Congressional Testimony

S. HRG. 117–495 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CONGRESS HEARING BEFORETHE COMMITTEE ON BANKING, HOUSING, ANDURBANAFFAIRS UNITED STATES SENATE ONE HUNDRED SEVENTEENTH CONGRESS SECOND SESSION ON OVERSIGHT ON THE MONETARY POLICY REPORT TO CONGRESS PURSU- ANTTOTHEFULLEMPLOYMENTANDBALANCEDGROWTHACTOF1978 MARCH 3, 2022 Printed for the use of the Committee on Banking, Housing, and Urban Affairs ( Available at: https://www.govinfo.gov/ U.S. GOVERNMENT PUBLISHING OFFICE 55–669 PDF WASHINGTON : 2024 COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS SHERROD BROWN, Ohio, Chairman JACK REED, Rhode Island PATRICK J. TOOMEY, Pennsylvania ROBERT MENENDEZ, New Jersey RICHARD C. SHELBY, Alabama JON TESTER, Montana MIKE CRAPO, Idaho MARK R. WARNER, Virginia TIM SCOTT, South Carolina ELIZABETH WARREN, Massachusetts MIKE ROUNDS, South Dakota CHRIS VAN HOLLEN, Maryland THOM TILLIS, North Carolina CATHERINE CORTEZ MASTO, Nevada JOHN KENNEDY, Louisiana TINA SMITH, Minnesota BILL HAGERTY, Tennessee KYRSTEN SINEMA, Arizona CYNTHIA LUMMIS, Wyoming JON OSSOFF, Georgia JERRY MORAN, Kansas RAPHAEL G. WARNOCK, Georgia KEVIN CRAMER, North Dakota STEVE DAINES, Montana LAURA SWANSON, Staff Director BRAD GRANTZ, Republican Staff Director ELISHA TUKU, Chief Counsel DAN SULLIVAN, Republican Chief Counsel CAMERON RICKER, Chief Clerk SHELVIN SIMMONS, IT Director PAT LALLY, Hearing Clerk (II) C O N T E N T S THURSDAY, MARCH 3, 2022 Page Opening statement of Chairman Brown ................................................................ 1 Prepared statement ................................................................................... 45 Opening statements, comments, or prepared statements of: Senator Toomey ................................................................................................ 4 Prepared statement ................................................................................... 46 WITNESS Jerome H. Powell, Chair Pro Tempore, Board of Governors of the Federal Reserve System .................................................................................................... 6 Prepared statement .......................................................................................... 47 Responses to written questions of: Chairman Brown ....................................................................................... 50 Senator Toomey ......................................................................................... 51 Senator Reed .............................................................................................. 55 Senator Menendez ..................................................................................... 57 Senator Warren ......................................................................................... 58 ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD Monetary Policy Report to the Congress dated February 25, 2022 ..................... 60 (III) THE SEMIANNUAL MONETARY POLICY REPORT TO THE CONGRESS THURSDAY, MARCH 3, 2022 U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. The Committee met at 10 a.m., via Webex and in room 538, Dirksen Senate Office Building, Hon. Sherrod Brown, Chairman of the Committee, presiding. OPENING STATEMENT OF CHAIRMAN SHERROD BROWN Chairman BROWN. The Senate Committee on Banking, Housing, and Urban Affairs will come to order. Today’s hearing again is in a hybrid format. Our witness is in person. Thank you, Chair Powell. Members have the option to ap- pear either in person or virtually. I want to start by acknowledging that as we sit here this morn- ing, Ukrainians are showing such courage and resolve, fighting Russian invaders in their homeland. Ukrainian families fleeing in- discriminate bombings are taking refuge in subway tunnels, some- thing that Europe has not seen since the siege of London seven decades ago. I want to express my support for the brave men and women in Ukraine fighting for democracy, and I know all my col- leagues on this Committee, of both parties, join me in that. This is a Russian attack on democracy. It is only the latest, ter- rible escalation of what has become one of the main goals of the Russian Federation, to attack and undermine democratic norms at home and abroad. The world is looking to us right now. We are the leader of the free world, and its oldest democracy. It is vital that we live by our values, both abroad and at home. That means a commitment to the rule of law, a commitment to democratic participation, and a com- mitment to independent institutions that allow our society to func- tion, like the Federal Reserve. We created the Fed 109 years ago, I guess, as an independent agency, outside of any political party’s control, to be staffed with economic experts, not political cronies. It is one of many American institutions that sets our country apart from autocratic regimes. It is vital that we reaffirm our commitment to the Fed’s role, showing the world what a functioning democracy looks like. Let us show up and do our jobs, like Chair Powell comes here, perhaps 14 times a year, it seems to him. That is the best way to achieve a strong, growing economy, that lifts up the whole country. (1) 2 This time last year, our country and our economy were in a place of deep uncertainty. More than 4 million people were out of a job. Frontline workers were just beginning to get vaccinated. We were in the midst of a public health crisis and economic crisis that need- ed us all of us—policymakers, business owners, workers, union and non-union alike—to come together and tackle the challenge of this pandemic economy. And that is what we did. We passed the American Rescue Plan. We got shots into arms, money into people’s pockets, workers back on the job, and kids back in school. Against the odds, 2021 became a year of, as the Chair, I am sure, will say, unprecedented eco- nomic growth for our country, in job creation, wage gains, GDP. For the first time in two decades—think about this—for the first time in two decades the American economy grew faster than Chi- na’s economy. Think about that. We averaged over half a million new jobs per month last year, and we saw the fastest drop ever in the unemployment rate. Wages rose for workers, especially low-wage workers, who began to have a little more power in a tight labor market. American entre- preneurs started a record-setting five million new businesses. This all translated into American families’ household balance sheets, which were healthier in 2021 than before the pandemic. It is because of the actions that Democrats took in this Congress, ex- panding the Child Tax Credit, and rental and housing assistance. The American Rescue Plan helped get most Americans vac- cinated and made a booster shot available to everyone. Today, over 65 percent of the population is fully vaccinated, more than 75 per- cent of all adults. Case counts and hospitalizations are dropping. We are one step closer to normal life beyond the pandemic. Ameri- cans no longer have to live in fear. We have come a long way, but the fight is not over, and it has taken a terrible toll on Americans. After 2 years of stress, of mas- sive disruptions in our lives and in our economy, people are simply exhausted. And they are fearful that inflation will make it harder and harder for them to keep up with the cost of living. The pandemic economy has caused inflation. Families feel it at the gas station. They feel it when they are making rent payments. They feel it when they check out at the grocery store. We must acknowledge that Russia’s invasion of Ukraine will af- fect the global economy. We learned over the past 2 years how frag- ile our global supply chains are. Some of us have said for years that we should make more things in America and rely less on China. Elites in Washington, in lobbying for trade change and trade law and tax law, elites in Washington dismissed those con- cerns for decade. Now they are starting to wake up. We help prevent long-term inflation by bringing supply chains home, and in the process we rebuild our own industrial base. The House and Senate have both passed bills investing in domes- tic manufacturing and research and development. We need to put a comprehensive bill on the President’s desk and bring manufac- turing, research, and development back to this country. We are building the capacity to move goods faster and more cheaply with the Bipartisan Infrastructure Bill. While most Ameri- cans report mixed feelings about the economy over the past year— 3 they may have gotten a raise and a tax cut and have more in sav- ings, while also being concerned rightly about rising costs—there is one group that did better than ever last year: America’s large corporations. Corporations made record profits in 2021 and they gave their executives and shareholders a bigger slice of the profits than ever. They have reacted with barely controlled glee at the op- portunity to raise prices during this pandemic economy. We can never forget: raising prices is a choice. There is no law saying that if the cost of an input goes up or if transportation costs increase, companies have to raise prices. They have options. They could cut costs elsewhere by making executive bonuses or stock buybacks just a little bit smaller. But of course they do not. There is not enough competition in the economy, especially drug companies, meatpackers, oil companies, shippers. From the meatpacking industry to the oil cartels, corpora- tions do not face the fair, capitalist free market competition we need to keep prices low and wages high. And when you combine current inflation with the expenses that have been rising for decades—drug costs, childcare, housing—it is little wonder that many middle-class families in Nevada, Massa- chusetts, South Carolina, Alabama, Pennsylvania, and Ohio do not feel stable. It will take all of us to lower these long-term costs, fight infla- tion, and create an economy where hard work pays off for everyone, no matter who you are, where you live, or what kind of work you do. All workers should be able to find a good-paying job that allows them to raise a family, keep up with the cost of living, and join the middle class. The Federal Reserve has a responsibility, as you know, Mr. Chair, to tackle inflation, to ensure we have a resilient labor mar- ket, a safe and stable banking system, an efficient and reliable pay- ments system, and empowered local communities where consumers, workers, small banks, and small businesses thrive. And it is more important now than ever that we have a full— full means seven members, first time in a decade; you only have four now, as you know—a full Federal Reserve Board making those decisions. In a time of deep economic uncertainty, where democracies across the world are threatened by authoritarian strongmen, we must ensure the Fed is operating at full capacity. We have an op- portunity, Mr. Chair, as you know, and you know her well, to con- firm one of the world’s leading experts on cybersecurity in the fi- nancial system. Sarah Bloom Raskin chaired the G–7 Cyber Expert Group. We need her in that position now more than ever. All of us need to do our job to get her and the other four Fed noms con- firmed. We must fill these positions so that the entire team of deci- sionmakers can come together, assess the data, and address the problems Americans face. Today, we have Chair Pro Tempore of the Federal Reserve, Jay Powell, here to deliver a biannual update on the Fed’s actions to steer our economic recovery. Chair Powell, thank you, and I look forward to your testimony. Senator Toomey. 4 OPENING STATEMENT OF SENATOR PATRICK J. TOOMEY Senator TOOMEY. Thank you, Mr. Chairman. Let me begin by fully endorsing the sentiments you expressed regarding the appall- ing Russian invasion of an entirely unjustified war against Ukraine, and share your salute for the extraordinary courage, valor, and commitment of the people of Ukraine. Chairman Powell, welcome. I do hope we process your nomina- tion soon. Of course, I have been advocating that we do that for some time now, but in the meantime I do know that you and your fellow FOMC members are fully able to do your job of fighting in- flation. And, obviously, there is a lot of work to do on that front. January’s inflation reached a 40-year high of 7.5 percent, and infla- tion like that is doing real damage to average Americans. Some of my colleagues like to observe that wages are growing. The problem is inflation is growing faster, and that causes workers to fall further and further behind, and that is what is happening today. Savers, of course, are earning virtually zero on their savings while inflation significantly erodes the value of those savings. Our current zero-interest-rate monetary policy that we have had for some time now is probably appropriate at a period of economic crisis or during a recession. It is hard to see that that makes sense during a period of multidecade-high inflation. Of course, profligate fiscal policy of the year has also contributed to inflation. Democrat supporters of blow-out deficit spending bills like the American Rescue Plan and Build Back Better have looked to blame others for the consequences of their own misguided policy. First they blame global supply chains. Now they have shifted their blame to greedy corporations. Actually, inflation is pretty easy to understand. It results from more money chasing fewer goods. The Administration’s policies such as overregulation and a war on American energy have limited the production of goods, and meanwhile reckless spending has re- sulted in more money chasing those goods. Of course, the Fed’s accommodative monetary policy has further stimulated demand. For several years now I have warned that it could be extremely difficult to put the inflation genie back in the bottle. Well, the genie is out and the Fed is behind the curve. We need to act with urgency to get inflation under control. Mr. Chairman, I am also deeply troubled to what appears to be a growing urge to use financial regulators, in general, and the Fed, in particular, to tackle complex political questions that are outside of our financial and monetary system. Questions like how and how quickly to transition to a lower carbon economy. Questions like how to address racially charged social issues. Or even how do we im- prove primary and secondary education. Now there is no doubt these are very important issues, but they are wholly unrelated to the Fed’s limited statutory mandates and expertise. And yet the Fed has been weighing in on every one of these issues. Some intend to use the Fed’s recently developed cli- mate scenario analysis as a mechanism, as part of a tool to steer capital away from carbon-intensive industries. All 12 Reserve Banks have hosted a Racism in the Economy series, where invited speakers advocated for specific policies, including racial reparations and defunding the police, among other very liberal proposals. And 5 the Minneapolis Fed is actively lobbying to change Minnesota’s con- stitution on the issue of K–12 education policy. Does anyone really think that these activities are within the Fed’s statutory mandates? Of course not. What they are is they are challenging and complex issues that require really difficult trade- offs. And in a democratic society, those tradeoffs have to be made by elected representatives who are directly accountable to the American people. Consider some tradeoffs associated with addressing global warm- ing. Now if we limit domestic oil and gas production Americans will pay more at the pump. How much more is appropriate? If we sud- denly limit domestic production without feasible energy alter- natives our Nation and the world will become more reliant on fossil fuels from autocratic nations. We are watching that play out. When does that reliance present an unacceptable national and global se- curity threat? These are just examples of the unlimited number of equally chal- lenging tradeoffs for all of these politically charged topics, none of which should be decided by unelected and unaccountable central bankers. And yet some of the Reserve Banks are diving right, and when I have requested additional information about their activi- ties, the Reserve Banks stonewall me. When I asked the Board to address the issue, everyone passes the buck. The Fed Board says, ‘‘Oh, those things are up to the Reserve Banks,’’ even though the Board oversees the Reserve Banks. And except through the Fed Board the Reserve Banks are completely unaccountable to Con- gress. So when I think about this state of affairs, Mr. Chairman, I can only conclude that we need to think seriously about reforming the structure of the Fed. In my view, any Fed reform should preserve and strengthen monetary policy independence, but it should also develop mechanisms to enforce the existing statutory limits on Fed- eral Reserve activity that are not being complied with today. That would require also proper congressional oversight by increasing transparency. So here are three reform ideas that we ought to discuss. First, unlike the main Fed Board, the Reserve Banks are not subject to FOIA. Well, that should change. Second, we should consider wheth- er or not to subject Federal Reserve bank heads, the regional Re- serve Bank heads, to Presidential appointment and Senate con- firmation. Third, we ought to examine the historical 12 Reserve Bank struc- ture. That dates back to a very, very different time. For example, it might make sense to consolidate them into 5 banks, and make each one a permanent voter on the FOMC. Or maybe we should eliminate the Reserve Banks entirely and have the main Fed Board assume these responsibilities. To be clear, I am not specifically advocating any one of these, but I think we have to consider these and other possibilities. I do not present these ideas lightly. But the Fed was given independence to insulate monetary policy from politics, and Congress has a respon- sibility to ensure that the Fed does not become a political actor. Thank you, Mr. Chairman. Chairman BROWN. Thank you, Senator Toomey. 6 Mr. Powell, we welcome you to the Committee again, as Chair Pro Tempore of the Federal Reserve. Please begin your testimony. Thank you. STATEMENT OF JEROME H. POWELL, CHAIR PRO TEMPORE, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Mr. POWELL. Thank you. Chairman Brown, Ranking Member Toomey, and other Members of the Committee, I am pleased to present the Federal Reserve’s semiannual Monetary Policy Report. Before I begin, let me briefly address Russia’s attack on Ukraine. The conflict is causing tremendous hardship for the Ukrainian peo- ple. The implications for the U.S. economy are highly uncertain, and we will be monitoring the situation closely. At the Fed, we are strongly committed to achieving the monetary policy goals that Congress has given us: maximum employment and price stability. We pursue these goals based solely on data and objective analysis, and we are committed to doing so in a clear and transparent manner so that the American people and their rep- resentatives in Congress understand our policy actions and can hold us accountable. I will review the current economic situation before turning to monetary policy. Economic activity expanded at a robust 5.5 percent pace last year, reflecting progress on vaccinations and the reopening of the economy, fiscal and monetary policy support, and the healthy fi- nancial positions of households and businesses. The rapid spread of the Omicron variant led to some slowing in economic activity early this year, but with cases having declined sharply since mid-Janu- ary, the slowdown seems to have been brief. The labor market is extremely tight. Payroll employment rose by 6.7 million in 2021, and job gains were robust in January. The un- employment rate declined substantially over the past year and stood at 4.0 percent in January, reaching the median of FOMC par- ticipants’ estimates of its longer-run normal level. The improve- ments in labor market conditions have been widespread, including for workers at the lower end of the wage distribution as well as for African Americans and Hispanics. Labor demand is very strong, and while labor force participation has ticked up, labor supply re- mains subdued. As a result, employers are having difficulties filling job openings, an unprecedented number of workers are quitting to take new jobs, and wages are rising at their fastest pace in many years. Inflation increased sharply last year and is now running well above our longer-run objective of 2 percent. Demand is strong, and bottlenecks and supply constraints are limiting how quickly pro- duction can respond. These supply disruptions have been larger and longer lasting than anticipated, exacerbated by waves of the virus, and price increases are now spreading to a broader range of goods and services. We understand that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food, housing, and transportation. We know that the best thing we can do to support a strong labor market is to promote a long expansion, and that is only possible in an environment of price sta- bility. 7 The Committee will continue to monitor incoming economic data and will adjust the stance of monetary policy as appropriate to manage risks that could impede the attainment of its goals. The Committee’s assessments will take into account a wide range of in- formation, including labor market conditions, inflation pressures and inflation expectations, and financial and international develop- ments. We continue to expect inflation to decline over the course of the year as supply constraints ease and demand moderates be- cause of the waning effects of fiscal support and the removal of monetary policy accommodation. But we are attentive to the risks of potential further upward pressure on inflation expectations and inflation itself from a number of factors. We will use our policy tools as appropriate to prevent higher inflation from becoming en- trenched while promoting a sustainable expansion and a strong labor market. Our monetary policy has been adapting to the evolving economic environment, and it will continue to do so. We have phased out our net asset purchases. With inflation well above 2 percent and a strong labor market, we expect it will be appropriate to raise the target range for the Federal funds rate at our meeting later this month. The process of removing policy accommodation in current cir- cumstances will involve both increases in the target range of the Federal funds rate and reduction in the size of the Fed’s balance sheet. As the FOMC noted in January, the Federal funds rate is our primary means of adjusting the stance of monetary policy. Re- ducing our balance sheet will commence after the process of raising interest rates has begun, and will proceed in a predictable manner primarily through adjustments to reinvestments. The near-term effects on the U.S. economy of the invasion of Ukraine, the ongoing war, the sanctions, and of events to come, re- main highly uncertain. Making appropriate monetary policy in this environment requires a recognition that the economy evolves in un- expected ways. We will need to be nimble in responding to incom- ing data and the evolving outlook. Maintaining the trust and confidence of the public is essential to our work. Last month, the Federal Reserve finalized a comprehen- sive set of new ethics rules to substantially strengthen the invest- ment restrictions for senior Federal Reserve officials. These new rules will guard against even the appearance of any conflict of in- terest. They are tough and best in class in government, here and around the world. We understand that our actions affect communities, families, and businesses across the country. Everything we do is in service to our public mission. We at the Fed will do everything we can to achieve our maximum-employment and price-stability goals. Thank you. Chairman BROWN. Thank you, Chair Powell. We, of course, are monitoring closely Russia’s invasion of Ukraine, the impacts it will have on our partners, including our country. In November, the Fed issued a rule jointly with the OCC and FDIC to require banks to notify their Federal financial regulator of any cybersecurity inci- dent within 36 hours. They already made a requirement of notifica- tion but you sped that up, obviously. 