Congressional Testimony

S. HRG. 117–848 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 JUNE 22, 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 55–794 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 WEDNESDAY, JUNE 22, 2022 Page Opening statement of Chairman Brown ................................................................ 1 Prepared statement ................................................................................... 47 Opening statements, comments, or prepared statements of: Senator Tillis .................................................................................................... 4 WITNESS Jerome H. Powell, Chairman, Board of Governors of the Federal Reserve System ................................................................................................................... 6 Prepared statement .......................................................................................... 48 Responses to written questions of: Chairman Brown ....................................................................................... 50 Senator Toomey ......................................................................................... 53 Senator Warren ......................................................................................... 62 Senator Van Hollen ................................................................................... 65 Senator Rounds ......................................................................................... 66 Senator Tillis ............................................................................................. 67 Senator Moran ........................................................................................... 69 Senator Daines .......................................................................................... 71 ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD Monetary Policy Report to the Congress dated June 17, 2022 ............................ 75 (III) THE SEMIANNUAL MONETARY POLICY REPORT TO CONGRESS WEDNESDAY, JUNE 22, 2022 U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. The Committee met at 9:30 a.m., via Webex and in room 216, Hart Senate Office Building, Hon. Sherrod Brown, Chairman of the Committee, presiding. OPENING STATEMENT OF CHAIRMAN SHERROD BROWN Chairman BROWN. The Senate Banking, Housing, and Urban Af- fairs Committee will come to order. Today’s hearing is in hybrid format. Our witness, of course, is in person, but Members have the option to appear either way. We welcome the Chair of the Federal Reserve. He has recently been confirmed for a second term, and this is his first hearing since then. Today we have seen the fastest job growth in decades, faster even than China’s, and the lowest unemployment levels in 50 years. But when Americans see the price of gas and groceries and rent going up, week after week, available jobs and long-awaited wage gains do not mean as much and do not go as far. American families have been through enough the past 2 years. But for most people, it is not just the past 2 years that have been tough. Our economy has not worked for most Americans for far too long. Whether it is war or disease or financial crisis or, sweeping over all of it, the march of globalization, workers and their families al- ways bear the biggest burden, whether it is in the form of higher prices or lost jobs or low wages or devastation to their community, or all of the above. It is not inevitable. The economy is not physics. The ghost of Adam Smith would not recognize America today. There is no invis- ible hand of the market. When prices go up, it is because someone made a choice to raise them. In corporate board rooms, when supply chains slow down or input costs go up or resources become scarce, executives make deci- sions: Do we cut back on bonuses? Do we rethink our stock buyback plan? Do we forgo executive raises this year? Do we post quarterly profits that are still higher than last year, but maybe not quite as high as analysts thought they could be? Or do we raise (1) 2 prices, and foist all the negative consequences of world events onto the people who can least afford them? We know what, in this country, most corporations do. They make the same choice they have always made, no matter the economic conditions of the moment. Most of these executives, they are not bad people. They are just doing their jobs, they tell us. It is the Wall Street system. These executives have to post profit increases for their shareholders, quarter after quarter after quar- ter, the consequences for everything else be damned, and everyone else be damned. It is why, for decades, Wall Street has rewarded the companies that squeeze their workers the hardest, companies that cut wages and retirement benefits, and then cut corners on worker safety and on consumer protection, just to make their stock prices go up. It is why too many companies failed to invest in their workers or their products. It is why companies moved manufacturing overseas, and then ne- glected the supply chains that have been crippled during the pan- demic, contributing mightily to inflation. It is why big corporations—Amazon and Starbucks—why they bust unions. It is why oil and gas companies would rather charge higher prices than increase supply to meet demand. We are not witnessing traditional inflation. We are watching Russia and OPEC drive up prices and American energy companies engage in war-time profiteering. At the root of the higher prices and the empty shelves is the same problem that has been shipping jobs overseas and keeping wages low for decades, from Nevada to Massachusetts to Ohio: cor- porate power and concentration reaching into every industry and market, into every corner of the economy. Our economy does not have to be a zero-sum game where Wall Street wins and everyone else loses. We can create an economy that reflects our values and works for everyone. We passed the American Rescue Plan, including the Child Tax Credit, the biggest tax cut for working families ever. And despite what naysayers claim, of course it was not the cause of inflation. For the American families that I talk to, it empowered them to keep up with the cost of raising children. We passed the bipartisan infrastructure bill, a long-term invest in economic growth that creates more jobs, strengthens our supply chains, and improves our bridges and roads and public transit. Last week, President Biden signed the bipartisan Ocean Ship- ping Reform Act into law, bringing down ocean shipping supply chain costs. We need to build on these successes to build an economy that re- wards work, making things in America. We should pass our Supply Chain Resiliency Act and begin to bring manufacturing back to our country. We should bring down the cost of prescription drugs and housing and childcare and elder care and other costs that have been rising for decades. We need to pass the Protecting the Right to Organize Act, to empower workers in their workplace and our economy so they actually get their fair share. And we need to crack down on 3 corporate concentration and consolidation. Fair competition is good for workers, consumers, and Main Street businesses, and it is a core American value. That is how we bring costs down and ensure that workers do not always pay the price for powerful people’s bad decisions, whether it is a dictator in Eastern Europe or a Wall Street executive. In a truly fair economy, people do not have to choose between two bad options—low wages or high prices. No one likes inflation, and people also want good jobs that pay a living wage. Americans want to work, and they want to work with dignity. That is central to the functioning of our economy, and as Chair Powell knows, it is part of the Fed’s mandate. We must continue to empower workers and strengthen the labor market. Wages are clearly not responsible for inflation now. We cannot forget that almost 6 million people are still looking for work, actual workers behind the numbers whose livelihoods are di- rectly affected by the decisions the Fed makes. And as interest rates rise and financial stability risks increase, it is even more im- portant to keep a close watch on the biggest banks, so that exces- sive risk-taking does not create even more problems. Banks must have enough capital to withstand a crisis. They must serve their communities, not just enrich themselves with stock buybacks and exorbitant executive pay. And mergers must benefit the local community, not just shareholders. We have seen too much evidence of big Wall Street banks behav- ing badly: shunning small businesses, still raking in billions in overdraft fees, discriminating all too often against Black and Brown borrowers. Chair Powell, you must also ensure we have a strong payment system that works for Main Street banks and consumers, so that people do not feel like the only option is a risky and unregulated alternative financial system, backed by nothing but empty prom- ises. The thousands of proxy currencies, like stablecoins, and other digital assets, that promise transparency and democracy are miss- ing one thing: they are not backed by the full faith and credit of the United States of America. The Federal Reserve, our Nation’s central bank, must use its au- thorities to protect consumers and the financial system from these risks. And you, Mr. Chair, must ensure that the Fed has the high- est ethical standards. After former Fed officials profited off of their positions in last year’s stock trading scandal, it is up to you to re- store the American people’s, and us, to restore the American peo- ple’s trust in this institution that is critical for a healthy economy. I was encouraged when you updated the Fed’s policies, but we need rules that have the force of law. That is why we need to pass my Ban Conflicted Trading at the Fed Act. As Chair of the Federal Reserve, you have an important role to play to make sure our economy works for everyone, not just those at the top. I urge you to remember the millions of working Ameri- cans who are counting on you. I will turn to today’s Ranking Member, Mr. Tillis, from North Carolina, and then Chair Powell. And the first questioner will be Senator Warren, who has another engagement, plus it is her birth- 4 day. So every time it is her birthday she gets to go first if she asks. And I have to introduce a judicial candidate in Judiciary so I may have to step out. Senator KENNEDY. It is my birthday, too. Senator WARREN. It is not. Chairman BROWN. Is it your 80th birthday today, Senator Ken- nedy? Senator Tillis. OPENING STATEMENT OF SENATOR THOM TILLIS Senator TILLIS. Thank you, Mr. Chairman, and welcome Chair- man Powell. Congratulations on your confirmation. I was proud to support it. When you testified before this Committee in March, inflation was at a 40-year high, and the Federal Reserve regional banks were stonewalling reasonable requests for information about their activi- ties from Banking Republicans. Unfortunately, neither situation has improved. Let us begin with inflation. Inflation is even higher now than when we saw you in March, with CPI up 8.6 percent per year, a new 40-year high. Getting inflation under control is critical because American families are being squeezed every day by rising prices and mounting costs. Also critical to any discussion we have on inflation is an under- standing of what served to turbo-charge it. In March of 2021, the U.S. economy, as measured by a range of economic factors, was well on its way to recovery. Unemployment was at 6 percent, down from its pandemic worst of nearly 15 per- cent, and continuing to make steady monthly improvements toward a tighter labor market. In fact, 18 States already had unemploy- ment rates below 5 percent, the often-cited threshold to identify a labor market that is almost at full capacity. Likewise, consumer spending had recovered, and it was actually above prepandemic levels, at 4.5 percent. And the personal savings rate had return by 80 percent to its prepandemic state, indicating Americans were capable and willing to spend. Considering these factors, and many others, CBO projected the United States would return to pre-COVID economic levels and GDP output by mid-2021, just a couple months away. At this same time, the Biden administration was aware of one major area of concern, the disruption of supply chains. In fact, President Biden issued a February 2021 Executive order to review U.S. supply chains, in part acknowledging they were already straining to meet rising consumer demand. Yet despite these facts—a soon-to-be recovered economy, strong consumer spending, and known limitations on the supply side due to the documented supply chain issues—the Biden administration and congressional Democrats still somehow considered it respon- sible to ram through a partisan $1.9 trillion spending spree. It is little wonder how this catalyzed the inflation we see today. And do not just take my word for it. Just last week, economists at Morgan Stanley blamed the 40-year high inflation on—this is a quote from their report—‘‘excess fiscal stimulus . . . particularly the last $1.9 trillion package at the end of March 2021,’’ adding 5 ‘‘this is what turbocharged consumption and drove inflation to 40- year highs.’’ Considering this damning assessment of the last reconciliation package, I can only add that any efforts to revive Democrats’ cur- rently stalled tax and spending legislation would no doubt worsen our economic condition. Regarding the Fed specifically, though I am pleased you have begun taking the drastic action necessary to right the U.S. econ- omy, these actions are long-overdue and monetary policy remains too loose. CPI inflation now stands at 8.6 percent per year, a new 40-year high, but the Fed funds rate sits at only 1.6 percent. Ac- cording to the Fed’s semiannual report, the rate should be over 6 percent under the Taylor rule. This disparity indicates not only the lengths the Fed has yet to go to normalize monetary policy, but also the fact that the Fed has largely boxed itself into a menu of purely reactive policy measures. Unless the Fed works quickly to move away from their discretion- based monetary policy approach that has remained consistently well behind the curve, I am concerned the Fed will lose its credi- bility to effectively manage the national economic situation. Regarding congressional oversight of the Fed, I remain concerned that the Fed and its regional banks continue a pattern of stonewalling reasonable requests for information. The latest exam- ple concerns the fairness, transparency, and consistency of Fed de- cisions to granting highly valuable Fed master accounts. This is a significant public policy issue. Ranking Member Toomey, myself, Senator Lummis, and others have repeatedly re- quested information about this from the Fed and the Kansas City Fed, yet we still have few, if any, answers. Just this month, the Kansas City Fed refused to provide any information about its re- cent decision to revoke the master account of Reserve Trust, a nonbank fintech. This is significant given the controversy that arose in former Governor Raskin’s nomination process when it was revealed that the Kansas City Fed reversed its denial of Reserve Trust’s application for a Fed master account following a call from Ms. Raskin. Now months after defending its decision to grant Reserve Trust a master account, the Kansas City Fed abruptly revoked the ac- count without explanation. The Kansas City Fed will not give Banking Republicans information or even a briefing about this cu- rious reversal. And it is important to point out that Republicans are not the only ones who have found it difficult to conduct Fed oversight. Sev- eral of my Democratic colleagues, including Senators Warren and Menendez, have been vocal when they also found their oversight ef- forts met with resistance. To address this unacceptable state of affairs, Congress should in- crease transparency at the Fed. Two simple steps that Republicans and Democrats can take together are subject regional Fed banks to FOIA, which they currently are not, and forbid the Fed from using FOIA exemptions to withhold info from any Member of Congress, not just committee chairmen. This second idea is a bipartisan pro- posal that has already passed the House and something Senator 6 Ossoff has mentioned in regard to various Federal agencies in the past. Likewise, Congress should also explore making the presidents of the regional Fed banks Presidentially appointed and Senate-con- firmed positions. This is another bipartisan idea, as Senator Reed previously proposed this requirement for the New York Fed presi- dent position, and in 2015, Chairman Brown himself raised this idea during a Banking Committee hearing on reforms to the Fed. The time has come to revisit these sensible ideas, and others in order to the make the Fed more transparent and more accountable. Thank you, Mr. Chairman, and I look forward to Chairman Pow- ell’s testimony. Chairman BROWN. Thank you, Senator Tillis. We will hear from the Chair of the Federal Reserve on monetary policy, the state of our economy. Congratulations again on your sec- ond term, second confirmation, to your second term. Thanks for your service and your testimony. Please proceed. STATEMENT OF JEROME H. POWELL, CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Mr. POWELL. Thank you, Chairman Brown, Senator Tillis, and other Members of the Committee. I appreciate the opportunity to present the Fed’s semiannual Monetary Policy Report. I will begin with one overarching message. At the Fed, we under- stand the hardship that high inflation is causing. We are strongly committed to bringing inflation back down, and we are moving ex- peditiously to do so. We have both the tools we need and the re- solve it will take to restore price stability on behalf of American families and businesses. It is essential that we bring inflation down if we are to have a sustained period of strong labor market condi- tions that benefit all. I will review the current economic situation before turning to monetary policy. Inflation remains well above our longer-run goal of 2 percent. Over the 12 months ending in April, total PCE prices—that is per- sonal consumption expenditures prices—rose 6.3 percent. Excluding the volatile food and energy categories, core PCE prices rose 4.9 percent. The available data for May suggest that the core measure likely held at that pace or eased slightly last month. Aggregate demand is strong, supply constraints have been larger and longer-lasting than anticipated, and price pressures have spread to a broad range of goods and services. The surge in prices of crude oil and other commodities that resulted from Russia’s in- vasion of Ukraine is boosting prices for gasoline and fuel and is creating additional upward pressure on inflation. And COVID–19-related lockdowns in China are likely to exacer- bate ongoing supply chain disruptions. Over the past year, inflation also increased rapidly in many foreign economies, as discussed in a box in the June Monetary Policy Report. Overall economic activity edged down in the first quarter, as un- usually sharp swings in inventories and net exports more than off- set continued strong underlying demand. Recent indicators suggest that real GDP growth has picked up this quarter, with consump- tion spending remaining strong. In contrast, growth in business 7 fixed investment appears to be slowing, and activity in the housing sector looks to be softening, in part reflecting higher mortgage rates. The tightening in financial conditions that we have seen in recent months should continue to temper growth and help bring de- mand into better balance with supply. The labor market has remained extremely tight, with the unem- ployment rate near a 50-year low, job vacancies at historical highs, and wage growth elevated. Over the past 3 months, employment rose by an average of 408,000 jobs per month, down from the aver- age pace seen earlier in the year but still robust. 