produced by the sci- entific community, which can be leveraged to inform economic re- search. Because of this, we do not expect to focus our hiring on nat- ural scientists. The Federal Reserve, however, hires economists with doctoral training in a broad array of economic and financial topics, includ- ing staff with expertise in climate and environmental economics and related fields. Recent Federal Reserve staff research includes, for example, the effects of climate, weather, and disasters on eco- nomic and financial outcomes. Federal Reserve researchers and others are engaging in active work to better understand the specific interactions between climate-related risks, the real economy, finan- cial stability, and the safety and soundness of financial institu- tions. In addition, we are leading or participating actively in inter- national efforts to understand these issues, including a new project at the Financial Stability Board, and a new Basel Committee Task Force on Climate-Related Financial Risks, cochaired by the Federal Reserve Bank of New York’s Executive Vice President for Super- vision. Federal Reserve economists continue to produce research that in- forms the dialogue on climate-related economic and financial risks. Q.9. Do you support the Fed officially joining the Network for Greening the Financial System (NGFS)? If not, why not? A.9. The Federal Reserve remains engaged with the Network for Greening the Financial System (NGFS) secretariat and its mem- bers, continues to participate in its meetings as a guest, and is fol- lowing its work closely. We continue to discuss with the NGFS what role the Board of Governors (Board) could potentially play in its work, in light of the scope of the Board’s activities and its statu- tory mandate, as well as the constraints of the current NGFS char- ter. 65 Q.10. The most recent report from Shared National Credit (SNC) Review program conducted jointly by the Fed, Federal Deposit In- surance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC), stated that ‘‘credit risk associated with leveraged lending remains elevated’’ and ‘‘lenders have fewer protections and risks have increased in leveraged loan terms through the current long period of economic expansion since the last recession.’’12 Please explain how the Fed monitors and evaluates the credit- risk management practices of a financial institution to ensure that these procedures, some of which are untested, will be sufficient during an economic downturn. A.10. The Federal Reserve dedicates substantial resources to pro- vide oversight of leveraged loans in supervised institutions and closely supervises institutions with leveraged loan exposures through processes such as the Shared National Credit (SNC) re- view. In addition, Federal Reserve staff performs ongoing analysis to assess and understand the risks within the broader leveraged lending market. The Federal Reserve expects its supervised banks to have pru- dent credit underwriting practices and commensurate risk manage- ment processes, as well as appropriate controls, transparency, and communication to senior management and the board of directors about leveraged lending risks. Federal Reserve supervisors evalu- ate banking organizations’ underwriting processes and risk man- agement policies for comprehensiveness and internal compliance, risk appetite, limit structures, the independence of the risk man- agement function from underwriting, the quality and reliability of internal audit function, timing and accuracy of internal and super- visory ratings processes, and information reporting to senior man- agement and the board of directors. Deficient policies, procedures, or practices that relate to safety and soundness may result in su- pervisory actions. Our supervisory and regulatory policies are in- tended to ensure that the institutions we supervise can appro- priately manage their risks through the credit cycle. Q.11. Do you believe that the Interagency Guidance on Leveraged Lending13 issued in 2013 is sufficient to address the risks associ- ated with leveraged lending, particularly with respect to the growth of nonbank lenders? Describe how the Fed monitors compliance with that guidance and what actions are taken when a bank is found to have inad- equate credit risk protections. A.11. The interagency guidance on leveraged lending promotes pru- dent underwriting and risk-management practices by banks and it helps supervisors fairly and consistently evaluate practices across banks. Commercial banks remain the dominant originators of le- veraged loans in the marketplace, though nonbank lenders have 12Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System Federal Deposit Insurance Corporation Office of the Comptroller of the Currency, ‘‘Shared Na- tional Credit Program: 1st and 3rd Quarter 2019 Reviews’’, https://www.federalreserve.gov/ newsevents/pressreleases/files/bcreg20200131a1.pdf. 13Federal Reserve Board of Governors, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, ‘‘Interagency Guidance on Leveraged Lending’’, March 21, 2013, https://www.federalreserve.gov/supervisionreg/srletters/sr1303a1.pdf. 66 taken a larger share of the riskiest parts of the market. While the leveraged lending guidance and existing supervisory activity ad- dress risks associated with leveraged loans originating from the banking sector, the guidance and supervisory efforts do not apply to nonbank lenders or their activities. To the extent that banks have exposures to the nonbank lenders in the leveraged loan mar- ket, for instance through investments in investment-grade tranches of collateralized loan obligations or loans to nonbank financial in- stitutions, those exposures are tested during the annual Dodd– Frank Act stress tests and comprehensive capital analysis and re- view. And as noted above, the Federal Reserve expects its super- vised banks to have the appropriate risk-management processes and controls in place to address leveraged lending risks. As supervisory guidance, the 2013 guidance does not have the force and effect of law, and the Federal Reserve does not take en- forcement actions based on supervisory guidance. If a bank has de- ficient practices relating to safety and soundness, the Federal Re- serve may take supervisory or enforcement actions based on its un- derlying statutory authority, as appropriate, so that the institution addresses those deficiencies. Examiners may refer to the 2013 guid- ance to provide examples of safe and sound conduct related to le- veraged lending activities. Examiners have not hesitated to issue supervisory findings related to leveraged lending activities in re- cent examinations when individual bank circumstances required them. Q.12. Increasingly, the riskiest leveraged lending is occurring out- side the banking system. Do those loans currently pose a risk to financial stability? If not, please explain why and under what circumstances the Fed would begin to judge them a threat to financial stability. Many of these nonbank lenders fall into a regulatory gap. What tools does the Federal Government have to mitigate the risks from the growth of leveraged lending and the deterioration of the terms of those loans? A.12. The Federal Reserve continues to monitor developments in the leveraged lending market, and we have been attentive to the risks of leveraged loans and corporate debt in general, noting the issue in several speeches, testimony, the June 2020 Monetary Pol- icy Report, and in our Financial Stability Reports, published twice a year. Highly leveraged companies may experience greater strains during a downturn than those with less leverage, and we are close- ly monitoring the effects of those strains on banks and other finan- cial institutions. The most recent Financial Stability Report did note an uptick in defaults of leveraged loans along with a reduction in the issuance of new leveraged loans.14 The Federal Reserve supervises the lending and risk-manage- ment practices of banking organizations that are subject to its ju- risdiction, such as State member banks and depository institution holding companies. Nonbank lenders that fall outside of the pur- view of the three prudential banking Federal regulators generally are not subject to the same level of oversight or transaction testing 14Board of Governors of the Federal Reserve System, Financial Stability Report (May 2020), https://www.federalreserve.gov/publications/files/financial-stability-report-20200515.pdf. 67 as is typical of regulated banking organizations. While the Federal Reserve does not directly supervise the lending and risk-manage- ment practices of these nonbanks, we have some ability to indi- rectly monitor risks from their leveraged lending activities. To the extent that banks have exposures to the nonbank lenders in the le- veraged loan market, those exposures are tested during the annual Dodd–Frank Act Stress Tests and Comprehensive Capital Analysis and Review. Q.13. Private equity firms often finance acquisitions through high- ly leveraged loans. According to the private equity industry, firms acquired in these acquisitions now employ more than 8 million workers.15 In an economic downturn, what would you expect to happen to employment in these firms? A.13. We should be concerned about possibly excessive and broad build-ups of corporate debt and leverage, in any form, that could potentially amplify a macroeconomic downturn. Private equity firms often acquire companies that are troubled or where they be- lieve costs could be reduced in order to improve the efficiency of the ongoing business. Often, these companies are purchased using debt at high-leverage multiples. Firms with higher debt-service burdens, all else equal, have less financial flexibility and thus are likely to be faster to reduce spending and at least temporarily reduce em- ployment in response to a decline in their sales. That said, the pro- pensity to finance with debt tends to be higher for companies or in industries that earn steadier cash flows and have more modest needs for reinvestment or research and development. It is difficult to know whether or how much private equity-owned firms might be more vulnerable that others, and the research on this topic finds mixed results. Although elevated leverage could be a source of vulnerability for some private equity-owned companies, private equity firms themselves may offer a funding backstop that could provide additional resilience for their companies. Q.14. Regulation—The OCC and FDIC made the decision to heed to the concerns of the Fed with respect to their plan to modify the Community Reinvestment Act (CRA) and issued a new proposed rule on the Jaw jointly enforced by the three agencies without the Fed last December.16 On January 8, 2020, Governor Brainard re- leased her own alternative plan to modernize the CRA.17 You have since stated that while the entire Board has not yet voted on the proposal, you supported the framework she described. Please describe in detail the aspects of the FDIC and OCC plan that prevented the Fed from joining the proposal. Does the Fed commit to not joining a final rule that does not ad- dress these issues? 15Office of Senator Elizabeth Warren, Letter From Senator Elizabeth Warren et al. to Car- mine Di Sibio, Global Chairman and Chief Executive Office of Ernst and Young AG, November 18, 2019, https://www.warren.senate.gov/imo/media/doc/Letter%20to%20Ernst%20and%20 Young%20re%20PE%20report.pdf. 16Comptroller of the Currency and Federal Deposit Insurance Corporation, Federal Register Notice, ‘‘Community Reinvestment Act Regulations’’, January 9, 2020, https:// www.federalregister.gov/documents/2020/01/09/2019-27940/community-reinvestment-act-regu- lations. 