8 Given the increased threat of cyberattacks, expeditious reporting by financial institutions is essential. How does the Fed address any reporting about cyberattacks when they occur? What do you do? Mr. POWELL. When we receive reports. Well, first of all to date we have not seen any significant issues, but we remain vigilant since the Ukraine war began. So we are in constant, ongoing con- tact with the financial institutions, especially the large ones, on cyber risk, and particularly in this environment; we have been since a couple of months ago on very high alert. So are they. It is regular communication, back and forth. The channels are open, and all of us are on the highest stage of alert, as you would imagine. Chairman BROWN. I think it is important. I know that your focus is always on financial institutions. It is important for us to be able to repel cyberattacks, to protect against them. Throughout our economy businesses are reporting cyberattacks on them, and your job is obviously with financial institutions. I am hopeful that you will make those comments increasingly public so that other busi- nesses understand, while you do not have jurisdiction, that other businesses understand the importance of that. We know the impact of Russia’s invasion could go beyond cyberattacks in financial institutions. It is possible because of his actions. Prices of commodities could go up, given any market dis- ruptions, and Americans could see higher prices in the grocery store and at the gas pump. How does the Fed, Mr. Chair, evaluate the economic uncertainty caused by Putin’s actions? What steps do you take to mitigate those risks, like inflation? Mr. POWELL. You know, so we are watching carefully to see how this evolves. I think, to your point, the ultimate effects on the U.S. economy of the war, of the sanctions, and of events yet to come is highly uncertain. And so we need to be alert to what those might be. What we know so far is that commodity prices have moved up significantly, energy prices in particular. That is going to work its way through our U.S. economy. We are going to see upward pres- sure on inflation, at least for awhile. We do not know how long that will be sustained for. In addition, we could see, you know, risk sentiment declining, risk-taking sentiment declining, so you could see lower investment, you could see people holding back on spending. It is hard to say what the effects on both supply and demand will be, and I would just echo that we need to be alert and nimble as we make decisions in what is quite a difficult environment. Chairman BROWN. The Monetary Policy Report that you released highlighted great news for workers in our economic recovery, wage gains across the Board, but especially for low-wage workers, job growth across sectors, a drop in the unemployment rate that beat forecasters’ expectations. All good news. But we clearly have a long way to go when it comes to making sure everyone has a good-qual- ity job. We know from prior economic crises that hiking up interest rates—and I know you will be cautious—but hiking up interest rates too early can depress job growth. My question is, as the Fed plans to raise interest rates, what steps will you take to ensure that it does not affect the pretty amazing job growth? President Biden mentioned, at the State of 9 the Union, 369,000 manufacturing jobs, many of them in my State of Ohio. How do you ensure that the steps the Fed takes do not affect that kind of job growth? Mr. POWELL. Well, the labor market as we have it today, unem- ployment is down to 4 percent and wages are at historic highs for recent history. Quits are at all-time highs or near that. Job open- ings are at all-time highs. So you are right. This is a great labor market for workers, particularly workers in the lower quartile of earning who are getting the biggest wage increases and really very, very high wage increases. So the problem really that we are facing is one of high inflation, and over time, the biggest risk to being able to sustain a long ex- pansion and have continued increases in participation, for example, which has tended to lag declines in unemployment, is to sustain or really restore price stability. So that is the single most important thing we can do to really try to have the kind of long expansion that we saw in the last cycle, and saw the many benefits that flowed to people as that expansion extended. Chairman BROWN. Thank you. In my last 60 seconds, two yes- or-no questions if I could. Do you agree that making testing and vaccinations accessible has already made it possible for people to safely rejoin the labor force? Mr. POWELL. I do not have any special expertise on that but that sounds right to me. Chairman BROWN. Do you agree that making childcare affordable would make it possible for parents to return to work and increase the labor supply? Mr. POWELL. As we, I think, have discussed, there is good re- search that supports that proposition as well. Chairman BROWN. Thank you. Senator Toomey. Senator TOOMEY. Thank you, Mr. Chairman. Chair Powell, just so that we get this on the record here, a couple of quick, simple questions here. Monetary policy is decided by the FOMC of the Fed. Correct? Mr. POWELL. Yes. Senator TOOMEY. And there are 12 seats on the FOMC of which 9 are currently filled. Correct? Mr. POWELL. Actually, there are as many as 19 participants, but you are right, there can be 12 voters. So we have right now 16 of the 19 seats filled, or 9 of the 12 voters. Senator TOOMEY. OK. So the FOMC is, today, right now, fully ca- pable of determining monetary policy, and the Fed as a whole is fully capable of implementing that policy right now. Is that correct? Mr. POWELL. Yes. We will do our jobs. Senator TOOMEY. OK. I was glad to hear your emphasis on the importance of price stability. Here is my concern. You know, it is a little bit easier to raise interest rates to normalize to fight infla- tion at a time when the economy is booming. What I am a little bit worried about—and I fully acknowledge nobody knows how this is going to play out, but I think it is fair to say that this war has changed the risk profile a little bit with respect to inflation, that you just alluded to. There is certainly some upward pressure on energy, and maybe beyond. And all else being equal, it probably increases the risk that we will be looking at downward 10 revisions in growth. Nothing certain about that, but the risk is higher. And so I wonder if you could share with us your thoughts on the importance of fighting inflation if we find ourselves in a situation where growth is less robust than what we are hoping for now. Mr. POWELL. So I would agree on both the supply and demand side there is a lot of uncertainty. Oil prices are higher. That typi- cally does weigh on spending, to some extent. But at the same time we have households and businesses that are in such strong finan- cial shape, it is not clear what those effects are going to be. So as I mentioned yesterday, I do think that it is going to be ap- propriate for us to continue to proceed along the lines that we had in mind before the Ukraine invasion happened, and that was to raise interest rates at the March meeting and to continue through the course of the year, based on incoming data and the evolving outlook, to engage in a series of rate increases. I would say in this very sensitive time at the moment I think it is appropriate for us to be careful in the way we conduct policy, simply because things are so uncertain and we do not want to add to that uncertainty. But that is where it leaves me. Senator TOOMEY. I just hope that the actual practice going for- ward at the Fed is consistent with what I think you were alluding to earlier, and that is the need for price stability as a precondition for maximizing the well-being of American workers. If we are in a world where we do not have price stability, they do not have job security. They do not have income security. It is just so important. I sure hope that we exceed all of our expectations about growth this year, but I do not know that. Let me shift to ask you this. In your view, is it consistent with the statutory mandate of the regional Fed banks to engage in polit- ical advocacy, and specifically a racial justice campaign or efforts to amend a State constitution? Is that within the proper domain of regional Fed banks? Mr. POWELL. So as we have discussed, you know, the Reserve Banks have generally had and exercised a degree of freedom of oversight from the Board, the Board of Governors, in their research activities, in their policy thinking activities, and that has always been thought to be a benefit, including by me, because it avoids the kind of group-think you could get if you had one economic staff in one building and that is where all the Governors were. So it has been a feature rather than a bug of the System, for a long time. I would echo, though, I strongly share the view that everything we do in the System needs to be clearly linked in ways that people understand to our mandate, and that that is one of the very most important underpinnings of our independence. If we are not doing that then the case for our independence immediately becomes weaker. Senator TOOMEY. Yes, and I do not think anybody can make the case that amending a State constitution with respect to how a State pays for primary and secondary education has anything to do with that mandate. Let me ask you the last question. The Fed has embraced the idea of requiring climate scenario analyses for banks, and the justifica- tion is this is an important way for banks to understand the nature 11 of the risk that they face. Whatever one thinks of that, is it your view that among the Fed’s responsibilities is to determine the pace at which the American economy transitions to a lower carbon econ- omy? Mr. POWELL. No. Senator TOOMEY. OK. Thank you. Thank you, Mr. Chairman. Chairman BROWN. Thank you. Senator Tester, of Montana, is recognized. Senator TESTER. Thank you, Mr. Chairman and Ranking Mem- ber, and I want to thank Chairman Powell for being here today. I appreciate the work that you do, as always. Look, I think inflation is on everybody’s minds and how you deal with it, and as you pointed out the last time you were in front of this Committee, it is not only a demand problem, it is a supply problem. You can help deal with the demand but the supplies issue are a little different thing. Being in the business of agriculture personally I can see that consolidation in the marketplace is a big deal, and I am talking particularly the meat industry right now, where you have four packers that control 84 percent of this country’s meat supply. Com- petition is critically important if capitalism is going to work. I do not need to tell you that. You know that better than anybody. But there does not seem like there is a lot of competition in a number of different areas, but I will just focus on meatpacking. No, I will not. Let me back up. Let us talk about consolidation generally, and if that helps drive prices up or down, and then if, in fact, you think it does drive prices up, would inserting more competition in the marketplace help consumers? Mr. POWELL. First of all, we are not responsible for competition policy. Individual industries can have competition issues, and those are appropriate subjects for the folks who wield those tools. That is not us. At the aggregate level, the connection between concentration, for example, and inflation is really not clear. Some of the industries that had a lot of consolidation were the very ones that drove low inflation over the last 25 years. You know, retail and wholesale consolidated a whole bunch and a bunch of technology went in, and that was very high productivity and very low inflation. So it is not obvious. But again, industry by industry there will be cases in which there are competition issues, and those are certainly an appro- priate subject for antitrust scrutiny. Senator TESTER. As we look at the war in Ukraine, and as we look at inflation that is occurring here in this country, and I know you are Chairman of the Fed and I know that these are areas that you might not want to get into, but I will ask anyway. You can al- ways decline to answer. And that is, are there certain things we should be doing right now, or paying particular attention to, in the inflation realm? Mr. POWELL. I am sorry. In the sense of—— Senator TESTER. In the sense from a congressional standpoint, are there things we should be paying particular attention to? I do not want to answer that question for you, but I think trucking is a big issue in this country right now. I think being able to get 12 products in and out of this country is a big issue right now, from a shipping standpoint. Should we be looking at those kinds of things? Should be looking at other things? Mr. POWELL. I do think that over time there are certainly things that Congress could do. I think in the near term, really, it is down to the private sector and the supply chains and things like that getting untangled, getting fixed, and it is down to us doing our jobs with our tools. But I would agree, though, that we need more labor supply. We need more semiconductors and things like that. Clearly you men- tioned trucking. We are short workers right now. We had a shock to participation that is much larger than in any other country, and there must be ways to address that, although some of that is vol- untary, clearly on the part of people who decided to retire and things like that. Senator TESTER. OK. Thank you. Thank you, Mr. Chairman. Chairman BROWN. Senator Shelby is recognized, from Alabama. Senator SHELBY. Thank you, Mr. Chairman. Chairman Powell, welcome again to the Committee. You have spent a lot of time with us here. You are the Chairman of the Federal Reserve. We have this hearing now before the U.S. Senate Banking Committee, but mil- lions of people around the world are watching this hearing and watching what you say and also what you do at the Fed. Let us talk some more about price stability because I think that is so im- portant. We know what the term is, but to the average person just explain what you mean by price stability, which is a mandate that the Congress gives the Fed. Mr. POWELL. We think of price stability as having inflation that is 2 percent, right around 2 percent, but maybe a clearer way—— Senator SHELBY. Stable prices, stable everything. Right? Mr. POWELL. Yes. But really what it means is that people can go about their daily lives without thinking much about inflation. It comes down to that, that it is just not an important consideration for people living their lives, taking out mortgages, putting their kids through school, or for businesses that are borrowing, and things like that. Senator SHELBY. It affects everybody in the economy just about, does it not—— Mr. POWELL. It does. Senator SHELBY.——in one way or the other. Mr. POWELL. And when inflation goes up, and you are seeing this now, real wages, what matters is whether your wages are going up more or less than inflation, and for the most part real wages are declining, but not for everybody. I think at the bottom end of the wage spectrum real wages have actually been increasing. And that is why we need to get inflation under control. Senator SHELBY. It is going to be harder to get it under control once it is rampant than it would be when it starts out. My question to you is this. We know you have a lot of great, gift- ed economists at the Federal Reserve that furnish you data on every trend on prices dealing with inflation, price stability in the world and how it affects us here, everybody. The Fed obviously missed the trends there. Was it a question of not having the right 13 data or was it a question of ignoring the data you had? Because a lot of private—I would not say all, but a lot of private economists predicted where we are going on this inflation, and they were spot on 2 years ago. Was it a question of, again, you did not have the data, which you should have, or you misjudged the data, or you ignored the data? Mr. POWELL. No, no. It was not about data at all. This is really what it was about. When inflation really just about, barely a year ago, in March of last year, started to move up quickly, central banks and macroeconomists really overwhelmingly look at that as like a supply shock, like an oil shock. And what the textbook says is the shock is going to come and it is going to go, and you should not react to it. And so we looked at it that way. And I would say by the middle of last year we started to move away from it, and we moved away from it at an increasing rate of speed. Hindsight says we should have moved earlier, and that turned out to be wrong. Not maybe conceptually wrong, but it is just taking so much longer for the supply side to heal than we thought. So in hindsight you certainly would not have done that, but I think there really is no precedent for this. We looked at it the way it was. There were certainly some voices, and they have turned out to be right so far. Ultimately, we think the supply side will improve and that will help with inflation. In the meantime, we are going to use our tools and we are going to get this done. Senator SHELBY. About 40 years ago or more, you know, we had rampant inflation in the United States. We had Chairman, Dr. Volcker, who was Chairman of the Fed, and he was maligned for a little while by people but praised later. But he brought the lead- ership to the Fed and to the country that we had to squeeze infla- tion out, at all costs just about. And a lot of it was draconian. You have to do it. Is the leadership at the Fed under you and Fed prepared to do what it takes to get inflation under control and protect price sta- bility? Mr. POWELL. Well, let me say I knew Paul Volcker. I am pretty sure I saw him testify in this room many years ago. I think he was one of the great public servants of the era, the greatest economic public servant of the era, and I hope history will record that the answer to your question is yes. Senator SHELBY. So you are prepared to do what it takes without any reservation to protect price stability. Mr. POWELL. Yes. Senator SHELBY. That would be a departure from what you have done. Thank you very much. Chairman BROWN. Senator Menendez, from New Jersey, is recog- nized. Senator MENENDEZ. Thank you, Mr. Chairman. The Biden ad- ministration, in coordination with U.S. allies around the world has placed historic sanctions on Russia in response to the invasion of Ukraine. In particular, sanctions on the Russian central bank, cut- ting off its access to international reserves I believe will have a powerful effect on Putin and the elites who have reaped the bene- fits of his repressive regime. Sanctions are one of our most impor- 14 tant foreign policy tools, but it is not always easy to understand just how effective they can be. So Chairman Powell, can you explain in layman terms the effect of sanctions imposed on the Russian central bank? Mr. POWELL. Sure. I should start, though, by saying that every- one should know that we do not implement sanctions. Those are really the province of the elected Government and the Treasury De- partment. All we do is we are sort of there in the background. Senator MENENDEZ. I understand. Mr. POWELL. A technical backstop. Senator MENENDEZ. I understand. I just want to use your exper- tise. Mr. POWELL. Sure. So what the central bank does is—so different currencies in different countries are traded all day long, and in some cases all night long around the globe, and the value of those currencies really matters for people when they are trying to buy something. For example, if you are trying to buy an American car or American radio or an Apple iPhone, it will be priced in dollars. So the ruble weakened dramatically through this, which is the Rus- sian currency, and what those sanctions do is make it very difficult for the central bank of Russia to do its job, which is to support the ruble on behalf of the government. And it is because the sort of re- sources that it had to support the ruble were tied up in a way that made it difficult to do that. That is part of it. Senator MENENDEZ. Yes. And those sanctions means that Putin cannot access hundreds of millions in international reserves that he could use to continue to fund his war effort. Is that correct? Mr. POWELL. Well, yes. Senator MENENDEZ. Let me ask you this. As the economy con- tinues to recover, we have had a lot of conversation here about managing inflation as a key challenge, the first step to do so, in my mind, is to confirm the five highly qualified nominees President Biden has selected for the Federal Reserve Board, including your- self, and I hope our Republican colleagues will allow us to do that soon. The next and more challenging step is to address the supply cri- sis that is driving up much of this inflation. Can you give us a brief update on how persistent supply chain issues are disrupting the re- covery and contributing to inflation? Mr. POWELL. Sure. So a lot of the inflation we are seeing is com- ing from imported goods or manufactured goods that contain im- ported content, and the price of shipping, for example, internation- ally has gone up quite a lot. And there are long delays and the ports are full because demand is really so high. It is a demand problem as well as a supply problem. You know, we have been feeling very small amounts of progress on that. I have to say, one of the little bit unexpected byproducts of the Ukraine war, it is looking like supply chains—it is not going to help at all with supply chains because ships are not being offloaded and things like that. So there are unanticipated or unex- pected effects of what we are doing, which is not to say we should not do them. 15 So this is not something we have any expertise in fixing, but we have been waiting for that to happen, and it has not happened. We have not seen much relief on the supply side. The other thing is the supply of labor. You know, there is no problem with labor demand. Really, the ratio of job openings to un- employed is at, by far, the highest level it has ever been, more than 1.7 open jobs per unemployed person. So we have a labor supply problem. We think that getting past the pandemic will really help with that, and, of course, higher wages should help bring people in too. Senator MENENDEZ. So would strengthening supply chains and resolving bottlenecks help to combat inflation in the long term? Mr. POWELL. Certainly in the near term it would, and I would think it would be certainly a good thing. Senator MENENDEZ. You know, we passed the Strategic Competi- tion and Innovation Act last May, and the House now has its own provisions. I am looking forward to a reconciliation of that because that would address bottlenecks, strengthen our supply chains going forward, including funding to boost domestic production of semi- conductors and my supply chain database provision as well. Finally, you just mentioned labor. We are facing a dire labor shortage across the country which is holding back our economy. The Fed’s Monetary Policy Report from last week noted that, quote, ‘‘Labor supply has been slow to rebound even as labor demand has been remarkably strong.’’ There are currently 11 million job open- ings nationwide. Immigrants are ready and willing to fill many of those jobs. Would you say that if we had a process in which we could bring those immigrants out of the shadows into the light, have them go through a process, criminal background check, and make sure they paid their taxes, that the role of immigrants in mitigating the current labor shortage and rising inflation would be a significant one? Mr. POWELL. Seeing that we do not do immigration policy, as an arithmetic fact immigration has been much lower and accounts for, you know, a meaningful part of the labor shortfall. Senator MENENDEZ. And that is why leading business groups agree with you. Thank you, Mr. Chairman. Chairman BROWN. Thank you, Senator Menendez. Senator Crapo, from Idaho, joins us from his office. Senator CRAPO. Thank you very much, Mr. Chairman, and Chair Powell, thank you for being with us today. I wanted to start first by following up on some of the line of questioning that Senator Toomey raised, just a couple of quick questions in terms of the ability to manage the Fed and its ability to operate right now. It is correct that you were recently named by the Federal Re- serve Board as the Chairman Pro Tempore pending the handling of your nomination. Is that correct? Mr. POWELL. Yes. Senator CRAPO. And in that capacity you have the full ability to chair the Board while we wait for the handling of your nomination. Is that correct? Mr. POWELL. Yes, it is. 16 Senator CRAPO. I want to make it very clear, I hope that we han- dle your nomination soon, and I intend to vote in support of it. But I just wanted to also make it clear that you are fully functioning as the Chair now, in the capacity of Chair Pro Tempore. And it is also correct that you were named in January by the Federal Re- serve Board as the Chairman of the FOMC. That is correct also? Mr. POWELL. Actually, I was elected by the FOMC to be chair. Senator CRAPO. You were elected by the FOMC. Mr. POWELL. Yes. Senator CRAPO. All right. And let me move on to just one other aspect of it. You have already discussed the dual mandate of the Fed today, the low and stable inflation rate, and maximum employ- ment. Disturbingly to me, there are some who are suggesting that the Federal Reserve should, in addition to that, or even to claim it as a part of that, that the Federal Reserve should stop so-called suboptimal industries from having access to capital, either to re- strict their access to capital or to deprive their access to capital. Do you believe that any kind of standard such as that should be some- thing that the Federal Reserve Board should pursue in its super- visory capacity? Mr. POWELL. No, I do not. Senator CRAPO. All right. I appreciate that because this is a dis- turbing trend that has come in a number of different contexts over the last few years, and the notion that we should utilize our Fed- eral regulatory and supervision authorities to decide which indus- tries are optimal and restrict those that we do not like politically from access to capital is a very alarming idea that I think Amer- ican should reject quickly. Finally, I just have one more question. Obviously, related to Ukraine and the issue of oil and energy markets have come to the forefront as a result of a number of different aspects, whether it is sanction questions or whether it is simply the issues of depriving Russia access to the utilization of Nord Stream, and many other as- pects. Do you expect that the strains on the oil or energy markets that we will see coming out of this war will act to push inflation even higher or will act as an impediment to our ability to get infla- tion under control? Mr. POWELL. In the near term we already see this. Oil prices are up substantially from where they were 2 months, 3 months ago, and that will get into gasoline prices and other fuel prices, and that will show up in higher inflation. The question really is what will be the extent of those, and even more important, what will be their persistence? So typically with an oil spike prices go up and they ei- ther stay at that level or they go down. In either of those cases they add to the price level but not to inflation. The concern, though, is there is already a lot of upward inflation pressure, and additional inflation pressure does probably raise, at the margin, the risk that inflation expectations will start to react in a way that is negative for controlling inflation. Senator CRAPO. All right. Thank you very much. Chairman BROWN. Thank you, Senator Crapo. Senator Warner, from Virginia, is recognized from his office. Senator WARNER. Thank you, Mr. Chairman. Chair Powell, it is great to see you, at least remotely. 17 I want to at least point out, because I want to move to Ukraine where my friend, Senator Crapo, raised some of the issues. It is, obviously, the responsibility of the Fed, as we are looking at the economy, to evaluate systemic risk to the economy. Is it not? Mr. POWELL. Yes. Senator WARNER. Thank you. And you and others have testified that whether we call it climate change, sea level rise, dramatic changes in weather that brings about flooding, storms, you name it, that is appropriate for review, and while obviously the termi- nology of designating a particular industry I agree should not be, but the systemic risks, I think, are critically important, and I ap- preciate the fact that you have recognized that. I think we need to continue to recognize that. We lived through that, literally, and if we look at the number of natural disasters from fires in the West to floods in my State or floods in the South it is here to stay. I want to talk about, I am Chair of the Intel Committee and I am very, very concerned about what is happening in Ukraine. I am very proud of the fact that the Administration has worked in con- cert with our European allies rather than acting solo. I was in Mu- nich 11 days ago, and if you would have told me 11 days later that the Europeans would have used SWIFT, struck down Nord Stream 2, Germany would change its complete position on funding arms, Sweden, Finland, we would have sanctioned Putin, I think all ter- ribly important to have a Western response to this aggression. On the SWIFT issue, I think it is good. I do think we need to get our European allies, as well, to sanction some of the smaller banks as we have. I think we also need to look at non-SWIFT abili- ties of transfer. And I am concerned that—the Chairman and Sen- ator Warren and Senator Reed and I are very concerned about some of the leakage that could be taking place through cryptocurrencies. I think there is a great deal of value in ultimately digital-based currencies, but the concern I have is that crypto ex- changes DeFi—there is a stat I got the other day that I thought was very impressive—7,000 stocks on our public markets, 17,000 different crypto tokens on crypto exchanges, literally a million crypto tokens being developed in decentralized finance. And I know this is not directly—this is more Secretary Yellen’s purview, but you and the Fed have gained a lot of expertise in this space. Do you see the possibility at least of Putin or his oligarchs using digital payments and other alternative payment methodology to avoid these sanctions, in a sense to transfer their assets out since we have been able to kind of clamp down within the tradi- tional banking realm? Mr. POWELL. So you are right. This is right in the heart of what Secretary Yellen is working on. I believe she actually addressed this yesterday in some public remarks. And I am not privy to any private information about this. You are reading about it. I saw that transactions, crypto transactions are spiking in Ukraine and in Russia. I think it really underscores the need to have a strong regulatory regime that permits appropriate activity but that prevents inappro- priate activity. And we do have laws on the books and all that, but I think for digital finance generally we need a legal framework that would really take away as much as possible of the possibility that 18 people could use unbacked cryptocurrencies as a way to evade the law or to finance terrorism and hide their ill-gotten gains, and things like that. I think it is very important. Senator WARNER. And again, I appreciate the fact that the Fed has, I think, both expertise-wise ramped up in this space. I do think the notion of the United States having a digital currency when we see the challenges around the digital yuan from China. But I do think the amount of capital flows that are going into this area, of nonbanked in many ways, there is not that kind of clear regulatory overview. It is something we need to look at, and I think as an independent source we are going to need to continue to draw upon not only yours but the enormous resources you have got at the Fed to at least follow the capital flows. And I am gravely con- cerned that Putin and his oligarchs may use this escape valve to escape these sanctions. Thank you, Mr. Chairman. Chairman BROWN. Thank you, Senator Warner. Senator Scott, from South Carolina, is recognized. Senator SCOTT. Thank you, Mr. Chairman, and thank you, Chair Powell, for investing the time with us. We have seen you a lot late- ly, and I think it is important that we continue to have the con- versation in public about the priorities of the Fed. One of the concerns that I have, I think both Senator Toomey and Senator Crapo have discussed the importance of the Fed stay- ing on mission and not looking for ways to expand their mission, looking at nominees like Ms. Raskin’s approach in public statement as it relates to the environmental responsibilities that the Fed should take on. I am completely, unequivocally opposed to that di- rection. I know that there is a lot of attention being paid these days to ESG. I think that is a bad direction for the Fed. I think the Fed should focus its attention on its primary responsibilities, and frankly not even get involved in congressional matters. I know that Senator Tester had some important questions to the wrong person about truckers. I think if we were going to have a long, serious debate about your opinion on what Congress should do to help truckers we would start back in the Obama administra- tion and look at the hours of service that curtailed the number of available truckers that we have and the amount of time that they could spend on the roads. So there are a lot of things that the Fed should not do. The one thing that we want you to continue to do is to focus on the impact that everyday folks, like in Abbeville, South Carolina, or in Ander- son, South Carolina, are feeling the pressure from the inflationary effects of this economy. We cannot tie that to Russia or conflict. We can just tie that to bad decisions by Democrats and the Biden ad- ministration when on day one you cutoff the Keystone XL pipeline, which could have pumped 800,000 barrels a day, and we are de- pendent on Russian oil, and 600,000 barrels a day. The inflationary impact that South Carolinians have felt since December of 2020, where prices were $1.99 and now they are $3.40. I think about the seniors who are trapped in too much month and too little money. And I think to myself that too many folks on fixed incomes throughout this country, and specifically in South Carolina, are having to make decisions about rationing—rationing 19 medicine, rationing food, and rationing energy, whether it is in your car or at your home. This is a crisis. I love to hear that our wages are up 4 or 5 percent, but inflation is up 7.5 percent, so the net effect is that the invisible tax that we refer to here in Washington as inflation is eroding and degrading the spending power of everyday Americans, and they are not gul- lible. They know exactly what has changed, and any time you put fuel on a fire you should expect it to get hotter, and our economy reflects that same direction. And those are concerns that I have, and I know that yesterday you spoke at length about how the Fed policymakers are working to game out a variety of policy scenarios to grapple with the uncer- tain economic risks posed by the ongoing geopolitical turmoil while simultaneously working to curb still-rising prices, and I think that is an important and incredible balance that you will be in charge of. And frankly, I did not vote for you the first time but I am voting for you this time, because I think that you have proven that you have kept your eye on the ball and it is necessary for folks in my State and around this country. I would love for you to spend my 90 seconds left, talk to me about the gaming out of scenarios that the Fed is going through so that the average person in our country can appreciate the depth of knowledge and the time that you are investing in helping us under- stand the scenarios that could happen. Mr. POWELL. Sure. So we have tools to bring inflation down, and they work by raising interest rates. We do that over time, and what that does is it increases mortgage rates but just at the mar- gin, and the same thing with car loans and things like that. And ultimately that slows down demand, ideally in a way that comes to a gradual halt, and economic activity continues. So that is what we are trying to do here. Right now we need to move away from very low interest rates. They are not appropriate for the current situation in the economy. The economy is very strong. Unemployment is low, wages are going up, the labor market is quite healthy, and inflation is way too high. So we are accountable for inflation, and we are going to use our tools to bring it down. Senator SCOTT. May I have a little bit more time, Chairman? I know this is your Committee. Thank you, sir. Very kind. So a question for you. As you think about the next meeting, when you discuss the interest rate increases, are there increments that you would consider not foreshadowing your decision but the incremental increases that you think would bring the spending and the inflation down while not overchallenging the economy? Mr. POWELL. Yes. So as I mentioned yesterday, my thinking at this time, which is at a very, very sensitive time in markets and in the world because of what we are seeing happening in Ukraine, and we do not know the economic implications of that, I said that I would be recommending and supporting a one-quarter of 1 per- cent interest rate increase at our March meeting, which is 2 weeks from yesterday. But I also said that if we do not see inflation behaving as we ex- pect it to behave, which is to peak and begin to come down, if we see inflation behaving in ways not consistent with that, then we 20 are prepared to raise by more than that amount, in a meeting or meetings. Senator SCOTT. Very good. I would simply say for, as I call them, the kitchen table economists all across the country, typically moms making hard decisions on rationing the amount of resources that they have and the priorities that they have, I think it is really im- portant for us to make it as clear as possible and as simple as pos- sible their understanding and appreciation for what is happening. When you are trying to run a very strong and heavy load at home and you have a full-time job, think what we can do to talk in a way that makes it easy for us to digest at home, we are doing our pub- lic, the average person in our country, a lot of good to understand what we are trying to explain. Thank you. Chairman BROWN. Senator Warren, from Massachusetts, is rec- ognized. Senator WARREN. Thank you, Mr. Chairman. Right now our country is trying to enforce strong sanctions against Russia, weath- er the political economic fallout of the Ukraine crisis, and address the pandemic-related inflation and corporate price-gouging that is hurting American families. Much is at stake for our country. But Republicans on this Committee refuse to show up and vote on five nominees to the Fed. They refuse to do their job. This is shameful and it is risky. Any Republican talking today about the risks facing our economy should be willing to show up and vote on Fed nominees. So let us talk about one of those risks, Mr. Chairman. As Russia has invaded Ukraine, the centerpiece of the U.S. response is eco- nomic sanctions. The United States and its allies have rolled out some of the strongest economic sanctions in history, severely re- stricting Russia’s access to the global financial system, by sanc- tioning the biggest banks and companies, by kicking Russian banks out of SWIFT, the international payments messaging system, and by freezing the Russian central bank’s foreign reserves. These sanctions are powerful, but Russia can dodge some of this pain by using the same cryptocurrency tools that are currently used by drug traffickers, cyber criminals, and tax cheats. I will pick one example here. We have all become familiar with ransomware, where a cybercriminal infects someone’s computer system, locks it up, then demands payment in order to unlock the system. And how do they get paid? Through unregulated cryptocurrencies like Bitcoin. Chair Powell, do you know who cybersecurity experts say is the world leader in ransomware attacks and in getting paid through cryptocurrencies that allow them to obscure and hide their trails? Mr. POWELL. I could guess. Senator WARREN. Do you want to make a guess here, based on what we are talking about today? It is Russia. You know, if you listen to our own national security agencies the answer is Russia, and that is why, when President Biden held an international sum- mit last year to fight ransomware, Russia, the biggest source of the problem, was intentionally not invited. According to one estimate by the blockchain analysis company, Chainalysis, Russia-linked actors collected nearly three-quarters of all ransomware revenue in the world last year, and hundreds of 21 millions of crypto dollars are collected in Moscow each quarter. As much as half of those come from illicit crypto wallet addresses. Russia is the world’s expert on moving money outside legal chan- nels. So Chair Powell, obviously, you do not administer sanctions but you are an expert on the international financial system. So I just want to take a look at this. Are other countries currently using cryptocurrencies to evade sanctions? I am thinking here of North Korea, Iran, Venezuela? Mr. POWELL. Honestly, it is not something we are responsible for. I mean, I have read publicly that those things have happened, though, yes. Senator WARREN. Well, the Treasury Department, the Depart- ment of Justice, the United Nations, and the IMF all say that the answer is yes. Crypto takes the sting out of sanctions, and in fact, the Treasury Department warned last year that crypto could un- dermine our sanctions regime. Theoretically, the crypto industry is supposed to enforce sanctions as well. So let me ask, Chair Powell, is the crypto industry enforcing sanctions right now? Mr. POWELL. So what I have read—again, this is really for the Treasury Department, but I have read the same things you have and that you had in your letter, which is some reluctance expressed on the part of the crypto industry to do that. Senator WARREN. All right. They are supposed to, but the prob- lem is they have not been doing a very good job. Just read the Treasury Department’s sanctions review or the U.N. reports on sanctions compliance. We know that many crypto exchanges and wallets are not collecting information about the identities of their customers, are not screening their platforms for illicit activity, and are not reporting sanctions violations. Heck, this is how North Korea has been able to move money around and finance its illegal missile programs. Here is the thing. The whole point of crypto is that it allows someone to conduct financial transactions without having to go through the traditional banking system or traditional financial intermediaries. Right now, millions of transactions are taking place that are completely unregulated, with no one verifying who gets what. And that means that while sanctions can make it very dif- ficult for Russian companies, political leaders, and billionaires to move money around in the traditional financial system, there is an- other shadow unregulated world that they can turn to. Crypto poses a variety of threats, to financial stability, to inves- tor protection, to our environment, but crypto is also providing a new way for countries to sanction-proof themselves. Cracking down on crypto is a critical piece of holding Russia accountable for its ag- gression. We cannot fool around any longer. We need to get new crypto rules in place. Thank you, Mr. Chairman. Chairman BROWN. Thank you. Senator Moran, from Kansas, is recognized. Senator MORAN. Chairman, thank you. Chairman, thank you. At least one member of the Open Market Committee has said that combining a relatively steep path of rate increases with a relatively 22 modest reduction in the balance sheet could flatten the yield curve and distort incentives for private sector intermediation, especially for community banks. Help me understand the relationship between balance sheet deci- sions and rate increase decisions and what thought process you would undertake in that regard. Mr. POWELL. Basically we think of the interest rate as the active tool of monetary policy, and we think of the balance sheet as some- thing we do really in urgent situations. We buy assets and that tends to drive down long-term rates. So what we are very much about to do, and we are going to do this over the course of this year, is both raise interest rates and we are going to begin to allow the balance sheet to shrink and run off. As the balance sheet shrinks, you know, the securities are ma- turing is what is happening, and Treasury, on the other side of the wall, Treasury is deciding what to issue. So they issue long, short, in the middle. That is what they do. And that will have an effect on the yield curve and on financial conditions, but those are deci- sions that Treasury makes. But the way we do it, though, to answer your question, is we want to decide a path for the balance sheet and then we want to let it go in the background and have the interest rate tool, meeting to meeting, be the