Congressional Testimony

THE FEDERAL RESERVE’S SEMI-ANNUAL MONETARY POLICY REPORT HEARING BEFORETHE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED EIGHTEENTH CONGRESS FIRST SESSION JUNE 21, 2023 Printed for the use of the Committee on Financial Services Serial No. 118–33 ( U.S. GOVERNMENT PUBLISHING OFFICE 53–199 PDF WASHINGTON : 2024 HOUSE COMMITTEE ON FINANCIAL SERVICES PATRICK MCHENRY, North Carolina, Chairman FRANK D. LUCAS, Oklahoma MAXINE WATERS, California, Ranking PETE SESSIONS, Texas Member BILL POSEY, Florida NYDIA M. VELA´ZQUEZ, New York BLAINE LUETKEMEYER, Missouri BRAD SHERMAN, California BILL HUIZENGA, Michigan GREGORY W. MEEKS, New York ANN WAGNER, Missouri DAVID SCOTT, Georgia ANDY BARR, Kentucky STEPHEN F. LYNCH, Massachusetts ROGER WILLIAMS, Texas AL GREEN, Texas FRENCH HILL, Arkansas, Vice Chairman EMANUEL CLEAVER, Missouri TOM EMMER, Minnesota JIM A. HIMES, Connecticut BARRY LOUDERMILK, Georgia BILL FOSTER, Illinois ALEXANDER X. MOONEY, West Virginia JOYCE BEATTY, Ohio WARREN DAVIDSON, Ohio JUAN VARGAS, California JOHN ROSE, Tennessee JOSH GOTTHEIMER, New Jersey BRYAN STEIL, Wisconsin VICENTE GONZALEZ, Texas WILLIAM TIMMONS, South Carolina SEAN CASTEN, Illinois RALPH NORMAN, South Carolina AYANNA PRESSLEY, Massachusetts DAN MEUSER, Pennsylvania STEVEN HORSFORD, Nevada SCOTT FITZGERALD, Wisconsin RASHIDA TLAIB, Michigan ANDREW GARBARINO, New York RITCHIE TORRES, New York YOUNG KIM, California SYLVIA GARCIA, Texas BYRON DONALDS, Florida NIKEMA WILLIAMS, Georgia MIKE FLOOD, Nebraska WILEY NICKEL, North Carolina MIKE LAWLER, New York BRITTANY PETTERSEN, Colorado ZACH NUNN, Iowa MONICA DE LA CRUZ, Texas ERIN HOUCHIN, Indiana ANDY OGLES, Tennessee MATT HOFFMANN, Staff Director (II) C O N T E N T S Page Hearing held on: June 21, 2023 .................................................................................................... 1 Appendix: June 21, 2023 .................................................................................................... 57 WITNESSES WEDNESDAY, JUNE 21, 2023 Powell, Hon. Jerome H., Chairman, Board of Governors of the Federal Re- serve System ......................................................................................................... 5 APPENDIX Prepared statements: Powell, Hon. Jerome H. .................................................................................... 58 ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD Horsford, Hon. Steven: Las Vegas Sun editorial entitled, ‘‘Economy, infrastructure thrive when Dems have the reins,’’ dated June 16, 2023 ............................................... 63 Powell, Hon. Jerome H.: Written responses to questions for the record from Representative Barr ... 66 Written responses to questions for the record from Representative Donalds .......................................................................................................... 84 Written responses to questions for the record from Representative Himes 88 Written responses to questions for the record from Representative Luetkemeyer .................................................................................................. 90 Written responses to questions for the record from Representative Moon- ey .................................................................................................................... 92 Written responses to questions for the record from Representative Sher- man ................................................................................................................ 95 Written responses to questions for the record from Representative Roger Williams ......................................................................................................... 97 (III) THE FEDERAL RESERVE’S SEMI-ANNUAL MONETARY POLICY REPORT Wednesday, June 21, 2023 U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. The committee met, pursuant to notice, at 10:05 a.m., in room 2128, Rayburn House Office Building, Hon. Patrick McHenry [chairman of the committee] presiding. Members present: Representatives McHenry, Lucas, Luetke- meyer, Huizenga, Wagner, Barr, Hill, Emmer, Loudermilk, Moon- ey, Davidson, Rose, Steil, Timmons, Meuser, Fitzgerald, Garbarino, Kim, Donalds, Flood, Lawler, Nunn, De La Cruz, Houchin, Ogles; Waters, Velazquez, Sherman, Lynch, Green, Cleaver, Himes, Fos- ter, Beatty, Vargas, Gottheimer, Gonzalez, Casten, Horsford, Tlaib, Torres, Garcia, Nickel, and Pettersen. Chairman MCHENRY. The Financial Services Committee will come to order. Without objection, the Chair is authorized to declare a recess of the committee at any time. Today’s hearing is entitled, ‘‘The Federal Reserve’s Semi-Annual Monetary Policy Report.’’ Not the most inventive title, but tradi- tional; we call it the Humphrey-Hawkins hearing. I will note at the outset that this hearing has a hard stop at 1:00 p.m., which we will strictly observe. The Chair would further an- nounce to committee members that the Chair’s intention is to, in the second week we return in July, have a markup, and that mark- up will include two important bills: the first is giving digital assets a market structure and Federal regulatory remit; and the second is on a Federal stablecoin regime. It is the intention of the Chair to have that as two pieces of our committee markup in the second week we return in July. I now recognize myself for 4 minutes to give an opening state- ment. Thank you, Chairman Powell, for joining us today. Inflation re- mains broad-based and persistent, two troubling trends the Fed ex- pects will continue. As you said last week, the process of getting inflation back to 2 percent has a long way to go. So even though the Federal Open Market Committee (FOMC) did not recommend a rate increase at last week’s meeting, it is fair to say that the Fed will continue to make additional increases in the months ahead. We would like to hear your thinking on those matters. As the FOMC again pointed out last week, the labor market still appears tight, with Fed policymakers projecting a rise in the unem- (1) 2 ployment rate to a still-low 4.1 percent at the end of the year. De- spite pressure from the left, the Federal Reserve must remain com- mitted to eliminating this stealth tax on American workers and families, and I urge you to continue that resolve. A few weeks ago, Congress took the first step toward getting our fiscal house in order through the Fiscal Responsibility Act. Repub- licans will continue fighting for sensible spending reductions to combat inflation. This stands in stark contrast to the Democrats’ spending spree that poured nearly $2 trillion