17Board of Governors of the Federal Reserve System, ‘‘Strengthening the Community Rein- vestment Act by Staying True to Its Core Purpose’’, Governor Lael Brainard, January 8, 2020, https://www.federalreserve.gov/newsevents/speech/brainard20200108a.htm. 68 A.14. Implementing and strengthening the Community Reinvest- ment Act (CRA) regulations is a key priority for the Federal Re- serve. We have taken a close look at different approaches to strengthen the CRA rules in ways that further the core purposes of the statute, and this work will be an ongoing priority for us. There is a fair amount of agreement on the part of the agencies on some of the overall objectives of CRA modernization and some of the challenges of the current regulatory approach that we are all trying to address. For example, all of the agencies share an interest in using metrics to inform performance assessments with the objec- tive of increasing the level of transparency and consistency in CRA examinations. There is also broad agreement on the need to update CRA regulations to reflect new ways of obtaining financial services, including via online channels. Finally, there is agreement on the need to provide more clarity on what counts for CRA consideration. On May 20, the Office of the Comptroller of the Currency (OCC) separately issued a final CRA rule that applies to only OCC-super- vised banks. In light of this development, our ongoing analysis of CRA modernization issues, and our review of comments to the OCC and Federal Deposit Insurance Corporation’s (FDIC) notice of pro- posed rulemaking (NPR), we are assessing a path forward. To date, my colleagues and I at the Federal Reserve have focused on evaluating retail lending and community development activities separately. Having separate retail lending and community develop- ment tests would allow regulators to set metrics based on opportu- nities available in a given market, which can differ for retail lend- ing and community development financing activities. Further, hav- ing separate tests also would allow regulators to do full reviews of how banks use branches, mobile banking, and volunteer activities to meet the needs of their communities. We also have focused on developing a tailored approach in applying metrics that would en- able adjusting those metrics to local conditions and including metrics that adjust across business cycles. Additionally, we support grounding reforms in data and analysis and relying as much as possible on information already reported by banks. Finally, while there is agreement on the need for greater clarity in terms of what counts for CRA credit, we need a high level of confidence that ex- panding eligible activities maintains the regulations’ focus on low- and moderate-income places and households. Q.15. Much of the criticism of the other agencies’ plan focuses on the lack of analysis demonstrating the economic impact of the changes. However, according to Governor Brainard, the Fed has conducted some analysis with relevant data and would like to pub- lish that data so the public can provide feedback. When does the Fed anticipate doing so? Do you believe it is important for any new metrics included in a new CRA plan are grounded in data? Do you believe that it is important for the public to have ample time to examine these data to provide input and ensure that re- forming this critical civil rights law is done correctly? A.15. As Governor Brainard discussed in January, the Federal Re- serve constructed a database to assist our efforts in analyzing pos- sible revisions to CRA, including the possible use of metrics. This 69 database draws upon publicly available data, including data that are currently found in public CRA evaluations for individual banks. We believe that this is a valuable resource that can help give us the confidence we need to develop metrics and thresholds that can be used in evaluating CRA performance. The database also helps provide insight in how a proposed metrics approach would affect small banks and banks in different types of geographies. We shared the data tables with the public in early March 2020. Q.16. You said during the hearing that the Fed was mostly focused on coming to consensus with the OCC and the FDIC before the pro- posal was issued, but hasn’t formally engaged since that time. What is the Fed’s plan going forward? Will the Fed formally vote on the proposal to be published in the Federal Register and subject to the traditional notice and comment period? A.16. As noted above, on May 20, the OCC separately issued a final CRA rule that applies to only OCC-supervised banks. Given this, our ongoing analysis of CRA modernization issues, and our re- view of comments to the NPR, we are assessing a path forward. We remain interested in working with the other agencies on an ongo- ing basis, as we have demonstrated in our actions on CRA during the current crisis. For example, we recently issued a joint state- ment on assessing CRA-eligible activities that are responsive to the banking needs of low- and moderate-income households and areas as a result of actions taken in response to containing the coronavirus. If the Board does opt to release a proposal to be pub- lished in the Federal Register, we would plan to formally vote on it and it would be subject to a notice and comment period. Q.17. What are the consequences of having two separate CRA re- gimes for institutions with different regulators? A.17. We are currently assessing the OCC’s final CRA rule that ap- plies to only OCC-supervised banks, issued on May 20. As our re- view is ongoing, it would be premature to assess the consequences of having separate CRA regimes for institutions with different reg- ulators. Q.18. On January 30, 2020, the Fed finalized a rule to determine ‘‘when a company controls a bank or a bank controls a company.’’18 Reporting has indicated that the rule could allow private equity funds to control a greater portion of a bank’s equity and thereby allow private equity investors to influence the operations of banks.19 Given the various risks associated with the private equity business model and documented research that demonstrates that private equity investments in financial companies can increase the risk profile of those companies,20 do you believe that this rule in- creases the level of risk in the financial sector? 18Board of Governors of the Federal Reserve System, ‘‘Federal Reserve Finalizes Rule To Simplify and Increase the Transparency of the Board’s Rules for Determining Control of a Bank- ing Organization’’, January 30, 2020, https://www.federalreserve.gov/newsevents/pressreleases/ bcreg20200130a.htm. 19New York Times, ‘‘The Fed Wants To Loosen Rules Around Big Banks and Venture Cap- ital’’, Jeanna Smialek and Emily Flitter, January 30, 2020, https://www.nytimes.com/2020/01/ 30/business/economy/volcker-rule-banks-venture-capital.html. 20Harvard University, ‘‘Private Equity Ownership, Risk-Taking, and Performance in the Life and Annuities Industry’’, Divya Kirti and Natasha R. Sarin, April 2, 2018, https://schol- Continued 70 A.18. The final rule is intended to simplify and proved trans- parency to the Board’s control standards by codifying a comprehen- sive control framework in regulation. The final rule is generally consistent with current practice, with certain targeted adjustments, and therefore is not expected to materially change the level of risk in the financial sector. In addition, nothing in the final rule would limit the ability of the Board to take action to address unsafe and unsound practices or conditions or other issues. Q.19. In her statement, Governor Brainard suggested that it will be important to ‘‘monitor the ownership structures of banking orga- nizations in light of this control framework and industry trends’’ and ‘‘how the control framework interacts with other regulations that involve ownership thresholds.’’21 Do you agree with Governor Brainard? A.19. It will be important to monitor the implementation of the final control rule to ensure that it is achieving its intended pur- pose. In addition, the final rule provides guidance to Federal Re- serve System staff responsible for reviewing the ownership and funding structures of banking organizations as part of the super- visory process and to ensure compliance with applicable laws and regulations. Q.20. If so, please describe how the Fed will monitor these owner- ship structures and how the Fed will determine if there is a finan- cial stability risk associated with a banking organization’s owner- ship structure? A.20. The Board will continue to monitor the ownership of banking organizations as part of its normal supervisory process. The Board also will continue monitoring for financial stability risks through its broad program to assess the stability and resilience of the U.S. financial system. In addition, the Board must consider financial stability in connection with many merger and acquisition applica- tions under the Bank Holding Company Act and the Home Owners’ Loan Act, as revised by the Dodd–Frank Wall Street Reform and Consumer Protection Act. Q.21. Supervision—In Wells Fargo’s Q4 2019 Earnings Call, newly appointed CEO Charlie Scharf acknowledged the bank’s many mis- deeds, claiming ‘‘we made some terrible mistakes and have not ef- fectively addressed our shortcomings.’’22 These comments suggest that Wells Fargo has not made substan- tial progress in remedying the issues at hand. In a written re- sponse to me in 2018, you stated that the terms of the Fed’s cur- rent Consent Order require that ‘‘the firm must make significant progress in remedying its oversight and compliance and operational risk management deficiencies before relief from the asset growth restriction would be forthcoming.’’23 Do you agree with Mr. Scharf ar.harvard.edu/nsarin/publications/private-equity-ownership-risk-taking-and-performance-life- and-annuities-industry. 21Board of Governors of the Federal Reserve System, ‘‘Statement by Governor Lael Brainard’’, January 30, 2020, https://www.federalreserve.gov/newsevents/pressreleases/brainard-state- ment-20200130a.htm. 22Bloomberg, ‘‘Q4 2019 Earnings Call’’, Wells Fargo, January 14, 2020. 23Letter from Federal Reserve Chairman Jerome H. Powell to Senator Elizabeth Warren, May 10, 2018, https://www.warren.senate.gov/download/20180510-powell-response-re-wells- fargo. 71 that Wells Fargo still has a long way to go before the asset cap can be removed? A.21. The firm’s remediation plans under the Federal Reserve Con- sent Order, and information on the progress of the firm, are con- fidential supervisory information. However, the Federal Reserve does not have a timeline for lifting the asset cap and does not in- tend to lift the asset cap until the firm has fully resolved its prob- lems and adopted and implemented, to our satisfaction, measures that address the risk management breakdowns that led to the Fed- eral Reserve’s enforcement action. On a temporary and narrow basis, due to the extraordinary dis- ruptions from the coronavirus, the Federal Reserve on April 8, 2020, modified the growth restriction on Wells Fargo so that it can provide additional support to small businesses. The change will only allow the firm to make additional small business loans as part of the Paycheck Protection Program and the Federal Reserve’s Main Street Lending Program. The changes do not otherwise mod- ify the Board’s February 2018 enforcement action against Wells Fargo. As you are aware, the Board will vote on any decision to termi- nate the asset growth restriction imposed by the Order, and that decision will be released to the public. Q.22. In a recent speech, Fed Vice Chair for Supervision Randal Quarles suggested that Fed bank supervisors use of MRAs should be limited, and that they should only be permitted to institutions ‘‘to violations of law, violations of regulation, and material safety and soundness issues’’24—a severe narrowing of Fed’s authority. Does the Fed have any plans to alter the process, standards, and requirements under which MRAs and/or MRIAs are issued? If so, when do you expect to formally announce those changes? How will you be announcing these changes? Will you put in place a formal notice and comment process so that outside experts and consumer advocates can review and com- ment on any proposal? When do you anticipate implementing these changes? The 2013 guidance on the communication of supervisory findings states that standardization of the terms MRAs or MRIAs ‘‘facili- tates the Federal Reserve’s national systems of record for informa- tion related to examination and inspection issues’’ and ‘‘enables the Federal Reserve to access information about supervisory issues and remediation efforts and aids in the identification of systemic and programmatic challenges facing banking organizations supervised by the Federal Reserve.’’25 If, as proposed, certain supervisory find- ings will no longer be categorized as MRAs, how will this impact the Fed’s ability to assess progress in addressing these challenges? In his speech, Vice Chair Quarles referenced the restoration of the ‘‘supervisory observation’’ category that was removed in 2013.26 When the Fed used them, they were defined as ‘‘matters that are 24Federal Reserve Vice Chair for Supervision Randal K. Quarles, ‘‘Spontaneity and Order: Transparency, Accountability, and Fairness in Bank Supervision’’, January 17, 2020, https:// www.federalreserve.gov/newsevents/speech/quarles20200117a.htm. 25Federal Reserve Board of Governors, ‘‘Supervisory Considerations for the Communication of Supervisory Findings’’, https://www.federalreserve.gov/supervisionreg/srletters/sr1313a1.pdf. 26Id. 72 informative, advisory, or that suggest a means of improving per- formance or management operation of the organization. However, senior management of financial institutions had the discretion to decide whether or not to adopt the observations.27 Does the Fed intend to restore the ‘‘supervisory observation’’ cat- egory based on the same definition that was used prior to 2013? Is the Fed considering adding additional categories to describe supervisory communications? Do you believe that it is possible for a bank examination to un- cover an issue with a financial institution that could pose a threat to safety and soundness but does not represent a legal violation? Please describe some examples. The impact of any proposed changes to MRAs is largely depend- ent on the definition of ‘‘material safety and soundness.’’ How will the Fed determine this definition? How will the process for remediation differ for issues that were previously covered by MRAs but will no longer be? How will the process for escalating an unresolved issue to an enforcement mat- ter? Certain MRAs are issued on an industrywide basis.28 How would proposed changes affect the use of these types of MRAs? A.22. As I expressed in response to your letter of February 11, 2020, the Federal Reserve is committed to continually reviewing its supervisory processes and practices in order to increase their effec- tiveness and enhance transparency, while maintaining a super- visory framework that promotes a safe, sound, and stable financial system. Fundamental to this work is our belief that effective super- vision requires clear two-way communications and transparent su- pervisory expectations. We are working to ensure that our frame- work for supervisory communications focuses supervised institu- tions on the most important safety and soundness and compliance concerns identified by examiners. The Federal Reserve takes very seriously its role in supervising financial institutions under its jurisdiction. Strong supervisory processes and practices, including rigorous examination activities, are vital to that role. Critical components of strong supervision in- clude evaluating banking organizations’ activities and practices and, as warranted, issuing findings that require supervised institu- tions to take corrective action in a timely manner. This aspect of supervision promotes the adoption and maintenance of sound prac- tices and helps to avert excessive risk taking. Early identification of supervisory concerns also helps to deter actions or activities that may otherwise significantly impair institutions’ safety and sound- ness. Our overarching goal is to ensure that any changes to super- visory processes and practices are properly calibrated and would help us better fulfill our statutory responsibility to promote a safe, sound, and stable banking system. 27Federal Reserve Board of Governors, ‘‘Communication of Examination/Inspection Findings’’, January 24, 2008. 28American Banker, ‘‘Wells Fargo Not Alone: OCC Finds Sales Abuses at Other Banks’’, Kevin Wack, June 5, 2008, https://www.americanbanker.com/news/not-just-wells-fargo-occ- finds-sales-practice-abuses-at-other-banks. 73 RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCHATZ FROM JEROME H. POWELL Q.1. According to the Federal Reserve’s annual supervisory report for 2019, approximately 40–45 percent of financial holding compa- nies (FHCs) with more than $100 billion in assets have a less than satisfactory rating, and thus are not meeting the Bank Holding Company Act standard of ‘‘well-managed.’’ This is a trend that has spanned more than the last 10 years. While we cannot know from aggregated supervisory data whether which firms are falling below the statutory standard year after year, it is a troubling trend. It suggests both a widespread failure of large FHCs to manage them- selves well, as well as a persistent failure to correct their defi- ciencies. In addition, more than half of the Federal Reserve’s super- visory findings have related to deficiencies in the governance and risk management of these large banks. Wells Fargo is one of the most recent and high-profile examples of poor management. Wells Fargo has been responsible for a string of egregious consumer abuses in several business units, including (a) opening over 3.5 million fake accounts; (b) illegally repossessing military members’ cars; (c) charging auto loan borrowers for insur- ance without their knowledge; (d) improperly levying fees for ex- tending mortgage rate-locks; (e) failing to offer mortgage modifica- tions because of a software glitch that resulted in several hundred foreclosures; and (f) charging wealth management services for inap- propriate add-on products and steering them into investments that generated larger commissions for Wells. According to a report com- missioned by Wells’ independent directors, the firm’s sprawling or- ganizational structure inhibited effective risk management. The Fed has responded by imposing an unprecedented asset cap until the company fixes its governance problems. But the Fed has the authority to require Wells Fargo, and other poorly managed FHCs, to make themselves smaller and less complex in order to re- gain control over their management. Do you see any benefits to institutions like Wells Fargo being smaller and less complex? A.1. Since the financial crisis, the Federal Reserve has subjected larger, more complex firms to more stringent regulatory require- ments (such as the G–SIB surcharge, which increases with size and complexity) and comprehensive, intense examination focused on key risks. The Federal Reserve will continue to appropriately tailor its regulatory and supervisory regime to calibrate stringency and severity to the risks a firm poses to the financial system. Q.2. What is the Fed doing to improve governance at large, poorly managed firms? A.2. Since the financial crisis, the Federal Reserve has taken a number of regulatory and supervisory steps to improve governance at large firms in general and firms that are not well managed in particular. These steps built on the existing regulatory and super- visory framework that has for many years restricted firms that are not well managed. For example, large firms are subject to specific governance re- quirements in Regulation YY (12 CFR part 252). In addition, the Federal Reserve has articulated governance expectations for large 74 firms in Supervision and Regulation (SR) Letter 12-17 (Consoli- dated Supervision Framework for Large Financial Institutions), and that governance is a fundamental aspect of each of the three com- ponent ratings assigned to large firms (see SR 19-3, Large Finan- cial Institution (LFI) Rating System). The supervisory programs for large financial institutions, which culminate in ratings assigned under the LFI rating system each year, include examinations and other activities that focus on governance. If governance issues are identified, supervisors direct the board and senior management to address them through supervisory findings and formal and infor- mal enforcement actions, as appropriate. If a firm fails to address these issues, such actions may be escalated and lead to more strin- gent limitations on their operations, as in the case of Wells Fargo. Q.3. Has the Fed considered exercising its divestment authority under Section 4(m) of the Bank Holding Company Act of 1956 to require large FHCs that are poorly managed to shrink themselves until they are better able to manage themselves? A.3. When a financial holding company (FHC) falls out of compli- ance with section 4(l) of the Bank Holding Company Act, by becom- ing less than well-managed or well-capitalized, the noncompliant FHC enters into a confidential 4(m) agreement with the Federal Reserve Board (Board) requiring, among other things, that they remedy the identified deficiencies. This agreement is an enforce- ment action that permits the FHC to continue operating while it addresses its deficiencies. The agreement is approved by the Board and may be modified or terminated by the Board. Through the 4(m) agreement, the FHC is required to seek prior approval from the Board to engage in any new financial activities or to make nonbank investments or acquisitions.1 The Board may also impose other restrictions on the FHC as appropriate. This ap- proach incentivizes the firm to focus on fixing its supervisory issues. If a noncompliant FHC fails to address the identified deficiencies within the specified period of time then the Board may require the institution to divest its depository institutions unless the FHC chooses to voluntarily cease all of its FHC-only permissible activi- ties. The Board regularly assesses a noncompliant FHC’s progress in remediation of identified issues and as part of this review con- siders whether it would be appropriate to implement other limita- tions or ultimately exercise authority to require divestiture. Q.4. Why has the Fed never used this authority before? A.4. We have found that the broad range of supervisory and en- forcement tools that Congress as conferred on the Board have gen- erally been effective in motivating institutions to remediate issues. These tools include the ability to issue examination findings that highlight Matters Requiring Attention and Matters Requiring Im- mediate Attention, as well as ratings downgrades. If a problem re- quires a more detailed resolution or is more pervasive at an institu- tion, the Board can impose informal enforcement actions (typically in the form of Memorandums of Understanding) and formal en- forcement actions, such as Written Agreements and Cease and De- 112 CFR 225.83(d). 