active policy tool. I hope that is responsive. Senator MORAN. And what is the different consequence between altering the balance sheet and altering interest rates? Mr. POWELL. For the shape of the yield curve, you mean? Senator MORAN. Yes. What happens differently in the economy as a result of doing one or the other, or what is the reason to do them together? Mr. POWELL. Well, when we are using them actively, cutting in- terest rates and buying assets, buying longer-term assets, we are trying to provide support for the economy. The interest rates affect shorter-term rates actually more than they affect longer-term rates. Quantitative easing affects longer-term rates, and those are impor- tant in the economy. When you turn it around, really, as I tried to explain, we shrink the size of the balance sheet. So for example, if Treasury were to issue only long bonds, well that would drive up rates and that would tend to tilt the yield curve up. But that is a question for Treasury, the issuance question. Senator MORAN. I am trying to understand while you are trying to explain it, and the fault probably lies with me. But in regard to interest rates, long-term, short-term, does it matter which of those tools you use, and is there a consequence different to an American industry, a sector of our economy as a result of the machinations between those two tools? Mr. POWELL. Not really. Not really. So again, our interest rate is an overnight interest rate, right, and so when we change it, it will affect asset prices all the way out the curve. It will affect eq- uity prices and things like that. But ultimately, if you are zero lower bound and you cannot cut anymore, then in one sense you could be out of tools. And so, actually, Milton Friedman was one of the first to talk about this many years ago with respect to Japan. You can always affect longer-term interest rates by buying 23 sovereign debt, and so that tends to bring down longer-term rates. They all matter for the economy. To the extent you borrow long, if you are someone who likes to borrow very long, like investment- grade companies, then your rates will go down for 30-year lending. For most people the short end is more important. Senator MORAN. Mr. Chairman, I am not going to ask you about energy policy, but let me ask what percentage or what is the quan- tification of how inflation is related to energy prices. Mr. POWELL. Energy inflation, when we talk about core inflation we exclude inflation from energy and food prices because those are quite volatile. So right now, I guess, if you look at it the way we look at it, core PCE is about 5, in the range of 5, and energy infla- tion and food inflation you put on top of that is in the high 6’s. So it is close to a couple of percent, I believe. Senator MORAN. And just in my last 14 seconds, I always worry about farmers and ranchers, small towns, community banks, lend- ers to those farmers and ranchers. Interest rates and energy prices combined have a huge consequence to those who feed and clothe and provide energy to us and the world. And decisions that you make have perhaps an exacerbated consequence to somebody who borrows significant amounts of money to put seed in the ground at a time in which fertilizer costs, diesel fuel is extremely high. Every input a farmer faces today is here. While commodity prices have risen, they have not risen sufficiently to overcome the cost of pro- duction. Mr. POWELL. We are very much aware of that. Some of this shock is going to be very tough for agricultural companies, and that is something we will be monitoring. We do not have the tools to deal with that very well, but that is clearly a risk. Senator MORAN. Mr. Chairman, thank you. Chairman BROWN. Thank you. Senator Smith, from Minnesota, is recognized. Senator SMITH. Thank you, Mr. Chair. Thank you so much, Chair Powell. It is wonderful to see you again, and I really appre- ciate the questions that Senator Moran is asking about kind of how this actually works, the mechanics of the economics of this. Be- cause the impacts of interest rates, the interest rates are the tool that the Fed has to address inflation, but in a world where the causes of inflation are so complex it can have a tool with other im- pacts that you do not necessarily anticipate—or you can anticipate it but you cannot control for that. So I want to come back to that, because I am very much thinking about this in the context of workforce and what we need to do about workforce. You laid out at the beginning of your testimony that the American economy is really strong. We have seen millions and millions of Americans go back to work, fastest economic growth since 1984, unemployment rate is very low, and the economy is in good shape, notwithstanding the fact that we have got real chal- lenges around rising prices for American families. In Minnesota, the biggest economic challenge that I hear people talk about is the workforce challenge, that there just are not enough people to do the work that we have. It is interesting. The U.S. Chamber noted that women are participating in the labor 24 force at the lowest rate since the 1970s, and this is having signifi- cant impacts on our ability. I cannot vouch for the U.S. Chamber’s numbers but it reflects what I have heard, which is that there is a very big discrepancy between the number of men that have come back to the workforce and the number of women that have come back. So why is this happening? It is complicated, of course. There are a lot of early re- tirements. But there is a real issue with childcare and women being able to—women and men, but women in particular—being able to come back to the workforce. And so, Chair Powell, can you help me understand this? If we were to invest, as a country, if we were to invest in making childcare more affordable, more accessible, what impact would that have on the overall economic conditions of this country, I mean, this workforce challenge that we have? And I want to try to under- stand the interplay between that and inflation and how this all comes together. Mr. POWELL. You know, it would, of course, depend on the design of the program and how well executed it was, and that kind of thing. But there is research. So labor economists, including one of our Reserve Bank presidents, have written and done research on this and looked at other countries, try to control for other factors, but look to see whether childcare that can be afforded or is free contributes to labor force participation among women, and they have come back with positive results on that. And, you know, that does make sense. It is intuitive, I think, but that is what the re- search tends to show. Senator SMITH. Right. And so public investment—if we decided, which I think we should, but if we were to decide to make a public investment in making childcare more affordable, that would not contribute to inflation, would it? Mr. POWELL. You know, to the extent it got people back in the workforce and got them working over time it would help relieve the labor shortage and things like that, so it would be positive. Senator SMITH. That is the way it seems to me too, that if one of the contributors—if you have more people working you are going to be addressing the workforce challenges. Of course, I think it is a good thing that wages are going up, and I think that is part of what is happening in the economy is the relative power of employ- ers versus workers has shifted so that workers have more power and they are shifting jobs if they can get better salaries, get better wages in other places, and that might be contributing to rising wages. But it is generally, I think, a good thing. So assuming the Fed does what it is planning on doing and rais- ing interest rates, what impact does that have on the workforce shortage, if any? What does that interplay look like? Mr. POWELL. Well, again, our tools do not really go very much to supply. They go to demand. So right now we have substantial excess demand, as I mentioned, and I think the first 15 pages of our report are actually a really good summary of the labor market inflation and supply chain bottlenecks. I would do that commercial. But you have more than 1.7 job openings per unemployed person, and that is an overheated labor market. The level of quits is at an all-time high, and the level of job openings. 25 So it seems to me there is a lot that we could do to gradually bring demand back down to where demand and supply are more in sync, without risking damage of the kind you are talking about. Senator SMITH. So raising interest rates would cause companies to cut back. They are not going to have as many job openings. Mr. POWELL. Yes. I mean, it slows economic activity across the economy gradually because buyer borrowing costs, mortgage rates will go up, the rates for car loans, all of those rates that affect con- sumers’ buying decisions, and with a lag it will tend to slow down—— Senator SMITH. Job creation. Mr. POWELL. In addition, it has effects through wealth effects, because housing prices will not go up as much and equity prices will not go up as much, and so people will spend less. And what we hope to achieve is bringing the economy to a level where de- mand and supply are in sync. Senator SMITH. Thank you. Mr. Chair, I am just thinking about what President Biden said at the State of the Union, which is that as we grapple with this problem what we want to do is we want to lower costs, not lower wages. And so I think this is just part of the dynamic that we are all trying to figure out here. Thank you so much for being with us, Chair Powell. Chairman BROWN. Thank you, Senator Smith. Senator Daines, of Montana, is recognized. Senator DAINES. Chairman, thank you. Chairman Powell, good to have you back here. Everybody is talking about inflation as we are sitting here today. It is raging in my home State of Montana, a 40-year high at 7.5 percent in January. Core inflation rose 6 percent. And we recognize it is both above estimates and both well above the Federal Re- serve’s 2 percent target. As we take a look at what is going on in Europe and Russia as it relates to energy prices, energy independence, national security, we are seeing it is all interconnected. As many countries in Europe continue to decommission nuclear power plants and stop investing in traditional energy, they have become now more dependent on adversaries like Russia for energy, and now we are seeing the cost of energy is skyrocketing. Sadly, I think this is a sneak peek at the path that America is headed down if President Biden, and frankly our colleagues across the aisle, continue to undermine made-in-America energy. In order to help lower energy costs, help our allies be less reliant on Putin and Russia, I believe we must unleash American energy and sup- port truly the all-of-the-above American energy portfolio, which in- cludes oil, natural gas, nuclear, hydro, and coal. I think it is more important now than ever before. Chairman Powell, the Fed demonstrated unprecedented amount of speed to cut rates in March of 2020, when it first cut rates then by 50 basis points and followed that soon after by cutting rate to zero and launching a new round of quantitative easing (QE). My question is this. Has the Fed looked at what impact $125-per-bar- rel oil might have on growth and inflation? Because I think we were just here about a year ago having a conversation about infla- tion. Of course, we have moved away from any conversations about 26 anything transitory now, as we certainly have some inflation here that is far more than transitory. But I think it would be fair to say none of us at that moment would have thought we would be seeing oil at $100 a barrel, or more. My question is, have you looked at what $125 a barrel looks like, $150 a barrel, even $175 a barrel, what that might mean in terms of growth in inflation? Mr. POWELL. The answer is yes. We run simulations and we are running those all the time right now. In addition, we have these rules of thumb that show what happens to gas prices, what hap- pens to inflation, what happens to growth. They are crude rules of thumb but they give us a way of thinking about what the effects would be, and they are what you would think. You know, inflation goes up, gas prices go up, and growth goes down a little bit. Senator DAINES. So as you have done that modeling, what kind of impact are we going to see on inflation in your models if we have got, let us say, $125 or $150 a barrel? Mr. POWELL. Well, you know, let us say that that is $50 above where oil was during the fourth quarter of last year. I want to say it was in the $75, $80 range, something like that. And the thing that matters more than anything is how long does it persist for. You can have an oil spike, and if it just comes and goes, prices will go up but it will not actually affect ongoing inflation. That is really the key thing. But, you know, I want to say $10 of oil—and I hope I do not get this wrong—is like two-tenths, something like that, of inflation. Senator DAINES. Yes. How about on economic growth? What is your sense? Mr. POWELL. It is more like one-tenth. These are rules of thumb. Senator DAINES. Yes. And I think these numbers I quoted here are not outlandish. I mean, you have seen how quickly this is mov- ing, how volatile the situation is. I am glad you are modeling it, but we are very, very concerned, certainly, as you are, where this might go. I want to talk about the balance sheet of the Fed. The Federal Reserve’s balance sheet is nearing $9 trillion, which is more than double where it was before the pandemic. Could you describe how unwinding the balance sheet as a tool to fight inflation compares to raising interest rates? For example, would a $500 billion reduc- tion in the size of the balance sheet equate to a 50-basis-point hike in interest rates? Mr. POWELL. It would be a very crude calculation because we do think that the signaling value of QE is a big part of it, and you do not have that when you are having the balance sheet run up. I do not have that one in my head. You are right, though. That is the sign that it would be tightening policy. We really think of getting the balance sheet running in the back- ground and shrinking in a predictable way, and we think about the interest rates as the active tool. Senator DAINES. Last question. Do you think we could be on the cusp of a wage-price spiral, and what factors are you using to make the determination? Mr. POWELL. Obviously, that is something we really do not want. The big thing we do not want is to have inflation become 27 entrenched and self-perpetuating. And it is a question of inflation psychology really, and it having what we call having unanchored inflation expectations. And that is why we are moving ahead with our program to raise interest rates and get inflation under control. That is a serious concern and one that we monitor careful. And again, it will depend on—wage increases have been very high, par- ticularly at the low end, and it will depend on whether those are persistent or not. Senator DAINES. Thank you, Mr. Chairman. Chairman BROWN. Thank you, Senator Daines. Senator Van Hollen, of Maryland, is recognized. Senator VAN HOLLEN. Thank you, Mr. Chairman. Welcome, Mr. Chairman. I was listening to your testimony, and you pointed out that you have got a lot of job openings, a lot of vacancies. And you pointed out that there were some commonsense measures we could take to address those, including more affordable childcare, so more people could ensure that their kids are in a safe and secure and affordable place while they are at work, and in response to Senator Menendez, allowing people to come out of the shadows in our econ- omy with some immigration reform. And I think those are both commonsense measures, as you said, that we should take. You are in a tough position given all of the variables we are see- ing. We are seeing higher economic growth. In fact, you have testi- fied previously that because of the American Rescue Plan we have seen much more robust economic and job growth than had been es- timated before then. You have got a war in Ukraine, which is put- ting upward pressure on oil and gas prices, and that in effect, that could also have an impact in slowing down the economy. I was in- terested in Senator Toomey’s line of questioning. I mean, you have got to navigate that. Another variable here, of course, is the possibility of another var- iant of the coronavirus coming back and wreaking havoc. Is that not another major unknown that you have got to factor into your decisionmaking? Mr. POWELL. Yes. Yes, it is. Senator VAN HOLLEN. And as you think of that, along the com- monsense lines, does it not make sense that we be fully prepared so that if there is another variant and outbreak that we are able to quickly address it, quickly reduce the economic fallout that we witnessed around the original outbreak? Does that not also make common sense? Mr. POWELL. It sounds like it. I am not sure where I am going here. It sounds like a fiscal proposal. Senator VAN HOLLEN. Well, it is like the other ones are kind of common sense. I am not asking you to make a judgment totally within, you know, monetary policy or the Fed’s domain in that sense. But from an economic perspective—and you have an impor- tant role to play there—it seems to me that the more prepared we are to fight a new variant, the better off we will be, from an eco- nomic perspective. Right? Mr. POWELL. Yes. Senator VAN HOLLEN. I just point that out because we just re- ceived a request from the President for a supplemental assistance package to stockpile more antivirals, so people could be treated 28 more quickly, to stockpile tests so that we could quickly determine where we experience an outbreak, and to stockpile more vaccines, and also to work globally to prevent a new variant from developing. Again, just from an economic perspective, those preparations would make common sense, would they not? Mr. POWELL. They would. And, you know, variant to variant, the economy has gotten better at dealing with this, the American peo- ple have. So I think anything that allows us to continue living our economic lives is a plus. Senator VAN HOLLEN. I appreciate that. I think that we just need to take some practical steps, as you said. Can you just talk a little bit about the assessment that you made regarding the households being in strong financial shape? You mentioned that, and I think it is worth just elaborating on that a little bit, because we have wage income but we also have the in- come people received as a result of the American Rescue Plan, right, $1,400 per person, and other emergency assistance we pro- vided. And that has put households, overall, in strong financial shape. I think those are the words you used. Is that right? Mr. POWELL. Yes. Just as you say, the level of savings, even among those that the lower end of the income spectrum is much higher than it was just continuing the prior trend. In the surveys that we undertake, people feel better about their financial situation than they have in a long time. Senator VAN HOLLEN. Right, and again, we have had this back and forth about real wage growth, and I think if you look at people at the lower end of the economic spectrum you have seen real wage growth, as you indicated. But if you look even overall at all house- holds, in terms of their personal income last year, after-tax per- sonal income compared this year, overall that has improved, right? Mr. POWELL. Yes, in nominal terms. Senator VAN HOLLEN. No. I am asking in real terms, actually. Mr. POWELL. You know, it depends on whether you are looking at 1 year or 2 year and which measure you are looking at. But if you are talking about a particular piece of data I do not have it at hand, but I know that for many real wages rose in 2020, and in the aggregate declined marginally in 2021. Senator VAN HOLLEN. Yes. But I am talking about all the income available to a household, in real terms. I am happy to follow up. Mr. POWELL. That would be great. Senator VAN HOLLEN. Thank you. Chairman BROWN. I think, Senator Van Hollen, you were in part referring to the child tax credit and assistance that low-income peo- ple had. Senator VAN HOLLEN. Child tax credit, $1,400 per individual. All those helped in terms of personal household savings in real time, in real terms. Chairman BROWN. What matters is the quality of life. Senator Kennedy is recognized, from Louisiana. Senator KENNEDY. Thank you, Mr. Chairman. Mr. Chairman, the President has requested that the Congress appropriate additional money to fight COVID. Senator Van Hollen just referred to it. Do we have that money? 29 Mr. POWELL. I feel like I am getting into fiscal policy here. I real- ly want to leave this to—— Senator KENNEDY. Yes, sir. But do we have that money? Mr. POWELL. Do we have that money? Well, in the sense of—— Senator KENNEDY. Do we even have 5 percent of that money? Mr. POWELL. I do not know what you mean by ‘‘have the money.’’ Senator KENNEDY. Will we have to borrow the money? Mr. POWELL. Yes, I think we are running a deficit, so I think a lot of spending is on the basis of borrowing. Senator KENNEDY. OK. Let me ask you about the sanctions on Russia’s central bank. The West has sanctioned its bank, and you say it is—or some say that it has basically prevented Russia from using those foreign reserves, because they are foreign reserves. They are not in Russia. They are in other banks in other countries. Has China joined in that sanction? Mr. POWELL. No, I do not believe so. Senator KENNEDY. So if China wants to it could support the ruble, could it not? Mr. POWELL. In theory, yes. Senator KENNEDY. OK. Now does that sanction on the foreign re- serves of Russia by the West, does that stop dollars and euros from coming into Russia? Mr. POWELL. I think other sanctions do. They are not getting any hard currency. I think a lot of payment of dollars into Russia is coming to a grinding halt. By the way, I should say we are really not responsible for sanc- tions, as you obviously know. Senator KENNEDY. I know that. You are not responsible for cli- mate change either, but that does not stop the Federal Reserve, or for elementary and secondary education, but that has not stopped the Federal Reserve from having an opinion, not you but some of your colleagues. Now the West has said, the President has said we are going to throw Russia out of the international community and we are going to throw Russia out of the international marketplace, and obviously we all agree with that. And he sanctioned everything. But he has not sanctioned Russia’s energy. Europe is going to continue to buy Russian oil and gas, despite the fact that Europe has 1,000 trillion cubic feet of natural gas that it refuses to produce. And America, right now, we are continuing to buy Russian oil. So how are we going to throw Russia out of the international community and global markets if we do not attack their oil? Mr. POWELL. That really is a question for the elected Govern- ment, for the Administration, and particularly the Treasury De- partment. Senator KENNEDY. I know, but I am asking your opinion, because you are a smart man. Mr. POWELL. I appreciate that very much, but my opinion is that it is not something I would have an opinion on, as Fed Chair. We do not do energy policy. We do not do sanctions. We are technical support. We are not the policymakers. It would be like the Sec- retary of the Treasury coming in and talking about monetary pol- icy. 30 Senator KENNEDY. OK. Let me take you back to the spring of 2020. Governments shut down the private sector in virtually every country. Markets are panicking. Everybody is looking at you to calm things down. You did. You did. And one of the things you did, aside from the currency swap plan that you established—well played—you said we, meaning the Federal Reserve, are going to provide capital to American businesses. OK? And you did. And you kept us going, and I thank you for that. Suppose, though, the Federal Reserve had said, at that time, we are going to keep American businesses going and we are going to supply the capital, except we are going to use this opportunity to bankrupt the oil and gas community, the oil and gas sector. Where would we be today if we had done that? Mr. POWELL. You would be very unhappy with me, and appro- priately so. Senator KENNEDY. Why is that? Because some of your possible new colleagues think we should have done that. Ms. Raskin has talked about that, said we should have taken the opportunity, at that point, to bankrupt oil and gas. Mr. POWELL. I do not want to—— Senator KENNEDY. I know. Mr. POWELL.