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. A box in the June Monetary Policy Report discusses developments in employment and earnings across all major demographic groups. Labor demand is very strong, while labor supply remains subdued, with the labor force participation rate little changed since January. The Fed’s monetary policy actions are guided by our mandate to promote maximum employment and stable prices for the American people. My colleagues and I are acutely aware that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food, housing, and transportation. We are highly attentive to the risks that high inflation poses to both sides of our mandate, and we are strongly committed to re- turning inflation to our 2 percent objective. Against the backdrop of the rapidly evolving economic environ- ment, our policy has been adapting, and it will continue to do so. With inflation well above our longer-run goal of 2 percent and an extremely tight labor market, we raised the target range for the Federal funds rate at each of our past three meetings, resulting in a 11⁄ 2 percentage point increase in the target range so far this year. The Committee reiterated that it anticipates that ongoing increases in the target range will be appropriate. In May, we announced plans for reducing the size of our balance sheet and, shortly thereafter, began the process of significantly re- ducing our securities holdings. Financial conditions have been tightening since last fall and have now tightened significantly, re- flecting both policy actions that we have already taken as well as anticipated actions. Over coming months, we will be looking for compelling evidence that inflation is moving down, consistent with inflation returning to 2 percent. We anticipate that ongoing rate increases will be ap- propriate. The pace of those changes will continue to depend on the incoming data and the evolving outlook for the economy. We will make our decisions meeting by meeting, and we will continue to communicate our thinking as clearly as possible. Our overarching focus is using our tools to bring inflation back down to our 2 per- cent goal and to keep longer-term inflation expectations well an- chored. Making appropriate monetary policy in this uncertain environ- ment requires a recognition that the economy often evolves in un- expected ways. Inflation has obviously surprised to the upside over the past year, and further surprises could be in store. We therefore will need to be nimble in responding to incoming data and the 8 evolving outlook, and we will strive to avoid adding uncertainty in what is already an extraordinarily challenging and uncertain time. We are highly attentive to inflation risks and determined to take the measures necessary to restore price stability. The American economy is very strong and well positioned to handle tighter mone- tary policy. To conclude, 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, and I look forward to your questions. Senator REED [presiding]. Thank you very much, Mr. Chairman. Now let me, on behalf of Chairman Brown, recognize Senator War- ren. Senator WARREN. Thank you, Acting Chairman. I appreciate the help of the Chairman this morning. And thank you for being with us, Chair Powell. Americans are struggling with rising costs and all eyes turn to the Fed. Last week, you announced that the Fed would raise rates by three-quarters of a percentage point, the biggest increase in nearly 30 years. So let’s talk about what the Fed is and is not doing when it raises interest rates to try to bring down inflation. Let’s start with gas prices. The price of gas is up 40 percent since Russia invaded Ukraine in February. Chair Powell, will gas prices go down as a result of your interest rate increase? Mr. POWELL. I would not think so, no. Senator WARREN. OK. And that matters because gas prices are one of the single biggest drivers of inflation. Energy prices overall dropped a third of the inflation last month, but the Fed’s tools, as you say, have no impact here. So let’s look at another necessity, food. The price of groceries is up nearly 12 percent this year. Americans feel the pinch. No mat- ter how much groceries cost people have still got to eat. Chair Powell, will the Fed’s interest rate increases bring food prices down for families? Mr. POWELL. I would not say so, no. Senator WARREN. OK. So a Fed increase will not bring down these prices, and why? Because rate hikes will not make Vladimir Putin turn his tanks around and leave Ukraine. Rate hikes will not break up monopolies. Rate hikes will not straighten out the supply chain or speed up ships or stop a virus that is still causing lockdowns in some parts of the world. So let’s talk about what interest rate increases can do. Chair Powell, you said last week that interest rate increases, quote, ‘‘moderate demand.’’ Can you just explain a little more about what that means? Mr. POWELL. Sure. So we think about interest rate increases as affecting financial conditions and then the economy through three broad channels, the first of which is interest-sensitive spending. So that is durable goods and automobiles and things like that. As in- terest rates go up, people’s demand, as a result of higher interest 9 rates, will moderate or decline, so that supply and demand can get into better balance. The second channel is just asset prices generally. Interest rates, as they go up, will cause asset prices to moderate across the econ- omy, and people spend a little bit less out of their lower level of wealth. The third channel is the exchange rate, which is really just an- other asset price, and that just basically, as the dollar strength- ens—sorry—as rates go up the dollar would strengthen, which would tend to drive—— Senator WARREN. So I appreciate this, and I do. I appreciate the explanation. But let me just see if I can just put a little more plain vanilla explanation of what is going on here. If I understand what you said, and what economists are saying across the board, is that when you raise interest rates there is going to be less money to invest, and that is it is going to dampen business investment. Is that a fair statement? Mr. POWELL. I think the idea is to—— Senator WARREN. It makes it more expensive—— Mr. POWELL. ——moderate demand—— Senator WARREN. ——to invest. Mr. POWELL. ——so that it can be in better balance with supply. In the current situation—— Senator WARREN. OK. So it is going to make it more—— Mr. POWELL. ——demand is well in excess of supply in some areas of our economy. Senator WARREN. ——more expensive to invest, which, in turn, is going to throw workers out of work. And when they are out of work they have less money to spend. So I get that rate increases stop companies from spending money to build new plants or to buy new trucks or to hire new people. Right, Chair Powell? When money is more expensive they are less inclined to do that. I think that is what you just said, on asset pric- ing, right? Mr. POWELL. Well, in the labor market, as you know, you have a situation where there is a shortage of workers and there are two job vacancies for every person who is actively looking for work. So part of this is to get the labor market back into balance. Senator WARREN. Well, I appreciate you call it back into balance. What I am trying to get at, though, is what does the tool of raising rates do? And part of what you just said is that it increases, in ef- fect, the cost to invest, to buy those trucks or new plants or to hire new people. The reason I raise this and the reason I am so concerned about this is rate increases make it more likely that companies will fire people and slash hours to shrink wage costs. Rate increases also make it more expensive for families to do things like borrow money for a house. So far, the cost this year of a mortgage has already doubled. Inflation is like an illness, and the medicine needs to be tailored to the specific problem. Otherwise, you could make things a lot worse. And right now the Fed has no control over the main drivers of rising prices, but the Fed can slow demand by getting a lot of people fired and making families poorer. 10 And while President Biden is working to increase energy supplies and straighten out supply chain kinks and break up monopolies and bring down prices, you could actually tip this economy into re- cession. So I just want to say, you know what is worse than high inflation and low unemployment? It is high inflation and a recession with millions of people out of work. And I hope you will reconsider that before you drive this economy off a cliff. Thank you, Mr. Chairman. Senator REED. Thank you, Senator Warren. On behalf of Chairman Brown, Senator Tillis, please. Senator TILLIS. Senator Reed, I am going to defer and allow Sen- ator Shelby before me, and then I will follow in turn. Senator REED. Quite all right, sir. Senator SHELBY. Thank you. Thank you, Mr. Chairman. Chair Powell, earlier this month, Secretary Yellen acknowledged she was wrong about the risk of inflation. Previously, you also ac- knowledged that the Fed got it wrong in thinking that inflation would be transitory. Yet myself and other Members of this Banking Committee here have been warning about inflation for over a year. Last July, nearly 1 year ago, when you came before this Com- mittee I raised my concerns about the risk of rising inflation, par- ticularly following the enactment of a $2 trillion spending bill. At that time there was already evidence that inflation was affecting numerous areas of our economy. I discussed the year-to-year price increases on agricultural goods such as corn, wheat, and soybeans at that time. I pointed out the rising costs of metals, including cop- per and aluminum. I mentioned the increase in energy prices, used cars, and airline tickets. As someone who remembers, and I do, from this Committee, en- countering high inflation during the ’70s, I warned that many of the same conditions present then, such as loose monetary policy and significant Government spending, were occurring again, among other things. My main concern last year was that the Federal Reserve would fail to address rising inflation before it was too late. Eleven months later, this concern has come to fruition. And as we sit here today, inflation, as you have already pointed out, is at a 40-year high, the average gas price is over $5 a gallon, and we are currently in the midst of 12 consecutive months of inflation above 5 percent, includ- ing spiking to 8.6 last month. Ultimately, Mr. Chairman, as inflation continues to run rampant I believe the Federal Reserve and this Administration failed the American people by not heeding these warnings a year ago and by not acting sooner to address it. We are where we are today. I know that. The consequences of being wrong on inflation are now being felt, as has been pointed out here today, by American families and workers across the coun- try. And despite the recent decision to raise interest rates, the Fed- eral Reserve still has a long way to go to get inflation under con- trol. What can we expect in the future from the Federal Reserve? And I know you do not have total control over inflation, but you have 11 a lot of sticks there, and what will you use to bring this under con- trol? Mr. POWELL. Thank you, Senator. So financial conditions, of course, have tightened and have priced in a string of additional rate increases, and that is appropriate. As you pointed out, and as Senator Tillis pointed out as well, our policy rate is only at 1.6 per- cent, but all out the curve the market is pricing in increases. So financial conditions already reflect—have already priced in—addi- tional rate increases. But we need to go ahead and have them, and I think that the most recent inflation indicators of various kinds suggest to us that we needed to accelerate the pace at which we get up to a level that is neutral, that is close to the longer-run neutral level, and then we can make an assessment of how much further and faster to go. And so that is what we are doing. I think you can see from the moves we are making now that we do understand the full scope of the problem, and we are using our tools to address it pretty vigor- ously now. Senator SHELBY. Mr. Chairman, explain to us again how impor- tant—one of your mandates is price stability—how important price stability is to all Americans? Mr. POWELL. So price stability is really the bedrock of the econ- omy in this sense, in the sense that you really cannot have a sus- tained period of maximum employment, our other co-equal goal. You cannot have that without price stability. And so we must— must—restore price stability, and we will. We have the tools and the resolve and hopefully the judgment to accomplish that task. It is essential that we do. Senator SHELBY. What is your next step? Mr. POWELL. Well, if you look, the market has been, I think, reading our reaction function reasonably well, and I think what you will see is continued progress, expeditious progress, toward higher rates. I will say this. The Committee, the center of the Com- mittee wrote down that rates would be between 3 and 3.5 percent by the end of this year, as of a few weeks ago, as of 1 week ago. Senator SHELBY. Is this Federal Reserve Board of Governors under your leadership committed, as Dr. Volcker was some 40 years ago, to bringing inflation under control, no matter what? Mr. POWELL. I would never want to try to compare myself to Paul Volcker in any way, but I will say that we are strongly, strongly committed to restoring price stability. We do understand that it is the thing that we need so that we can get back to the kind of labor market that we all want. Senator SHELBY. But reading the standard that Volcker left at the Fed would be a high reach but one that anybody there should try to get there, would it not? Mr. POWELL. Yes. Senator SHELBY. Thank you, Mr. Chairman. Senator REED. Thank you, Senator Shelby. I will exercise my time now. Mr. Chairman, you pointed out in your testimony that the core personal consumption expenditures minus gas, food, and rent, is 4.9 percent, and even slightly declined from the previous report. So 12 that leaves the real culprits—gas, food, and rent. First, the issue of gas price inflation is a global phenomenon. Is that correct? Mr. POWELL. Yes. Gas prices are a function of oil prices, to a sig- nificant extent, and then the refining spread as well. Senator REED. And that has been exacerbated by the Ukraine in- vasion. We have deliberately, and the Europeans have deliberately cutoff accessing Russian supplies, and that has added to inflation. And the other problem, also with hydrocarbons, it is a cartel that sets the price. Is that accurate? Mr. POWELL. Sorry. What is a cartel? Senator REED. The cartel that sets the price of oil. Mr. POWELL. Yes. Globally, that cartel has a very major impact on the price of oil. Senator REED. And they have decided that further production is not as lucrative to them as just sitting back and making money, or it appears like. With respect to food, there are multiple factors there also. One is climate. We have seen loss of arable land. We have seen a lot of factors. All of this is outside the purview of the Federal Reserve, but I think it is helpful to understand what are driving forces in these price increases. Transportation issues, with respect to food, that is a function of higher diesel costs, a function of lack of drivers. Again, the Ukraine, a significant amount of what is not being exported from Ukraine, or from Russia, as well as fertilizers. That is driving the price up. And then the affordable housing issue, that has been a crisis since I became a Congressman in 1990. I recall marching in Wash- ington for affordable housing in 1990. We just do not have enough, and that, I think, is a factor too. Are those the major causes for these increases in prices? Mr. POWELL. Those are some of the major ones. You know, you could also point to some parts of the goods economy, which have been at restrained capacity, and you are actually seeing significant price increases in some of the service economy as it really reopens fully now, and that would be the travel and leisure sector. Senator REED. There is another issue too. We talked about the cartels that dominate hydrocarbons, but we have found, for exam- ple, during the pandemic, that there are really just four major meat processors in the United States, and with four rather than a multiple of that, there is the ability to indirectly restrain supply and increase prices. In fact, some of my colleagues, particularly in the House, have been talking about the antitrust aspects of some of these price increases. Is that a plausible ingredient to the prob- lem too? Mr. POWELL. So I think that is really a matter for the competi- tion authorities, not for us, but sure. I think broadly speaking our economy is very competitive. There will be some industries where that is less the case. Senator REED. So you have to take action, and basically your tool is interest rates and going in and out of buying public securities. But we have a lot of work to do too, which is to try to resolve some of these issues, and we have to do it in order to assist your efforts, the fiscal policy and other policy. 