into a supply-con- strained economy that was already flush with trillions of dollars in savings provided by earlier bipartisan COVID rescue efforts. And after keeping interest rates too low, for too long, the Fed was slow to address the problem. In a stunning about-face, the Fed then raised interest rates by 5 percentage points in a little over a year, the fastest spike in modern history. This approach introduced accelerated interest rate risk for which companies, workers, and families across the country were not prepared. The bank runs we saw earlier this year are an example of the consequences. Now, we are told these runs represent a systemic threat to the stability of our financial system. Add in the commer- cial real estate exposure facing financial institutions, and it be- comes very easy to understand the mounting anxiety consumers and job creators share, and I share their anxiety as well. The rapid rise in interest rates, coupled with knock-on effects of the bank fail- ures, have led to signs of a credit crunch across the economy. This would have a damaging impact on consumers and job creators alike. To top it off, Fed Vice Chair for Supervision, Michael Barr, is un- dergoing a so-called holistic review of capital requirements, and something interesting that he mentioned in the press yesterday is a new approach to stress tests that I can’t quite understand. If re- ports are accurate, he is pursuing a massive increase in capital standards for medium and large institutions. This would limit banks’ ability to lend money, exacerbating the looming credit crunch, and starving families and small businesses of the capital they need. Financial markets will also bear the strain as they will be forced to absorb nearly $1 trillion in new Treasuries. This has led many to believe the Fed may be called on to help, perhaps through its repo or other facilities. Clearly, our economy is in a precarious position, from inflation, to a potential credit crunch, to substantial balance sheet risks for financial institutions. There is a great deal of uncertainty on the horizon. Uncertainty from the Fed’s supervision and regulation is the last thing the well-capitalized banking system needs now. Fol- lowing numerous supervisory failures and a new Vice Chair for Su- pervision in the Federal Reserve injecting politics into policy, it has become clear that Congress may need to again examine separating supervision and regulation out of the Fed and gaining greater over- sight and control by Congress and the elected branches. With that, Chairman Powell, thank you for being here today. The Chair now recognizes the ranking member of the committee, the gentlewoman from California, Ms. Waters, for 4 minutes for an opening statement. 3 Ms. WATERS. Thank you, Chairman McHenry. Chairman Powell, welcome back. First, I would like to start by acknowledging that the Federal Reserve made the right decision to pause interest rate hikes. As you know, since last November, I have cautioned against any approach to monetary policy that ignores the Fed’s maximum employment mandate and results in a recession with millions of people losing their homes and jobs. While we have had strong job growth thus far, experts contend that this trend will not persist with more rate hikes, especially in light of new challenges. For ex- ample, the recent bank failures have resulted in the banking indus- try further restricting credit, making it even more important for the Fed to move with caution. The progress that we have made in reducing inflation is borne out in the latest Consumer Price Index (CPI) data. In fact, it has been 10 months since the passage of the Inflation Reduction Act, and inflation has successfully been cut in half. Every single Repub- lican Member of Congress voted against the bill and chose to cozy up to the wealthy tax cheats instead of working with Democrats to bring down costs for middle-class families. However, the only way we will fully combat inflation is to ad- dress the primary driver of inflation: soaring housing costs. Con- gress must invest more in fair and affordable housing. Under Presi- dent Biden, unemployment is also at a historic low and job growth is on the rise. So far, there has been 29 straight months of strong job growth. In fact, a record 13 million jobs have been created since President Biden took office. Democrats are working to build on this progress and grow the middle class so that everyone can share in this economic growth. Republicans, however, just can’t seem to get their house in order. On the heels of almost blowing up our economy by forcing a na- tional default, they are now picking a fight over a teeny-tiny fee of less than 1 percent of total housing costs, ignoring the costs homebuyers are paying with 7 percent interest rates, appraisal fees, and title insurance. Instead, they are fighting about gas stoves. In fact, just a week ago, Republican disarray got so bad that it halted business on the House Floor for the first time in 20 years. Lastly, as we continue to monitor the banking system following the recent bank failures, the Fed must act to correct the super- visory and regulatory failures identified by our committee’s over- sight. Committee Democrats recently introduced 11 bills, including 3 of my own, to strengthen the safety and soundness of our bank- ing system and hold executives accountable for their misdeeds. The Senate Banking Committee is holding a markup this morning on a bipartisan bill on bank executive accountability. So, I urge Chair- man McHenry to join us in advancing sensible reforms to strength- en our nation’s banking system With that, I yield back. Chairman MCHENRY. The gentlelady yields back. I now recognize the gentleman from Kentucky, Mr. Barr, who is also the Chair of our Subcommittee on Financial Institutions and Monetary Policy, for 1 minute. Mr. BARR. We expect proposals from the Fed’s Vice Chair for Su- pervision that could increase capital for financial institutions as much as 20 percent. Our already well-capitalized banks withstood 4 the COVID shock and severe Fed stress tests as the economy is fac- ing headwinds from the Fed’s own rapid rate hikes. Now is not the time to be engineering massive new regulatory changes or hin- dering regional banks, which have already been under stress. New, onerous, one-size-fits-all regulation by the Fed needs proper vetting and transparency. I would ask you today to commit to providing us with analysis done so far by the Fed on the Vice Chair’s new pro- posals. I also respectfully ask that Chairman Powell revisit Section 1107(a)(1) of the Dodd-Frank Act to