——get into the—— Senator KENNEDY. I know. I just thought I would slip that in. I am not asking you to comment on Ms. Raskin, our reserve trust, or the other things that we need to get to the bottom of. I am ask- ing you to tell me what would have happened if we had used that opportunity to bankrupt the fossil fuel industry, as Ms. Raskin sug- gested we should? Mr. POWELL. Well—— Senator KENNEDY. Strike the Raskin part. That makes you nerv- ous. I can tell. Mr. POWELL. You know, we are a creature of law. You passed the CARES Act. It did not say anything about picking and choosing, and we were not going to do that, and we did not do it. Senator KENNEDY. Do you think picking and choosing is a bad idea? Mr. POWELL. I think, you know, we actually have a document I have right here from 2009. It is sort of our document where we ne- gotiated with the Treasury Department who does what, and it talks about the fact that we do not get into allocating credit. We try to affect broad credit conditions. We do not allocate credit to par- ticular industries. And that is a document that we think is sort of one we live with. Senator KENNEDY. Thank you, Mr. Chairman. Chairman BROWN. Thank you, Senator Kennedy. Senator Ossoff, from Georgia, is recognized. Senator OSSOFF. Thank you, Mr. Chairman. Chair Powell, thank you for joining us again. Thank you, as always, for your service. Please explain to the Committee and to the American public what steps the Fed is taking and expects to take in response to the increase in price level for consumer goods, gas, and groceries. Mr. POWELL. Well, as I discussed yesterday, we are embarking on a series of rate increases over the course of this year, and no doubt beyond, and we are also going to be shrinking the size of our 31 balance sheet as the year goes on. So what those things will do is they will raise interest rates across the economy and that has the effect of moving demand back down to where it is more aligned with supply and getting inflation back down to a level that we would recognize, that is consistent with our mandate of around 2 percent. Senator OSSOFF. And what considerations will inform you and your team as you determine the rate at which you reduce the value of assets on the Fed’s balance sheet? Mr. POWELL. The way we think about that is we want to set— and this is the meeting we are going to have in 2 weeks—we are going to set a pace at which runoff will happen, subject to caps, so that if there is more runoff—basically, when securities mature we can just not reinvest that money and we can just give that money back to the Treasury Department, and that is what we do, up to a certain limit. We like to have caps so that it is not volatile and it does not affect markets. So essentially it is what we think we can do in ways that will not interfere with market function and that will get us back expe- ditiously to a balance sheet which is the one we need, which is just the right size to implement monetary policy, consisting of demand for our liabilities plus a buffer. Ample reserves, we call it. Senator OSSOFF. We are seeing right now the impact of geo- political events on markets’ likely impact on the price level poten- tially on unemployment and therefore on your mandate. I would like to request that you consider providing this Committee with a Members-only briefing that would cover two subjects. The first is how the Federal Intelligence Coordination Office that connects you and your team with the intelligence community, per- forms in ensuring that you and your team are up to date on the latest intelligence that could provide a forewarning of geopolitical events that impact your mandate and financial markets in the U.S. economy. And the second is a briefing on the resilience of your internal systems and the mechanisms of action for monetary policy in the event of a cyberattack or a continuity of Government event such that you can continue to do your job even if the Nation’s informa- tion technology or financial infrastructure is degraded or under at- tack. Will you and your team provide to this Committee in a Members- only or closed or classified setting, as necessary, that information? Mr. POWELL. Sure. The second one, for sure. I am not sure there is a lot to really—well, we can talk about this offline in terms of what there is to talk about, but we are delighted to come up if you want to have us up for a briefing. If the Chair and the Ranking Member want us to come up, we will come up at any time. Senator OSSOFF. OK. We will coordinate that with Committee leadership and look forward to making that happen. How do you consider the labor participation rate when you think about what it means to fulfill your mandate with respect to em- ployment? Mr. POWELL. It is one of the key measures. There are many, many measures that go into determining what is maximum em- ployment. Ultimately, maximum employment is, one way to think 32 about it, the highest level that is consistent with price stability. And so at a certain point, labor supply has not increased at the pace that everyone expected it to increase at. It is still meaning- fully below where it ought to be, even based on its trend. It is very hard to understand why that is. There is a great discussion of it in the Monetary Policy Report. So essentially what we do is we make a forecast, and that fore- cast now amounts to relatively modest additional improvement in labor force participation. We factor that into how tight the labor market will be. That will give us a view on unemployment, on wages, and things like that. And so that is how we do it. And the reason it is fairly modest improvements is that is what we have seen so far. Senator OSSOFF. The Chairman is a stickler for time so I am just going to get this last question in here. Will you please provide to my office the research that the Fed has conducted or third-party academic research that you consider credible with respect to the distributional effects of monetary policy over the last 15 years, the quantitative easing programs, the massive increase in the money supply from central banks across the world, how that has impacted the Gini coefficient and other distributional and inequality meas- ures? Mr. POWELL. I would be delighted to. Senator OSSOFF. Thank you. Thank you, Mr. Chairman. Chairman BROWN. Thank you, Senator Ossoff. Senator Hagerty, from Tennessee, is recognized. Senator HAGERTY. Thank you, Mr. Chairman and Ranking Mem- ber. I appreciate you getting us together today again. And, Mr. Chairman, I appreciate you being here. I would like to talk a little bit about what Senator Kennedy was just talking about, what Senator Daines touched on with respect to energy. As a candidate, President Biden promised that he would do away with the oil and gas industry here in America if he were elected, and I think that has been one of the campaign promises that he has been very effective at essentially undertaking a war on that industry, whether it is killing the Keystone XL pipeline per- mits, whether it is terminating oil and gas leases on Federal lands, pressuring asset managers and banks to stop lending, to divest from energy projects. It has been a very extensive effort to decrease American energy production. That has had the effect of costing American jobs. It has had an effect of raising domestic prices for energy. But it has also had an effect, as Senator Kennedy mentioned, of making it ex- tremely difficult for the Biden administration to respond to Rus- sia’s invasion of Ukraine, because it makes it very difficult for President Biden to hit Vladimir Putin where it will really hurt. It makes it difficult to sanction Putin’s energy. The reason for that is sanctioning Putin’s energy, again according to the argument that Senator Kennedy eloquently laid out, is going to raise prices for en- ergy around the world, given our dependence on Russian energy and others. We are in a tough spot, and energy touches so many aspects of our economy. I hope I could get your insight in terms of how you 33 look at the trendline for energy prices, Mr. Chairman, and how that is going to affect monetary policy moving forward. Mr. POWELL. Well, I mean, in the near term clearly energy prices have gone up and they may go up further. It depends upon events to come. And that is going to push up inflation. Certainly in the near term gas prices will go up. As I mentioned earlier, there will be effects on inflation, on growth, on gas prices, and it all comes down to how persistent will they be. You know, if it is a spike that comes back down, or it looks like it is coming back down, then that is one thing. If it is persistent, then that is a different thing. And we would be much more concerned at the latter, and also, frankly, the effect that just another oil price shock would have on general inflation expectations. We will be watching that very carefully. Senator HAGERTY. I wake up every morning and check futures prices. I am sure you have got many variables that you watch, and I would look forward to your insight in terms of what you think are the most informative variables as you think about monetary policy in the long run. I would like to turn to the Fed’s accountability right now, and again, this touches on inflation. I think that the Federal Reserve is in a very difficult situation right now, Mr. Chairman. You and I have talked about it. A lot of the stimulus spending, fiscal policy have made your job very difficult. We have had that discussion in hearings before. But with January’s CPI at 7.5 percent, it really does feel like the Fed is behind the curve right now and may have to take more aggressive actions than otherwise would have been the case. And I saw that the most recent Monetary Policy Report omitted the section on monetary policy rules. And I know those rules are not intended to be prescriptive there but they are to consult, for contextualization. But it was concerning that they were missing. And again, I think those rules would have indicated that we are behind the curve, that there is more to be done on inflation. And it brought me to think about how does the Fed think about ac- countability? How do you think about holding the Fed accountable for managing inflation? Mr. POWELL. So we will bring them back for the July thing. Hon- estly, we sometimes do and sometimes do not. And, by the way, I would recommend, the Cleveland Fed has really all of the rules. There are a range of rules, but clearly the median rule is, you know, so . . . But in terms of accountability, you know, it starts with trans- parency from us, and, you know, explaining to you. You are the mechanism through which we get our transparency. We deliver transparency and we get our democratic accountability by explain- ing ourselves in understandable terms to you and by you holding us accountable. And in our system of Government it runs through this Committee and the Senate, and the House as well. And so we try to be very transparent. We try to be engaged with Members and explain and hear your concerns and all those kinds of things. Ultimately, it is the bottom line. We both came from the business world. It is what you deliver, and we need to deliver price stability—we are not currently doing that—and we are very high- ly motivated to get the economy back to a place where we have 34 inflation under control, but also a strong economy and a strong labor market. Senator HAGERTY. I could not agree with you more. Accountable and, frankly, credibility are so important for the Fed. I know the Ranking Member has talked a good deal about mission creep at the Fed, politicization at the Fed. I will just underscore and associate myself with his remarks there as well, in terms of my concern there, because it does get very deep to the credibility of an organi- zation that we are all so dependent upon to be credible, to be trans- parent as you described, and to accurately telegraph where we are headed as a Nation and as the most significant economy in the world. Thank you, Mr. Chairman. Chairman BROWN. Thank you, Senator Hagerty. Senator Cortez Masto, who waited patiently in person for her turn, is now recognized from her office. Senator CORTEZ MASTO. Thank you. Thank you, Mr. Chair, and thank you, Chairman Powell, for being here. I listened until I had to run over to the Natural Resources Com- mittee—but one question I have for you, and I appreciate your can- dor always, clearly the focus is price stability, but we are having challenges right now. Based on what you know now, with our econ- omy and the facts before us, do you believe that the Fed should have engaged its monetary tools a year ago instead of waiting until March to engage some of those, to address price instability? Mr. POWELL. I am sorry. I did not hear the last part of your question. I apologize. It was not—— Senator CORTEZ MASTO. No, that is OK. Do you believe—and let me know if you cannot hear me OK—do you believe that the Fed- eral Reserve, based on what you know now, with the facts and the economy, should have engaged their tools to address the price in- stability a year ago instead of waiting until March? Mr. POWELL. I do not know about a year ago. I would say this. You know, we thought that the supply side problems would get bet- ter faster than this. They have not. Had we known that they were not going to get better then certainly we would have engaged our tools earlier. Senator CORTEZ MASTO. OK. Let me talk about the Monetary Policy Report. You make a strong case that the USA economy is the best in the world. Do you believe that our economy has weath- ered the COVID–19 pandemic more effectively than other nations? Mr. POWELL. I think there is quite a lot of evidence to that effect, yes. Senator CORTEZ MASTO. Thank you. And I appreciate your con- sistent focus on leisure and hospitality industry. As you well know, I talk to you about it all the time, coming from the State of Ne- vada. Can you speak to the Fed’s report that wages in the leisure and hospitality sector are improving quickly? Mr. POWELL. Yes. I mean, that is an area where we have seen very large wage increases, but, you know, it is still one of those very much an in-person business, and I guess it is still difficult to hire people, which is, of course, why the wages have gone up so much. 35 Senator CORTEZ MASTO. And why do you think that nearly a third of all jobs added to the economy in January were in leisure and hospitality? I am curious. Mr. POWELL. I just think that is where the job openings are. You know, that is still the part of the economy—I do not need to tell you—that is the part of the economy that still has to fully recover. Senator CORTEZ MASTO. Thank you. That is what I wanted to hear, because it is true. I see the unemployment numbers in my State, the highest unemployment rates are in southern Nevada where the hospitality and leisure industry is, and we cannot forget that. And that has been the challenge to our workforce in general, and getting people back to work. I know Senator Smith asked you this question, but let me just reiterate this, going back to a full workforce. There are interesting facts in the monetary report, particularly in the first 73 pages, but there was nothing in the labor force discussion regarding about the importance of women in that labor force. I am assuming you utilize that factor as well. Does the Federal Reserve analyze women’s workforce participation? Mr. POWELL. Oh yes, very much so. There is a story there. I do not know why it did not go into this, if it is not in there. But, I mean, early on women bore the brunt of participation and of job loss, but over the course of the pandemic much of that effect has really reversed, so you are back now to—we were looking at this earlier this week—if you look at the change in participation or un- employment for men and women, it is very hard to see any dif- ference at this point. But that was not the case a year ago, where women bore the brunt then, but not so much now. Senator CORTEZ MASTO. And do you think impact of lack of childcare has impacted and been a barrier for women to get back in the workforce? Mr. POWELL. Yes, and there is a table, I think on page 11 in our book that shows who is not participating. Actually, childcare is not so much. Caregiving overall is a big number. But according to this data anyway, childcare as such is no longer big from a macro- economics standpoint. I know for the people affected it is big. Senator CORTEZ MASTO. Thank you. And then one of the other areas that we have been talking about, the rising prices that we see and that I hear about at home, I see at home, one area though is around housing and the focus on how we can reduce costs and prices for affordable housing. And so there is work being done that we have done already, but also that we can still address to increas- ing the housing supply here, incentivize that at the Federal level. I am just curious. Would you believe that investments in increas- ing the supply of housing affecting the inflation that we see in the housing market and inflation overall? Mr. POWELL. If you are getting into fiscal policy to support af- fordable housing, that is certainly a worthy and important issue but really not our doing. Senator CORTEZ MASTO. No, just the fact of supply and demand. If what we are seeing is more of a demand for housing and lack of supply, and if we are to incentivize that increase in the supply of housing that should lower costs, that should help address the in- flationary—— 36 Mr. POWELL. I think if you create more supply then you will get prices going down, pretty much in anything. Senator CORTEZ MASTO. Yes, I appreciate that. Chairman Powell, thank you again. Chairman BROWN. Thanks, Senator Cortez Masto. Senator Tillis, from North Carolina, is recognized. Senator TILLIS. Thank you, Mr. Chairman. Chair Powell, thank you for being here and thank you again for your long track record of being very accessible. When we call you answer the phone, and I appreciate that. I wanted to talk briefly. Senator Smith talked about childcare and in response—I am paraphrasing—you said it depends on how it would be designed and executed. And then you just made a point in response to Senator Cortez Masto that not so much childcare but dependent care. It could be a parent that you are taking care of. It could be a disabled spouse. It could be any number of other in- stances. And I think if we stop talking—well, let me back up, and say, do you think that a universal childcare, flood the zone, even for nonworking persons would be helpful in fixing the problems that you have right? Like everybody gets it, whether you are going to work or not. Mr. POWELL. That is really not for me to say. That is a real legis- lative question. Senator TILLIS. But it is sort of a flooding. I know you cannot an- swer it because there are pending proposals there, but it just seems to me that if we wanted to really stop talking past each other and start talking about policies that makes sense, that free people up who have marketable skills or who could go to school and get mar- ketable skills, and focus on that segment of the population, that is probably an area where we could get some consensus, that would have a positive economic impact on productivity, potentially even revenue, more people working, more businesses prospering. So that is something I think our Members should look at versus some of the positions we have had here where we have not made any progress, and I think we should. We filed a bill this week, Senator Tester and I have been work- ing on, and I appreciate the Chair’s support for what we are trying to do for the LIBOR transition. Could you speak to the impor- tance—with all the other things going on here some Members may not be dialed into it and not necessarily think it is important. Could you speak to the importance of getting the LIBOR transition legislation passed, which I understand that you all are in support of in its final form? Mr. POWELL. Yes. So it is very important because there will be some remaining contracts that are not covered by fallback lan- guage, and this really is to plug that hole. It is very important from a financial stability standpoint. It is good that we are down to this last so-called hard tail, but this is important legislation. Senator TILLIS. Thank you for that. I hope that we can get it moved forward. In any research or reports that you are getting, economic re- search or reports, how well, and I know it would vary sector to sec- tor, but how well are small businesses doing right now? 37 Mr. POWELL. You know, startups or small businesses—I guess every startup is a small business—are really high and have been right through the pandemic. We did not see that coming but that has been the case. You know, I remember seeing that small businesses at the begin- ning of the pandemic did not have the resources. We were very, very worried about losing a lot of small businesses, through no fault of their own, at the beginning of the pandemic, but that really did not happen. Senator TILLIS. Was that likely Paycheck Protection, other stim- ulus measures probably had an impact on that? Some of them just figured out how to weather the storm? Mr. POWELL. Yes, and I just think the overall economy, for what Congress did and what we did, you know, I think the economy re- covered so much quicker than we were afraid. Senator TILLIS. In North Carolina we are approaching about $90 billion in agriculture product every year. I talked with a farmers’ group yesterday that are struggling with access to labor and in- creased costs. Do you think the way that they fix their problems or businesses that are struggling with the cost of inputs up, in- flated, they can pass some of that to the consumer, not all of it? But is it your general sense or intuition that most of these small businesses are flush with cash and margins? Mr. POWELL. I mean, it depends on the sector, I would think, some of them. The agricultural businesses are paying big fertilizer costs, and we hear a lot of stress in that sector. Senator TILLIS. So I know you are not an economist, but intu- itively do you think, just looking certain sectors in the eye and say- ing cut costs is even a viable option, given where we are with the inflationary pressures? Mr. POWELL. I think businesses are always minimizing their costs. But if we are talking about the President’s speech—— Senator TILLIS. I think there is a general consensus that any business that is not trying to cut costs so they can increase their margins or pay their employees more, then they are not competent business people. Could you at least agree with that? Mr. POWELL. I absolutely agree with that. Senator TILLIS. So to suggest that they are not cutting costs right now would suggest that maybe they are not competent. I do not ex- pect you to respond to that but that is what I infer from the state- ments from the President. Thank you, Mr. Chairman. Chairman BROWN. Thank you, Senator Tillis. Senator Warnock, from Georgia, is recognized. Senator WARNOCK. Thank you so much, Mr. Chairman, and thank you, Chair Powell, for being here again today. Every day I hear from Georgians who are feeling the pinch of ris- ing costs in their wallets. Wages grew last year, but this growth has not kept pace with rising costs for housing, for gas, for gro- ceries. Georgia families are swimming upstream, and while supply chain disruptions contribute to the problem, they are not the sole cause. Three global shipping alliances control delivery for the ma- jority of imported goods. Two companies account for 70 percent of 38 America’s diaper market, and just four meat processors control more than 80 percent of the beef industry. This type of market concentrations lowers competition and gives giant companies more power to use inflation as an excuse to raise prices, leaving Georgia families to foot the bill while their execu- tives and investors get richer and richer. This is why I pushed for a Federal investigation into apparent price gouging by inter- national cargo carriers, carriers that have seen as much as 2,000 percent increase in profit in the midst of a pandemic. Chairman Powell, yes or no. Do you agree that more market com- petition is generally good for the economy and for consumers? Mr. POWELL. I do. Senator WARNOCK. And that too much market concentration poses a risk, a risk that consumers can feel and are feeling, in fact, right now with rising prices? Mr. POWELL. I think that concentration is an appropriate subject for the competition authorities. Senator WARNOCK. But does market concentration pose a risk for rising prices? Yes or no. Mr. POWELL. Yes. I would not want to be heard to say, though, that that is the main source of inflation, but it certainly is—— Senator WARNOCK. So do you believe there is a role for the Fed- eral Reserve to promote market competition to help ease infla- tionary pressures? Mr. POWELL. So outside of the banking industry we do not have a role in competition policy as such. We do administer statutes that bear on that, but ultimately, though, our jobs are inflation and maximum employment, as you know very well. The industries that you are talking about and the kind of issues that you are talking about really are for the antitrust people rather than for monetary policy. Senator WARNOCK. But dealing with inflation is part of your—— Mr. POWELL. Yes. Senator WARNOCK.