75 sist Orders, which may carry civil money penalties, are available tools. In addition, there is a range of restrictions the Federal Re- serve may impose through 4(m) agreements short of requiring di- vestiture, such as limits on particular nonbank businesses. Enforcement measures may escalate depending on the severity or difficulty of the problem. Indeed, the decision to force divestiture of a depository institution or cessation of nonbank financial activi- ties would be one of the most severe penalties that would be con- sidered if the informal and formal enforcement tools exercised throughout the supervisory process did not result in corrective ac- tion, or if circumstances otherwise warrant a heightened response. Q.5. Under what circumstances would the Fed use this authority going forward? A.5. As discussed above, because of the severity of the action and the potential for unintended consequences, the Board would con- sider ordering divestiture only in severe cases where other options would not be feasible or effective. The risk of unintended adverse consequences to the broader economy would be a primary consider- ation, as would the severity and duration of the issues giving rise to the consideration. The supervisory process is focused on addressing the issues you have identified, including ensuring that large and complex organi- zations have robust risk management practices to ensure safety and soundness and compliance with consumer compliance laws and regulations. I welcome further discussion on ways to improve our current approach to this important issue. Q.6. While unemployment has reached record lows, those numbers can obscure the economic reality of working Americans. For exam- ple, in Hawaii, 48 percent of households have incomes that are not high enough to afford a basic household budget that includes hous- ing, childcare, food, transportation, and health care.2 Almost a quarter of working adults in Hawaii report that they work multiple jobs to make ends meet.3 For these households in Hawaii and in communities across the country, the unemployment rate may be low, but they are not enjoying the financial security that should come from working full-time. As the Federal Reserve works to fulfill its dual mandate, does it consider data that provide insight into the quality of the jobs avail- able or whether employment is providing wages that can support a basic household budget? If yes, what data are the Fed using and how is it using them? If no, why not? A.6. In fulfilling our dual mandate, the Federal Reserve Board looks at a broad range of labor market indicators, including those on the types of jobs workers have and how workers from different income and demographic groups are faring. We do not target a par- ticular level of wages for the aggregate economy or for particular demographic groups. Instead, we use labor market indicators to as- sess whether resources in the economy are being used to the fullest extent possible without creating undue inflationary pressures. For 2https://www.auw.org/sites/default/files/ALICEoverview.pdf 3https://www.hawaiinewsnow.com/2020/01/31/survey-hawaii-adults-say-theyre-struggling- financially/ 76 example, in the recovery from the Great Recession, we focused at- tention on the number of individuals that were working part-time for economic reasons. These workers are included in the Bureau of Labor Statistics’ (BLS) U-6 measure of unemployment. The number of these workers remained elevated for longer than the conven- tional unemployment rate, termed U-3 by the BLS, following the Great Recession, and suggested at that time that the unemploy- ment rate alone was understating the number of workers who would work more if the demand for labor increased. More recently, but prior to the COVID–19 outbreak, we focused intently on whether disadvantaged or struggling segments of soci- ety were benefiting from the overall improvement in the labor mar- ket. Fed Listens—a series of events aimed at consulting with a broad range of stakeholders in the U.S. economy—was particularly valuable for us in this respect. We heard that many individuals and communities were only beginning to feel the positive effects of economic expansion, which suggested that output and employment were not as high as they potentially could be, at least in these com- munities. We were encouraged that wages for workers with the lowest incomes were rising the most and that many disadvantaged individuals were starting to benefit from the long expansion. Since the COVID–19 outbreak, we have been concerned that workers earning the least have suffered the most from the unprece- dented decline in economic activity. Because these workers often lack the financial resources to sustain themselves for long without work, the potential damage to the economy and to economic well- being from prolonged unemployment is substantial. As the current situation evolves, we are prepared to use our full range of tools to support the economy, maintain the flow of credit to households and businesses, and promote our maximum employment and price sta- bility goals. Q.7. During the hearing, you stated that in a future recession, the Federal Reserve would use tools that it used for the first time dur- ing the 2008 financial crisis, including quantitative easing through purchases of long-term assets and Treasury bills. Quantitative eas- ing was successful in increasing the money supply and pushing down interest rates. But even with almost $2.6 trillion in quan- titative easing, one quarter of American families lost at least 75 percent of their wealth and more than half lost at least 25 percent of their wealth.4 And the pace of economic recovery was histori- cally slow, averaging just 2 percent instead of the average of 3–5 percent typical of other economic recoveries. The problem for households who lost their homes and for the broader economy was that not enough of the money that the Fed pumped into the financial system made it into the hands of Amer- ican households and businesses. In stead, much of the extra supply of money remained within the financial system and was poured back into the stock market. Two years after the start of the finan- cial crisis, the Fed cleared the largest banks to pay out dividends and buy back shares. Since then, stock buybacks in the financial sector—and economywide—have surged. In the past 10 years, the financial sector spent $860 billion in stock buybacks, and in 2019, 4https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4200506/ 77 S&P 500 companies spent a record $1 trillion in stock buybacks. These data suggests that the Fed’s reliance on using the financial system as its intermediary for stimulating the economy in a crisis was inefficient. Do you think the financial system made the best use of the addi- tional money supply from quantitative easing? A.7. The Federal Reserve’s asset purchase programs were mainly intended to place downward pressure on longer-term interest rates to reduce the cost of funding to business and households. Academic research suggests that the purchases programs were successful in achieving this goal.5 In addition to reducing the cost of funding, the Federal Reserve’s asset purchase programs also appeared to have boosted the avail- ability of funding to business and households through increased bank lending-though these effects are difficult to estimate pre- cisely, as banks raise funds from various sources and those funds are all fungible. Nonetheless, recent academic research provides evidence that the asset purchase programs did increase bank’s risk tolerance and their lending to customers. For example, several studies find that following the first round of large-scale asset pur- chases (LSAP) and the third round of LSAPs, which involved Fed- eral Reserve purchases of agency mortgage-backed securities (MBS), banks with higher initial holdings of MBS increased lend- ing more than banks with little initial MBS exposure, and were more likely to reorient their lending activities towards riskier loans and easier lending standards.6 Q.8. In the case of a future recession, do you think the economy would benefit more if the Fed used its tools to increase the money supply in a way that put money directly into the hands of Amer- ican households? A.8. The Federal Reserve is committed to using its full range of tools to support the economy, thereby promoting its maximum em- ployment and price stability goals. For example, in the current eco- nomic downturn, the Federal Open Market Committee (FOMC) has moved quickly to cut the policy rate to near zero and stated that it intends to keep the rates at that level until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals. To support the flow of credit to households and businesses, foster smooth market functioning, and promote effective transmission of monetary policy to broader financial conditions, the Federal Re- serve has been purchasing large amounts of Treasury and agency mortgage-backed securities. Federal Reserve policies to lower short- and longer-term interest rates are helping-by reducing the interest 5See Gagnon, Joseph E. 2016. ‘‘Quantitative Easing: An Underappreciated Success’’, Policy Briefs PB16-4, Peterson Institute for International Economics; and Kuttner, Kenneth N. 2018. ‘‘Outside the Box: Unconventional Monetary Policy in the Great Recession and Beyond’’, Journal of Economic Perspectives, 32 (4): 121–46. 6See Rodnyansky, Alexander, and Olivier M. Darmouni (2017). ‘‘The Effects of Quantitative Easing on Bank Lending Behavior’’, Review of Financial Studies, vol. 30, pp. 3858–3887; Chakraborty, Indraneel, and Goldstein, Itay, and MacKinlay, Andrew, 2020. ’’Monetary Stim- ulus and Bank Lending’’, Journal of Financial Economics, Elsevier, vol. 136(1), pp. 189–218; and Kurtzman, Robert, Stephan Luck, and Tom Zimmermann (forthcoming). ‘‘Did QE Lead Banks To Relax Their Lending Standards? Evidence From the Federal Reserve’s LSAPs’’, Journal of Banking and Finance. 78 payments that households pay on their mortgages and other loans- to put more money in the hands of American households. Addition- ally, by providing support for economic activity and jobs in this challenging time, our actions will also help to put more money— in the form of labor income—into the hands of American house- holds. The Federal Reserve is also undertaking programs to provide sta- bility to the financial system and to more directly support the flow of credit in the economy—for households, for businesses of all sizes, and for State and local governments. Many of these programs rely on emergency lending powers that are available only in very un- usual circumstances. The Federal Reserve is deploying these lend- ing powers to an unprecedented extent, enabled in large part by the financial backing and support from Congress and the Treasury. However, these are lending powers, and not spending powers. The Federal Reserve cannot grant money to particular beneficiaries, but can only make loans to solvent entities with the expectation that the loans will be repaid. Q.9. If American households had been able to keep up with their rent and mortgage payments, pay their bills, and maintain finan- cial stability during the recession, do you think it would have en- abled the U.S. economy to recover faster from the crisis? What do you think the impact would have been on household wealth today? A.9. During and after the 2007–2008 financial crisis and the Great Recession the Board and the FOMC indeed exercised their statu- tory authority to undertake a wide range of aggressive and unprec- edented conventional and unconventional policy actions, including large-scale asset purchases. Although those actions did mitigate to a considerable extent the consequences of severely adverse and widespread pressures and difficulties facing families and busi- nesses all across the country, very many American families fell be- hind on their rent payments or mortgage payments, and fell into a fragile financial state. Moreover, there were other Government programs, such as the Home Affordable Refinance Program, that allowed mortgagors to either lower their monthly mortgage pay- ments or to pay down their loan faster by lowering their interest rates, and allowed them to build more equity. Such programs were more effective because the Federal Reserve purchases of mortgage- backed securities helped improve conditions in the secondary mar- ket for mortgages. Had families been able to maintain their incomes, home values, and other financial resources throughout that extremely difficult period, household wealth would likely have been higher than its record level at the end of 2019, but one cannot know just how much. Q.10. What tools could the Fed use to make sure that any increase in the money supply in a crisis gets into the hands of American households, rather than remaining in the hands of banks or share- holders? A.10. As mentioned above, Federal Reserve policies to lower short- and longer-term interest rates—by reducing the interest payments that households pay on their mortgages and other loans—help to put more money in the hands of American households in a crisis. 