observe that the Vice Chair for Supervision is authorized only to develop recommendations for the Board and oversee supervision and regulation. The law does not give the Vice Chair special abilities to unilaterally write his own preferred regulations. It does not say that the Vice Chair should unilaterally write public-facing book reports on bank failures or re- sults of climate scenario experiments. Consensus is—— Chairman MCHENRY. The gentleman’s time has expired. Mr. BARR. I yield back. Chairman MCHENRY. We will now recognize the ranking member of our Financial Institutions and Monetary Policy Subcommittee, Mr. Foster, for 1 minute. Mr. FOSTER. Thank you, Chairman McHenry, and thank you, Mr. Powell, for being here today. In the wake of what seemed to be endless novel problems and disruption, I believe the Fed and Con- gress have done a reasonable job given the cards that we have been dealt. And indeed, it looks like the widely-anticipated recession from the endgame of COVID disruptions, if it occurs at all, will continue to be more of a soft landing than a disaster for our econ- omy. While there is certainly more work to be done, in the immediate term, we can reflect with satisfaction on the historically-low unem- ployment, and 11 straight months of slowing inflation since the passage of the Inflation Reduction Act. However, I recognize that the necessary monetary policies put forth to combat inflation have not been without stress, including on the fraction of our banks that chose to ignore the Fed’s clear forward guidance that interest rate hikes were in the pipeline. We on this committee remain committed to alleviating the finan- cial stress on everyday Americans to pay rent and get food on the table. And I look forward to discussing how recent policies have performed and what else we should do going forward to ensure a strong economic rebound. Thank you, and I yield back. Chairman MCHENRY. Today, we welcome the testimony of the Honorable Jerome H. Powell, Chair of the Board of Governors of the Federal Reserve System. Chair Powell, we thank you for your time and for being here. We will recognize you for 5 minutes to give an oral presentation of your written testimony. And without objection, your written statement will be made a part of the record. Chairman Powell, you are now recognized. 5 STATEMENT OF THE HONORABLE JEROME H. POWELL, CHAIR- MAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Mr. POWELL. Thank you, Chairman McHenry, Ranking Member Waters, and other members of the committee. I appreciate the op- portunity to present the Federal Reserve’s semi-annual Monetary Policy Report. Chairman MCHENRY. Chairman Powell, if you will pull the microphone closer. Mr. POWELL. Thanks. We at the Fed remain squarely focused on our dual mandate to promote maximum employment and stable prices for the American people. My colleagues and I understand the hardship that high inflation is causing, and we remain strongly committed to bringing inflation back down to our 2-percent goal. Price stability is the responsibility of the Federal Reserve, and without it, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all. I will review the current economic situation before turning to monetary policy. The U.S. economy slowed significantly last year, and recent indi- cators suggest that economic activity has continued to expand at a modest pace. Although growth in consumer spending has picked up this year, activity in the housing sector remains weak, largely re- flecting higher mortgage rates. Higher interest rates and slower output growth also appear to be weighing on business fixed invest- ment. The labor market remains very tight. Over the first 5 months of the year, job gains averaged a robust 314,000 jobs per month. The unemployment rate moved up, but remained low in May at 3.7 per- cent. There are some signs that supply and demand in the labor market are coming into better balance. The labor force participa- tion rate has moved up in recent months, particularly for individ- uals aged 25 to 54. Nominal wage growth has shown some signs of easing, and job vacancies have declined so far this year. While the jobs-to-workers gap has narrowed, labor demand still substan- tially exceeds the supply of available workers. Inflation remains well above our longer-run goal of 2 percent. Over the 12 months ending in April, total personal consumption ex- penditures (PCE) prices rose 4.4 percent. Excluding the volatile food and energy categories, core PCE prices rose 4.7 percent. In May, the 12-month change in the CPI came in at 4.0 percent and the change in the core CPI was 5.3 percent. Inflation has moderated somewhat since the middle of last year. Nonetheless, inflation pressures continue to run high, and the proc- ess of getting inflation back down to 2 percent has a long way to go. Despite elevated inflation, longer-term inflation expectations appear to remain well-anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as meas- ures from financial markets. With inflation running well above our longer-run goal of 2 per- cent, and with labor market conditions remaining tight, the FOMC has significantly tightened the stance of monetary policy. We have raised our policy interest rate by 5 percentage points since early 6 last year, and we have continued to reduce our securities holdings at a brisk pace. We have been seeing the effects of our policy tight- ening on demand in the most-interest-rate-sensitive sectors of the economy. It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation. The economy is facing headwinds from tighter credit conditions for households and businesses, which are likely to weigh on eco- nomic activity, hiring, and inflation, and the extent of these effects remains uncertain. In light of how far we have come in tightening policy, the uncertain lags with which monetary policy affects the economy, and potential headwinds from credit tightening, the FOMC decided last week to maintain the target range for the Fed- eral funds rate at 5- to 5.25 percent, and to continue the process of significantly reducing our securities holdings. Nearly all FOMC participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year. But at last week’s meeting, considering how far and how fast we have moved, we judged it prudent to hold the target range steady to allow the Committee to assess additional information and its impli- cations for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 per- cent over time, we will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects eco- nomic activity, and inflation, economic, and financial developments. We