13 I was very pleased to see the President sign legislation with re- spect to shipping reform. That is a step. But we have to do much more too. Is that accurate? Mr. POWELL. I think that is really a question for you. We are very focused on sticking to our knitting and carrying out the task that we have been assigned. Senator REED. No, I appreciate that, and the independence of the Fed is something that has to be protected by everyone, including, particularly, yourself. A final sort of issue that I am thinking of, we are at a tremen- dous, I think, turning point in our economy. Factors that 10, 15 years ago were not active, things like social media, et cetera. But one other factor with respect to hydrocarbons is perhaps the com- panies that are either unconsciously or consciously limiting invest- ment because they are anticipating an electrified power supply, electric cars, electric everything. Is that something that the Fed is looking at? Mr. POWELL. I think that is certainly, if you pick up the annual report of any of the big oil companies you will see that that is something that is happening, and it is a rational economic response to expectations about where future policy is headed. Senator REED. No, again I think there are so many factors here, but I think it is good to get some of them on the table. Thank you very much, Mr. Chairman. With that let me recognize Senator Tillis. Senator TILLIS. Thank you, Senator Reed. Again, Chair Powell, thank you for being here. By the Fed’s own analysis of various policy rules, including the Taylor rule, the revised Taylor rule, the balanced-approach rule, and the balanced-approach shortfall rule, rates should have begun to rise long before they did. According to the Fed’s own analysis of these rules, the Fed’s fund rate should currently be above 6 per- cent. This is in a report to Congress. Yet the rate currently stands at 1.6 percent. Likewise, these same rules should have prompted the Fed to begin raising rates, 2.4 last year, 2.1 this year. I am concerned that the Fed has opted out of rules-based to dis- cretionary monetary policy. As the Fed reviews monetary policy strategy, Chair Powell, will you commit to considering an increased weight for a rules-based strategy in Fed decisionmaking, and if not, why? Mr. POWELL. We do use policy rules like the various forms of the Taylor rule, in all of the analysis that we do. If you are thinking about how monetary policy will affect the economy you have to have some sort of a rule like that. The Fed has never really used them in a prominent way to actually set policy in real time. But that is not to say they do not shed light, and we do consult them. You know, we consult them on an ongoing basis. You know, the rules called for deeply, deeply negative rates dur- ing the pandemic, and we did not do that. They did call, of course, for rates to move up, and rates now really are moving up, much closer to where the Taylor rule, various forms of the Taylor rule are, and I think by the end of the year we will be pretty close to where some of the Taylor rule iterations are. 14 So it is something that we consider. I think in a couple of years, when we look at our framework again, that is something we could look at. Senator TILLIS. Chair Powell, could you just briefly explain the variance between rules-based decisionmaking being at 6 and where we are today, what other factors came into play, what other factors came into play? Mr. POWELL. Tailor rules do not take into consideration changes in financial conditions. They just look at the overnight policy rate. As I mentioned earlier, we began signaling, and we are set up now to signal policy changes going forward with the Summary of Eco- nomic Projections that we do four times a year. Markets price that in, and you are getting a lot of policy tightening well in advance of actually raising rates. As you pointed out, we are at 1.6 percent only on the Federal funds rate, but look at the rate curve. Very substantial additional rate hikes are already priced in, and they are affecting financial conditions, and they have been for several months. So that is one way of thinking about it. It is really only at the very short end of the curve, where rates are still in negative terri- tory, from a real perspective. If you look farther out, real rates are positive right across the curve, and that is really what you are try- ing to achieve with policy. In a situation like this, where we have 40-year highs in inflation, and we know we need to have restrictive policy, that is where we are headed. Senator TILLIS. Thank you. In 2012, the Fed adopted its current 2 percent inflation target, then amended this in 2020, to allow in- flation to run over 2 percent target so that inflation averages 2 per- cent over time. Many warned this approach would simply give in- flation a foothold before the Fed could respond. Now inflation is at 6.5 percent per year, and many serious analysts are predicting a recession. According to the Fed’s framework, will the Fed push inflation below 2 percent so that it averages 2 percent over time? Mr. POWELL. No. That was not the way the framework worked, and I should clarify, though, the framework was carefully focused on what we knew, which was the economy of the last 25 years. The pandemic hit a few months afterward, and I think we have been aware since reasonably quickly after that, that the dis-inflationary forces over the last quarter century had been replaced, at least temporarily, but a whole different set of forces, and those are the forces that our policy has been reacting and dealing with. And we are well aware of that. I think that what we were looking at was a world in which you did not see inflation move up, even when unemployment was, for an extended period, well below 4 percent. This is a different econ- omy, different forces. The real question is how long will this new set of forces be sustained, and we cannot know that. But in the meantime, our job is to find price stability and maximum employ- ment in this new economy. Senator TILLIS. Final question. There is some renewed discussion about increased spending and increased taxes through reconcili- ation. Just hypothetically, if Congress were to pass a bill that in- 15 creased spending by half a trillion or a trillion dollars and raised taxes, would that make your job easier or more difficult? Mr. POWELL. I swore off getting involved in these fiscal debates a year or so ago, and I am determined to see if I cannot stick to that. But remember, we can always incorporate, and what we do is we take fiscal policy as given and we react appropriately. Senator TILLIS. Well then maybe instead of policy working through Congress but policy that was passed by Congress, do you believe that the $1.9 trillion spending package last year had any effect on inflation? Mr. POWELL. It is really not our job to, you know, to pass judg- ment. We did not pass judgment on the Tax Cuts and Jobs Act or the CARES Act or that Act as well, the ARP. So I really think that is a job for Congressional Budget Office. Senator TILLIS. Thank you, Chairman Powell. Mr. POWELL. Thank you, Senator. Chairman BROWN [presiding]. Senator Cortez Masto, of Nevada, is recognized for 5 minutes. Senator CORTEZ MASTO. Thank you, Mr. Chairman. Chairman Powell, thank you for being here. Let me start with high prices, because not only in Nevada but across the country we are seeing high food, housing, and gas prices, which really is creating a financial hardship for too many families. And I want to start with gas prices first. In Nevada, the average price of gas is $5.60, in Las Vegas, about $5.60, in Reno, at $6.00 a gallon. And as gas prices rise across the country, oil and gas companies, we know, are making record profits but are using that money to continue to consolidate their industry and pay for stock buybacks instead of investing in increased oil production. And what I have heard is over 9,000 permits that they have that are unused, drilling permits, or they are not expanding their refining capacity. We also know that reduced refining capacity is a particular prob- lem that has been cause, in large part, by decades of oil industry consolidation, and is driving gas price hikes to be as much as 61 cents a gallon higher than expected. So when considering the drivers of inflation, how much do Fed- eral Reserve economists consider consolidation in an industry, and what else can we do to hold these industries accountable for their contributions to rising prices? Mr. POWELL. You know, those are really questions for the com- petition authorities, questions of industry structure and consolida- tion. They really are not questions that we directly address. You know, we raise interest rates and our job is maximum employ- ment—— Senator CORTEZ MASTO. But I have to push back. You have to consider that. I mean, you are considering what is happening in Ukraine as a variable on inflation and high prices. So you have to consider the fact that we have these oil companies, they exclusively control this commodity that is key for this country. We know that not only do they produce and decide how and when they are going to drill crude oil. We also know the refineries, and quite honestly, the refineries in this country are not prepared to refine the domestic oil that even 16 comes from Texas and the Dakotas. The refineries are prepared to refine the oil that comes from out of this country. And we also know that many of the oil companies have their own traders that are trading on the price of crude oil in this country. I mean, listen. You just talked about an outside agency. This is why this is so important and why I am a cosponsor of the Trans- portation Fuel Market Transparency Act. Glencore was just fined $1.1 billion because they were manipulating the oil prices for their benefit. So that is something you have to take into consideration when we have an industry like these gas and oil companies that are so consolidated they are having an impact on the prices, to the det- riment of the people in my State. So that has to be something you consider and take into consideration when you are looking at the impact that people across the country are seeing from these high prices. I hope it is. Please tell me you are. Mr. POWELL. Well, I think we see that the global oil prices, which have, you know, very important effects on gas prices here at home, are set on the global market and that, as we mentioned ear- lier, there is a large cartel that is responsible, to a significant ex- tent, for setting those prices. We take that as given. Senator CORTEZ MASTO. So do you pay attention to what Wall Street is saying and what these cartels are doing? When you say ‘‘cartels,’’ these are these big oil companies, and they are indicating that, well, I am not going to drill because I am making profits be- cause the price of gas is so high. So you would assume—I would hope that you would take that into consideration, that it is going to continue these high prices because there is a challenge in hold- ing these oil companies accountable. Mr. POWELL. So in principle we pay attention to anything that could affect the use of our tools, and the need to use our tools, and I think with the future price of oil the best thing you can probably do is look at oil futures, because futures, in theory, should be tak- ing into account all of these factors, and that is what we do. But ultimately the question for us is do we raise or lower interest rates. We do not have tools that would address these practices that you are discussing. Of course, we understand them—— Senator CORTEZ MASTO. Do you have concerns that these oil com- panies are manipulating and controlling the prices that we have right now? Do you take that into consideration with the tools that you need to reduce inflation and reduce these costs? Mr. POWELL. Honestly, those are not judgments for us to make. You know, questions about industry structure and competition, it is not our assignment. Our assignment is—— Senator CORTEZ MASTO. But the outcome—— Mr. POWELL. ——maximum employment and price stability. Senator CORTEZ MASTO. ——the outcome of that infrastructure is something that you have got to take into consideration. Mr. POWELL. Yes. Very much. Senator CORTEZ MASTO. Unless they change, the prices are not coming down. Unless they stop giving profits and sharing that with their shareholders and start addressing and looking at actually the consumer at the other end of this, who is bearing the brunt of it, 17 these prices are not going to come down. I would assume you take that into consideration. Maybe I am wrong. Mr. POWELL. Well, when you say ‘‘take it into consideration,’’ we do have to have a forecast of oil prices, and we do. But ultimately, though, the question for us is price inflation, what is happening with price inflation, and it is a macroeconomic question. It is not a question about industry structure or corporate behavior. It is a question about what will be the behavior of inflation across the economy. And in particular, there is really not anything that we can do about oil prices. You know, food prices is a bit more mixed, but for oil prices, they are set at the global level. It has to do with global oil prices and also the refining spread. Neither of these are things that we have the tools to affect. Senator CORTEZ MASTO. Does it concern you that these oil com- panies have not come to the table to look for a solution to help us reduce fuel costs? Mr. POWELL. Honestly, I do not think it is appropriate for the Fed or for me to be reaching out into areas of policy that are not assigned to us. It is not up to us to comment on that sort of thing. We have a very specific job, and precious independence to carry that job out, and I think the other side of that is stick to that job. And our job is maximum employment and price stability. Senator CORTEZ MASTO. Thank you, Mr. Chairman. My time is up. Chairman BROWN. Thank you, Senator Cortez Masto. Senator Rounds, from South Dakota, is recognized. Senator ROUNDS. Thank you, Mr. Chairman. Chairman Powell, welcome again. It seems as though for the last couple of times that we have had you in front of this Committee inflation has been a primary item of discussion. I want to follow up, just as my col- leagues have, and I would like to take it in a little bit different path perhaps, because when it comes to breaking down the dif- ferent causes of inflation, clearly there is the supply side and the demand side. The reality is that a large portion of the inflation stems from the higher energy prices, which is part of the supply side issue. When President Biden took office, January of 2021, through Jan- uary of 2022, the price of unleaded gas has increased by 50 percent during that time period, from $2.33 to about $3.35 per gallon. Now that was well before the Russian invasion of Ukraine. Higher prices are instead, I believe, a direct result of policy decisions made by the Biden administration, like prohibiting new oil and gas leases on public lands and waters and choking off future access through the Keystone XL pipeline and increasing U.S. dependence on foreign energy sources by actively calling on OPEC to produce more oil. All of these seem to send a terrible message to the market about the future of investing in oil and gas processes within the United States. At the same time, Mr. Chairman, your tools are designed, as we have discussed in the past, to impact not necessarily the supply side but the demand side of inflation. So if you attempt to use your tools that are available at this time to address what I believe to be the policy-induced side of inflation, do you risk hurting the econ- 18 omy by using these interest rate increases when, in effect, as you indicated earlier here in this meeting, that you really cannot im- pact the price of gas or the price of food? Mr. POWELL. I think that is right. We know that our tools cannot affect certain aspects of inflation, and that would include certainly energy inflation and food inflation. Nonetheless, our statutory goal is headline inflation, but we also know that core inflation is actu- ally a better indicator of headline inflation than headline inflation itself is because food and energy tend to be quite volatile. They tend to move up and move down, and that has been the history. Core enables us to look through that volatility, so we focus very much on that as a better representation of what underlying infla- tion of the economy is at any given time. Senator ROUNDS. But in this particular case that core inflation, if we are not going to include some of those what I think earlier we thought would be transitory in nature portions of inflation, they have proven not to be transitory. In fact, South Dakotans are now paying $682 more per month on goods and services than they were when President Biden took of- fice, due to inflation. The Administration is claiming the Federal Reserve can fix our inflation problem, but as you have just indi- cated, you focus on core, and your tools might very well work on core but not on those really heavy drivers to inflation that South Dakotans are seeing, like the rest of the country. See, Mr. Chairman, what I believe is going to happen here, and I just share this, clearly you are aware that you are going to be the person that takes the fall if inflation is not brought under con- trol, and this Administration is going to point to you and to the Federal Reserve, saying you have the tools to fix inflation and you are not doing your job, when, in essence, the portion of inflation which Americans are feeling today may not just be the core infla- tion that some of your tools do but the total cost of inflation that my citizens in South Dakota feel, to the tune of, well, $682 more per month in living expenses than what they were when this Ad- ministration took office. Mr. POWELL. So we are focused on the part of it that we can ad- dress, and that is there a job to do on demand here. There are parts of the economy where demand exceeds supply, and that is where we think our tools can help, and that is what we are focused on. Senator ROUNDS. Very good. Just very briefly, Mr. Chairman, an- other item. The Basel Committee on Banking Supervision issued a press release indicating that it had made substantive technical changes to the calculation of the G–SIB score for EU-based global, systemically important banks, the G–SIBs. The Federal Reserve, as being a part of this organization, do you believe right now that this change reflects the views of the Federal Reserve as an influential member of the Basel Committee? Apparently it looks like this may very well provide some advantages to our European banks over U.S. banks, based upon this reassessment of how they view risk within the EU community. Mr. POWELL. My understanding of that is that it is really about supervisors being able to use discretion about transactions that go across national lines within the European Union. 19 Senator ROUNDS. Yeah. Mr. POWELL. It does not apply at all here, and ultimately, the capital rules that Europeans apply are decided by Europeans, not by us. Senator ROUNDS. Very good. Thank you, Mr. Chairman. Chairman BROWN. Thank you, Senator Rounds. Senator Warner, from Virginia, is recognized. Senator WARNER. Thank you, Mr. Chairman, and Chairman Powell, it is good to see you again. Thank you for your service to our country. I want to go in a couple of different directions. First, and I think some colleagues have already raised this, the truth is what we are grappling with right now on inflation is clearly a global phe- nomenon. I think even the Cato Institute, a group which does not always necessarily agree with folks on my side of the aisle, have pointed out inflation in many industrial countries around the world is running at the same rates, if not higher than us. Frankly, I just returned from a bipartisan trip to Finland, Lat- via, and Turkey, getting back late last night, so I am a little bit jetlagged. In Turkey, I think inflation is running at 78 percent a year. In Finland, gas prices were at $9.00 a gallon, and I asked one of my key Republican colleagues, ‘‘It is amazing. Joe Biden’s infla- tion hitting here in Finland too.’’ The point being that a lot of these effects are not due to any single country’s activities but it is a glob- al effect. I think colleagues have already acknowledged the effect that the Russian Ukraine war has, some of the disruptions on sup- ply chains. What I do not think has been fully addressed yet is some of the challenges that are coming around from China, in terms of their zero-COVID policy, a lockdown on Shanghai for literally months on end, and how that supply chain disruption is floating through the whole global economy. Can you speak to that, Mr. Chairman? Mr. POWELL. Sure. So, of course, you are right. Inflation is very much a global phenomenon. If you look at comparable large, ad- vanced economies like ours you will see inflation rates that are quite similar to ours, in some cases higher, in some cases lower. But there are important differences in the characteristics of that inflation. Ours is more about demand, I would say, than most of the others, and theirs is more about energy prices and things like that. In terms of your question on China, we do not think we have seen the full effect of the lockdowns that we have had, so we will expect to be seeing some negative effects on bottlenecks. On the other hand, China now seems to be coming out of that period of lockdown, and growth seems to be picking up. Advanced indicators are that their economy may be recovering. But, of course, the zero- COVID policy, as long as it is in place, it certainly could—you could certainly have a relapse, given this highly contagious disease. Senator WARNER. Again, we are all looking for short-term items, and frankly, I am glad that the President, I know particularly some folks on my side of the aisle are concerned about the President vis- iting Saudi Arabia and visiting with the leadership of that regime. I think you have got to use all the tools in the toolkit in getting 20 additional partners in the Middle East to increase oil production. I think it is important. I have got a lot more proof to see whether some kind of short- term gas tax holiday would actually provide relief to consumers or simply, as we have seen in some States that have implemented, the prices do not change and the companies may make more money, but it does not really provide that kind of inflationary relief. And I am concerned, as somebody who spent a long time as Governor and as Senator trying to make sure we pay for our infrastructure investments, it is easy to take away a tax, tough to put it back on, and there is always an excuse not to. But I am open to seeing a better analysis. I do want to raise, recognizing that not everything can be done with the flick of a switch, you know, there is a piece of legislation that has been floating around here for almost a year. It passed the Senate a year ago on a broadly bipartisan basis, passed the House a number of months ago. I think the House, frankly, took the wrong approach. But it goes at at least one of the inflationary pressures here, which is making sure that we have got a domestic supply chain on semiconductor chips. Every device that has an on-and-off switch re- quires a semiconductor chip. And right now we see, particularly around auto inflation, one of the big drivers is the lack of chip sup- ply so cars cannot actually be sold. They are literally sitting in warehouses, waiting for the semiconductors to come around. This legislation, $52 billion of investment, would build ten semi- conductor facilities here in America. I know Senator Brown has been a big advocate for this. If we do not do this, I do not think there will be another semiconductor facility built in America, even though some have been announced. I point out the fact that, you know, a year ago the Europeans had no plan here, in semicon- ductor investment, until recently announced $8 billion from the German Government. When the German bureaucracy and Euro- pean bureaucracy moves faster than the American legislative proc- ess, I do not care which side of the aisle we are on, we are in trou- ble. So in the last few seconds, I know you do not want to weigh in on specific piece of legislation, but the notion of investment in a key industry component like semiconductors, long-term in terms of keeping inflationary pressures down, right move or not? Mr. POWELL. Again, as you say, I would not comment on a spe- cific legislative proposal. Senator WARNER. Talk about the industry sector. Mr. POWELL. I will just say that I do think we learned a lot about global supply chains, and we are still learning, and it is im- portant to take the right lessons, and I think it is an important area to explore about how we can harden up and improve our sources capabilities, including what should be here. Senator WARNER. Thank you, Mr. Chairman. Chairman BROWN. Thank you, Senator Warner. Senator Kennedy, from Louisiana, is recognized. Senator KENNEDY. Mr. Chairman, inflation is just an imbalance of supply and demand. Can we agree on that? Mr. POWELL. Yes, generally. 21 Senator KENNEDY. And to put a little finer point on in, our infla- tion, at this time—and this is the case with respect to most cases of inflation—demand is greater than supply, so prices go up. Mr. POWELL. In some parts of the economy, yes. Senator KENNEDY. Right. So we have got a situation where de- mand is up here, supply is down here. You are trying to lower de- mand. Is that correct? Mr. POWELL. Yes, while also giving the supply side time to re- cover. There is some ground to be covered on that side. Senator KENNEDY. Yes, but you talked about your role, scope, and mission, and your job is monetary. You are trying to lower de- mand—— Mr. POWELL. Well, I would say lower demand growth. We do not know that demand has to actually go down, which would be a re- cession. Senator KENNEDY. Well, 70 percent of our economy is driven by consumer demand, and you are trying to lower demand and slow the economy down. Am I correct? Mr. POWELL. I guess I would just say we are slowing down growth. Senator KENNEDY. Right. That is what the economy is. Mr. POWELL. Growth, yeah. Senator KENNEDY. OK. Mr. POWELL. Exactly. Senator KENNEDY. All right. There is another way. The two are not exclusive. You alluded to that. You can also lower demand but you can increase supply, can you not? Mr. POWELL. Yes. Senator KENNEDY. And that would solve inflation. Mr. POWELL. Yes, it would. Senator KENNEDY. Now, Congress’ job is not to deal with demand per se. A lot of the bills we pass impact demand, but that is the Fed’s job. Mr. POWELL. Right. Senator KENNEDY. OK? Now, I am not going to ask you to com- ment on any specific bill, but tell me the things that Congress could do right now, while you are lowering demand—not you, lit- erally, the Federal Reserve—what we can do right now to increase supply. Mr. POWELL. I think the things you can do are important over the medium and longer term, but probably not so much in the short term. But it is things like investing in people so that they can remain in the labor market longer, things like that. You know, in- frastructure, again, things that will increase the productive capac- ity. Senator KENNEDY. Well, in the long run, as Keynes said, we are all dead. I am interested right now in the short run. If we reduce the regulatory burden, let’s say on refineries, would that not incent refineries to start refining more and help on the supply side? Mr. POWELL. I would say anything that could increase capacity on that front could have a—— Senator KENNEDY. Yeah, but would that help? I am not trying to get you to endorse legislation. 22 Look, Mr. Chairman, we have got a hell of a mess here, OK? In- flation is hitting my people so hard they are coughing up bones. I do not care what the inflation is in other parts of the world. I am sorry they are having inflation in other parts of the world, but them in misery does not make my people feel better. They are still miserable. Inflation is hitting people so hard they are coughing up bones. It is the highest in 40 years. Our national debt is greater than our national output. Crime is up. The border is open. Respect for insti- tutions is way down, and 70 percent of American people think we are headed in the wrong direction. Now we have got a hell of a mess, and right now you are the most powerful man in the United States, maybe in the world. I mean, President Biden, I do not blame him. I understand politics. He keeps saying, ‘‘Well, your 401(k) has crashed and gas has gone from 2 bucks to 5 bucks a gallon because the economy is so good.’’ And the American people know that is not true. Now other than relieving regulatory burden—well, let me put it in the form of a question. What if the U.S. Congress said, look, we have got a budget. We are going to freeze spending. We are going to stop injecting more money into the economy. We are going to freeze spending until Powell can get control on the demand side. Would that help? Mr. POWELL. You know, I feel like giving you advice on what to do when we are not—— Senator KENNEDY. I am asking for it. I welcome it. Mr. POWELL. ——getting our own job done. I feel like maybe a better thing to do would be for us to get our house in order and do the job you have assigned us. Senator KENNEDY. Well, let me put it another way. Forget about Congress. Let us suppose that every Governor in every State, and every legislature in every State got together tomorrow and said— I know it is not likely to happen—and said we are going to freeze our budgets. We are not going to spend a penny more than is al- ready budgeted. Would that help? Mr. POWELL. Would it help? Senator KENNEDY. Sir? Mr. POWELL. Would it help with—— Senator KENNEDY. Would it help reduce inflation. Mr. POWELL. It might. It might. But, I mean, it would take— again, I am scoring fiscal policy. I am really reluctant to do it. Senator KENNEDY. Well, I understand you are being careful, but Mr. Chairman, the U.S. Congress, in addition to its regular budget, has spent $7 trillion. I am not saying all of it was unnecessary. On top of that, the Fed has increased its balance sheet from $1.5 tril- lion to $9 trillion—$9 trillion. I know you are cutting it back, but we have injected all of this money into the economy, and then peo- ple go, ‘‘Well, we have inflation.’’ Duh. Give me some help here. Tell me what we can do? Mr. POWELL. I am really focused on what we can do, which is shrink our balance sheet and raise interest rates and get supply and demand back into alignment, and get inflation back down to 2 percent. Chairman BROWN. Thank you, Senator Kennedy. 23 Senator Tester, from Montana, is recognized for 5 minutes. Senator TESTER. I want to thank the Chair and Ranking Mem- ber. I also want to thank you for being here, Mr. Chairman. I ap- preciate it. I have just got to say one thing about Senator Kennedy. I think freezing spending is probably a pretty good idea, except we just had a flood that cost $1 billion worth of damage in southern Montana, $1 billion was projected. If we freeze spending that infrastructure never gets rebuilt. So I hear what you are saying, and in some respects I agree, but it is a lot easier to talk about than it is to do. And I think that is the challenge that the Chairman of the Fed has, is that he really needs to focus on what needs to do, and if it was a simple solution we would have already had it done. I am concerned about rural America and the impact inflation is having on rural America. And I know that you have seen it. You have seen it transpire over the last several years, particularly as this country has come out of this pandemic. And I know we have had a conversation that it is two-edged—it is supply and it is de- mand—and you are only dealing with the demand part, which is an important part. And in some respects Secretary Kennedy is right. You are probably one of the strongest people in the world to be able to deal with some of this stuff. But from a rural perspective, is the Fed doing anything in par- ticular that I could take back to my constituents and say this is what the Fed is doing to help rein in inflation in rural areas? Mr. POWELL. Well, so we are, of course, well aware, as you know, we have four or five Reserve Bank presidents who have very large agricultural economies within their districts, and we hear excellent reports from them about what is going on. It is clearly a tremen- dously challenging situation. You know, fertilizer prices and all kinds of inputs, very difficult situation. Cannot get parts for your equipment and that kind of thing. You know, overall, we do appreciate that. You are not seeing this yet but, you know, when times do get difficult and we work care- fully with borrowers in the Farm Belt and that kind of thing be- cause we know that is what you do in those kinds of times. We are not at those times at this point, but that is one thing we have done in the past. I mean, overall, we think we need to get back to price stability, and that will help everybody. It will help the whole economy, in- cluding rural America. Senator TESTER. OK. Interest rates. I know they have been raised a bit recently, and I think three-quarters of a point—correct me if I am wrong. And I am not going to ask you where interest rates need to be. But I do think this is a fine line to walk, and you tell me if I am wrong, where if interest rates are raised too high it could drive us into a recession. Can you tell me some of the things you are looking at to make sure that does not happen? Mr. POWELL. Sure. When we pivoted and started talking about raising rates last year, markets had priced in rate increases so that all out of the curve of debt maturities, interest rates have already 24 moved up to reflect interest rate increases that we have not actu- ally made yet. So what we have right now is a low short-term rate, which is our policy rate. And the increase that we made, we made one decision at the last meeting, which was to raise, by 75 basis points, but only to 1.6 percent. And we thought that was the right thing to do. I am happy to discuss why. But really, the point is that our policy rate is still at a relatively low level, and in principle we want to get it up to a more neutral- ish level, even more expeditiously than we had been, and that is what was behind our thinking. And so the concern, I do not think, is about the level. It was with the speed. Are we moving too quick- ly? And I think I was persuaded that it was important that we make this move now and not wait and telegraph it and do it 6 weeks later, for example, or the meeting after that. It was impor- tant to do it now, because where we are with inflation is having seen inflation come in above target, over and over again, and we said we would move more aggressively if it was appropriate. We thought it was appropriate and we did. Senator TESTER. And so you said you want to get things more to a neutral level. Are we to a neutral level now? Mr. POWELL. No. We estimate that the longer-run neutral level of the Federal funds rate to be around 2.5 percent, and actually we think it will be appropriate to raise rates above a neutral level into a modestly restrictive level, because this is very high inflation and it is hurting everybody. And we need to do our job and get inflation back on a path down to 2 percent, and the way we are going to do that, we think, is raise rates, to that level. Of course, everything depends on the data that we see. We are really strongly committed to getting inflation down to 2 percent, but we are going to be flexible as we see the data coming in. Senator TESTER. Do you agree with the perspective—and then I will be done—but do you agree with the perspective that if interest rates go too high, too fast it could drive us into a recession? Mr. POWELL. It is certainly a possibility. It is not our intended outcome at all but it is certainly a possibility. And frankly, the events of the last few months around the world have made it more difficult for us to achieve what we want, which is 2 percent infla- tion and still a strong labor market. Senator TESTER. Thank you. Thank you, Mr. Chairman. Chairman BROWN. Thank you, Senator Tester. Senator Hagerty, of Tennessee, is recognized. Senator HAGERTY. Thank you, Chairman Brown. Chairman Powell, one of the many downsides of quantitative eas- ing is the fact that the Federal Reserve, and then by extension, the American taxpayer is essentially taking a long position in the secu- rities that are acquired. That means that when rates rise, the value of the securities on your balance sheet drop. That is exactly what is happening today. And as of March of this year, the Federal Reserve had about $330 billion worth of unrealized loss on its bal- ance sheet. That number is probably close to half a trillion right now, given the rise in rates. So my question of you is, did these unrealized losses limit the Federal Reserve’s ability to execute its monetary policy objectives, 25 and specifically, will the Fed sell mortgage-backed securities and realize a loss, or will the Fed be cornered into holding these securi- ties until they appreciate? Mr. POWELL. Those kinds of unrealized losses play no role in our decisionmaking, have no effect at all on our ability to conduct mon- etary policy. They are just not a consideration, and they will not be a consideration when we decide whether to sell, and in what quantity, MBS. We said we would look at selling MBS when the normalization process for the balance sheet was well underway, and that means not soon. We have not decided exactly what that means. And by the way, the reason we want to do that is we are com- mitted to having a mostly Treasury balance sheet, and with these higher rates, MBS prepayment speeds have gone way down, and so to achieve the mostly Treasury balance sheet we may well need to sell MBS at some future date. When we turn to that we are going to be very transparent and give lots of transparency, obviously. But we will not be thinking about the balance sheet. I mean, remember that we have contributed $1 trillion in profits to the Treasury over the course of the last 10 years. The reason we do not have a lot of capital is that we give our earnings to the Treasury every year. So it is not at all a concern for us. Senator HAGERTY. But to be clear, these long-dated mortgage- backed securities may be sold as a loss. You are not limiting your ability to do that, to sell at a loss. Mr. POWELL. No. Senator HAGERTY. And that could happen. I just think the down- side of quantitative easing is very much illustrated for us when you find yourself in this situation of holding this long-dated securities. To turn to another point, Chairman Powell, I realize there are a number of factors that play a role in the historic inflation that we are experiencing—supply chain disruptions, regulations that constrain supply, we have got rising inflation expectations, and ex- cessive fiscal spending. But the problem has not sprung out of no- where. In January of 2021, inflation was at 1.4 percent. By December of 2021, it had risen to 7 percent, a fivefold increase. Since the war in Ukraine began in late February, the rate of inflation has risen incrementally another 1.6 percent to a current level of 8.6 percent. So again, from 7 percent to 8.6 percent. Given how inflation has escalated over the past 18 months, would you say that the war in Ukraine is the primary driver of in- flation in America? Mr. POWELL. No. Inflation was high before, certainly before the war in Ukraine broke out. Senator HAGERTY. I am glad to hear you say that. The Biden ad- ministration seems to be intent on deflecting blame, and as re- cently as just this past Sunday spread the misinformation that Putin’s invasion of Ukraine is the, quote, ‘‘biggest single driver of inflation.’’ I am glad you agree with me that that is not the truth. I would like to turn to the situation we find ourselves in now, tightening. A recent survey of global CEOs showed that more than 60 percent of executive expect a recession in the next 18 months. Meanwhile, per its most recent forecast, the Fed will be tightening 26 monetary policy for the next 21⁄ 2 years. Thus, the Fed could soon find itself the challenging position of potentially exacerbating an economic downturn in order to address the historic inflation that has been unleashed by the Biden administration. So, Mr. Chairman, as you know the Fed has a dual mandate— stable prices and maximum employment. As we look to the fall, how do you think about balancing this potential tension between the Fed’s two mandates, particularly if the economic outlook wors- ens but inflation remains elevated? Mr. POWELL. We do have a dual mandate, as you point out. Right now the labor market is extremely tight, and I would say unsustainably hot. And there is a mismatch between supply and demand there. As you know, there are more job openings, by a fac- tor of 2 to 1, than there are unemployed people looking for work. On the inflation side we are very far from our target. We think that we have to restore price stability to put the economy back in a place where, in the medium and longer term, we can have a sus- tained period of what we would call maximum employment. So that is how we are thinking about it. Of course, we are not trying to provoke, and do not think that we will need to provoke a recession, but we do think it is absolutely essential that we re- store price stability, really for the benefit of the labor market as much as anything else. Senator HAGERTY. I agree. I think you have an extremely chal- lenging job, particularly given some of the fiscal policies that have been undertaken that make your job more challenging than it should be. Thank you very much, Mr. Chairman. Chairman BROWN. Thank you, Senator Hagerty. Senator Smith, from Minnesota, is recognized for 5 minutes. Senator SMITH. Thank you, Mr. Chair, and welcome back to the Committee, Chair Powell. It is good to see you again. I want to follow up on this issue of this imbalance between labor demand and supplies, you were just referring to. According to the latest figures from the Bureau of Labor Statistics, there were 5.5 million more jobs in April than available workers. And so we have, as a result, an extremely competitive labor market and very strong wage growth. But inflation is even higher than wage growth, so that is wiping out worker gains and leaving a lot of folks with what amounts to a pay cut as they, at the same time, try to figure out how to pay higher prices for gas and food. So let me ask you this, Chair Powell. With all of that in mind, what is the basis for the argument that wages are too high and that they need to come down in order to rein in inflation? Mr. POWELL. It is not that wages themselves are too high. It is that the rate of growth of wages is not consistent—and I will ex- plain this—not consistent with 2 percent inflation over time. Of course, it is great when wages go up, and we want them to go up. We want people to get strong wage increases. But at a cer- tain point wages become high enough that companies start raising prices and you wind up getting high inflation. So if you just kind of reverse engineer what level of wage increases would be con- sistent with 2 percent inflation over the longer term, today’s wage 27 increases, if you look across the numbers of measures that we look at, they are significantly above that. Now there is some evidence that they are flattening out, particu- larly average hourly earnings. There is some evidence that that measure of wages is flattening out so that it is no longer going up. So it is really not about reducing wages. It is just having a more sustainable pace of increases. Senator SMITH. And what would you expect if wages started to stabilize, as you say, they stopped increases? How long would you expect it to be before the prices that consumers are paying would start to go down, or are they ever going to go down? Mr. POWELL. It depends. They do not have to go down for infla- tion to go down. Senator SMITH. Right. Mr. POWELL. So if prices remain at the same level, inflation goes to zero. But it depends on different businesses. In some parts of the service economy labor costs are a very large portion of costs, and so you would think that that gets passed through very quickly into prices. And so we would think that that pass-through should be shown fairly quickly, in some parts of the economy. In others, less so. But over time, you know, we would want wages to be moving up at the highest sustainable rate that is possible and consistent with 2 percent inflation. Senator SMITH. Of course, at the same time the economy, we have got this very, very strong labor market, but simultaneously we continue to see higher unemployment rates among African Americans, for example, nearly double the unemployment of white Americans. So how do you see this sort of interplay between wage growth and the Fed actions to cool demand on that underlying issue? Mr. POWELL. So we do not target wage growth, of course. Our job is price stability. We look at wage growth because over a long pe- riod of time it is an important factor in determining price stability. So that is really how we think about it. In terms of the disparities, we saw those disparities increase sig- nificantly at the beginning of the pandemic and then reverse, as we pointed out in our Monetary Policy Report. Those gaps have at least returned to historically lower levels. There are still gaps, though, and those are not really gaps that we can get at with mon- etary policy. But we point them out because they are an important aspect of our economy and we do consider them as we think about appropriate policy. Senator SMITH. I think I would agree with you. I think that those are sort of systemic challenges on our economy that need to be ad- dressed through the policy that we work on here. You know, it seems to me that, I mean, one, I think we have a labor supply problem in this country, and we should be dealing with that in Congress, in terms of what we need to do to make sure that people have the skills and the capacity to do the jobs that our economy is creating. But it also seems to me that as long as wage growth is lagging inflation that in some ways labor costs are actu- ally dampening inflationary pressures because they are not keeping up with inflation. So I think it is just an interesting and com- plicated issue. 28 Mr. POWELL. No argument there. Senator SMITH. I just have a couple of minutes left. I am not going to have a chance to get into this, but I am quite interested also in what we are seeing around the country everywhere, and es- pecially in Minnesota, about extraordinarily high increases in hous- ing. The Fed is raising interest rates, which is going to have an im- pact on increasing housing prices because mortgage prices are going to go up, and other costs, in terms of building housing is going to go up. So I am just interested in how you sort of weigh that dilemma. Mr. POWELL. You know, after the pandemic, for a number of rea- sons, housing demand went way up, rates were low, but also people decided they wanted to live more in single-family homes rather than downtown. So prices went up all over the country, at very, very high levels. Now you see the housing market slowing down because you see higher rates are having an effect. That should have an effect on housing prices, perhaps even fairly quickly, so that prices will not necessarily come down but price increases will flatten out. We are seeing lower home sales. We are seeing lower starts. So we are seeing a slowing in housing. And, you know, the very low settings of rates during the pandemic were appropriate, but part of what that did was it supported a lot of demand for housing. We want to get back to a place where supply and demand are closer. I will say I agree with you on the labor shortage issue, which is a longer-term issue that we have, but also with housing there are constraints on housing construction. So it is very possible that we will be in a position where there is not enough appropriate housing at the right price, and that is a longer-run issue, again, not so much for us as for you. Senator SMITH. Thank you. Thank you, Mr. Chairman. Chairman BROWN. Thank you, Senator Smith. Senator Lummmis, of Wyoming, is recognized. Senator LUMMIS. Thank you, Mr. Chairman, and thank you, Chairman Powell, for being with us today. It will come as no sur- prise to you that I want to focus on digital assets in Fed master accounts. My first question is about the accounting treatment of digital as- sets, specific SEC Staff Accounting Bulletin 121. This bulletin re- quires publicly traded companies, including banks, to hold digital assets in custody as an on-balance-sheet liability. So will the ac- counting standards contained in this bulletin, that requires it to be on balance sheet, be applied by the Federal Reserve to banks and bank holding companies? Mr. POWELL. We, too, saw that and understood the implications, and I think that is something we are working on with our fellow bank regulators. And I do not have an answer for you, but that is certainly something we are focusing on very closely right now. Senator LUMMIS. And I would note that the Basel Committee on Bank Supervision has declined to establish a cap- ital charge for custody digital assets because they are always off balance sheet. They have created a framework called the pruden- tial treatment of cryptoassets that continues to acknowledge that they are off balance sheet. 29 So if the standards of the SEC’s Staff Bulletin are adopted, that would be the first time that custody assets are place on balance sheet. Do you think it is smart for the U.S. to be imposing bank standards beyond international norms? Mr. POWELL. So again, the SEC has authority over accounting rules, and that is what this was, and we now have to consider that exact question, and that is what we are doing. I cannot really say more because we are working our way through it. But my under- standing of it is the same as yours, though, which is custody assets are off balance sheet, have always been. But the SEC made a dif- ferent decision as it relates to digital assets, for reasons it ex- plained, and now we have to consider those. Senator LUMMIS. Yeah, and thank you. I encourage you to con- sider that, and I appreciate that you are looking at it and you are aware of it. That is great. I will turn to master accounts now, of course. The Board and the Reserve Banks have refused to provide Congress and the public with transparency with regard to the application process. At its core, a master account is a public benefit, conferred by the Fed to a private institution. And since a master account is a public ben- efit, really does the public not have a right to know which institu- tions have master account and which have applied for accounts and not received them? Both the FDIC and the OCC publicly list simi- lar application information on their websites today. So could you commit, as part of transparency project, to make publicly available a list of institutions that have received master accounts as well as the institutions that have applied and not re- ceived them? Mr. POWELL. I will be glad to look into that. You know our sys- tem well, and it really is that the Board, you know, we set rules but the Reserve Banks really make the decisions about granting ac- counts, subject to those rules. And we actually think we can im- prove on that system with the current proposal we have, and are considering comments on that right now, as I am sure you know very well. Senator LUMMIS. Yeah, and as you also know, applicants for master accounts are getting whipsawed between the Federal Re- serve Board of Governors and the banks. The Federal Reserve says that the banks have all of the authority they need, meaning Fed- eral Reserve Bank of Kansas City and others have all of the au- thority they need to make these decisions, and yet you go to the Reserve Banks and they say, ‘‘Oh no, we are waiting for the Board of Governors.’’ And so there is a whipsaw effect, and we get no an- swer. The black hole continues to exist, and my frustration level has long since been at a boiling point. It continues to be at a boiling point. There is no responsiveness. It is a black hole. And I wish to just, once again, use this opportunity to encourage you to address that. There is just no excuse. There is no excuse anymore, Mr. Chairman. Thank you. Chairman BROWN. Thank you, Senator Lummis. Senator Van Hollen, of Maryland, is recognized. Senator VAN HOLLEN. Thank you, Mr. Chairman. Welcome, Chairman Powell. I cannot let an opportunity go by without raising 30 the issue of the FedNow real-time payments system implementa- tion. You would agree that if we can get this system into place it will save millions of Americans billions of dollars, would you not? Mr. POWELL. Yes, I would. Senator VAN HOLLEN. And so that is why I always want to en- courage you to move very quickly. As you know, the system is scheduled to go up next year. We had an earlier hearing in May, in this Committee, and Brookings senior fellow Aaron Klein, who has spent a lot of time monitoring this system, shared his concern that we were not moving fast enough to hit that date and fully im- plement it. So I just want your commitment, Mr. Chairman, that you are fo- cused on this and that it is a priority. Mr. POWELL. Very much so. We are very focused on doing it right and also on time, and that is next year. Senator VAN HOLLEN. Right. Because it especially impacts, of course, people living paycheck to paycheck, right, who make a de- posit in a bank but it does not clear, and then they get tagged with all sorts of overcharge fees and things like that. You know, other countries that are a lot less advanced in terms of technology than the United States have figured this out and we should be there now. I just want to turn to really the issue of the day, which is this challenge in navigating between keeping a strong economy moving and low unemployment and dealing with price stability. On the good news front, and I think you testified to this earlier, the United States is doing a lot better than our sort of near-peer economies when it comes to economic growth and quickly reducing our unemployment rate. Is that not the case? Mr. POWELL. Yes, generally. We are further advanced in our re- covery, I would say. Senator VAN HOLLEN. Yeah. So that is good news, and we want to keep that going. We also, obviously, want to deal with the price increase. And the concern which has been shared by others this morning is that many of the causes of those price increases are be- yond the control of the Fed. And I call them the three P’s—Putin’s war, pandemic supply chain disruptions, price gouging—Senator Cortez Masto raised that. And so I think the challenge is how do you navigate increases in interest rates when a lot of the drivers of price increases are be- yond your control? And I want to raise a specific kind of case study here, which is in the housing market. Because you would agree, would you not, that increasing the supply of housing can help re- duce housing prices, right? Mr. POWELL. Sure. Senator VAN HOLLEN. Yeah. But what we are seeing now is that with rising interest rates obviously new investments are more ex- pensive. We have seen housing starts fall by 14 percent in May. So that means fewer housing opportunities, less supply, fewer workers engaged in building new homes. So if you could just use that as a sort of case study of how you are going to navigate these cross currents. Mr. POWELL. Interest-sensitive spending is a very important as- pect of how our tools work, and in the case of the housing market 31 what you are seeing is higher mortgage rates, so you are actually seeing demand move down quite significantly. Many, many indica- tors suggest that fewer people are visiting homes, the wait time for selling a home is increasing, housing sales are moving down, hous- ing starts are moving down, and overall, it is a slowing in the hous- ing market. And I think what you will see, or many forecasts call for, the in- crease in housing prices to slow pretty significantly now. You have seen very, very large, as you know, increases in housing prices, really since the beginning of the pandemic, to the point where, you know, all over the country you have people five bids above the ask the second the house comes on the market. Well, that is cooling off now to a more sustainable pace. So what we hope is we can get demand, that part of the economy, to slow to a more sustainable pace, and get the housing market back on a more sustainable path where there is a better balance between supply and demand. Senator VAN HOLLEN. I appreciate that. I am just going to use my remaining time to sort of push you a little further on this issue, not specifically with housing. But given the fact that so many of the factors that are driving price increases are beyond our con- trol—and you talked about core inflation—what is your confidence level that we will have what is generally referred to as a soft land- ing, where we will not overcorrect in raising our interest rates to the point that it begins to really hurt our economy, workers, and wages? What is your level of confidence that you can navigate a soft landing for the economy? Mr. POWELL. I mean, it is our goal. It is going to be very chal- lenging. It has been made significantly more challenging by the events of the last few months, thinking there of the war and com- modities prices and further problems with supply chains. And the question whether we are able to accomplish that is going to de- pend, to some extent, on factors that we do not control. Senator VAN HOLLEN. Well, Mr. Chairman, if I could, but this is the point, I think many of us are making. The factors that are out of your control are not going to be susceptible to those costs being brought down—oil, gas, food—by the measures you are taking. And the risk is that the measures you are taking will slow down other parts of the economy without getting us the benefit of lower prices. So I think that is a big theme today, and I just look forward to continuing our conversation about how you are going to thread that needle. Mr. POWELL. Can I say that the other risk, though, is that we would not manage to restore price stability and that we would allow this high inflation to get entrenched in our economy. And we know from history that that will hurt the people we would like to help, the people in the lower income spectrum who suffer now from high inflation. That will hurt them more than anyone. So we cannot fail on that task. We have to get back to 2 percent inflation so that we can have the kind of labor market that we real- ly want. Senator VAN HOLLEN. I appreciate that, Mr. Chairman. But as you know, the prices that people are experiencing most vividly day to day is the price of gas at the pump and the price of food at the 32 grocery store, both of which are things that you have said are be- yond your control. So thank you. Thank you, Mr. Chairman. Chairman BROWN. Thank you, Senator Van Hollen. Senator Daines, from Montana, is recognized for 5 minutes. Senator DAINES. Mr. Chairman, thank you. Mr. Powell, good to see you here today. Like my colleagues, I continue to be deeply con- cerned with the inflation we are seeing in the economy and its real- life impact on Montana families. When I go back home I hear the top three concerns from Montanans. It is inflation, it is inflation, it is inflation. The price of gas, the price of groceries. CPI inflation grew 8.6 percent, year over year, in May, the high- est increase since December 1981. In Montana, the Mountain States, as you are aware, inflation grew by 9.4 percent versus a year earlier. This rate of inflation is unsustainable for Montanans and Americans alike. For months—for months—Republicans in Congress and even some Democrats, like former Treasury Secretary Larry Summers, warned of the massive inflationary risk of the $2 trillion March of 2021 stimulus package, what that posed to the economy. In fact, I just pulled up the Washington Post article from March 29, 2021. I remember being in this very room, similar hearings, warning our colleagues about the risks of moving through a $2 trillion spending package when we had $1 trillion of unspent COVID money still re- maining in December of the prior year. Let me quote from that Washington Post article. It says, ‘‘Sum- mers’’—remember, Secretary of the Treasury under Clinton and economic advisor to Barack Obama, a Democrat—‘‘Summers, age 66, who drafted economic blueprints for the past two Democratic Presidents and was a top candidate to lead the Federal Reserve Board under President Obama, has emerged in recent weeks as the loudest critic of President Biden’s approach to reviving the pan- demic-era U.S. economy. The Harvard University professor, who advised Biden for a time last summer, warns’’—and this is key— ‘‘that the President’s stimulus plan may trigger the highest infla- tion in more than half a century and could cost Democrats the chance to make lasting investments in the economy.’’ There were many of us warning the Administration and our col- leagues across the aisle of blindly moving forward, on a purely par- tisan basis, to jam through that $2 trillion package and the infla- tion risks associated with it. Now, with inflation at a 40-year high, these same Democrats are continuing their ill-advised effort to revise President Biden’s sweep- ing ‘‘build back broke’’ package, no matter the warning signs that are flashing right now in all of our faces. Chairman Powell, Mr. Summers has suggested several years of greater than 5 percent unemployment might be necessary to con- tain inflation. Would you agree with that assessment? Mr. POWELL. I guess I would say that I do not want to comment on other forecasts, generally, but my assessment is that it is going to depend, to a significant extent, on factors like how long does the war run and how long does it take supply chains to improve, and that kind of thing. There is a lot of uncertainty around that. I would have a lot of humility about trying to predict with any clar- 33 ity exactly where the economy is going to be in the next 3 years, for example. But my assessment, though, is that there are certainly paths to get inflation down to 2 percent with outcomes that are substan- tially less troubling than what you just read. Senator DAINES. You have characterized a soft landing as getting back to 2 percent inflation while keeping the labor market strong. What is your confidence that the Fed can achieve this goal without causing a recession? Mr. POWELL. That is our goal. That is our intention. I think it is going to be very challenging. We have never said it was going to be easy or straightforward. It is going to be challenging, and the events of the last few months have certainly made it more chal- lenging. Nonetheless, there are pathways through which that could happen, and in particular, what we saw in the early part of 2021, when inflation went up, was very strong demand surged against what were unanticipated supply side constraints. And the result was prices went up a lot, much more than could be explained by just the increase in demand. And so, in principle, if demand can move back down, then infla- tion could move back along that path just as quickly as it went up, in principle. No one is guaranteeing that, but the idea is this is not the same—you know, there are relationships in the economy for how quickly inflation would move compared to demand moving. This could be an unusual situation because we have had what is, in effect, a vertical supply curve, where there is not any more sup- ply, or a very steep supply curve. So you get really sharp increases in prices. You could get sharp declines for the same reason. So that could be a difference, and I think we will find out, ideal- ly. But ultimately we need to see progress on the supply side, and we are not waiting for it. Our job and our tools work on demand, and that is what we are working on now, is getting demand down to a more sustainable level so that supply can catch up and is in better balance with demand. Senator DAINES. Chairman Powell, thank you. Senator TILLIS [presiding]. Thank you, Senator Daines. Senator Ossoff, on behalf of the Chair. Senator OSSOFF. Thank you, Senator Tillis. Mr. Chairman, wel- come back. Let me state at the outset you have an extraordinarily chal- lenging job and extraordinarily complex times, and much of what you are responding to and adapting to is beyond your control. Your success is the country’s success. To a significant extent, it is the world’s success, and I fervently hope for your success and appre- ciate your continued efforts. I would like to ask you to specify, if you can, what transmission mechanisms you believe are most sensitive right now to the change in monetary policy, what forms of consumption you expect to be most sensitive to it, and the extent to which you anticipate that some of the effects that you hope to have on aggregate demand through the increase in rates are transmitted by financial markets, and if so, how. Mr. POWELL. I guess I would say three basic channels through which our tools work. The first would be interest-sensitive spend- 34 ing. So that is durables, including cars and things like that, dura- ble goods. Housing, for example. So when rates go up, spending on those purchases, which tend to be financed with debt, will be re- strained. That is one major, major channel. The second is just asset prices generally, across the economy. When interest rates go up, it raises the cost of holding assets. It can cause assets, again, broadly across the economy, to either mod- erate their growth or decline somewhat in value, and that has an effect, a broad effect, across the economy on spending, on every- thing. The third channel is really the exchange rate, which you can think of as another asset price. That also has the effect of pressing down on inflation. So we look at all of those. Starting with the first one, you can see, we just talked about the housing market. The housing market is the classic part of the economy that is very sensitive to interest rates, and you are going to see a moderation in housing demand. You are going to see declining—well, slower increases, at least, in housing prices. So those are the three main channels I would point to. Senator OSSOFF. Let me ask about, in terms of asset prices and how financial markets are responding to the Fed’s stance. I have consistently asked you and Secretary Yellen, when you appear be- fore the Committee to talk about systemic risks, risks to financial stability, risk of financial contagion, where you are moving swiftly and markets are volatile there are perhaps institutional trades that could rapidly unwind or exotic financial instruments that no longer function well. What do you anticipate to be the parts of capital markets now, or the phenomena in capital markets that present the greatest risk to financial stability as the Fed takes the aggressive action that you are taking? Mr. POWELL. Well, I would start by saying that the banking sys- tem is very strong, well-capitalized, highly liquid, does a much bet- ter job of understanding the risks it runs and managing them than before the global financial crisis, and that is a reflection of the work that regulators did and that the banks did. So that part of the financial system is critically very strong, and we saw that through the pandemic and we see it now. To your point, though, capital markets did show real periods of illiquidity during the immediate aftermath of the pandemic, and so we have been looking at ways—we, I say broadly, the regulatory community—has been looking at ways to address that. Senator OSSOFF. So you remain concerned about money markets. Mr. POWELL. Well, that is different. So money markets, that is a part of the economy where it has become illiquid because the as- sets that they were invested in were not able to be turned into cash quickly to fund depositors wanting to take their money back. So we stepped in and had to provide that liquidity for the second time. There are reforms going on there at the SEC which should address that, and they are in the process of being considered and then im- plemented. So that should help on that front. 35 I was thinking more of the Treasury market, for example, which became illiquid at the very beginning when people wanted nothing but cash, nothing but the cash, and those cash-like things. The Treasury market has been functioning, though, all through this period, when we have very significantly changed the stance of monetary policy. So markets have been functioning well, reason- ably well, and—— Senator OSSOFF. OK. My time is running short. I appreciate that. We will probably follow up to talk a little bit more about financial risk. With my remaining few seconds let me ask you this. How would you characterize the share of responsibility, if you will, on the sup- ply side versus the demand side, for the elevated price levels over the last year? To what extent do you believe that—you mentioned the supply curve being steeper than expected and so the increased durable goods demand and consumer demand having a greater than expected effect on prices. Right now, is the principal driver of the increase in the price level elevated consumer demand, elevated demand, or is it supply constraints? I know we are facing both, but I am asking you to allo- cate, as you can, some share to each phenomenon. Mr. POWELL. Yeah. I just would say it is clearly both factors are principally at work here. You could not get this kind of high infla- tion without strong demand, and you certainly could not get it without the kind of supply issues that we have had, both in the labor market, reflected in high wages, and then in the goods mar- ket, reflected in what has happened with durable goods. And cars, in particular, you look there, it has been driven by the semicon- ductor shortage. Senator OSSOFF. Thank you, Chair Powell. Thank you, Mr. Chairman. Senator TILLIS. On behalf of the Chair, Senator Moran. Senator MORAN. Mr. Chairman, thank you. Chairman Powell, thank you for your presence here today. Let me start just by mak- ing certain that I tell you something that I think I need to say, on behalf of Kansans. I have never seen the level of anxiety, uncer- tainty, concern for the future as I see today when I have conversa- tions with folks in my neighborhood and across Kansas. There is a sense that something is not right. Inflation is a significant com- ponent of that feeling, and the inability to know what is around the corner is terribly damaging to folks, both financially but also men- tally or psychologically. There is a real circumstance out there that I want you, as the Chairman, and your colleagues to know exists. I think uncertainty in what the future holds is one of the most damaging things, when people try to figure out their lives and how comfortable they are. I also want to highlight a particular Kansas but middle America, across the country issue of agriculture. I was on a farm on Satur- day, participating in, observing harvest of wheat. We live in a world in which people are starving and more are going to starve if we fail to get more grain into markets, from Ukraine and from Russia, but from the United States as well. Agriculture, farming is a noble calling and it has a lot to do with being able to feed people who are now desperate. 36 Part of the concern in regard to agriculture is the interest rates have a significant consequence to the profitability, to the surviv- ability of producers, and profit margins gets squeezed. If interest rates continue to climb we face declining or lower land values. That creates greater access to credit challenges. Tell me how you see, one, how I can assure my Kansans and Americans that things are going to be better, and two, how can I assure farmers and ranchers that their future will be brighter, based upon the activities of the Federal Reserve? Mr. POWELL. I take the sort of very low confidence readings that we are reading about, and your comments about Kansas citizens, as being pretty directly related to high inflation, and I think people have not seen it. You know, most people, you and I are old enough to remember what it was like, and it is something that it just real- ly does destroy public confidence in the economy and that kind of thing. So we need to get inflation back down to 2 percent, and all I can say is we are using our tools to do that and the public should believe that we will get inflation back down to 2 percent, over time. Again, there are factors that we do not control, but those factors do tend to wash out over time. Things like commodity prices do not tend to just keep going up. They may remain high but essentially they are quite volatile over time. That is what the record shows. So we are doing what we can to get inflation down, the parts that we can address. So whatever that is worth, that is what we can do and what we will do. In terms of the agricultural patch, as you know we have, includ- ing your Kansas City Fed president, we have some terrific people who are Reserve Bank presidents who give us a good sense of what is going on in the agricultural sector on an ongoing basis, and it is obviously a very, very difficult time, with fertilizer prices and dif- ficulty in getting all kinds of inputs. It is just a very challenging time in the agriculture world. We do understand that. Our part of it is to do what we can to get inflation back under control. I know higher interest rates are painful, but that is the tool we have to moderate demand and get demand and supply back into balance so that inflation can come down. Senator MORAN. Mr. Chairman, in a conversation you and I had on the phone you indicated, as you did today, that there are certain aspects of inflation that you have little control over. One of them, I think you mentioned, was energy. Let me be reassured, if you would, that there will not be actions by the Federal Reserve to make lending to fossil fuel producers a component of the policies of the Federal Reserve. When you say you have little to do with it, you could cause great damage if you decide to go down a path that was at least contemplated by a number of nominees for the Federal Reserve Board, and I would love to be reassured that is not a com- ponent that you would pursue and that we would not see resulting in increasing cost of fuel as a result of Federal Reserve policy. Mr. POWELL. My view certainly is that it is not our job to allocate credit to or against or away from any particular sector of the econ- omy. That is the job for elected officials or for markets, but it is not a job for the Federal Reserve, which has a mandate to, you know, pursue maximum employment, price stability, a well-regu- lated banking system, and a sound payment system. 37 Senator MORAN. Mr. Chairman, thank you. Senator TILLIS. On behalf of the Chair, Senator Warnock. Senator WARNOCK. Thank you very much, Mr. Chair, and thank you, Chairman Powell, for being here again today. Georgia is in a serious housing crisis, and the Federal Reserve Bank of Atlanta has designed owning a home in Atlanta as unaffordable to the average home buyer. But it is not just a city problem. It is urban. It is rural. Haralson County, a county with a population of less than 30,000, is also rated as unaffordable. In the midst of this housing crisis, the Federal Reserve Bank, which has a tough mandate and a tough time of managing infla- tion, has raised the Federal funds rate by 0.75 percent. This means mortgages are about to get a lot more expensive for families. Chairman Powell, as the Fed raises its interest rates, what is the Fed doing to prevent this rate increase from further exacerbating the housing crisis? Mr. POWELL. Well, so by raising rates, what you are seeing is a slowing housing market now. Because of higher interest rates, mortgage rates have gone up pretty substantially, and you are see- ing a slowing in the housing market. And one of the things that should mean is that housing prices should stop going up at such remarkably rapid rates. Since the beginning of the pandemic, we have had a very, very hot housing market all around the country, and what should take place is as demand moderates, the demand for housing moderates, for new and existing homes, you should see prices stop going up quite so fast. You are also going to see fewer home sales, and just generally a lower rate of activity in the hous- ing market. So really what needs to happen is housing supply and demand need to get back into better alignment, and the part of that that we can control is really by moderating demand so that prices stop going up quite so much and that we can get back to a housing mar- ket where supply and demand are. Now we do not control supply, and there are issues in this coun- try around housing supply. It is harder to get land and lots and things like that. It is harder to get people to work. So there are supply side constraints, if you meet with builders from around the country. They will tell you that we have a longer-term issue as a country around creating enough housing supply. That is not some- thing that the Federal Reserve can do anything about, but it is an important issue. Senator WARNOCK. Notwithstanding that mortgages are clearly, at least in the short term, about to get more expensive, it seems to me that what would be helpful is if the Congress would pass my Down Payment Toward Equity Act to help first-generation home- buyers afford their first home. What effects do you expect the Fed’s interest rate increases will have on the—well, let me put it another way. The Federal Reserve helps enforce the Fair Housing Act and the Equal Credit Oppor- tunity Act. What plans do you have to ensure that as interest rates increase everyone still has access to a fair, reasonably priced mort- gage? Mr. POWELL. Higher interest rates do not change our very impor- tant obligations under the fair credit laws that we enforce, and so 38 we will continue to enforce those, you know, transparently and ag- gressively. It is true, though, that mortgage rates have gone up, and that will slow down demand, and there is some pain involved in that for people paying higher mortgage rates and also some people will be priced out of the mortgage market. But that is ultimately what needs to happen if we are to get back to price stability to a place where people’s wages are not being eaten up by inflation. So the greatest pain would be if we allow this high inflation to just continue. Senator WARNOCK. Yeah, and I guess my point is in the mean- time, the folks who are on the margins of the marketplace in the first place, the issue is how do we protect them as much as pos- sible. Related to that, when Secretary Yellen was here she stated that the Federal Reserve needed to not only be skillful, but she said, quote, ‘‘lucky’’ to ensure, quote, ‘‘a soft landing.’’ I do not like count- ing on luck when the economic safety of Georgians, particularly those at the margins, is at risk, which is why I am doing what I can here in the Senate. I have introduced a couple of bills to lower the price of gas, to lower the cost of groceries and other everyday goods, to cap the cost of insulin and other medication, and I have held the White House accountable to pursue investigation of price gouging of ocean car- riers and I have supported bipartisan legislation addressing the same issue that just became law. How can Congress lower costs for Georgia families, and what steps can Congress take to support the Fed and ensure a soft land- ing? Mr. POWELL. I guess I would be reluctant to give you advice while we are trying so hard to do the job that you have actually assigned us, which is to get inflation back down. Yeah, I mean, I think those are authorities that those of you who run for elected office have, and we do not have, as mere appointees. So that is really up to you. Senator WARNOCK. You would agree that the folks at the mar- gins of the economy are feeling the most pressure and pain, and that has to be addressed? Mr. POWELL. I think that is always the case, and in the case of inflation it is really that if you are spending every dollar that you are intaking on the bare essentials of life, and the cost of them goes up 10 percent, you are in trouble right away, whereas middle-class people and people better off than that, they have got some re- sources, some ability to deal with it. But that is why it is such a priority for us to get on top of infla- tion before it does become entrenched. Inflation has only now been around for—you know, it really did not start until March of last year. So it is not at all too late for us to get this job done and get back onto the kind of path we all want to be on. Senator WARNOCK. Thank you so much. I am concerned about this, and it is why, in the meantime, I have introduced several bills the lower costs for essential items like gas and groceries and medi- cation. Thank you for your testimony. 39 Mr. POWELL. Thank you, Senator. Senator TILLIS. On behalf of the Chair, Senator Sinema I think will join virtually. Senator SINEMA. Thank you, Mr. Chairman, and thank you, Chairman Powell, for joining us today, and congratulations on your recent reconfirmation. You know, the inflation numbers continue to be concerning, and this is the number one issue I have been hearing about from Arizo- nans. Families and small businesses are paying higher prices and they need relief from soaring inflation so they can make ends meet. But we also know that this is not only a U.S. problem. Countries around the world, both big and small, are also seeing high infla- tion. So how is the U.S. positioned relative to other countries with respect to inflation? Mr. POWELL. I would say our level of inflation is broadly com- parable to that of other major economies. You saw Canada release their inflation number today. It is not far from where ours are. Same with the Western European democracies and the United Kingdom. But there are different compositions. So I would say generally, to generalize, in the United States our inflation has more of a de- mand-driven component whereas in Europe it is more, to a greater extent, driven by very high energy prices, for example, although the United Kingdom kind of has a mix of both of those. We also have high energy prices here. So the levels are similar but the com- position is a little bit different here in the United States. Senator SINEMA. Thank you. You know, crypto markets have ex- perienced substantial volatility in the past several weeks. Has the Fed been tracking these events, and what implications do they have for how the Fed is viewing the broader economic outlook and making decisions with respect to monetary policy? Mr. POWELL. We are tracking those events very carefully of course, and not really seeing significant macroeconomic implica- tions so far. But I think the principal implication is really what we have been saying, and others have been saying, for some time, which is that in this very innovative, new space, really there is a need for a better regulatory framework. The same activity should have the same regulation no matter where it appears, and that is not the case right now because a lot of the digital finance products are in some ways quite similar to products that had existing in the banking system or the capital markets but they are not regulated the same way. So we need to do that. And I think that is the main takeaway I would have. Senator SINEMA. What is an appropriate proportion of current U.S. inflation to assign to Russia’s illegal invasion of Ukraine, and how are you thinking about these events in the context of setting monetary policy? Mr. POWELL. Well, I would say that, you know, the increase in commodity prices are clearly connected to the war in Ukraine, so that part of inflation would be certainly much lower than it is with- out the war in Ukraine. And, you know, really there is nothing that our tools—our tools work on demand, and there is a job for our tools to do here. There is a job to moderate demand so that it can 40 be in better balance with supply. But we do not think that we have the answer to higher oil prices due to the global oil situation. Senator SINEMA. I know the Fed tracks the core personal con- sumption expenditures index closely when thinking about mone- tary policy. Many trends in our economy, including a big shift to- ward technology and e-commerce, accelerated during the first year of the pandemic, and it is possible that the indicators and weights used to measure inflation may need to be revised to accurate meas- ure inflation as Americans are experiencing it. So we all know inflation is high, but how high it is matters to ensure that we have an appropriate response. Congress and the Fed should make decisions based off the best information that most accurately reflects the challenges that families and businesses are facing. Have you given thought to this issue? Mr. POWELL. Well, yes, in the sense that we look very carefully at the way we measure inflation in this country. We actually use personal consumption expenditures, which is a little different and a better approach, we think, than the more traditional consumer price index. This was a change we made about 20 years ago, and I think economists generally think that PCE inflation does a better job of measuring the inflation that people are actually experiencing in their lives. So that is what we do. And we keep it updated. The Government agency that manages it keeps it updated on a regular basis. So we think that is the right approach in terms of measuring inflation. Of course, we look at CPI as well, but we have chosen to make PCE inflation our principal measuring stick. Senator SINEMA. OK. Thank you. Mr. Chairman, I see my time has expired. I yield back. Thank you. Chairman BROWN [presiding]. Senator Menendez, of New Jersey, is recognized. Senator MENENDEZ. Thank you, Mr. Chairman. Chairman Pow- ell, I want to start on the issue of diversity at the Fed. I have a letter that we sent you yesterday, and signed by nine Senators, in- cluding five Members of this Committee, urging you to undertake a number of simple reforms to the process for selecting bank presi- dents and Class B directors. That process has to include meaning- ful transparency and public engagement if we are ever going to have Fed leadership that truly represents the public, as required by the Federal Reserve Act. So I will wait for your written response because we just sent that letter, on the details of those proposed reforms, but for now can I have your commitment that you will provide us with a substantive response by July 22nd? Mr. POWELL. Yes. Senator MENENDEZ. Thank you. And also will you commit to work with me to put in place real, meaningful changes to the proc- ess so we can have a broader array of voices to the Fed leadership? Mr. POWELL. I will commit to having a frank discussion with you about that. We are open to ideas of how to improve. As you point out in your letter, you know, it is not like we have not made tre- mendous strides as it relates to the Class B and Class C directors in the course of the last 10 years. We really have, and the diversity 41 numbers are, I think, quite impressive for the B and C directors. The A directors, as you point out in your letter, less so, but those are appointed by the bankers in the district. But we can have this conversation. I look forward to it. Senator MENENDEZ. Less so, but it is worse than less so. I mean, you do not have one bank president in the history of the Federal Reserve who has been Hispanic. That is far worse than less so. Mr. POWELL. I was talking about directors. But you are right about that. Senator MENENDEZ. And there was a tremendous opportunity and it did not happen. You know, I feel like I am the lone effort on this, but 62 million Hispanic Americans, who represent $2 trillion of domestic pur- chasing power, deserve a seat, where some of the most important economic decisions are being made. So we look forward to the en- gagement that you have said that you are willing to engage in. Now I am trying to find out, as others have raised with you, there is no question that painfully high inflation is affecting every family in America. But in order to develop the right response we need to understand the underlying factors that are driving price in- creases. I think you have said here today that Russia’s invasion of Ukraine, pandemic-related supply chain issues, and the energy issues that flow from Russia’s invasion of Ukraine are perhaps some of the biggest factors in driving inflation. But the question is, how is it that raising interest rates on those underlying causes of today’s inflation ultimately are going to change it? You know, energy is still energy. Supply chain is still supply chain. Russia’s invasion of Ukraine is a continuing chal- lenge for the world. But there is nothing about interest rates that is going to affect any of that. Mr. POWELL. No, but notwithstanding that there are major parts of the economy where demand exceeds supply, meaningfully, and that is where our tools have a job to do, where we can moderate demand and give supply time to recover so that supply and de- mand get back into better balance and inflation comes down. Senator MENENDEZ. Well, it seems to me that we can all recog- nize that raising interest rates is a blunt tool at the end of the day, but I am looking, going back to the beginning of my questioning, it is essential, I believe, to be mindful of the effects of your ac- tions—‘‘your’’ meaning the Federal Reserve—will have on unem- ployment, particularly for those groups that we were hit hardest by the pandemic. The Fed’s latest Monetary Policy Report states that, quote, ‘‘Em- ployment for Blacks and Hispanics not only declined by more than that for Whites and Asians early in the pandemic but also recov- ered more quickly since the end of last year.’’ Now that we are po- tentially entering a period of larger and more frequent interest rate increases, what do you expect will happen to the unemployment rates of Black and Hispanic workers relative to the population as a whole? Mr. POWELL. It will depend on what happens to the overall un- employment rate. Our goal is to achieve 2 percent inflation while still keeping the labor market strong. That is our intention with this. 42 Senator MENENDEZ. Well, I appreciate what your intention is, but I would venture to say that what we will see is what we have seen in the past, that crisis after crisis disproportionately harms Americans of color. So I hope the Fed’s response to inflation does not continue that trend because it is woefully wrong that one group of Americans disproportionately faces consequences of policy deci- sions versus the rest of America. And this is another reason to have people at the Federal Reserve who represent this community to share those insights with the Fed as you determine these macro policies that are going to affect our communities disproportionately. Chairman BROWN. Thank you, Senator Menendez. Senator Tillis. Senator TILLIS. Thank you, Mr. Chair. Chair Powell, in response to a question from Senator Warner and a question from Senator Sinema, Senator Warner more or less asserted that we are all in the same boat in terms of inflation globally, but you made the point, on two different occasions that what is driving inflation in largely Europe, a little bit less so in the U.K., has to do with spi- raling energy prices. Could you talk a little bit about, beyond the pain at the gas pump and the increased cost of transportation, how increasing—I should say, and I believe that Europe is where they are—this is not for you to comment on—because they moved a little bit too aggres- sively and did not look at resiliency with some of their energy in- puts that were largely affected by the Russian invasion. But could you talk a little bit about the other commodities that are affected by rising interest rates? We are talking about housing, and we know that pipes, a number of inputs to housing construction have gone up. Can you talk a little bit more about the market basket of other commodities that are influenced by increasing energy prices? Mr. POWELL. I think energy prices go into an awful lot of dif- ferent places in the economy, including as an input into manufac- turing goods of all kinds and plastics, particularly, and things like that. So it is a big contributor to inflation, beyond just the actual energy prices. Senator TILLIS. Yeah, and so, my only comment here, then I just have a closing thought, is that we are unilaterally hamstringing your ability to bring inflation down—you do not have to respond to this; it is a policy position—by artificially increasing the cost of en- ergy in this country. If we simply would recognize that there is a way to get to a transition to green, renewable energy and made the glidepath sustainable, we could easily separate ourselves from the rest of other Western democracies with respect to that tool, which is not in your toolbox. And hopefully we can get to that discussion and embrace the idea that the transition is inevitable. It is a mat- ter of timing and resiliency in the meantime. Just one other question. I know the Post FOMC press conference you ruled out a 100 basis point increase. Is that a long-term view or a view based on the circumstances as you see them today? In other words, would that be something potentially on the table if the measures that you are taking right now to not work out? Mr. POWELL. I think I would never take something off the table for any and all purposes. You know, the committee that I chair will 43 make whatever moves it believes are appropriate to restore price stability. Senator TILLIS. OK. Well, I, for one, am glad you are at the helm. I have a lot of confidence in you, which I why I voted for your con- firmation. But we will be submitting some questions to the record back on the points that I made in the opening statement about transparency. There is some frustration, and I have to say it is bi- partisan, in terms of questions that we are asking and not getting answers to. The master account is one of them, but there are other items that we will just include for the record. Thank you, Chair Powell. Thank you for serving. Chairman BROWN. Thank you, Senator Tillis, and thank you for your cooperation in this hearing today. It has been a busy day for a lot of people, and Chair Powell, thank you. I have a series of questions. I have not asked my questions. I was saving them for last. After my questions we will adjourn. You have said that Russia’s aggression in Ukraine, port conges- tion, and COVID lockdowns in China especially have contributed to higher prices. Consumer spending continues to be strong. Most Americans probably worry about inflation. Talk for a moment, if you would, about the strengths of the American economy now and whether or not you see positive signs of prices stabilizing. Mr. POWELL. Well, consumers are overall—not every consumer, but overall the consumer sector is in very strong shape financially. There is, as you know, a very substantial accumulated quantity of savings on balance sheets, less so at the very bottom of the income spectrum but right across the rest of the spectrum. So that is there to support spending, even in the face of higher inflation. And you are seeing consumer spending hold up pretty well. Sorry, the rest of your question—— Chairman BROWN. Well, are there positive signs of prices stabi- lizing? Mr. POWELL. So in terms of prices stabilizing, what we are look- ing for is compelling evidence that inflation is coming down, and we do not have that, so nothing I could point to says that we have that. I will say that core PCE inflation is a pretty good indicator of where underlying inflation is running, and it has moderated over the course of this year reasonably significantly from where it was in the latter part of last year. It is still way higher than it needs to be. We need to see a lot more progress. But it has been running at a rate over the last, say, four or 5 months that is lower than it was, at least, but again, still far too high. So we are looking for that. We are not really seeing it yet. You know, there are lots of stories out there of how this should happen, and some people think it is very clear that it will, and until we ac- tually do see it happen we need to keep moving. Chairman BROWN. And I want to be clear. From your comments publicly, your comments to this Committee today, you say the econ- omy is not at the point of a recession. Correct? Mr. POWELL. I do not see the likelihood of a recession as particu- larly elevated right now. You should know that no one is very good 44 at forecasting recessions very far out. No one has been able to do that regularly. But I would say that the U.S. economy for now is strong, and spending is strong, consumers are in good shape, businesses are in good shape. Clearly financial conditions have tightened, and you are seeing growth slow from the very elevated levels of last year, associated with the reopening. You are seeing the beginnings of job growth slowing to more sustainable levels. And, you know, there is risk in that. There is obviously risk in that. Monetary policy is famously a blunt tool, and there is risk that weaker outcomes are certainly possible. But they are not our intent. Chairman BROWN. And as I said at the beginning of my testi- mony, or my opening statement a couple of hours ago that our economy is growing faster than China’s. Let me ask two simple questions about gas prices. We have heard a lot today about gas prices from both sides. Just a few yes-or-nos. Does President Biden set gas prices? Mr. POWELL. No. Chairman BROWN. Does Congress set gas prices? Mr. POWELL. Not as far as I know. Chairman BROWN. Do you, as Chair of the Federal Reserve, set gas prices? Mr. POWELL. No. Chairman BROWN. I would not ask you to assign a sort of quan- tum responsibility, but starting with the decisions of OPEC and the world’s major oil companies to not produce more, can you tell the Committee briefly what goes into the price at the pump and only what tools you have, Congress has, other Government agencies have to bring the price down? Mr. POWELL. It is really principally, the price of oil, which is set globally, largely by the actions of