——your mission and your mandate, and if market concentration is contributing to that, does that not involve the Fed’s mandate? Mr. POWELL. But we do not have the tools to deal with market concentration. You know, we are supposed to achieve maximum employment and price stability. That is the classic role for the anti- trust people at the FTC and Justice Department and at the State level, rather than for us. Senator WARNOCK. Will you commit to a study on how market concentration has affected the price of consumer goods during the pandemic and share that study with Congress and antitrust enforc- ers? Mr. POWELL. So I think I can do better than that, which is, we actually have a good amount of research from inside the Fed and from outside the Fed that bears on these questions, and we will be happy to share that with you right away. Senator WARNOCK. All right. Thank you so much. I look forward to working with you to address the root causes of rising costs for Georgia families, for American families, in general. All right? Mr. Chairman, I have got 50 seconds left but I am going to defy Baptist preacher gravity and that is the end of my questions. 39 Chairman BROWN. Thank you, Senator Warnock. Follow that advice, Senator Rounds, from South Dakota. Senator ROUNDS. Thank you, Mr. Chairman. Mr. Chairman, first of all, thanks for what you do. I appreciate it, and I appreciate your openness with us. I want to go back and kind of simplify a couple of things if we can a little bit, just in terms of the issues surrounding inflation. I think it is fair to say that one way you can divide it is into two parts, one being the supply side pressure on inflation, and the sec- ond side being the demand side. I think the last time that you were here before this Committee we talked about the fact that the Fed really had the ability to im- pact the demand side. Is it fair to say that that is where most of your capabilities are today? Mr. POWELL. Yes. Very much so. Senator ROUNDS. In order to do that—and I know that the ques- tion is, is trying to get inflation down to 2 percent or so—what would you say is, of the total amount, right now we are running 7.5 percent, how much of that can the Fed actually impact with their policies? What part of it is demand-driven versus supply driv- en in the analysis that you do? Mr. POWELL. That is a really interesting question, and I do not have a precise answer for that. I think it is clearly both, and that is why I would say to get back to 2 percent inflation we really do think we are going to need help from the supply side in the form of just the bottlenecks and shortages and all that being alleviated as well. Senator ROUNDS. When you make a determination as to the tools that are available to you, and in particular primarily raising the basic interest rates that are available to you right now, how much of that inflation do you think you can impact using the tools that you have got right now? What I am pointing at is, it seems to me that if we decided that the tools that you have are available to fix all of inflation, we put you in a really tough spot, and we may very well go way overboard on the amount of interest increases and not be able to actually impact a significant part of the inflation itself. A fair concern to have? Mr. POWELL. Yes, and I think we need to bear in mind, and we will keep in mind, that some of this is because of very strong de- mand meeting a limited supply, an inflexible supply. Cars are a great example. Ordinarily, if there is demand for cars, a lot of de- mand, the car makers go, ‘‘This is great. We will make more cars and we will raise the prices too.’’ You cannot make more cars with- out more semiconductors, right? You can only make the amount that you are making. And so what happens is it all goes into higher prices. So we can lower car demand by raising rates, and we will do that, but ultimately we need more semiconductors so that there can be more cars as well, to really get back to 2 percent inflation. Senator ROUNDS. Fuel costs have gone up, in some cases, 40 per- cent in the last year, though. You cannot really impact—— Mr. POWELL. No, we cannot. Senator ROUNDS.——that portion of it. 40 Mr. POWELL. No. Well, I mean, we can impact demand, but really these prices are set at the global level, by and large, and so really, we cannot affect it. Senator ROUNDS. The section of the Monetary Policy Report on our debt and deficit explains that due to the extreme Federal spending the Federal deficit surged by 15 percent of nominal GDP in 2020, and Federal deficits are expected to increase by roughly $5.4 trillion by the end of fiscal year 2030. Federal debt by the pub- lic jumped to above 100 percent of nominal GDP in 2020, the high- est debt-to-GDP ratio since 1947, and it remained there in 2021. If the Fed is slated to raise interest rates potentially more than five times this year, the interest on the Federal debt will also rise, further ballooning the national debt. What effect does a ballooning national debt have on the economy, and how does the Fed factor that into its forecasting of that portion of the challenge? Mr. POWELL. Our unsustainable fiscal path does not really have a bearing on that. You know, we work in business cycle limit. That is sort of the timeframe we can think about things, given our tools and what they do. You know, we are on an unsustainable fiscal path, meaning that the debt is growing faster than the economy. That, by definition, is unsustainable in the long run. We need to get back to that, but the time to do that is when the economy is strong, and that is really all I can say. That is all I can say about it. Senator ROUNDS. OK. One last question. This week the Fed an- nounced a proposed plan to improve the process for financial insti- tutions looking to get access to Fed master account. It seems unique that it would happen right now with everything else going on with regard to nominations here before us. Would it suggest that the Fed believes that the process has been abused in the past or is this just an arbitrary determination being made right now? What is the reason for this investigation? Mr. POWELL. Well, it is just that we have had burgeoning—it is really digital finance and all the new kinds of charters and all of those things, and there is a need for us to—and we put a lot of time and thought into the extent to which we should provide mas- ter accounts to fintechs that may or may not have deposit insur- ance. You know, it is highly precedential, and we wanted to get it right. We have been thinking about this for a long time, as one of your colleagues knows well. And this is a proposal. It is out for com- ment, I think, for 45 days, and it gives sort of three tiers, and we want to get public feedback on that. But I think it has taken us awhile to get to this. There is no magic to the timing, but it is just a reflection of what is going on in the world of digital finance. Senator ROUNDS. Very good. Mr. Chairman, thank you. Chairman BROWN. Thank you, Senator Rounds. Senator Reed, from Rhode Island, is recognized. Senator REED. Thank you, Mr. Chairman. Thank you, Chairman Powell, for your great work. Senator Cortez Masto raised the issue of housing, and for fami- lies all across the country, particularly in my home State of Rhode Island, this is one of the biggest forms of inflation they are seeing. It has been reported that housing prices, year over year, have gone 41 up 20 percent. Rent nationwide in January rose 14 percent in 2021, the last numbers we have. I had school principals in yesterday, and they were commenting about some of their families having to leave a working-class com- munity in Rhode Island because they cannot afford the housing— and this is in not luxury housing—to go into poorer neighborhoods just to have some shelter. And I am afraid there is another factor that is going to really ex- acerbate what is going on, and that is private equity and Wall Street have decided that they are going to buy up as many homes as they can, and that disrupts what we assume is the typical hous- ing market for both rental, i.e., relatively small owners have rental properties in the State, they have a relationship with their tenants. When it comes to homes, you buy a starter house, and then you move up, and you sell it, and these are families, through a realtor, selling it. Now we have got the big machines that are just buying up houses, throwing people out, and I think that is something that is going to essentially sneak up on us like the derivatives crisis and a lot of other crises in the past. But what you are going to do, and within your authority, is ad- dress the demand side of the economy. This is really a supply side issue. I would assume you would agree. Mr. POWELL. Yes. Senator REED. But if we do not address it, we will see continued inflation in housing and continued problems, and that is contrib- uting significantly to the overall inflation rate. Is that accurate? Mr. POWELL. I think in housing it is land, labor, lots, materials, and it is very strong demand. All of those are scarce, and it is a very strong demand hitting, and so that is why you are seeing prices go up. Senator REED. Will the interest rate increases, do you think, af- fect demand for housing? Mr. POWELL. I expect they will, yes. It is a very interest-sensitive sector. Senator REED. Yes. And in terms of rental housing that typically, because of the supply shortage, will be passed on to the renter, I would assume. Mr. POWELL. Yes. Senator REED. So, you know, we have a problem that affects fam- ilies all through this country, and one of the consequences of what you are going to do is raise prices, at least slightly. But we have to deal with it, and that is on the supply side. I know that is not your bailiwick. But, you know, we are talking in general terms about inflation, and if we do not get a handle on housing inflation the American people will still be, and particularly the lower-income working fam- ilies will be hammered by this. So I hope we can come together on the fiscal side and do something that is appropriate. We are witnessing extraordinarily disturbing conflict in Ukraine, and it is going to have repercussions in many dimensions. I think it will also have repercussions in the financial world, and I hope the Fed is tuning in and watching closely. I think the Chinese are particularly interested in the fact that we have been able to assemble a global coalition to basically shut 42 down the Russian economy, and they will start thinking about how they can avoid that fate if they get into a similar circumstance. They have, I think, a rudimentary SWIFT system, which they might try promoting much more, which could interfere with the system that we have invested. Then cryptocurrency will be exploited. I think also, too, that the whole issue of the dollar as the medium of exchange to the world, which is the key that is really making our sanctions effective, the Chinese again will look very closely, as they have in the past. So first, I presume you are going to look at this issue very close- ly, and second, inform us of what developments, and then third, you might just indicate what you think might happen. Mr. POWELL. Yes to all of the above. I mean, you are asking some longer-term questions, the reserve currency and the Chinese mes- saging system that is like SWIFT. In the near term, those are not going to be big questions in this one particular instance, but in the longer run I think those things are very much on the table. Senator REED. And so we will see, at some point, and again, not in months but probably years, movement, particularly by the Chi- nese, to insulate themselves from the same thing that is happening in Russia now. Mr. POWELL. And that is going on now. I mean, that has been going on for some time. But it may change the trajectory. Senator REED. It is an accelerant. Mr. POWELL. Yes. Senator REED. Thank you, Mr. Chairman. Thank you very much. Chairman BROWN. Thank you, Senator Reed. Senator Sinema, from Arizona, is recognized from her office. Senator SINEMA. Thank you, Mr. Chairman, and thank you to Chair Powell for being here today to speak about these important issues. As you know, over the last 2 years we have seen the significant impact of the COVID–19 pandemic on our global supply chains for both industrial and consumer goods. While our economy is begin- ning to recover, we are already seeing the impact that Vladimir Putin’s illegal, violent attack on Ukraine will have on the price of oil and gas here at home. I am supportive of the strong, swift actions the Administration has taken to sanction major Russian banks and Russian oligarchs in response to the unprovoked war that Russia is waging against Ukraine. I believe we can go farther and do more. I am also mindful of the impacts that these sanctions are having and will continue to have on everyday people, not just in Russia and Ukraine but also here at home. These sanctions can affect the availability and pricing of essential goods for hard-working Arizona families by further disrupting global supply chains. Let me be clear. Arizonans stand with Ukraine in their fight to determine their destiny. We are supportive of the actions taken thus far to hold Russia accountable. And Arizonans are also con- cerned with the price of groceries and everyday goods, and we are paying too much at the pump right now. So in a global economy, sanctions often involve economic trade- offs. How is the Fed assessing the impact of Russia’s illegal war 43 and the United States and allied sanctions against Russian banks on the pricing of oil and gas for consumers? Mr. POWELL. Thank you. Oil and gas prices have been going up really for a couple of months now, in anticipation of this, and then they have gone up substantially in the last couple of weeks, and, you know, the really important question for the economy is how long that will persist. The immediate impact will be to raise gas prices and other fuel prices and prices for companies using energy. So inflation will move up. People will feel that certainly at the gas pump. And also, you know, crudely, you would expect at least a lit- tle bit of lower economic activity due to higher energy prices. But again, it is both the magnitude of that, and that will really depend on events that have not happened yet. How big will those increases be, and second, how long do they persist? If they are brief and go away, or if just the price of oil stays at a certain level for a while, then the effect on inflation will be temporary. So we will be watching all of those things. And, you know, we run simulations and that sort of thing. That is one of the things we like to do, and so to make ourselves think about the possibili- ties. Of course, everything is so uncertain. It is just very hard to say where this is going. And I think in that environment we need to move carefully with our policy, and that is what we are planning to do. Senator SINEMA. How much do you expect these changes in oil and gas prices to affect the availability and pricing of other goods that rely on oil and gas in the United States, and do you expect there to be a noticeable impact in the consumer price index? Mr. POWELL. I think certainly you will see gas prices move up, as they do when oil prices go up, and that will show up in the con- sumer price index. It will show up in the headline index. It does not show up in the core index but it shows up in the headline index. And the headline index, of course, is what people are actu- ally paying at any given time. So it will show up. Senator SINEMA. Does Russia’s war in Ukraine change the Fed’s thinking about interest rates? Mr. POWELL. Too early to say. I do think before the invasion we were planning to raise rates this year. We were planning to make a series of interest rate increases. That is still the case. I think right now, in this very sensitive time where uncertainty is highly elevated and we really do not know which way things are going to go, I think we need to move carefully. But we certainly think it is appropriate for us to go ahead with our plan, and also our plan to shrink the balance sheet, but just knowing that we do not want to add to uncertainty. Our goal is al- ways to promote financial stability and macroeconomic stability, and that means that at times like this we move carefully, and that is what we will be doing. Senator SINEMA. Last question. The sanctions on Russia’s central bank are also affecting American companies who have holdings in Russia. So what assessments are the Fed making about the impact of American companies’ dealings in Russia, and how could the Fed respond to stabilize the markets if that does become an issue? Mr. POWELL. Particularly the large financial institutions, but really American businesses, generally really do not have major 44 exposures to Russia, and they have gotten less over the years. So particularly with the big banks, there are some meaningful expo- sures but they are not large in the context of the overall institu- tion. So, in a sense, the first-order effects on the U.S. economy from trade or from investment or from operations on the ground are not going to be large. There can be other effects, though, second-order effects, and unintended consequences and all that, so we are watch- ing the situation very carefully. Senator SINEMA. Thank you. Mr. Chairman, I see my time has expired. Thank you. Chairman BROWN. Thank you, Senator Sinema. Thank you to Chairman Powell for joining us today. For Senators who wish to submit questions for the hearing record, those ques- tions are due 1 week from today, Thursday, March 10th, close of business. Chair Powell, please submit your responses to questions within the 45 days from the day you receive them. Thank you again for your testimony. The hearing is adjourned. [Whereupon, at 12:23 p.m., the hearing was adjourned.] [Prepared statements, responses to written questions, and addi- tional material supplied for the record follow:] 45 PREPARED STATEMENT OF CHAIRMAN SHERROD BROWN I want to start by acknowledging that as we sit here this morning, Ukrainians are showing such courage and resolve, fighting Russian invaders in their homeland. Ukrainian families fleeing indiscriminate bombings are taking refuge in subway tunnels—something that Europe hasn’t seen since the siege of London seven dec- ades ago. I want to express my support for the brave men and women in Ukraine fighting for democracy, and I know all my colleagues on this Committee, of both par- ties, join me in that. This is a Russian attack on democracy. And it’s only the latest, terrible escalation of what has become one of the main goals of the Russian Federation—to attack and undermine democratic norms at home and abroad. The world is looking to us right now. We are the leader of the free world, and its oldest democracy. It’s vital that we live by our values—both abroad and at home. That means a commitment to the rule of law. A commitment to democratic par- ticipation. And a commitment to independent institutions that allow our society to function, like the Federal Reserve. We created the Fed as an independent agency, outside of any one party’s control, to be staffed with economic experts—not political cronies. It’s one of many American institutions that sets our country apart from autocratic regimes. It is vital that we reaffirm our commitment to the Fed’s role, showing the world what a functioning democracy looks like. Let’s show up and do our jobs—like Chair Powell comes here, perhaps 14 times a year, it must seem to him. That’s the best way to achieve a strong, growing economy, that lifts up the whole country. This time last year, our country and our economy were in a place of deep uncer- tainty. More than 4 million people were out of a job. Frontline workers