will continue to make our decisions meeting by meeting based on the totality of incoming data and their implications for the outlook for economic activity and inflation, as well as the bal- ance of risks. We remain committed to bringing inflation back down to our 2-percent goal and to keeping longer-term inflation ex- pectations well-anchored. Reducing inflation is likely to require a period of below-trend growth and some softening in labor market conditions. Restoring price stability, again, is essential to set the stage for achieving maximum employment and stable prices over the longer run. Before concluding, let me briefly address the condition of the banking sector. The U.S. banking system is sound and resilient, as detailed in the box on financial stability in our Monetary Policy Re- port. The Fed, together with the Treasury and the FDIC, took deci- sive action in March to protect the U.S. economy and to strengthen public confidence in our banking system. The recent bank failures, including that of Silicon Valley Bank, and the resulting bank stress have highlighted the importance of ensuring that we have the ap- propriate rules and supervisory practices for banks of this size. We are committed to addressing these vulnerabilities to make for a stronger and more-resilient banking system. 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. [The prepared statement of Chairman Powell can be found on page 58 of the appendix.] Chairman MCHENRY. Thank you, Chairman Powell. I now recog- nize myself for 5 minutes. 7 Chairman Powell, as I laid out in my opening statement, infla- tion continues to be broad-based and persistent, both of which are concerning. Last week, the Federal Open Market Committee (FOMC) decided to pause rate increases, and at the same time, the Committee alluded that it would raise rates more later in the year. So, how should the FOMC’s posture at the June meeting be inter- preted? Will the Committee continue to raise rates later this year? Mr. POWELL. Thank you, Mr. Chairman. You are right. Of course, we did decide to maintain the Federal funds rate at its cur- rent rate at this meeting. At the same time, participants submitted personal forecasts. Almost all of them thought there will be addi- tional hikes, and I just want to say those two things are entirely consistent, the point being that the level to which we raise rates is actually a separate question from the speed with which we move. Earlier in the process, speed was very important. It is not very im- portant now. The sense of the summary of economic projections and the decision really is just that, given how far we have come, it may make sense to move rates higher, but to do so at a more moderate pace. That is really it. We were at 75 basis points for several meetings, then we were at 50 basis points, then 25 basis points at 3 consecutive meetings, and now we are monitoring that pace as much as you might do if you were to be driving at 75 miles an hour on the highway, then 50 miles an hour on a local highway, and then as you get closer to your destination, as you try to find that destination, you slow down even further. Chairman MCHENRY. Okay. So, more data is necessary for the Fed to make these decisions, and that is one interpretation, but thank you for a broader view there. I also want a broader view on this question. The Vice Chair for Supervision is performing his own personal holistic review of the Fed’s regulatory framework for bank capital and liquidity. In an interview yesterday, he discussed some version of a new type of stress test, even striking complete confusion in his description of it. And at the same time, we have testimony from you, and even from the Vice Chair for Supervision, saying that we have a sound banking system that is well-capitalized. You will sit in judgment of this proposal that the Vice Chair for Supervision will bring to the full Board on this holistic review of capital. There are a lot of dis- cussions about the amounts of capital he is talking about. The con- cern that this is pro-cyclical at a time where our economy with higher rates is you are measuring what is happening in the broad- er economy. And at the same time, we are going to have a major piece of capital required by financial institutions, which will fur- ther restrict lending. So, how can you tell us to think about that, given your seat on the Federal Open Market Committee and your position as a Fed Governor? How would you interpret that? Mr. POWELL. I guess I would say that you are right. There are a significant number of proposals that are kind of in the works. They haven’t been finalized, let alone brought to the Board yet, so I can’t really get into specific details today. Chairman MCHENRY. But we would like your thinking, Chair- man Powell. That is what we would like. 8 Mr. POWELL. What I can share is principles and how I will think about this. Regulatory proposals go to the Board. Every person on the Board—that is six Governors now—has an obligation to evalu- ate and vote on those, and I am one of those people. I also chair the Board. There are a couple of things I would point out. First, I think reg- ulation should be transparent, consistent, and not too volatile, par- ticularly as it relates to capital requirements. I do note the central importance of capital. We want banks to be resilient to shocks. We want them to be able to lend in both good and bad times. We want, in particular, the global systemically important banks (G-SIBs), which are the 8 largest banks, to have very high levels of capital and liquidity. Indeed, we have spent years raising those levels over a long period of time. And I think there is broad agreement, as you point out, that capital is strong, and the question there will be what sorts of increases will be justified? That is what we will be looking at. The other thing to point out is the tradeoff between higher cap- ital—the benefit of it, of course, is to have stronger banks that can lend and maybe survive more kinds of crisis environments, but there are costs as well there. And I think it is going to be, as al- ways, a question of weighing and balancing those costs, and that is what I will be thinking about. The last thing I will say about that is just we benefit from having banks of all different shapes and sizes in our system, and we want to be careful not to regulate the smaller banks to the point where their business models are challenged for all but the largest banks. Chairman MCHENRY. This committee would expect to see a quantitative analysis of whatever the capital charge is going to be. We expect that from the Fed, as we do from other regulators. With that, we will now recognize the ranking member of the committee, Ms. Waters, for 5 minutes. Ms. WATERS. Thank you very much. Chair Powell, at this com- mittee’s last hearing on digital assets, my Republican colleagues proposed a stablecoin bill that would create 58 different licenses, with Federal regulatory approval over only 2 of the licenses. The remaining 56 licenses could be issued by each State, Territory, and Washington, D.C., with little or no Federal oversight, regulation, and enforcement. This proposal takes State preemption to a whole new level. It ef- fectively allows every State to preempt another State. D.C.