79 Additionally, by providing support for economic activity and jobs in this challenging time, lower interest rates will also put more money—in the form of labor income—into the hands of American households. During the 2007–2008 financial crisis and more recently in re- sponse to the COVID–19 crisis, the Federal Reserve purchased agency MBS in order to support the transmission of changes in pol- icy rates to mortgage rates, which are the key interest rates that households face when they buy a house or refinance an existing mortgage. Additionally, in both of these crisis episodes the Federal Reserve established the Term Asset-Backed Security (ABS) Loan Facility (TALF) to support the flow of credit—in the form of auto loans, credit card loans, student loans, and other loans—to house- holds. The Federal Reserve took these actions to alleviate signifi- cant dislocations in agency MBS and in private label ABS markets that were impeding the flow of credit to households. Q.11. Can you provide an update on what the Fed is doing to ad- dress the financial risks from climate change in its supervisory and financial stability responsibilities? Please be specific about the steps you are taking. What does the Fed hope to accomplish in the next year? A.11. The Federal Reserve is focused in the near term on miti- gating economic disruptions and supporting the efficient func- tioning of the financial system during recovery from the COVID– 19. However, we expect to continue a number of longer-term super- visory and financial stability projects in the year ahead, including on climate-related risks. We continue to participate actively in ana- lytic efforts by the Basel Committee, the International Association of Insurance Supervisors, and the Financial Stability Board, fo- cused on assessing the impact of climate-related risks on the finan- cial system. Federal Reserve researchers are continuing preexisting efforts to procure additional climate-related data and to pursue projects on the intersection of climate-related risks with super- visory policy. We also continue to engage externally and to identify and draw on expertise from other fields relevant to the assessment of climate-related risks. To the extent the Network for Greening the Financial System (NGFS) continues to hold meetings during the ongoing public health crisis, we also anticipate participating in those as a guest. Q.12. Does the Fed have the data it needs to assess climate finan- cial risks? A.12. For the Federal Reserve’s near-term analysis of economic and financial activity, the staff use a variety of data sources to measure the economic effects of weather events. These include, for example, data from the Federal Emergency Management Agency and the De- partment of Energy used to gauge the disruptions to oil and gas extraction, petroleum refining, and petrochemical and plastic resin production in the wake of hurricanes that have affected the Gulf region. Our staff regularly uses daily measures of temperatures and snowfall from the National Oceanic and Atmospheric Adminis- tration weather stations to better understand how severe weather may be affecting measured and real economic activity in specific areas. 80 Our understanding of what economic activities will be affected by a severe weather event depends critically on data produced by the Federal statistical agencies, such as the Census Bureau’s County Business Patterns data, as those data provide information on eco- nomic activity in different geographic locations. In addition, our staff uses credit and debit card transactions data for gauging how specific types of severe weather might be affecting consumer spend- ing in areas affected by those events. Data remains a significant challenge in identifying, assessing, and managing climate-related financial risks, for the Federal Re- serve and for other organizations, such as financial institutions. In addition to data on economic activity described above, under- standing financial risks from climate change requires different types of data, including climatic, geospatial, and financial data. The challenges in meeting these data needs are faced by central banks and supervisors around the world, as well as by private financial institutions, researchers, and the public. The Federal Reserve is engaged in efforts to help bridge these gaps through investigating public and private data sources and through its work with inter- national groups such as the Basel Committee on Banking Super- vision. Q.13. Could you provide an update on the Fed’s work to join the NGFS? Is there an estimated timeline for when the Fed would join, if it is going to? If the Fed joins as an observer, what would that mean? A.13. While the timeline of the NGFS’s activities is in flux as a re- sult of COVID–19, the Federal Reserve remains engaged with the NGFS secretariat and its members, continues to participate in its meetings, and is following its work closely. We continue to explore how the Federal Reserve will be allowed by the NGFS to partici- pate further in a way that is consistent the full range of the Fed- eral Reserve’s responsibilities. Q.14. Do you see value in conducting scenario analyses or stress tests, either of individual institutions or the financial system as a whole, to gauge resilience to climate financial risk? A.14. The innovative and exploratory work of central banks on ‘‘cli- mate stress-testing’’ is valuable, precisely because of the novel chal- lenges that such an exercise poses. While scientific research on cli- mate change is well developed, research on the specific trans- mission channels between climate change and financial risk is novel and emerging in ways that specifically affect many elements of traditional supervisory stress tests. As climate-related risks manifest themselves over long horizons, stress testing for those risks involves the challenge of formulating scenarios and projecting outcomes over periods that stretch well be- yond the current stress tests. Most supervisory stress tests today project losses with granularity at horizons of 3 to 5 years. A granu- lar analysis of the effects of climate on banks over a timeframe rel- evant for climate change would require predictions of output, em- ployment, and the structure of the economy and financial system over a 60-year period. The uncertainty of such long-horizon eco- nomic forecasts would dramatically reduce the plausibility and rel- evance of the results. 81 RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM JEROME H. POWELL Q.1. In your testimony before the Banking Committee, we dis- cussed the percentage of people who are currently working two jobs in order to make ends. A recently released Census report found that in 2013, 8.3 percent of workers had more than one job, and women were more likely to have a second job—8.8 percent versus 8.0 percent. Additionally, 6.9 percent of those workers worked more than two jobs.1 Data from the Bureau of Labor Statistics shows fewer workers working two or more jobs.2 Please share Federal Reserve research and or analysis related to the prevalence of workers holding more than one job. Why are women more likely than men to work multiple jobs? Ac- cording to the BLS, in 2017, the multiple job holding rate for women was 5.3 percent, while for men it was 4.6 percent. What percentage of these jobs are seasonal jobs, such as a teach- er holding a summer job? In 2018 and 2019, the multiple job-holding rate for black workers has remained higher than any other racial or ethnic group. Why is this disparity occurring for black workers?3 Are workers in rural areas more likely to hold multiple jobs than urban areas? Are workers in communities with higher minimum wages less likely to hold multiple jobs than workers with the Federal min- imum wage of $7.25/hour? The Federal Reserve has a mandate to increase employment. What tools does the Federal Reserve have to address disparities in labor force participation rates including women and African Ameri- cans who hold multiple jobs? Does the Federal Reserve have any recommendations to Con- gress on policies that would mitigate these disparities of workers who hold two or more jobs? A.1. The best information on the prevalence of multiple job holding is from two Census surveys, the Survey of Income and Program Participation (SIPP) and the Current Population Survey (CPS). The difference between the 8.3 percent figure in the Census report you cite, which derives from SIPP data, and the close to 5 percent fig- ure from the Bureau of Labor Statistics (BLS), which derives from the CPS, likely reflects the different definitions of multiple job holding in these two reports. The Census report estimates the per- cent of workers who had multiple jobs at any point during the year. The BLS reports the percent of workers who had multiple jobs in a particular week during the year. Thus, the different estimates are not necessarily inconsistent with each other. The BLS reports multiple job holding every month in its Employment Situation re- port. Data for the second week of February 2020 show that 5.1 per- cent of workers held more than one job. The Federal Reserve Board’s (Board) Survey of Household Eco- nomics and Decisionmaking (SHED) also collects information on 1https://www.census.gov/library/stories/2019/06/about-thirteen-million-united-states-work- ers-have-more-than-one-job.html 2https://www.bls.gov/opub/ted/2018/4-point-9-percent-of-workers-held-more-than-one-job-at- the-same-time-in-2017.htm?viewfull 3https://www.bls.gov/cps/cpsaat36.htm#cpsleeannlmultljobhder.f.1 82 multiple job-holding. For the fourth quarter of 2019, the survey found that 10 percent of adults had multiple jobs in the month prior to being surveyed. A variety of other information from the SHED on the well-being of U.S. workers is published in the Board’s Report on the Economic Well-Being of U.S. Households (report),4 including the share of workers who would like more work, the share whose work schedule varies according to their employer’s needs, and the share who would not use liquid savings to cover a $400 expense. While the report issued on May 14, 2020, found that financial circumstances were generally positive for most adults at the end of 2019, the report also included supplemental data from April 2020. The supplemental survey found that financial condi- tions changed dramatically for people who experienced job loss or reduced hours during March 2020 as the spread of COVID–19 in- tensified in the United States. Q.2. In your testimony, we also discussed labor market disparities across racial and ethnic groups and across regions of the country. Please provide research by the Federal Reserve related to the fol- lowing: data on the causes of disparities in unemployment rates across racial and ethnic groups, why it’s occurring, and how policy- makers can address these gaps. Does the Federal Reserve have any recommendations to Con- gress on policies that would mitigate these disparities? A.2. Two papers by Federal Reserve economists on unemployment disparities may be of interest to you. In a Finance and Economics Discussion Series (FEDS) paper ‘‘Racial Gaps in Labor Market Out- comes in the Last Four Decades and Over the Business Cycle’’,5 Federal Reserve researchers find that: (1) observable characteris- tics (e.g., age, education, etc.) can explain very little of the dif- ference in black and white unemployment rates; (2) disparities in unemployment tend to shrink as the labor market improves, but never disappear; and (3) higher rates of job loss drives the dis- parity in black and white unemployment rates. In a Brookings Paper titled ‘‘Okun Revisited: Who Benefits Most From a Strong Economy?’’6 Federal Reserve researchers find some evidence that improvement in labor market outcomes for blacks and Hispanics relative to whites are largest when the labor market becomes very tight. As described in the first paper mentioned above, the disparity in black and white unemployment rates is not easily explained. By pursuing maximum employment and price stability, Federal Re- serve policymakers can limit the disparity to some extent, but the gaps that remain even when the labor market is very tight are best addressed by fiscal policies. Decisions about which policies are best suited to reduce persistent unemployment rate gaps are best left to Congress. 4‘‘Board’s Report on the Economic Well-Being of U.S. Households’’ at https:// www.federalreserve.gov/publications/files/2019-report-economic-well-being-us-households- 202005.pdf. 5‘‘Racial Gaps in Labor Market Outcomes in the Last Four Decades and Over the Business Cycle’’ at https://www.federalreserve.gov/econres/feds/files/2017071pap.pdf. 6‘‘Okun Revisited: Who Benefits Most From a Strong Economy?’’ at https:// www.brookings.edu/bpea-articles/okunrevisited-who-benefits-most-from-a-strong-economy/. 83 Q.3. You also discussed the disparities between rural and urban areas. What tools does the Federal Reserve have to address this dis- parity? Does the Federal Reserve have any recommendations to Con- gress on policies that would mitigate these disparities? A.3. The Federal Reserve does not have tools to address persistent disparities in economic outcomes across different geographic areas. The tools we do have are those we use to pursue maximum employ- ment and price stability for the economy as a whole. Our pursuit of maximum employment benefits all Americans, including those in rural areas. But persistent structural causes of rural–urban dis- parities are best addressed by fiscal policies. Decisions about which policies are best suited to reduce disparities between rural and urban areas are best left to Congress. Q.4. In your exchange with Senator John Kennedy (LA), you dis- cussed whether there is a link between our social safety-net pro- grams and participation in the labor market and argued that there was no link between our safety-net programs and labor force par- ticipation. Please elaborate on whether there is a link between our social safety-net and labor force participation, and provide share data or research if appropriate. During your comments, you noted that our safety net is not gen- erous enough to discourage people from participating in the work- force. Please explain why you believe that our safety net does not discourage participation in the labor force. A.4. Household decisions on whether to participate in the labor market and seek work are affected by many factors including wage rates, taxes, and Government benefits. Safety-net programs usually link eligibility to income with the goal of improving the situations of lower-income households. To maintain that intended focus, the benefits are phased-out or unavailable to households with higher incomes. As a consequence, for low- and moderate-income house- holds, any improvement to household finances from increased work is partially offset by the loss of benefits that occurs as household income rises. Researchers have found that programs with rapid phaseout of benefits, and the interaction among various safety-net programs, sometimes leads to relatively high effective marginal tax rates. This, in turn, may discourage work, particularly for second earners. Researchers also have found that programs where the phase-out range is relatively long, reduce potential disincentive ef- fects. More broadly, I also would note that as the labor force participa- tion rate of prime-age workers generally declined in the past couple of decades, both the average benefit level and the number of recipi- ents of Temporary Assistance to Needy Families (TANF), the pri- mary cash assistance program, also declined.7 7See, for example, figure 5 in the Congressional Budget Office report ‘‘Temporary Assistance for Needy Families: Spending and Policy Options’’, January 2015, at https://www.cbo.gov/publi- cation/49887. 84 As you know, it is up to Congress to determine how best to en- sure safety-net programs provide the lowest work disincentives as possible while still achieving the social goals of the programs. Q.5. The Census Bureau is in the process of recruiting and hiring thousands of employees throughout the United States to conduct the 2020 Census. In fact, the Census Bureau estimates that they need to hire up to 500,000 temporary, part-time census takers to get the job done. How does today’s tight labor market serve as a challenge for the Census Bureau to achieve their goals of hiring half-a-million work- ers? A.5. The Census Bureau has noted that hiring a substantial num- ber of workers in a low unemployment rate environment is a ‘‘big challenge.’’8 Indeed, in anticipation of this challenge, the Census Bureau raised the hourly pay for temporary Census workers in many locations. That said, prior to the COVID–19 outbreak, it cur- rently appeared that the Census Bureau was on track to hire suffi- cient temporary workers. In particular, the Bureau announced in early March that recruitment efforts had led to over 2.6 million ap- plicants, which they noted was ‘‘more applicants than our estimates suggest we need to hire in every office.’’9 However, in April, the Bureau announced it was temporarily suspending field data collec- tion activities due to the COVID–19 outbreak and that it was seek- ing relief to allow for an additional 120 days to deliver final appor- tionment counts.10 Q.6. The Census Bureau increased its hourly salary to encourage workers to apply. In Nevada, the pay rate is between $16 and $18 an hour—well above our minimum wage. Do you think the higher wage offered by the Census will result in wage increases generally? Do you think the Census will increase workforce participation rates? A.6. Prior to the COVID–19 outbreak, the Census Bureau antici- pated hiring about 500,000 workers across the U.S., mostly for part-time positions expected to last only a few weeks. Since then, the forceful measures that we as a country have taken to control the spread of the virus have substantially limited many kinds of economic activity. As a result, the U.S. unemployment rate was ap- proximately 15 percent nationwide in April and the rate in Nevada was about 28 percent. With unemployment expected to remain high over the next several months, there will likely be many unem- ployed individuals available to fill these temporary jobs. Absent the COVID–19 outbreak, the Census Bureau would have been trying to hire workers in a very tight labor market, and it is possible that many of the workers would have been drawn in from out of the labor force. Further, if all temporary Census workers were to have come from out of the labor force, the labor force par- ticipation rate could have been boosted by about 0.2 percentage point during May and by smaller amounts during the ramp-up and ramp-down periods. However, it would have been likely that some temporary census workers would have already been employed, and 8See https://www.census.gov/newsroom/press-releases/2020/ready-to-hire-html. 9Id. 10See https://www.census.gov/newsroom/press-releases/2020/statement-covid-19-2020.html. 85 taking on the census job in addition to their other jobs would have dampened the rise in the participation rate. As a point of reference, we observed temporary boosts of 0.2 percentage point to the na- tional participation rate around the 2000 and 2010 census hiring cycles. In Nevada, as in the rest of the country, the Census Bureau an- ticipated that it would be necessary to increase the wage rate for temporary census workers in order to meet hiring goals. Although the wages offered in Nevada before the COVID–19 outbreak were well above the State minimum wage, the pay rate for short-term census jobs would unlikely put pressure on other wages because these part-time, temporary jobs are not close substitutes for full- time, permanent work. That is evidenced by the fact that, typically, the Census Bureau hires many people from the sidelines of the labor market such as students and retirees. Moreover, many low- skilled workers in Nevada before the COVID–19 outbreak were earning more than the $8 per hour minimum wage. For instance, recent data from before the pandemic showed that ‘‘Interviewers,’’ the occupation most similar to Census survey-takers, earned an av- erage (mean) wage of $15.32 per hour and a median wage of $13.82 per hour.11 Q.7. How important is a complete and accurate Census to the Fed- eral Reserve Banks? A.7. The Federal Reserve’s conduct of monetary policy is data de- pendent. Thus, making sound monetary policy decisions requires having good data, including a complete and accurate Decennial Census. For example, data on the labor market from the Current Population Survey (CPS) provides one of the most important read- ings on economic activity that we receive each month. The process used to construct the CPS data relies on data from the Decennial Census. Thus, the accuracy of the CPS—and therefore the efficacy of monetary policy—relies on the accuracy of the Decennial census. Q.8. Federal Reserve’s Tools During a Crisis or Recession—Should the Federal Reserve experiment with capping yields on short to in- termediate Treasury securities as Federal Reserve Governor Brainard recommended? What would be the impact of that? A.8. At the October 2019 Federal Open Market Committee (FOMC) meeting, FOMC participants discussed a range of topics associated with the FOMC’s review of strategy, tools, and communications in- cluding the possible role of capping rates further out the yield curve. There are many different ways this type of policy approach has been employed. For example, the Bank of Japan has been tar- geting a 10-year yield with the goal of keeping long-term interest rates low and providing policy accommodation. Recently, the Re- serve Bank of Australia established a target for shorter-maturity yields as a way of reinforcing its forward guidance around the like- ly path of its policy rate over the next 2 or 3 years. And in the 1940s, the Federal Reserve operated to keep Treasury yields across a full range of maturities below a schedule of caps as part of the governmentwide efforts to support wartime finance. 11See https://www.bls.gov/oes/current/oeslnv.htm. 86 As noted in the minutes of the October FOMC meeting, there are potential benefits and costs associated with the use of balance sheet tools to cap long-term interest rates. Capping longer-term in- terest rates could help support household and business spending. In addition, capping longer-maturity interest rates using balance sheet tools, if judged as credible by market participants, might re- quire a smaller amount of asset purchases to provide a similar amount of accommodation as a quantity-based program purchasing longer-maturity securities. However, determining the appropriate level of a cap on long-term interest rates could be challenging. Moreover, maintaining such a cap could result in an elevated level of the Federal Reserve’s balance sheet or significant volatility in its size or maturity composition. In addition, managing a cap on longer-term interest rates might be seen as interacting with the Federal debt management process. Policymakers have also discussed the potential role of targeting or capping shorter-term Treasury yields as a way of reinforcing for- ward guidance about the likely path of the Federal funds rate. Such policies could help to align market expectations about the fu- ture path of the Federal funds rate with the FOMC’s intentions. At the April 2020 FOMC meeting, a few participants again noted the potential role of asset purchases as a tool to cap longer-term yields or to reinforce forward guidance. These topics are among the many issues being discussed by the FOMC as part of its review of monetary policy strategy, tools, and communications. As noted in the minutes of the April meeting, the review will most likely be completed later this year. Q.9. We know that some communities in our Nation do not benefit from wage increases, job growth, and business success. Do you agree with Larry Summers who said the Federal Reserve should promote the idea that Government spending should be dif- ferent in depressed areas than in successful markets? A.9. The Federal Reserve has been charged by Congress with achieving maximum employment and stable prices. The tools we have to pursue these goals are not well suited to target the growth and development of individual communities. By contrast, fiscal and other policies that are under the purview of Congress are well suit- ed for assisting depressed localities. It is the role of Congress and the Administration to determine how to best address the unequal development of these communities. Q.10. Do you think public spending to support economic activity in communities with high unemployment avoid risking a rise in infla- tion the way public spending might in more prosperous places? A.10. The Federal Reserve does not have the tools to address the problems of localities. Fiscal policy can be a tool to assist these communities through both targeted tax policies and spending pro- grams. In the case where the community suffers from relatively high unemployment, the increased demand for local workers and businesses that may result from these fiscal policies should not lead to a problematic increase in inflation. 