were just beginning to get vaccinated. We were in the midst of a public health crisis and economic crisis that needed us all—policymakers, business owners, workers—to come together and tackle the challenge of this pandemic economy. And that’s what we did. We passed the American Rescue Plan. We got shots into arms, money into people’s pockets, workers back on the job, and kids back in school. Against the odds, 2021 became a year of unprecedented economic growth for our country—in job creation, wage gains, GDP. For the first time in two decades, the American economy grew faster than China’s. We averaged over half a million new jobs per month last year, and saw the fastest drop ever in the unemployment rate. Wages rose for workers—especially low-wage workers. American entrepreneurs broke started a record-setting 5 million new busi- nesses. This all translated into American families’ household balance sheets, which were healthier in 2021 than before the pandemic. That’s because of the actions Democrats took in this Congress—expanding the Child Tax Credit, and rental and housing as- sistance. The American Rescue Plan helped get most Americans vaccinated and make a booster shot available to everyone. Today, over 65 percent of the population is fully vaccinated—including more than 75 percent of all adults. Case counts and hos- pitalizations are dropping. And now we are one step closer to normal life beyond the pandemic. Americans no longer have to live in fear. We have come a long way, but the fight isn’t over—and it has taken an incredible toll on Americans. After 2 years of stress, of massive disruptions in our lives and in our economy, people are exhausted. And they are fearful that inflation will make it harder and harder for them to keep up with the cost of living. The pandemic economy has caused inflation. Families feel it at the gas station. They feel it when they’re making rent payments. And they feel it when they check out at the grocery store. And we must acknowledge that Russia’s invasion of Ukraine will affect the global economy. We learned over the past 2 years how fragile our global supply chains are. Some of us have said for years that we should make more things in America and rely less on China. Elites in Washington that dismissed those concerns for decades are now finally starting to wake up. We help prevent long-term inflation by bringing supply chains home—and in the process, we create jobs and rebuild our industrial base. The House and Senate have both passed bills investing in domestic manufac- turing and research and development. We need to put a comprehensive bill on the 46 President’s desk and bring manufacturing, research, and development back to Amer- ica. And we’re building the capacity to move goods faster and more cheaply with the Bipartisan Infrastructure Bill. While most Americans report mixed feelings about the economy over the past year—they may have gotten a raise and a tax cut and have more in savings, while also being concerned about rising costs—there’s one group that did better than ever last year: corporations. Corporations made record profits in 2021 and gave their executives and share- holders a bigger slice of the profits than ever. And they’ve reacted with barely controlled glee at the opportunity to raise prices higher than ever. We can never forget: raising prices is a choice. There is no law saying that if the cost of an input goes up or if transportation costs increase, companies have to raise prices. They have options. They could cut costs elsewhere by making executive bonuses or stock buybacks a little tiny bit smaller. But of course they don’t—there’s not enough competition in the economy. From the meatpacking industry to the oil cartels, corporations don’t face the fair, capi- talist competition we need to keep prices low and wages high. And when you combine current inflation with all the expenses that have been ris- ing for decades—prescription drugs, childcare, housing—it’s little wonder that even many middle-class families don’t feel stable. It will take all of us to lower these long-term costs, fight inflation, and create an economy where hard work pays off for everyone—no matter who you are, where you live, or what kind of work you do. All workers should be able to find a good-paying job that allows them to raise a family, keep up with the cost of living, and join the middle class. The Federal Reserve has a responsibility to tackle inflation, and to ensure we have a resilient labor market, a safe and stable banking system, an efficient and reliable payments system, and empowered local communities where consumers, workers, small banks, and small businesses thrive. And it’s more important now than ever that we have a full Federal Reserve Board making those decisions. In a time of deep economic uncertainty—where democracies across the world are threatened by authoritarian strongmen—we must ensure the Fed is operating at full capacity. We have an opportunity to confirm one of the world’s leading experts on cybersecurity in the financial system—she chaired the G7 Cyber Expert Group. Let’s get her on the job. At this critical time, we must fill these positions so that the entire team of deci- sionmakers can come together, assess the data, and address the problems Ameri- cans face. Today, we have Chair Pro Tempore of the Federal Reserve, Jay Powell, here to deliver a biannual update on the Fed’s actions to steer our economic recovery. Chair Powell, thank you, and I look forward to your testimony. PREPARED STATEMENT OF SENATOR PATRICK J. TOOMEY Chairman Powell, welcome. I hope we process your nomination soon. In the mean- time, I’m confident that you and your fellow FOMC members are fully able to do your job to fight inflation. Obviously, there’s much work to be done. January’s inflation reached a 40-year high of 7.5 percent. Inflation like that harms average Americans. Even though wages are growing, inflation is growing faster and causing workers to fall further and further behind. Savers are earning virtually zero on their savings while inflation erodes their value. Our current zero-interest-rate monetary policy would be appropriate for a period of economic crisis—not a period of multidecade high inflation. Of course, the profligate fiscal policy of the last year has also contributed to infla- tion. Democrat supporters of blowout, deficit spending bills like the American Res- cue Plan and Build Back Better have looked to blame others for the consequences of their misguided policies. First, they blamed global supply chains. Now they have shifted their blame to ‘‘greedy corporations.’’ Actually, inflation is pretty easy to understand. It results from more money chas- ing fewer goods. 47 The Administration’s policies, such as over-regulation and a war on American en- ergy, have limited the production of goods. And reckless spending has resulted in more money chasing those goods. Meanwhile, the Fed’s accommodative monetary policy has further stimulated de- mand. For many years now, I’ve warned that it could be extremely difficult to put the inflation genie back in the bottle. Well, the genie is out, and the Fed is behind the curve. We must act with urgency to get inflation under control. I’m also deeply troubled by what appears to be a growing urge to use financial regulators, including the Fed, to tackle complex political questions outside the finan- cial system. Questions like: how (and how quickly) to transition to a lower carbon economy? How to address racially charged social issues? Or even how can we improve primary and secondary education? No doubt, these are important issues. But, they’re wholly unrelated to the Fed’s limited statutory mandates and expertise. And yet the Fed has been weighing in on every one of these issues. Some intend to use the Fed’s recently developed climate scenario analysis to steer capital away from carbon intensive industries. All 12 Reserve Banks have hosted a ‘‘Racism in the Economy’’ series where invited speakers advocated for racial rep- arations and defunding the police, among other far-left proposals. And the Min- neapolis Fed is actively lobbying to change Minnesota’s constitution—on the issue of K–12 education policy. Does anyone truly think these activities are within the Fed’s statutory mandates? Of course not. They are challenging and complex issues that require difficult tradeoffs. And in a democratic society, those tradeoffs must be made by elected representatives who are directly accountable to the American people. Consider some tradeoffs associated with addressing global warming. If we limit domestic oil and gas production, Americans will pay more at the pump. How much more is appropriate? If we suddenly limit domestic production without feasible energy alternatives, our Nation and the world will become more reliant on fossil fuels coming from autocratic nations. When does that reliance present an unacceptable national and global secu- rity threat? There are an unlimited number of equally challenging tradeoffs for each of these politically charged topics—none of which should be decided by unelected and unac- countable central bankers. And yet, some of the Reserve Banks are diving right in. When I’ve requested additional information about their activities, the Reserve Banks stonewall me. When I ask the Board to address the issue, everyone passes the buck. The Fed Board says it’s up to the Reserve Banks, even though the Board oversees the Reserve Banks. And except through the Fed Board, the Reserve Banks are unaccountable to Congress. From this state of affairs, I can only conclude that the Fed requires reform. Any Fed reform should preserve and strengthen monetary policy independence; develop mechanisms to enforce the existing statutory limits on the Federal Reserve’s ac- tions; and strengthen Congressional oversight by increasing transparency. Here are three reform ideas. First, unlike the Fed Board, the Reserve Banks are not subject to FOIA. That should change. Second, we should consider subjecting the Reserve Bank heads to presidential ap- pointment and Senate confirmation. Third, we should examine the historical 12 Reserve Bank structure. For example, it may make sense to consolidate them into 5 banks, making each a permanent voter on the FOMC. Or perhaps we should eliminate the Reserve Banks entirely by having the Board assume their responsibilities. To be clear, I do not present these ideas lightly. The Fed was given independence to insulate monetary policy from politics. Congress has a responsibility to ensure that the Fed does not become a political actor. PREPARED STATEMENT OF JEROME H. POWELL CHAIRPROTEMPORE, BOARDOFGOVERNORSOFTHEFEDERALRESERVESYSTEM MARCH3, 2022 Chairman Brown, Ranking Member Toomey, and other Members of the Com- mittee, I am pleased to present the Federal Reserve’s semiannual Monetary Policy Report. 48 Before I begin, let me briefly address Russia’s attack on Ukraine. The conflict is causing tremendous hardship for the Ukrainian people. The implications for the U.S. economy are highly uncertain, and we will be monitoring the situation closely. At the Federal Reserve, we are strongly committed to achieving the monetary pol- icy goals that Congress has given us: maximum employment and price stability. We pursue these goals based solely on data and objective analysis, and we are com- mitted to doing so in a clear and transparent manner so that the American people and their representatives in Congress understand our policy actions and can hold us accountable. I will review the current economic situation before turning to mone- tary policy. Current Economic Situation and Outlook Economic activity expanded at a robust 51⁄2 percent pace last year, reflecting progress on vaccinations and the reopening of the economy, fiscal and monetary pol- icy support, and the healthy financial positions of households and businesses. The rapid spread of the Omicron variant led to some slowing in economic activity early this year, but with cases having declined sharply since mid-January, the slowdown seems to have been brief. The labor market is extremely tight. Payroll employment rose by 6.7 million in 2021, and job gains were robust in January. The unemployment rate declined sub- stantially over the past year and stood at 4.0 percent in January, reaching the me- dian of Federal Open Market Committee (FOMC) participants’ estimates of its longer-run normal level. The improvements in labor market conditions have been widespread, including for workers at the lower end of the wage distribution as well as for African Americans and Hispanics. Labor demand is very strong, and while labor force participation has ticked up, labor supply remains subdued. As a result, employers are having difficulties filling job openings, an unprecedented number of workers are quitting to take new jobs, and wages are rising at their fastest pace in many years. Inflation increased sharply last year and is now running well above our longer- run objective of 2 percent. Demand is strong, and bottlenecks and supply constraints are limiting how quickly production can respond. These supply disruptions have been larger and longer lasting than anticipated, exacerbated by waves of the virus, and price increases are now spreading to a broader range of goods and services. Monetary Policy We understand that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food, housing, and trans- portation. We know that the best thing we can do to support a strong labor market is to promote a long expansion, and that is only possible in an environment of price stability. The Committee will continue to monitor incoming economic data and will adjust the stance of monetary policy as appropriate to manage risks that could impede the attainment of its goals. The Committee’s assessments will take into account a wide range of information, including labor market conditions, inflation pressures and in- flation expectations, and financial and international developments. We continue to expect inflation to decline over the course of the year as supply constraints ease and demand moderates because of the waning effects of fiscal support and the removal of monetary policy accommodation. But we are attentive to the risks of potential fur- ther upward pressure on inflation expectations and inflation itself from a number of factors. We will use our policy tools as appropriate to prevent higher inflation from becoming entrenched while promoting a sustainable expansion and a strong labor market. Our monetary policy has been adapting to the evolving economic environment, and it will continue to do so. We have phased out our net asset purchases. With inflation well above 2 percent and a strong labor market, we expect it will be appro- priate to raise the target range for the Federal funds rate at our meeting later this month. The process of removing policy accommodation in current circumstances will in- volve both increases in the target range of the federal funds rate and reduction in the size of the Federal Reserve’s balance sheet. As the FOMC noted in January, the federal funds rate is our primary means of adjusting the stance of monetary policy. Reducing our balance sheet will commence after the process of raising interest rates has begun, and will proceed in a predictable manner primarily through adjustments to reinvestments. The near-term effects on the U.S. economy of the invasion of Ukraine, the ongoing war, the sanctions, and of events to come, remain highly uncertain. Making appro- priate monetary policy in this environment requires a recognition that the economy 49 evolves in unexpected ways. We will need to be nimble in responding to incoming data and the evolving outlook. Maintaining the trust and confidence of the public is essential to our work. Last month, the Federal Reserve finalized a comprehensive set of new ethics rules to sub- stantially strengthen the investment restrictions for senior Federal Reserve officials. These new rules will guard against even the appearance of any conflict of interest. They are tough and best in class in Government, here and around the world. We understand that our actions affect communities, families, and businesses across the country. Everything we do is in service to our public mission. We at the Federal Reserve will do everything we can to achieve our maximum-employment and price-stability goals. Thank you. I am happy to take your questions. 50 RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN BROWN FROM JEROME H. POWELL Q.1. The record levels of leveraged lending prepandemic continue to rise and a recent report issued by the Federal Reserve, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation noted that ‘‘credit risk associated with leveraged lend- ing is high.’’ U.S. banks have both direct and indirect exposure to leveraged loans. How is the Fed assessing increased credit risk as- sociated with leveraged loans? What are you doing to mitigate fi- nancial stability risk as interest rates rise? A.1. The Federal Reserve regularly monitors and assesses risks to supervised institutions and to the broader system from leveraged lending. We use our supervisory tools to closely monitor risks, as- sess unknowns, and work to develop a comprehensive under- standing of the market. Our analysis includes efforts to quantify bank holdings of leveraged loans and assess the direct and indirect exposures of large banking institutions. In terms of nonbanks, we strive to understand their funding structures and the amount of le- veraged loans they hold. We also work to understand the character- istics and credit quality of the loans themselves and the market dy- namics in this space. Currently, this work does not suggest that the leveraged loan market poses a greater financial stability risk than in other time periods. The Federal Reserve also assesses the broader financial stability consequences of credit and interest rate risk stemming from in- creased leveraged lending activity. This assessment is done as part of our ongoing, comprehensive program of financial stability moni- toring. Our Financial Stability Report provides in further detail how our framework for assessing financial stability looks for vulnerabilities in the financial system that could amplify the ef- fects of shocks or adverse unexpected economic developments. We track vulnerabilities in four key areas: asset valuations, debt owed by businesses and households, funding risk, and leverage among fi- nancial institutions. In the near team and longer run, the strength of the economy will influence how the system responds to stress. Our objective is to ensure that the overall financial system is able to handle shocks without amplifying them and causing damage to the broader economy. Thus, a crucial part of our assessment is based on the fact that the banking system remains highly resilient and bank capital ra- tios have remained at multidecade highs. However, we are not com- placent and are continuously monitoring for new or emerging risks, including those that may arise from leveraged lending. Q.2. In light of President Biden’s Executive order on Ensuring Re- sponsible Development of Digital Assets, the Chairman of the Fed- eral Reserve is ‘‘encouraged to evaluate the extent to which a United States CBDC, based on the potential design options, could enhance or impede the ability of monetary policy to function effec- tively as a critical macroeconomic stabilization tool.’’ What factors will the Fed consider in evaluating the effectiveness of a CBDC to further monetary policy? A.2. As part of the Federal Reserve’s exploration of both the poten- tial benefits and potential risks and policy considerations of a U.S. 51 central bank digital currency (CBDC), the Federal Reserve has been researching the possible impact of a CBDC on monetary policy implementation. We are also actively engaged on these topics with our international counterparts at other central banks and multilat- eral financial institutions to understand and learn from their expe- riences. Under the current monetary policy regime, the Federal Reserve exercises control over the level of the federal funds rate and other short-term interest rates primarily through the setting of the Fed- eral Reserve’s administered rates. In this framework, the introduc- tion of a CBDC could affect monetary policy implementation and interest rate control by altering the supply of reserves in the bank- ing system. In the case of non-interest-bearing CBDCs, the level and vola- tility of the public’s demand for a CBDC might be comparable to other factors that currently affect the quantity of reserves in the banking system, such as changes in physical currency or overnight repurchase agreements. A CBDC that pushed reserves lower may have little effect on the federal funds rate if the initial supply of reserves were large enough to provide an adequate buffer. Over the long term, the Federal Reserve might have to increase the size of its balance sheet to accommodate CBDC growth, similar to the bal- ance-sheet impact of issuing increasing amounts of physical cur- rency. The interactions between CBDCs and monetary policy implemen- tation could be more pronounced and more complicated if a CBDC was interest-bearing at levels that are comparable to rates of re- turn on other safe assets. In this case, the level and volatility of the public’s demand for a CBDC could be quite substantial. The po- tential for significant foreign demand for a CBDC in this scenario would further complicate monetary policy implementation. As noted in the discussion paper released by the Board of Gov- ernors earlier this year, various design elements of a CBDC could have important effects on the way the public comes to use CBDCs and, by implication, the way in which CBDCs interact with mone- tary policy implementation. For example, limitations on the amounts of a CBDC that may be held or on the amount of a CBDC that could be accumulated in a given time period could have sig- nificant effects on the aggregate amount of a CBDC outstanding and variations in the CBDC over time in response to economic and financial developments. The Federal Reserve will continue to re- search these and other important topics related to CBDCs. RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY FROM JEROME H. POWELL Q.1. Fed Master Accounts. As you know, there has been an increas- ing interest among financial institutions, members of Congress, academics, and other stakeholders regarding the Federal Reserve’s process for reviewing requests for accounts and services at Federal Reserve Banks (Fed master accounts). In May 2021, the Federal Reserve issued a request for comment (RFC) on proposed guide- 52 lines for evaluating such requests.1 The RFC emphasizes that a ‘‘more transparent and consistent approach to such requests should be adopted by the Reserve Banks.’’2 Earlier this month, the Federal Reserve issued a supplement to the RFC, which proposes a three- tiered review framework for evaluating Fed master account appli- cations. Notwithstanding, there is a lack of transparency regarding the Federal Reserve’s process for evaluating Fed master account appli- cations, including with respect to (1) institutions that have pre- viously applied and (2) the status of those applications. As you know, a Fed master account is a type of public benefit.3 Other agencies that confer similar types of benefits are transparent about applications for those benefits and the status of past and current applications. For example, the public can see on the FDIC’s website the institutions that have applied for federal deposit insurance and the status of their applications.4 Similarly, the public can see on the FCC’s website what entities have applied for Federal commu- nications licenses and the status of those applications.5 However, the public cannot go to the Federal Reserve’s website to see the same information regarding Fed master accounts. In order to provide the public with the same degree of trans- parency for this public benefit, please provide the following infor- mation: A list of every institution that has applied for a Fed master ac- count in the past 20 years, identifying the type of each institution (e.g., traditional bank, trust company, fintech company); and the status of each application (e.g., approved, denied, withdrawn, under review). A.1. Through the Federal Reserve Act, Congress gave the Federal Reserve Banks (Reserve Banks) the authority to open master ac- counts to eligible institutions. Consistent with the longstanding practice of the Federal Reserve, information regarding which insti- tutions have requested or maintain master accounts is considered confidential business information of the requestors and the Reserve Banks. As such, the Federal Reserve does not disclose that infor- mation publicly. Institutions offering novel types of financial products or with novel charters have emerged in recent years, and many of these in- stitutions have requested access to accounts and payment services offered by Reserve Banks. As you note, the Board has proposed guidelines that are intended to ensure the Reserve Banks use a transparent and consistent set of factors when reviewing such re- quests for accounts and payment services. Q.2. Congressional Investigation Records Request. As you know, I made a request last year for Federal Reserve Board records per- taining to a congressional investigation of the Federal Reserve and Fed Regional Banks exceeding their mandates by engaging in 1https://www.federalreserve.gov/newsevents/pressreleases/bcreg20210505a.htm. 2Id. 3See, e.g., https://www.brookings.edu/research/the-fed-wants-to-veto-state-banking-authori- ties-but-is-that-legal/ (‘‘The master account allows a financial institution to participate in the payment system. Without it, a financial institution can’t really function as a financial institu- tion.’’). 