-based coins, for example, would be sold to individuals nationwide, and New York or North Carolina regulators could do nothing to protect their own residents, while even the Fed would be severely ham- strung in providing any oversight. I have argued that we should allow States to be part of this process, but we must have a strong, enforceable Federal floor with a role for the Federal Reserve to ap- prove and provide oversight of payment stablecoins issued by nonbanks in order to ensure that consumers are protected. Such a framework is similar to our dual banking system, and it would en- sure that nonbanks and banks are treated the same. We should also bear in mind that payment stablecoins are a new form of currency intended to allow individuals to pay for things with them. As such, do you agree that it is important for the Fed, 9 as our central bank, to have a chance to approve or decline any State-licensed non-bank entity before it starts issuing payment stablecoins nationwide? Mr. POWELL. First of all, let me say we appreciate that we have been able to offer our views on these things to your staff and also the Majority staff, and we appreciate the consideration that is given to our views. We do see payment stablecoins as a form of money, and in all advanced economies, the ultimate source of credi- bility in money is the central bank. And we believe that it would be appropriate to have quite a robust Federal role in what happens with stablecoins going forward, and that leaving us with a weak role, and allowing a lot of private money creation at the State level, would be a mistake. But nonetheless, again, I do appreciate that we have been able to be heard and share our views with the com- mittee. Ms. WATERS. Thank you so very much. I am appreciative for that clear answer. The next question I have for you is a bit unusual, but one of the reasons we push diversity is because issues of people of color, et cetera, have not been dealt with. I am going to throw you something that you would not expect. Earlier this week, our nation celebrated Juneteenth, which Con- gress recognized as a national holiday for the first time in 2021. This holiday celebrates the day enslaved African Americans in Texas heard that they were free, 21⁄ 2 years after the Emancipation Proclamation was issued. To this day, Black Americans grapple with enduring racial and economic inequality that has its roots in slavery, as evidenced by the Black-White gap in net worth and homeownership rates. My bill, the Federal Reserve Racial and Eco- nomic Equity Act, would require the Federal Reserve to carry out its duties in a manner that supports the elimination of racial and ethnic disparities in employment, income, wealth, and access to af- fordable credit. Now, the Fed has a number of duties: to pursue maximum em- ployment in monetary policy; to supervise banks for compliance with our fair lending laws; and to ensure that the Community Re- investment Act is administered in a way that puts an end to dis- criminatory redlining practices by banks. Do you agree with me and Atlanta Federal Reserve Bank President, Raphael Bostic, among others, that the Fed has a role to play in addressing racial and economic inequality as it carries out its work until Congress passes this bill? What steps can you take to address racial and eco- nomic inequality? Mr. POWELL. We do consider inequality in the economy as part of our thinking about decisions, and those are certainly highly-val- uable social goals to pursue. I would say our ability to take part in addressing those issues is fairly limited. We have one Federal interest rate that we set. We do try to keep in mind, as you know, not just the aggregate national level of unemployment or employ- ment, but also that for different ethnic groups, so we take that into account. And I think that is just part of making sure that we feel like we have all Americans in the room with us when we are mak- ing decisions on monetary policy. I will say, though, I think other agencies are better suited to address these deep issues. 10 Ms. WATERS. Thank you. We must have this continued discussion on racial equality. I yield back. Chairman MCHENRY. The gentlelady yields back. We will now go to the Vice Chair of the committee, Mr. Hill of Arkansas, for 5 min- utes. Mr. HILL. I thank the chairman of the committee, and, Chairman Powell, it’s great to have you back before the committee. This morning, you have reiterated, and certainly Vice Chair Barr has re- iterated a number of times that the banking industry here in the United States is well-capitalized. And, in fact, capital levels have remained robust despite COVID-19, with a 20-plus percent unem- ployment rate increase, and a 9-percent output gap. They have re- mained stable through government shutdowns. They have re- mained stable through severe stress testing. And maybe more im- portantly, just in the last few months, since the first week of March, you have seen strong capital come into play as we have grappled with the reality of a 40-year increase in short-term inter- est rates and that impact on banks. But as Chairman McHenry said, Vice Chair Michael Barr con- tinues to say he wants to increase capital requirements on certain financial institutions. And in March, you testified that, ‘‘I will do everything I can possibly do to bring people together—meaning on the Board of Governors—in consensus, and have a capital frame- work that could be broadly supported.’’ To what extent have you and the other Governors been involved in this so-called holistic re- view by Vice Chair Barr? Has he briefed the other members of the Board of Governors thus far? Mr. POWELL. Yes, and we have all been briefed by staff on the proposals, but as I mentioned, they are still somewhat in motion, but, yes, we have been briefed. Mr. HILL. So, you would say those proposals are still under con- sideration and that there is no final decision that has been made by the Board? Mr. POWELL. Well, no. Once the proposals really do settle down and are written up, they will come to the Board for a full discus- sion and a vote. Mr. HILL. Has the Fed Board reconstituted the Committee on Su- pervision and Regulation, the membership of it? Mr. POWELL. Yes. Oh, absolutely. Mr. HILL. And who is on that Committee now? Mr. POWELL. That Committee is chaired by Vice Chair Barr, and it also includes Governor Jefferson, and it includes Governor Bow- man. Mr. HILL. When you look at capital in the U.S. and look at the global systemically important banks (G-SIBs) here versus other places in the world, would you say that the U.S. banks, the U.S. G-SIBs are better capitalized than their global peers in Europe or in Asia? Mr. POWELL. We are certainly at or near the top-of-the-league table. I think there are a couple of other jurisdictions that also have broadly similar levels of capital strength, but, yes, we are at the top-of-the-league table. Mr. HILL. I looked at it this morning, and the U.S. G-SIBs have 11.3 percent capital without any kind of modification compared to 11 their European competitors at only 9.9 percent. Would you say that we are better capitalized than the European banks, the European G-SIBs? Mr. POWELL. I hate to call out the other jurisdictions, but I would say our banks are very strongly capitalized and also com- peting quite successfully globally outside the United States. Mr. HILL. Yes, I agree. And I think we have strengthened capital and we have strengthened our supervision, notwithstanding the problems that we saw this spring, which we have talked about ad nauseam here, but I think that capital standard does make Amer- ican banks stand out. And as for the so-called Basel III holistic re- forms, wouldn’t it be better if the European banks did a holistic re- view and actually got their capital up to American standards? Mr. POWELL. I think they are bound by the same—nobody is bound by these, but they have agreed to follow the same standards, and I think they are going through the same process we are going through. Mr. HILL. Same topic. The FDIC supervisory process and the OCC supervisors, are they involved and engaged with Vice Chair Barr in looking at this, ‘‘holistic,’’ review of capital adequacy? In other words, are they providing their input to the Vice Chair for Supervision and their own views on this topic? Mr. POWELL. On the regulatory proposals that are relevant to them, yes. I think on the capital proposals, yes, I believe so. Mr. HILL. And you made a comment a minute ago, I think to Chairman McHenry’s question, that you would like to see rules and supervisory rules consistent over time, and I think that is frus- trating. Here, we see change in Administrations. Sometimes, we see change in rules, which is, I think, frustrating to the private sec- tor and to market participants. I note that the Biden Administra- tion says that the Financial Stability Oversight Council (FSOC) should now base their decisions on size as opposed to activities, and for several years now, we have had an activities designation and a cost-benefit analysis. Do you think the activities designation gives supervisors more discretion at FSOC to select who should be deemed under their supervision? Mr. POWELL. I actually think that one—— Mr. HILL. In other words, should we be looking only at size, or should we look at cost-benefit analysis and activities? My time has expired, so if you would answer that in writing, I would appreciate it. I think this is an important issue. Mr. POWELL. Okay. Mr. HILL. I yield back, Mr. Chairman. Chairman MCHENRY. We will now go to Ms. Velazquez of New York for 5 minutes. Ms. VELAZQUEZ. Thank you, Mr. Chairman. Chair Powell, at your press conference last week, you stated, ‘‘The Committee is completely unified in the need to get inflation down to 2 percent, and we will do whatever it takes to get it down to 2 percent over time.’’ Some analysts have interpreted this statement as the FOMC’s willingness to trigger a recession in order to get inflation to 2 percent. How would you respond? Is this is a fair and accurate interpretation? 12 Mr. POWELL. Our statutory goals are price stability and max- imum employment, and we are dedicated to using our tools to achieve those goals. In the case of employment, we still have his- torically-low unemployment rates and high employment rates now, a high participation, and a very strong labor market. We are very far from our inflation target of 2 percent, and we are very focused on getting back to 2 percent. Ms. VELAZQUEZ. And how does the FOMC take into consideration the impact of rising interest rates on low- and moderate-income (LMI) communities and small businesses when determining mone- tary policies? Mr. POWELL. We only have one main interest rate to raise or lower, and it applies to everyone. But I would say that inflation hits LMI communities and people generally at the lower end of the income spectrum much harder than people in the middle or at the high end because high inflation can get you into trouble right away if you are living on a fixed income, just to cover the basic neces- sities. So, it is for the benefit of those people that we must get in- flation under control. It is for the benefit of all Americans, but par- ticularly for those people, and we keep that in mind as we are strongly committed to getting inflation back down to 2 percent over time. Ms. VELAZQUEZ. And they are the same people who are having a hard time accessing loans, and it’s the same with small busi- nesses. Chair Powell, Vice Chair Barr’s report on the Fed’s review of Silicon Valley Bank states that while there was regulatory tai- loring conducted in response to S. 2155, there was also—and this is the part that really concerns me—a cultural shift at the Fed under the direction of the previous Vice Chair for Supervision, Randy Quarles. According to the report, this shift included pres- sure to reduce burdens on firms, meet a higher burden of proof for a supervisory conclusion, and a need to accumulate more evidence than in the past. As Chair during that period, were you aware of this cultural shift and the impact it was creating? Mr. POWELL. I think we learned from the Silicon Valley failure and the others that there is going to be a need for stronger super- vision and also regulation for banks of that size, and I am com- mitted to learning the right lessons from this exercise and to forth- rightly implementing changes. Ms. VELAZQUEZ. But were you aware of the cultural shift? Mr. POWELL. I can’t really characterize it that way. Certainly, I was aware that we were