87 Q.11. We know we have an affordable housing crisis. Not only are low-income families paying half or more of their income for rent, many families are unable to buy a starter home. What do you think the impact of the Administration’s proposal to double the guarantee fee charged by Fannie Mae and Freddie Mac from 0.10 to 0.20 percentage points? How will this affect people seeking financing to buy a home? A.11. We monitor housing affordability carefully and are attentive to the effects of mortgage rates and credit availability on first-time homebuyers. Higher guarantee fees will likely raise mortgage rates for Government Sponsored Enterprise (GSE) borrowers as lenders pass the fee increase through to borrowers. However, mortgage rates are not currently a major barrier to affordability. Mortgage rates are at all-time lows and have been at the low end of their historical range for many years, and therefore we do not expect a 0.1 percentage point increase in the GSEs’ guarantee fee to materi- ally affect housing affordability. Rather, high house prices and stagnating income growth are straining affordability for many households. A guarantee fee increase is unlikely to disproportionately affect affordability for financially constrained first-time homebuyers, as these borrowers tend to rely on the Federal Housing Administra- tion (FHA) for financing. About half of all first-time homebuyers use an FHA mortgage, and first-time homebuyers with FHA loans tend to have lower credit scores and lower downpayments than those with GSE loans. More generally, because the change in the guarantee fee applies only to GSE borrowers, some of these borrowers may seek out other lenders if borrowing costs at the GSEs increase. The GSEs cur- rently finance about 40 percent of total mortgage volume, while FHA and bank portfolio lenders finance the majority of the remain- der. Competition may further limit the impact of the fee increase on affordability. It is also worth noting that a 0.1 percentage point increase in the mortgage rate is a very small change both relative to the level of the mortgage rate and relative to normal variation in the rate. It is not rare for daily changes in the mortgage rate to exceed 0.1 per- centage point. Even at today’s historically low mortgage rates, a 0.1 percentage point increase in the guarantee fee represents less than a 3 percent change in the mortgage rate and would increase monthly payments for new GSE borrowers by about 1 percent, on average. Q.12. You have spoken about the dangers of inequality. The gap between the richest and poorest households in the United States is at its highest point in more than 50 years. And household debt is now in excess of $14 trillion, exceeding the prerecession high. How much of our wage growth is due to increases in State and local minimum wages? A.12. In recent years, and before the onset of COVID–19, both in- creases in minimum wages and the improving labor market likely contributed to increases in wage rates. Many States increased their minimum wages even though the Federal minimum wage has re- mained unchanged. Estimates suggest that about 4 percent of all 88 employees are paid statutory minimum wages, and the effects of minimum wage increases are likely most noticeable for those work- ers. Separating out the effects of minimum wage increases on wage growth from the effects of an improving labor market is difficult. Recent research suggests that a 10 percent increase in the min- imum wage results in wage growth of about 4–7 percent for work- ers that were previously below the new minimum wage.12 Extrapo- lating those estimates for those workers affected by the minimum wage increase to economywide wage growth suggest that increases in minimum wages have likely boosted wage growth some, but the improving labor market is likely responsible for most of the in- crease in wage growth we had seen before the onset of COVID–19. Relatedly, research by staff at the Federal Reserve Bank of At- lanta, again, from before the onset of COVID–19, finds that wage growth for low-wage workers has outpaced that for higher-wage workers both in States that have raised their minimum wage and in States where the minimum wage has not increased in recent years, which again points to the importance of the strong labor market.13 Q.13. In your testimony before the House Financial Services Com- mittee, you noted that we should put the Federal budget on a sus- tainable path and reduce the Federal deficit, which is projected to reach over a trillion dollars this year. Please provide us with any statements you made about the im- pact of the Tax Cuts and Jobs Act law on the deficit. Please note the date you made those comments. A.13. For many years, I have spoken about the long term benefits to the economy of the Federal Government implementing policies that put the budget on a sustainable trajectory. The benefits arise generally from the effects of higher national saving on capital accu- mulation and productivity. Enacting policies that put the budget on a sustainable path requires important judgement calls by Congress about balancing the tradeoffs between different policy goals includ- ing equity, efficiency, and public sector investment. These choices are properly the responsibility of our elected officials. As Federal Reserve Chair, I believe that it is appropriate for me to discuss general fiscal policy principles, but to refrain from making judg- ments about particular policies. Accordingly, I have refrained from discussing how this particular policy, the Tax Cuts and Jobs Act, fits into the desired longer-term goal of sustainable fiscal policy. In addition to my comments about the benefits to the economy of putting longer-run debt and deficits on a sound trajectory, I have also spoken about the helpful role fiscal stimulus has played in re- storing growth during many of the recessions over the past 50 years. Such stimulus was certainly helpful during the Great Reces- sion when the Federal funds rates was pinned near zero, and the fiscal measures taken thus far in response to the current crisis— the fastest and largest response for any postwar downturn—have provided important support. While the overall policy response to 12See https://academic.oup.com/qje/article/134/3/1405/5484905. 13John Robertson, ‘‘Faster Wage Growth for the Lowest-Paid Workers’’, Macroblog, Federal Reserve Bank of Atlanta, December 16, 2019. 89 date has provided a measure of relief and stability, and will pro- vide some support to the recovery when it comes, COVID–19 raises longer-term concerns as well. We know that deeper and longer re- cessions can leave behind lasting damage to the productive capacity of the economy through unnecessary insolvencies on the part of households and businesses and long-term unemployment. If it helps avoid long-term economic damage and leaves us with a stronger recovery, additional fiscal support could be costly, but worth it. Again, this tradeoff is one for elected representatives, who wield powers of taxation and spending. RESPONSES TO WRITTEN QUESTIONS OF SENATOR JONES FROM JEROME H. POWELL Q.1. As you know, small businesses are crucial to the Nation’s economy. The Small Business Administration (SBA) reported that small businesses employ almost half of Alabama’s workforce. In the Federal Reserve’s Survey on Minority Owned Small Busi- nesses it acknowledges that the majority of small business owners, across all races, used their personal funds to finance their business. Additionally, when financing is needed small business owners use their credit cards. Are you concerned about the large number of small business owners using their personal finances and credit cards to fund their business as opposed to credit from financial institutions? Is the sustainable in the long-term? Do you believe this has contributed towards the stagnant rate of new businesses? A.1. Reliance on personal funds is common among all types of small businesses, even larger small firms (with revenues of greater than $1 million), and no matter the race or ethnicity of the owner.1 That said, the Small Business Credit Survey (SBCS) finds greater reliance on personal resources among minority-owned firms. For example, about 28 percent of Black-, Hispanic-, and Asian-owned firms were likely to use personal funds as a primary funding source for business operations as compared to 16 percent of white-owned firms, and white owners are more likely to report using a business credit card (as opposed to a personal credit card) as compared to minority owners.2 In addition, smaller firms, newer firms, and Black- and Hispanic-owned businesses are among those turning to online lenders for capital for their businesses.3 The present crisis posed by COVID–19 has been a challenging time, particularly for minority-owned businesses. Many minority- owned firms have lower revenues and are less connected to banks. For example, the SBCS indicates that black-owned firms are more likely than others to turn to a Community Development Financial Institution (CDFI). The smallest businesses lack both the financing options of larger businesses and the in-house financial expertise to 1The Federal Reserve Banks. 2019. ‘‘Small Business Credit Survey 2019 Report on Employer Firms’’, at https://www.fedsmallbusiness.org/survey/2019/report-on-employer-firms. 2The Federal Reserve Banks. 2019. ‘‘Small Business Credit Survey 2019 Report on Minority- Owned Firms’’, at https://www.fedsmallbusiness.org/survey/2019/report-on-minority-owned- firms. 3Federal Reserve Bank of Cleveland and Board of Governors of the Federal Reserve System. ‘‘Click, Submit 2.0: An Update on Online Lender Applicants From the Small Business Credit Survey 2019’’, at https://www.fedsmallbusiness.org/medialibrary/fedsmallbusiness/files/click- submit-2-0-121219.pdf. 90 tap the options that may be available to them. Especially during the current crisis, there is a significant need for technical assist- ance, such as that provided by CDFIs. In response, on May 1, the Federal Reserve opened up its Paycheck Protection Program Lend- ing Facility (PPPLF) to nonbanks, including CDFI loan funds, to provide liquidity to expand their reach in lower-income commu- nities. Moreover, as part of its broad effort to support the economy, the Federal Reserve developed the Main Street Lending Program (MSLP) to help credit flow to small and medium-sized businesses that were in sound financial condition before the pandemic. The MSLP was modified in May to expand the loan options available to businesses, and increased the maximum size of businesses that are eligible for support under the program. The changes expanded the pool of businesses eligible to borrow through the program, low- ered the minimum size for certain loans, and adjusted other fea- tures in response to public input. The Federal Reserve is con- tinuing to consider ways to increase the scope of this program. Q.2. During the hearing you mentioned that people receiving eco- nomic benefits like Supplemental Nutrition Assistance Program (SNAP), school nutrition programs, health care, childcare assist- ance, Temporary Assistance for Needy Families (TANF) and hous- ing are receiving less assistance than they have in the past. I want to expand on the complexities of economic assistance particularly for workers that have to turn down pay raises or promotions due to benefit cliffs. Benefit cliffs is the sudden and unexpected decrease in public benefits that can occur with small increase in earnings. When in- come increases, families can lose some or all economic supports, but the increase in earnings does not cover the costs associated with losing economic support. The Atlanta Federal Reserve has done research into benefit cliffs and some States have started working on solutions to decrease the dramatic cliff. Do you believe there are economic consequences to benefits cliffs? What do you recommend for