4https://www.fdic.gov/regulations/applications/actions.html. 5https://wireless2.fcc.gov/UlsApp/ApplicationSearch/searchAppl.jsp. 53 politically charged activities. My staff has communicated with Fed- eral Reserve Board staff about this request, but to date I have not received any requested records that were not already publicly available. Will you commit to producing all of the requested records? Please answer ‘‘yes’’ or ‘‘no.’’ If so, when should I expect to receive the requested records? If not, please fully explain your answer. A.2. Board staff have worked together with your staff to respond to your records request. The Board provided your staff with ap- proximately 2,000 pages of documents on April 19. This is in addi- tion to the over 7,000 pages provided previously. Q.3. Federal Reserve’s Balance Sheet. In January 2022, the FOMC ‘‘decided to continue to reduce the monthly pace of its net asset purchases, bringing them to an end in early March.’’6 As of March 2, 2022, the Fed’s portfolio included nearly $5.75 trillion of Treas- ury securities, and the Fed was reinvesting its maturing Treasuries at auction.7 In January 2021, the FOMC also released its ‘‘Prin- ciples for Reducing the Size of the Federal Reserve’s Balance Sheet.’’ In those plans, the FOMC announced that it will be ‘‘sig- nificantly reducing’’ the size of the balance sheet, primarily by let- ting its securities mature without reinvestment.8 Has the Fed determined how its balance sheet runoff will affect Treasury auctions and cash flows? If so, what are those effects? A.3. Response not received in time for publication. Q.4. Financial Stability Oversight Council (FSOC). On September 25, 2020, the Financial Stability Oversight Council (FSOC) re- leased a statement on its activities-based review of the secondary mortgage market. FSOC’s statement affirmed the overall quantity and quality of the regulatory capital required by the Federal Hous- ing Finance Agency’s (FHFA) June 30, 2020, proposed rule to es- tablish a new regulatory capital framework for Fannie Mae and Freddie Mac (each, a GSE). Specifically, FSOC stated that ‘‘risk- based capital requirements and leverage-ratio requirements that are materially less than those contemplated by the proposed rule would likely not adequately mitigate the potential stability risk posed by the Enterprises.’’ FSOC committed to ‘‘continue to monitor . . . FHFA’s implementation of the regulatory framework to ensure potential risks to financial stability are adequately addressed.’’ On December 17, 2020, FHFA finalized the regulatory capital frame- work for the GSEs. On September 27, 2021, FHFA proposed amendments that would have materially reduced the GSEs’ regulatory capital requirements. In your January 19, 2022, answers to my questions submitted fol- lowing the January 11, 2022, hearing, you stated that ‘‘Board staff continues to assess FHFA’s proposed amendments to its capital rule.’’ You also noted that ‘‘FHFA did not seek the Board’s input on the proposed amendment to its capital rule.’’ 6https://www.federalreserve.gov/newsevents/pressreleases/monetary20220126a.htm. 7https://www.federalreserve.gov/releases/h41/20220303/. 8https://www.federalreserve.gov/newsevents/pressreleases/monetary20220126c.htm. 54 On February 25, 2022, FHFA finalized those amendments largely as proposed. The amendments reduced the tier 1 capital that must be maintained by a GSE to avoid restrictions on capital distribu- tions from 4 percent to roughly 3 percent of the GSE’s adjusted total assets. The amendments also reduced Freddie Mac’s combined capital requirements from 4 percent to 3.6 percent as of September 30, 2021, with further reductions likely to follow due to continued house price appreciation, among other things. Fannie Mae’s com- bined capital requirements also could further decline as it reverts to prepandemic levels of credit risk transfer coverage (about twice the year-end 2021 levels according to its annual reports on Form 10–K). As a member of FSOC, what steps do you think FSOC should take with respect to FHFA’s now-finalized amendments to fulfill FSOC’s commitment to ‘‘continue to monitor . . . FHFA’s imple- mentation of the regulatory framework to ensure potential risks to financial stability are adequately addressed’’? Do you think that these new risk-based capital requirements and leverage-ratio requirements are ‘‘materially less than those con- templated by the proposed rule’’ and are adequate to ‘‘mitigate the potential stability risk posed by the Enterprises’’. Does the absence of any comment to-date by FSOC on FHFA’s now-finalized amendments pose a risk to the credibility of the Council or risk politicizing the Council? A.4. The Treasury Secretary is the Chair of the Financial Stability Oversight Council (FSOC) and is better placed to speak to the steps the FSOC is taking to evaluate amendments to the Federal Hous- ing Finance Agency’s (FHFA) capital rule for GSEs. I believe it is important that the GSEs be subject to risk-based capital require- ments and leverage-ratio requirements that are adequate to miti- gate the potential stability risk posed by the GSEs. An enhanced supervisory tool set for such private entities should include various prudential measures, such as resolution planning, stress testing, and liquidity management. I welcome the efforts of the FHFA to incorporate those measures into their supervisory framework. While these efforts and actions by the GSEs to distribute credit risk are positive developments, it is important to ensure that the overall levels of capital required at the GSEs are appropriate for the risks they are taking. Board staff actively monitors potential developments in the fi- nancial markets, including rules from other regulatory bodies that may have an impact on financial stability. As such, staff continues to assess any such impact by the amendments to the FHFA’s cap- ital rule. Q.5. Basel III Capital Requirements. In 2017, the Basel Committee on Banking Supervision (BCBS) made changes to the Basel III cap- ital framework that would require financial institutions to alter how they capitalize for credit risk, market risk, and operational risk exposures. It is expected that the United States will soon pro- pose to implement these reforms, which could significantly raise capital requirements for certain banks. There are concerns that such increases could reduce the availability of credit for employers. 55 How do you plan to administer Basel III in a way that does not reduce credit for any business? What is your expected timeline for implementation of Basel III? A.5. Strong capital levels are a source of strength for U.S. banking organizations, making them more resilient to economic shocks and allowing them to extend credit to businesses and individuals through the economic cycle, including in a severe recession. The U.S. banking sector entered the COVID-19 pandemic in a position of strength, having spent the previous decade implementing and adapting to more robust regulatory capital requirements. The expe- rience of the COVID-19 pandemic has demonstrated that U.S. banking organizations are well-capitalized, including through mul- tiple rounds of supervisory stress tests. The final Basel III reforms are intended to produce more robust and internationally consistent capital requirements for the largest banking organizations, building on the improvements to the capital framework following the 2007–2009 financial crisis. Staffs of the U.S. Federal banking agencies continue to work actively on a pro- posal to implement the revised framework for the largest firms, as appropriate for the U.S. banking system. In doing so, we are con- sidering factors such as credit availability and the resilience of firms. We plan to make any proposed changes through the standard no- tice-and-comment rulemaking process. At this time, I do not have a specific timeline for the proposal. RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED FROM JEROME H. POWELL Q.1. Last year’s temporarily boosted Child Tax Credit provided families with up to $250–$300 per child per month from July through December. These payments drastically cut child poverty and helped Americans cover the cost of essential daily expenses. Did the boosted Child Tax Credit support economic growth in 2021? Did monthly Child Tax Credit payments help parents cover high- er grocery, gas, and other living costs last year? A.1. As you note, last year Congress expanded the Child Tax Credit (CTC) on a temporary basis. The legislation increased CTC benefit amounts, made the credit fully refundable, and shifted issuance of the credit to a monthly basis from July through December 2021, whereas previously it was issued annually. These temporary changes in the CTC likely impacted the U.S. economy since, gen- erally, an increase in household incomes likely temporarily boosted aggregate demand and thereby supported economic growth.1 How- 1For analysis of how fiscal policy, including tax credits, can boost aggregate demand, see, for example, Cashin, Lenney, Lutz, and Peterman, ‘‘Fiscal Policy and Aggregate Demand in the U.S. Before, During and Following the Great Recession’’, Finance and Economics Discussion Series 2017–061. Washington, DC: Board of Governors of the Federal Reserve System. For additional discussion of the likely economic effects of the CTC, see Parolin, Z., Ananat, E., Collyer, S.M., Curran, M., and Wimer, C., ’’The Initial Effects of the Expanded Child Tax Credit on Material Hardship’’, National Bureau of Economic Research Working Paper 29285, 2021; Parolin, Z., Collyer, S., Curran, M., and Wimer, C., ‘‘Monthly Poverty Rates Among Children After the Ex- pansion of the Child Tax Credit’’, Poverty & Social Policy Brief 5(4), Columbia University, 2021; and Perez-Lopez, Daniel, ‘‘Economic Hardship Declined in Households With Children as Child Continued 56 ever, when considering such policies, fiscal policy makers also con- sider a wide range of tradeoffs, including the expansion of annual Federal deficits or the need to raise taxes to fund these policies. It is the responsibility of the Congress and the Administration to evaluate the effectiveness of the CTC and decide on its appropriate size and structure going forward. Q.2. As we’ve seen in recent weeks with the economic response to Russia’s unprovoked invasion of Ukraine, our Nation’s sanctions tools are so effective because the dollar is ubiquitous in cross-bor- der payments. It is an economic and national security priority to protect the international role of the dollar. Do you believe a U.S. digital currency can help maintain the attractiveness of the dollar, especially as foreign central banks have recently launched their own digital currencies? A.2. Today, the dollar is widely used around the world because of the size of the U.S. economy, our deep and liquid financial markets, the strength of our institutions, and the commitment of the United States to the rule of law. It is important, however, to consider the implications should many foreign jurisdictions introduce central bank digital currencies (CBDC). The Federal Reserve is examining the potential benefits and risks of issuing a U.S. CBDC, including implications for the use of the dollar abroad. The dollar is important to global financial mar- kets—it is not only the predominant global reserve currency, but it is also the most widely used currency in international payments. Thus, it is also essential to consider what the future status of glob- al financial markets and transactions would look like with and without a Federal Reserve-issued CBDC. In March, the Biden administration issued an Executive order to ensure the responsible development of digital assets to protect con- sumers, financial stability, and national security. The Executive order calls for analysis of the potential implications of a U.S. CBDC and foreign CBDCs on the U.S. national interest and financial cen- trality. The Federal Reserve will work closely with its interagency colleagues on these important topics, which will complement ongo- ing CBDC research at the Federal Reserve. The Federal Reserve is also working closely with international colleagues on CBDC and related topics. For example, in 2020 the Federal Reserve collaborated with six other central banks and the Bank for International Settlements (BIS) to produce a report on foundational principles for CBDCs.2 The Federal Reserve has con- tinued this work with further analysis of policy options and prac- tical implementation issues, joining other central banks in issuing a series of reports last fall on system design and interoperability, Tax Credit Payments Arrived’’, U.S. Census Bureau, August 11, 2021. For studies of employ- ment changes due to the introduction of the expanded CTC, see, for example, Ananat, E., Glasner, B., Hamilton, C., and Parolin, Z., ‘‘Effects of the Expanded Child Tax Credit on Em- ployment Outcomes: Evidence From Real-World Data From April to December 2021’’, National Bureau of Economic Research Working Paper No. 29823, 2022; Bastian, J., ‘‘Investigating the Effects of the 2021 Child Tax Credit Expansion on Poverty and Employment’’, Working Paper, February 14, 2022; and Corinth, K., Stadnicki, M., Meyer, B.D., and Wu, D., ‘‘The Anti-poverty, Targeting, and Labor Supply Effects of the Proposed Child Tax Credit Expansion’’, Becker Fried- man Institute for Economics Working Paper No. 2021–115, University of Chicago, 2021. 2Bank for International Settlements, ‘‘Central Bank Digital Currencies: Foundational Prin- ciples and Core Features’’ (Basel: BIS, October 2020), https://www.bis.org/publ/othp33.pdf. 57 user needs and adoption, and financial stability implications.3 Ad- ditionally, the Federal Reserve collaborated with the G7 to produce a set of public policy principles for retail CBDCs.4 We also work with the Financial Stability Board and BIS on ways to improve cross-border payments, which includes studying how CBDCs might be used for cross-border payments.5 The Federal Reserve Board also issued a discussion paper in Jan- uary as a first step in a public discussion between the Federal Re- serve and stakeholders about CBDCs.6 The paper is not intended to advance any specific policy outcome, nor is it intended to signal that the Federal Reserve will make any imminent decisions about the appropriateness of issuing a U.S. CBDC. Moreover, the Federal Reserve does not intend to proceed with issuance of a CBDC with- out clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law. Irrespective of any conclusion on whether to issue a CBDC, the Federal Reserve will continue to play an active role in developing international stand- ards for CBDCs. RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM JEROME H. POWELL Q.1. How does the Federal Reserve ascertain how much of rising prices is due to demand exceeding supply on the one hand and a reduction in the value of money on the other? A.1. Response not received in time for publication. Q.2. What is the Federal Reserve’s current expectation of how much reducing its balance sheet and increasing interest rates will contribute to reducing inflation as opposed to other actions Con- gress or the executive branch may take to address workforce, com- petition, supply chains, and related issues? A.2. Response not received in time for publication. Q.3. At the hearing, your testimony was that you expect to be tightening credit in order to reduce demand in the economy. What are the ways that the Federal Reserve can increase veloc- ity at the same time it is reducing the money supply? A.3. Response not received in time for publication. Q.4. The latest Monetary Policy Report states that ‘‘While all groups have experienced at least a partial recovery in employment rates since April 2020, the shortfall in employment remains espe- cially large for lower-wage workers and for Hispanics, African Americans, and other minority groups.’’ What effect do you expect raising interest rates to have on unem- ployment of these groups? 3Bank for International Settlements, ‘‘Central Banks and the BIS Explore What a Retail CBDC Might Look Like’’, press release, September 2021, https://www.bis.org/press/ p210930.htm. 4G7, ‘‘Public Policy Principles for Retail Central Bank Digital Currencies’’ (CBDCs), October 2021, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment -data/file/1025235/G7lPubliclPolicylPrincipleslforlRetaillCBDClFINAL.pdf. 5Financial Stability Board, ‘‘Enhancing Cross-border Payments: Stage 3 Roadmap’’ (Wash- ington, DC: FSB, October 2020), https://www.fsb.org/2020/10/enhancing-cross-border-pay- ments-stage-3-roadmap/. 6‘‘Money and Payments: The U.S. Dollar in the Age of Digital Transformation’’, https:// www.federalreserve.gov/publications/money-and-payments-discussion-paper.htm. 58 Will the Fed continue to monitor the effects of raising interest rates on low-income and minority workers as it considers future anti-inflation actions? A.4. Response not received in time for publication. RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN FROM JEROME H. POWELL Q.1. You have now refused, on three separate occasions, to provide Congress with the full set of requested information on the ethics scandal arising from top Fed officials’ trades in stocks, bonds, and other investments and potential insider trading. In my letter to you on January 10, 2022, and two previous letters, I requested the full contents of the March 23, 2020, email reported in the New York Times, and complete copies of any other ethics advice or informa- tion provided to Fed officials between January 1, 2020, and the present. I was provided with an excerpt of this email by the Board’s Congressional Liaison Office on October 21, 2021, and none of the other information I requested. I request again that you share this email in full, as well as complete copies of any other ethics ad- vice or information provided to Fed officials between January 1, 2020, and the present. A.1. As discussed in my response to your office dated February 14, the Federal Reserve Board’s (Board) Office of the Congressional Li- aison shared all of the substantive content of the March 23 email with your office on October 21, 2021. On an ongoing basis, the Board’s ethics office sends regular reminders of ethics obligations to Federal Reserve policymakers and staff. Q.2. In my letters, I also requested that Fed staff provide my staff a briefing on the Fed’s ‘‘broad set of new rules’’ that were an- nounced on October 21, 2021, regarding the purchase and trading of individual securities and the timeliness of reporting and public disclosure by Fed policymakers and senior staff. These new rules have since been released, yet it is unclear that these rules are strong enough to meet the shortcomings of ethical standards at the Fed. Will you commit to ensuring a briefing is provided by March 24, 2022? A.2. The Board’s Legal Division conducted a briefing for the staff of the Senate Committee on Banking, Housing, and Urban Affairs and the staff of its members on March 23. Q.3. I asked you to provide information on Vice Chair Clarida’s ‘‘er- rors’’ in his financial disclosures. You did not provide a response, citing the ongoing Inspector General investigation. However, the existence of this investigation does not preclude you from answer- ing these questions, so I ask again: When did Fed officials first learn that Vice Chair Clarida had made ‘‘inadvertent errors’’1 in his initial financial disclosure? When did Clarida file his amended disclosure? When was this amended disclosure made publicly avail- able on the Office of Government Ethics website? 1New York Times, ‘‘A Fed Official’s 2020 Trade Drew Outcry. It Went Further Than First Disclosed’’, Jeanna Smialek, January 6, 2022, https://www.nytimes.com/2022/01/06/business/ economy/richard-clarida-fed-stockfund.html. 59 A.3. In light of the Office of Inspector General’s investigation, it would not be appropriate for me to comment on the disclosures of any specific individuals, including the former Vice Chair. 60 ADDITIONALMATERIALSUPPLIEDFORTHERECORD 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125

Jerome H. Powell (2022, March 2). Congressional Testimony. Testimony, Federal Reserve. https://whenthefedspeaks.com/doc/testimony_20220303_chair_the_semiannual_monetary_policy_report

@misc{wtfs_testimony_20220303_chair_the_semiannual_monetary_policy_report,
  author = {Jerome H. Powell},
  title = {Congressional Testimony},
  year = {2022},
  month = {Mar},
  howpublished = {Testimony, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/testimony_20220303_chair_the_semiannual_monetary_policy_report},
  note = {Retrieved via When the Fed Speaks corpus}
}