trying to avoid excessive regulatory bur- den. That is always inappropriate—— Ms. VELAZQUEZ. Do you disagree with Vice Chair Barr’s report in that respect? Mr. POWELL. I am sure that the people who wrote the report were accurately reporting what they heard from back in the—— Ms. VELAZQUEZ. How often were you meeting with Vice Chair Quarles? Mr. POWELL. Reasonably frequently. We sat quite near each other. Ms. VELAZQUEZ. And never discussed a cultural shift? Mr. POWELL. I didn’t say that. The way you are describing it is not what I recall. I recall Vice Chair Quarles talking about things 13 like focusing on the really important issues and not getting di- verted into other—— Ms. VELAZQUEZ. So, the way it was described by Vice Chair Barr is not what you recall? Mr. POWELL. I had no part in—— Ms. VELAZQUEZ. What steps—— Mr. POWELL. I said I had no part in preparing the report. I am confident that the staff who worked on the report reported accu- rately what they heard. I am sure that is right. Ms. VELAZQUEZ. What steps did you take proactively to meet with regulatory and supervisory staff? Mr. POWELL. I think we are taking significant steps now. As you know, under Vice Chair Barr’s leadership, we are looking carefully at these events and asking ourselves what we need to do with su- pervision. I think there is a point to be made that there are situa- tions in which we need to be more forceful and more proactive, not in all situations, but in some. In regulation, I think we are learning that we need to update our thinking around liquidity regulation, which was based on a certain speed of bank runs, which now looks to be outdated. Ms. VELAZQUEZ. My time has expired. Chairman MCHENRY. The gentlelady’s time has expired. We will now recognize the gentleman from New York, Mr. Garbarino, for 5 minutes. Mr. GARBARINO. Thank you, Mr. Chairman. Chairman Powell, thank you for being here. I just want to start off by asking a few yes-or-no questions. Was the Silicon Valley Bank failure a result of a liquidity issue? Mr. POWELL. I’m sorry? Mr. GARBARINO. Was the Silicon Valley Bank failure the result of a liquidity issue? Mr. POWELL. Among other things, yes. Mr. GARBARINO. Was the Signature Bank failure the result of a liquidity issue? Mr. POWELL. Yes. There were also a lot of very bad management decisions being made there. Mr. GARBARINO. Was the First Republic Bank failure the result of a liquidity issue also? Mr. POWELL. Among other things, yes. I wouldn’t say just liquid- ity. Mr. GARBARINO. Okay. Were any of them a failure of having too- low capital levels? Mr. POWELL. Let’s go to Silicon Valley Bank. The issue that trig- gered the run initially was the presence of significant losses in their securities portfolio. Mr. GARBARINO. Yes. Mr. POWELL. And that is a capital issue. Mr. GARBARINO. So, they had too-low capital. Mr. POWELL. As you know, they weren’t required to take that into account in their capital. If you remember, what people were focusing on was these portfolio losses, and then what people weren’t focusing on was the fact that they had in excess of 90-per- cent uninsured deposits, and that is what caused the run. 14 Mr. GARBARINO. Would increasing capital requirements for Sil- icon Valley Bank or any of these other banks have stopped these banks from failing? Mr. POWELL. That is a hypothetical, unknowable question. I think it might have helped, but—— Mr. GARBARINO. Increasing it by how much would have helped? Mr. POWELL. It is very hard to say. Clearly, the main issue there was a failure of management to follow up, a failure of supervision to require them to follow up, and really, the liquidity regulation was not appropriate. We needed to have stronger regulation around liquidity and uninsured deposits. Mr. GARBARINO. Last year, you said the banking system is very strong, well-capitalized, and highly liquid, and it does a much bet- ter job of understanding the risks that it runs and managing them, and just today, you said the banking sector seems to be strong. Do you still stand by those things? I mean, you just said it today. Mr. POWELL. Yes. Mr. GARBARINO. Yes. And last month, Vice Chair Barr appeared before this committee, and he agreed with you and said, overall, banks have strong capital and liquidity. Treasury Secretary Yellen has said similar things. Even though you have all said that banks need to have strong capital, you seem to leave us today by saying the bank is considering what increase would be appropriate of cap- ital requirement. Has the Board already decided that an increase will happen, and they are just deciding what the size is of the in- crease for capital requirements? Mr. POWELL. No. What I thought I said was that any increase above these levels would need to be shown to be justified. Mr. GARBARINO. Do you personally think that an increase is nec- essary at this time? Mr. POWELL. Do I think—— Mr. GARBARINO. That an increase in capital requirements is nec- essary at this time. Mr. POWELL. Look, I am going to react to whatever the proposal turns out to be in the end and give it my best assessment. That is what I will say. Mr. GARBARINO. Okay. You just also say that credit is tightening. Won’t increasing capital requirements further tighten credit? Mr. POWELL. The thing about capital requirements is if we put a proposal out this summer, let’s say, it will be quite a while before that proposal is agreed to among the agencies and voted on, and then it will take some years to come into full effect. Whereas inter- est rates, for example, have immediate effects on financial condi- tions and reasonably quick effects on economic activity, capital re- quirements are a much more sort of medium-term, longer-term thing. Mr. GARBARINO. I would like to move on to what impacts raising capital requirements would have. According to academic literature by the Basel Committee on Banking Supervision, a 1-percent-point increase in capital requirements could potentially reduce annual GDP by up to 16 basis points, showing that higher capital require- ments come at a cost and could have a significant impact on the U.S. economy. I discussed this with Vice Chair Barr last month 15 and expressed my concerns about the impact of increased capital on the real economy, but he didn’t answer the question directly. We are hearing from all sorts of industries that these increased capital requirements at any level would have a further tightening on lending, and I am hearing that from everybody. If that happens, it is going to be a real disaster. So, I think for anything that the committee proposes, if you could come back and brief us on before