large oil-producing countries, and then it is the refining spread, what it costs to refine, what the re- finers can charge for what the public consumes, that refined prod- uct. So those are the two pieces of it, and our tools certainly do not work to address either of those things. Chairman BROWN. Let me talk for a moment about housing. Sev- eral have asked about the skyrocketing costs for both renters and aspiring homeowners, prices over the last 2 years, but prices were not that great prior to President Biden and the last administration either, we know. Last year alone, rents went up more than 11 per- cent, grew faster than wages. What are the short-term and long-term effects on inflation and our economy if renters see more and more of their monthly income going to housing? Mr. POWELL. That will crowd out other kinds of spending. The very fast increases in housing prices over the last couple of years have been very broad across the country and unsustainably high. Chairman BROWN. And that, of course, speaks to the importance of building more housing. Last question I want to ask before adjournment, we have seen cryptocurrency values collapse by some $2 trillion and markets crash over the past few weeks, consumers losing money, workers losing jobs. The Monetary Policy Report highlighted the risks of 45 stablecoins, digital assets that aim to maintain a stable value in order to trade cryptocurrencies. Talk for a moment, if you would, about the financial stability and monetary policy risks that these assets pose and how are stablecoins different? In your answer include how stablecoins are different from the U.S. dollar, which has the full faith and credit of the United States behind it. Mr. POWELL. A Stablecoin is an instrument really that is backed up—there is a reserve that has securities in it that are meant to assure the value. Let’s say it is a dollar stablecoin. So it is meant to assure that your interest is actually worth a dollar. So that sounds a lot like a money market fund, for example, and the way money market funds work is there is great transparency about what is in the reserve, and there are requirements about what must be in the reserve in order to preserve that one-dollar value. The world of stablecoins is new and emerging, and it does not have the sort of fit-for-purpose regulatory scheme that it needs to. And I think that is something you have been hearing a lot across the board from a number of Federal agencies, and from our own Treasury Department, which has been leading an effort to try to put in place—and many Members of Congress now have proposed new frameworks for regulating stablecoins, and digital assets gen- erally, and that seems like a wise thing. Chairman BROWN. And clearly SEC, clearly CFPB, other agen- cies, the Fed’s role in regulation of cryptocurrency in your mind is what? Mr. POWELL. Well, that is one of the issues is who really does have authority over this, and that is something Congress would need to clarify. We have authority over what banks can and cannot do, some banks and bank holding companies. The SEC has some jurisdiction, has jurisdictions over securities. The CFTC has rel- evant jurisdiction. So part of this will be deciding what these things are and how they should be regulated. There are stablecoins that are really used in connection with the crypto trading platforms. That is most of what happens now with stablecoins, but there are also some stablecoins, and even more po- tentially, that will be used in payments broadly. So that would be two different kinds of regulation there. It is just an area where Congress—and Congress is investing bandwidth and looking at proposals, and that is, I think, a healthy process that should lead, over time, to something that has bipar- tisan support and puts in place appropriate regulation for the whole area. Chairman BROWN. Let me drill down, and this is my last ques- tion. So if Congress does not act—I understand, and the Commod- ities Futures Trading Commission understand what you said about SEC. Is the Fed directly involved in any of these regulatory actions regarding cryptocurrency, absent of Congress action? Mr. POWELL. We regulate banks, regulate and supervise banks, and so we have a say in what our banks, you know, the Federal Reserve-regulated banks and bank holding companies, do with crypto assets on their balance sheets, what activities are permitted and that kind of thing. Of course, the OCC is at that table and so is the FDIC. 46 Chairman BROWN. Does that suggest that a number of American banks are cautious because of your oversight of them on crypto? Mr. POWELL. I mean, American banks are now very much explor- ing are there profitable opportunities to serve our customers in this new space? And, of course, what we are doing is saying let’s be sure that takes place in a way that preserves and supports safety and soundness. And we have had an ongoing set of meetings and collaborations with the FDIC and the OCC, and that is ongoing, I guess, between us and the OCC. So I think that is an appropriate way to carry forward. But it is not a substitute for what I think is—you know, it is like any other major area of innovation. Ulti- mately, Congress will come together to create a regulatory frame- work that is more fit for purpose for it, as it has in so many other cases. Chairman BROWN. OK. Thank you, Chair Powell. I look forward to continuing to work together. For Senators who wish to submit questions, those questions are due 1 week from today, Wednesday, June 29th. To Chair Powell, please submit your responses to these questions for the record no more than 45 days from the day you receive them. Thank you again for your testimony. The Committee is ad- journed. [Whereupon, at 12 p.m., the hearing was adjourned.] [Prepared statements, responses to written questions, and addi- tional material supplied for the record follow:] 47 PREPARED STATEMENT OF CHAIRMAN SHERROD BROWN The Banking, Housing, and Urban Affairs Committee will come to order. Today’s hearing is in hybrid format. Our witness is in-person, but Members have the option to appear either in-person or virtually. Today we’ve seen the fastest job growth in decades, faster growth than China, and the lowest unemployment levels in 50 years. But when Americans see the price of gas and groceries going up, week after week, available jobs and long-awaited wage gains don’t mean as much and don’t go as far. American families have been through enough the past 2 years. But for most people, it’s not just the past 2years that have been tough. Our econ- omy hasn’t worked for most Americans for far too long. Whether it’s war or disease or financial crisis or the march of globalization, work- ers and their families always bear the biggest burden—whether it’s in the form of higher prices or lost jobs or low wages or all of the above. That’s not inevitable. The economy isn’t physics. The ghost of Adam Smith would not recognize America today. There is no invis- ible hand of the market. When prices go up, it’s because someone made a choice to raise them. In corporate board rooms, when supply chains slow down or input costs go up or resources become scarce, executives make decisions: Do we cut back on bonuses, do we rethink our stock buyback plan for this quarter, do we forgo executive raises this year, do we post quarterly profits that are still higher than last year—but maybe not quite as high as analysts thought they could be. Or do we raise consumer prices, and foist all the negative consequences of world events onto the people who can least afford them. We know what most corporations do. They make the same choice they’ve always made, no matter the economic condi- tions of the moment. Most of these executives probably aren’t bad people. They’re just doing their jobs, they tell us. It’s the Wall Street system. These executives have to post profit increases for their shareholders, quarter after quarter—the consequences for everyone else be damned. It’s why for decades, Wall Street has rewarded the companies that squeeze their workers the hardest—companies that cut wages and retirement benefits, and then cut corners on worker safety and on consumer protection—just to make their stock prices go up. It’s why too many companies failed to invest in their workers or their products. It’s why companies moved manufacturing overseas, and then neglected the supply chains that have been crippled during the pandemic. It’s why big corporations like Amazon and Starbucks bust unions. It’s why oil and gas companies would rather charge higher prices than increase supply to meet demand. We aren’t witnessing traditional inflation—we’re watching Russia and OPEC drive up prices and American energy companies engage in war-time profiteering. At the root of the higher prices and the empty shelves is the same problem that’s been shipping jobs overseas and keeping wages low for decades: Corporate power and concentration reaching into every industry and market, into every corner of the economy. Our economy doesn’t have to be a zero-sum game where Wall Street wins and ev- eryone else loses. We can create an economy that reflects our values and works for everyone. We passed the American Rescue Plan, including the Child Tax Credit—the biggest tax cut for working families ever. And despite what naysayers claim, it was not the cause of inflation. For the Ohio families that I talk to, it empowered them to keep up with the cost of raising children. We passed the bipartisan infrastructure bill—a long-term invest in economic growth that will create more jobs, strengthen our supply chains, and improve our bridges and roads and public transit. Last week, President Biden signed the bipartisan Ocean Shipping Reform Act into law, which will bring down ocean shipping supply chain costs. We need to build on these successes to build an economy that rewards work, mak- ing things in America. We should pass my Supply Chain Resiliency Act, and bring manufacturing back to the United States. We should bring down the cost of prescription drugs and housing and childcare and elder care and others costs that have been rising for decades. 48 We need to pass the PRO Act, to empower workers in their workplace and our economy. And we need to crack down on corporate consolidation and concentration. Fair competition is good for workers, consumers, and Main Street businesses, and it’s a core American value. That is how we bring costs down, and ensure that workers don’t always pay the price for powerful people’s bad decisions—whether it’s a dictator in Eastern Europe or a Wall Street bank executive. In a truly fair economy, people don’t have to choose between two bad options— low wages, or high prices. No one likes inflation, and people also want good jobs that pay a living wage. Americans want to work, and they want to work with dignity. That’s central to the functioning of our economy—and that’s part of the Fed’s mandate. We must continue to empower workers and strengthen the labor market. Wages are not responsible for inflation right now. We can’t forget that 5.7 million people are still looking for work—there are actual workers behind the numbers, whose livelihoods are directly affected by decisions the Federal Reserve makes. And as interest rates rise and financial stability risks increase, it is even more important to keep a close watch on the biggest banks, so that excessive risk-taking doesn’t create even more problems. Banks must have enough capital to withstand a crisis. They must serve their com- munities—not just enrich themselves with stock buybacks and exorbitant executive pay. And mergers must benefit the local economy, not just shareholders. We’ve seen too much evidence of big Wall Street banks behaving badly: shunning small businesses, raking in billions in overdraft fees, discriminating against Black borrowers. You, Chair Powell, must also ensure we have a strong payment system that works for Main Street banks and consumers, so that people don’t feel like the only option is a risky and unregulated alternative financial system, backed by nothing but empty promises. The thousands of proxy currencies, like stablecoins, and other digital assets, that promise transparency and democracy are missing one thing: they aren’t backed by the full faith and credit of the United States. The Federal Reserve—our Nation’s central bank—must use its authorities to pro- tect consumers and the financial system from these risks. And you must ensure that the Fed has the highest ethical standards. After former Fed officials profited off of their positions in last year’s stock trading scandal, you must restore the American people’s trust in this institution that is crit- ical for a healthy economy. I was encouraged when you updated the Fed’s policies, but we need rules that have the force of law. That’s why we need to pass my Ban Conflicted Trading at the Fed Act. As Chair of the Federal Reserve, you have an important role to play to make sure our economy works for everyone, not just those at the top. I urge you to remember the millions of working Americans who are counting on you. PREPARED STATEMENT OF JEROME H. POWELL CHAIRMAN, BOARDOFGOVERNORSOFTHEFEDERALRESERVESYSTEM JUNE22, 2022 Chairman Brown, Ranking Member Toomey, and other Members of the Com- mittee, I appreciate the opportunity to present the Federal Reserve’s semiannual Monetary Policy Report. I will begin with one overarching message. At the Fed, we understand the hardship high inflation is causing. We are strongly committed to bringing inflation back down, and we are moving expeditiously to do so. We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses. It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all. I will review the current economic situation before turning to monetary policy. Current Economic Situation and Outlook Inflation remains well above our longer-run goal of 2 percent. Over the 12 months ending in April, total PCE (personal consumption expenditures) prices rose 6.3 per- cent; excluding the volatile food and energy categories, core PCE prices rose 4.9 per- cent. The available data for May suggest the core measure likely held at that pace or eased slightly last month. Aggregate demand is strong, supply constraints have 49 been larger and longer lasting than anticipated, and price pressures have spread to a broad range of goods and services. The surge in prices of crude oil and other com- modities that resulted from Russia’s invasion of Ukraine is boosting prices for gaso- line and fuel and is creating additional upward pressure on inflation. And COVID– 19-related lockdowns in China are likely to exacerbate ongoing supply chain disrup- tions. Over the past year, inflation also increased rapidly in many foreign econo- mies, as discussed in a box in the June Monetary Policy Report. Overall economic activity edged down in the first quarter, as unusually sharp swings in inventories and net exports more than offset continued strong underlying demand. Recent indicators suggest that real gross domestic product growth has picked up this quarter, with consumption spending remaining strong. In contrast, growth in business fixed investment appears to be slowing, and activity in the hous- ing sector looks to be softening, in part reflecting higher mortgage rates. The tight- ening in financial conditions that we have seen in recent months should continue to temper growth and help bring demand into better balance with supply. The labor market has remained extremely tight, with the unemployment rate near a 50-year low, job vacancies at historical highs, and wage growth elevated. Over the past 3 months, employment rose by an average of 408,000 jobs per month, down from the average pace seen earlier in the year but still robust. 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. A box in the June Monetary Policy Report discusses developments in employment and earnings across all major demographic groups. Labor demand is very strong, while labor supply remains subdued, with the labor force participation rate little changed since January. Monetary Policy The Fed’s monetary policy actions are guided by our mandate to promote max- imum employment and stable prices for the American people. My colleagues and I are acutely aware 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 are highly attentive to the risks high inflation poses to both sides of our mandate, and we are strongly committed to returning inflation to our 2 percent objective. Against the backdrop of the rapidly evolving economic environment, our policy has been adapting, and it will continue to do so. With inflation well above our longer- run goal of 2 percent and an extremely tight labor market, we raised the target range for the Federal funds rate at each of our past three meetings, resulting in a 11⁄2percentage point increase in the target range so far this year. The Committee reiterated that it anticipates that ongoing increases in the target range will be ap- propriate. In May, we announced plans for reducing the size of our balance sheet and, shortly thereafter, began the process of significantly reducing our securities holdings. Financial conditions have been tightening since last fall and have now tightened significantly, reflecting both policy actions that we have already taken and anticipated actions. Over coming months, we will be looking for compelling evidence that inflation is moving down, consistent with inflation returning to 2 percent. We anticipate that ongoing rate increases will be appropriate; the pace of those changes will continue to depend on the incoming data and the evolving outlook for the economy. We will make our decisions meeting by meeting, and we will continue to communicate our thinking as clearly as possible. Our overarching focus is using our tools to bring in- flation back down to our 2 percent goal and to keep longer-term inflation expecta- tions well anchored. Making appropriate monetary policy in this uncertain environment requires a rec- ognition that the economy often evolves in unexpected ways. Inflation has obviously surprised to the upside over the past year, and further surprises could be in store. We therefore will need to be nimble in responding to incoming data and the evolving outlook. And we will strive to avoid adding uncertainty in what is already an ex- traordinarily challenging and uncertain time. We are highly attentive to inflation risks and determined to take the measures necessary to restore price stability. The American economy is very strong and well positioned to handle tighter monetary policy. To conclude, 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. I am happy to take your questions. 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 ADDITIONALMATERIALSUPPLIEDFORTHERECORD 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138 139 140 141 142 143 144 145 146

Jerome H. Powell (2022, June 21). Congressional Testimony. Testimony, Federal Reserve. https://whenthefedspeaks.com/doc/testimony_20220622_chair_the_semiannual_monetary_policy_report

@misc{wtfs_testimony_20220622_chair_the_semiannual_monetary_policy_report,
  author = {Jerome H. Powell},
  title = {Congressional Testimony},
  year = {2022},
  month = {Jun},
  howpublished = {Testimony, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/testimony_20220622_chair_the_semiannual_monetary_policy_report},
  note = {Retrieved via When the Fed Speaks corpus}
}