Congress to do to help alleviate the cliff? A.2. Low-income support programs include both means-tested transfer programs (Medicaid, Supplemental Nutrition Assistance Program, and Temporary Assistance to Needy Families, for exam- ple) and some tax credits (the Earned Income Tax Credit and the Child Tax Credit, for example). Safety-net programs usually link eligibility to income with the goal of improving the situations of lower-income households. To maintain that intended focus, the ben- efits are phased out or unavailable to households with higher in- comes. As a household’s income increases and moves into a range where benefits are phased-out, the ‘‘effective marginal tax rate’’ that the household may face can increase substantially and some- times move up toward 100 percent if multiple program benefits are reduced or lost.4 4In addition to research by economists at the Federal Reserve Bank of Atlanta, see also, for example, calculations by C. Eugene Steurle (Urban Institute) in his Congressional testimony ‘‘Marginal Tax Rates and 21st Century Social Welfare Reform’’ for a joint hearing of the Sub- committee on Human Resources, Committee on Ways and Means and Subcommittee on Nutri- tion, Committee on Agriculture, June 25, 2015, at https://www.urban.org/sites/default/files/ 91 Evaluations of whether these programs are well-designed, re- quire—to an important extent—a judgment about the relative im- portance of helping those who are struggling economically versus potential work disincentives. That said, it is not the appropriate role of the Federal Reserve to make such judgments. Rather, it is the role of elected officials to ascertain whether social safety-net programs, both on the tax and spending sides of the budget, are well-designed. Q.3. As you know, the Federal Reserve, along with the other four regulators, recently proposed a rule that would clarify the defini- tion of covered funds under the Volcker Rule in an effort to in- crease long-term investments in companies across the country. This rulemaking should strike a balance between ensuring banks are able to engage in appropriate long-term investments in funds that can help spur innovation while not undermining safety and soundness. Do you believe that modifying the definition of covered funds to allow banks to provide permissible long-term investments to busi- nesses in Alabama and across the country would threaten the safe- ty and soundness of the financial industry? A.3. On January 30, 2020, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Securities and Ex- change Commission, and the Commodity Futures Trading Commis- sion (the Agencies) jointly issued a notice of proposed rulemaking (NPR)5 addressing the covered fund provisions of the Volcker Rule regulations. The NPR includes provisions that would provide bank- ing entities increased flexibility to invest in and sponsor certain funds. If finalized, the proposal may facilitate lending and capital investment in certain businesses, in particular by excluding from the definition of ‘‘covered fund’’ credit funds and venture capital funds, both of which may provide an additional conduit for banking entities to finance business activities, particularly in areas where such financing may not be readily available. The Volcker Rule’s covered fund provisions currently do not apply, and would not apply under the proposal, to banking entities’ direct lending to businesses, or direct merchant banking invest- ments in businesses. With respect to the two proposed exclusions for venture capital funds and credit funds, the preamble to the NPR noted that the Agencies do not believe that the proposed covered fund exclusions raise the concerns that the Volcker Rule was intended to address. The proposal included several eligibility requirements to appro- priately limit the scope of the proposed exclusions (for example, a prohibition on banking entities’ guaranteeing the performance of these funds). In addition, all of the proposed new exclusions would require a banking entity’s investment in, and relationship with, a publication/56291/2000275-Marginal-Tax-Rates-and-21st-Century-Social-Welfare-Reform.pdf; and the Congressional Budget Office report, ‘‘Effective Marginal Tax Rates for Low- and Mod- erate-Income Workers in 2016’’, November 2015, at https://www.cbo.gov/sites/default/files/ 114thcongress-2015-2016/reports/50923-marginaltaxrates.pdf. 5See https://www.federalreserve.gov/aboutthefed/boardmeetings/files/volcker-rule-fr-notice- 20200130.pdf. 92 fund to meet applicable safety and soundness and conflict of inter- est standards. Q.4. Historically, wages in the manufacturing sector are higher than those in the service sector. Men are more likely to hold jobs at any skill level in manufacturing, while women are more likely to hold jobs in the service sector, a sector that pays considerably less than manufacturing. Women hold 77 percent of the jobs in health care and edu- cation—fast-growing fields in the service sector that eclipse the en- tire goods-producing sector of the economy. The growing number of women in the workforce reflects a long- running evolution away from male-dominated industries like man- ufacturing toward the service side of the economy, where women have an edge. Is the Federal Reserve aware of this pattern of an increase of women in the service sector workforce while earning significantly less than men in manufacturing workforce? A.4. Prior to the COVID–19 crisis, women comprised just over 50 per- cent of all nonfarm payroll jobs. Breaking that down by industry shows that women made up a much larger share of employment in some industries than in others (Figure 1). For example, women comprised just about 80 percent of all jobs in education and health services, by far the largest share of any industry. In contrast, women comprised about only 30 percent of all jobs in manufac- turing. Women also comprised about half or more of jobs in a num- ber of other service sectors, including leisure and hospitality and retail trade. 93 The composition of employment across industries for men and women together has been shifting away from manufacturing, which largely employs men, and towards service sectors, which largely employs women (Figure 2). As a whole, manufacturing tends to pay a higher hourly rate per job than service sectors, but that is not true for each service sector (Figure 3). For much of the postwar pe- riod, manufacturing jobs paid more than education and health service jobs. That changed around the year 2000, when the average hourly pay rate in education and health service jobs eclipsed that rate for manufacturing jobs. Education and health service jobs prior to the COVID–19 crisis paid about $2.25/hour more than manufacturing. However, manufacturing paid much more than noneducation and health service jobs. In addition to monitoring employment trends in formal employ- ment, the Federal Reserve also tracks employment patterns in in- formal gig work. Based on the Federal Reserve’s recent ‘‘Survey of Household Economic Decisionmaking’’,6 men and women are simi- larly likely to earn money through gig work. Recent research on wages in the gig economy also observes that among rideshare driv- ers, women are paid less because of differences in how and when they work.7 Q.5. Over the last few years, the annual average earnings growth for American workers has remained below 3 percent. Yet at the same time, average house prices have increased more than 5 per- cent. Rising housing costs coupled with relatively stagnant wage growth has made it hard for consumers to save for a downpayment and the costs associated with buying a home like inspectors and appraisers. Additionally, there are large disparities in home ownership be- tween African Americans and their white counterparts. 73.1 per- cent of white Americans owned a home at the end of the second quarter of 2019 compared to 40.6 percent of African Americans and 46.6 percent of Hispanic American. What, if any, are the consequences of not addressing the large home ownership disparities among minorities? A.5. Because a home is the largest asset for many households, the racial home ownership gap has implications for the racial wealth gap.8 Rising house prices increase the wealth of homeowners, who have locked in their housing costs to a large degree, while making it more difficult for renters to afford a downpayment. If rents con- tinue to increase along with prices, it will be even more difficult for renters to save and build wealth. The gaps in home ownership by race and ethnicity are a concern, and we included an analysis of differences in home ownership rates in the February 2017 issue of the Monetary Policy Report. There are a number of factors contributing to these gaps. For example, 6See https://www.federalreserve.gov/newsevents/pressreleases/other20200514a.htm. 7Cook, Cody, Rebecca Diamond, Jonathan Hall, John A. List, and Paul Oyer. ‘‘The Gender Earnings Gap in the Gig Economy: Evidence From Over a Million Rideshare Drivers’’, No. w24732. National Bureau of Economic Research, 2018. 8For an analysis of the components of the racial wealth gap, see https:// www.federalreserve.gov/econres/notes/fedsnotes/recent-trends-in-wealth-holding-by-race-and- ethnicity-evidence-from-the-survey-of-consumer-finances-20170927.htm. 94 the African American and Hispanic populations have been more strongly affected by restrictions on the availability of mortgages to low-score borrowers, particularly in the postcrisis contraction in mortgage credit. However, it should be noted that the home owner- ship gap has been persistent for many decades and only widened a bit during the postcrisis period. RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA FROM JEROME H. POWELL Q.1. Businesses in Arizona are struggling to find workers with the skills they need. What effects have skilled labor shortages had on economic growth and social mobility? A.1. As we know, skill shortages arise in a tight labor market. While tight labor markets can make hiring difficult for businesses, they bring many benefits to workers. In particular, individuals without job opportunities previously are more likely to be employed in a tight labor market and, once employed, they are more likely to receive valuable training. The increase in skills from work expe- rience and training can increase their attachment to the labor force and, perhaps, increase aggregate employment and economic output in the longer run. As a result, the advantages that a tight labor market provides to disadvantaged workers can increase social mo- bility. The contrast between the labor market conditions that prompted this question just a few weeks ago and the current situation high- lights the scope and speed of the current economic downturn. The coronavirus has left a devastating human and economic toll in its wake. As a Nation, we have temporarily withdrawn from many kinds of economic and social activity to help slow the spread of the virus. Congress and the Federal Reserve have acted with unprece- dented speed and force to address the economic consequences. The overall policy response to date has provided a measure of relief and stability, and will provide some support to the recovery when it comes. The Federal Reserve will continue to use our tools to their fullest until the crisis has passed and the economic recovery is well under way. 95 ADDITIONALMATERIALSUPPLIEDFORTHERECORD 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138 139 140 141 142 143 144 145 146 147 148 149 150 151 152 153 154 155 156 157 158 159 160 161 LISCC GUIDANCE RESPONSE LETTER SUBMITTED BY CHAIRMAN CRAPO 162 163

Jerome H. Powell (2020, February 11). Congressional Testimony. Testimony, Federal Reserve. https://whenthefedspeaks.com/doc/testimony_20200212_chair_the_semiannual_monetary_policy_report

@misc{wtfs_testimony_20200212_chair_the_semiannual_monetary_policy_report,
  author = {Jerome H. Powell},
  title = {Congressional Testimony},
  year = {2020},
  month = {Feb},
  howpublished = {Testimony, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/testimony_20200212_chair_the_semiannual_monetary_policy_report},
  note = {Retrieved via When the Fed Speaks corpus}
}