it is finalized, we would appreciate that very much, sir. Chairman MCHENRY. The gentleman’s time has expired. The gentleman from Missouri, Mr. Cleaver, is now recognized. Mr. CLEAVER. Thank you, Mr. Chairman. And welcome, Chair- man Powell. Thank you very much. This is probably Economics 101, but a lot of people in my district are misunderstanding Eco- nomics 101, along with me. In May of this year, unemployment remained at 4 percent for the 16th consecutive month, and at 3.7 percent. This means that unem- ployment remained at or below 4 percent for the longest stretch in 50 years. In the U.S., the job openings rate has fallen by more than 1.5 percentage points from its peak while the unemployment rate has crept slightly lower. In other words, job openings declined but so did joblessness, and I am wondering if there was any expecta- tion that this would occur? Mr. POWELL. The ratio of job openings to unemployed people has been in historic territory, all-time highs for a while now in the last year or so, and there is an expectation that it will come down. A while ago, there were two jobs for every unemployed person. Now, we are down to 1.7, I believe, or 1.6, and that still speaks to a his- torically-tight labor market where the demand for labor still very substantially exceeds the supply of available workers. And by the way, that is a way that the labor market can become less tight without having unemployment go up. Mr. CLEAVER. I am sure you are hearing this all over, as I am. I have a good friend who has a number of barbecue restaurants in Kansas City, and he is constantly telling me how difficult it is to find workers, to the point where he did something that he would never do: He put a sign out in front of his restaurants of job open- ings. Are there particular industries or sectors of the economy where we would expect this sentiment to be particularly true? Mr. POWELL. No, and that is right. There is still a significant labor shortage. The surveys at the aggregate level show that it is not as bad as it was 2 years ago. And gradually, businesses are re- porting that they are better able to find workers. And workers are reporting that they are not quitting their jobs as much as they were. A really good sign of how tight a labor market is, is how much people feel free to quit their jobs voluntarily. So, those things are all suggesting a gradual cooling and gradually getting supply and demand back into alignment, but we are not there yet. We still have a significant excess of demand over supply. Mr. CLEAVER. Are we also finding that—I know in Missouri, in spite of the fact that there is some jelly-like movement with the economy, people are still willing to go out and buy homes. We are not having difficulty in terms of people going out and getting loans, even with the interest rates rising. If the consumers are constantly 16 paying whatever the interest rates might be, are we going to get stuck just continually going up? Mr. POWELL. No, I don’t think so. The housing sector nationally has flattened out and maybe ticked up a little bit, but at a much lower level from where it was with rates as high as they are. Sup- ply and demand are getting back into alignment. And I do think that housing inflation is set to come down as we move forward. There is a particular way that the inflation is calculated there so that you are waiting for leases to come due and roll over at much lower levels of increase. So, we think housing inflation will be com- ing down significantly over the course of the rest of this year and next year. Mr. CLEAVER. Thank you, Mr. Chairman. Chairman MCHENRY. The gentleman’s time has expired. The gentlewoman from California, Mrs. Kim, is recognized. Mrs. KIM. Thank you for recognizing me, Mr. Chairman, and Chairman Powell, thank you for joining us. I appreciate your com- ment to price stability and commend your efforts to reduce inflation and make life more affordable for all Americans. Thank you for that. The 10,000 Small Businesses survey of 2,000 small businesses found that 77 percent were concerned about their ability to access capital. With that in mind, do you think it is appropriate for the Federal Reserve to increase capital requirements at this time? And I know this was discussed earlier, but what specific analysis has the Fed conducted so we can determine the impact of this warrantless regulatory action on small businesses and other mar- ginal borrowers? Mr. POWELL. With capital standards, it is always a tradeoff. More capital means a more stable, more sound, and more resilient banking system, but it also, at the margin, can mean a little bit less credit availability, and also, the price of credit can be affected, and there is no perfect way to assess that balance. Obviously, the answer is not zero capital and it is not 100 percent capital, so it is somewhere in the middle. Mrs. KIM. Yes. Thank you. There are estimates that about $1.5 trillion of commercial real estate loans that are maturing in the next 3 years, and a decline in demand in the prevalence of work- from-home policies are putting a strain on the commercial real es- tate market. The bulk of commercial real estate loans are held by smaller and regional banks. Is the Fed thinking about policies that could provide time for commercial real estate loans to be refi- nanced, and could an increase in capital requirements reduce li- quidity in the commercial real estate loan market? Mr. POWELL. We are very focused on the commercial real estate situation. You are right, of course, that a good portion of the com- mercial real estate loans are held in smaller banks. And super- visors are very much engaged with those banks, and it is particu- larly banks that have a high concentration. That is what we look for among the smaller banks, and there are some of those. But there is a playbook for working your way out of these loans, and it is particularly in the office sector where working from home is still a pretty material factor in some areas, as you know. 17 Mrs. KIM. Thank you. The next question has to do with the Board’s processes and procedures. What are those procedures that govern consideration and potential adoption of matters like the pro- posals that Vice Chair Barr is about to present to the Board? Mr. POWELL. On regulation as opposed to supervision, on regula- tion, the Board of Governors votes on regulatory proposals, and it is a majority vote. We now have six voters. So, when there is a pro- posal, it will be briefed carefully, then we will have a meeting, or it can actually be done virtually, and it probably will be done that way, as most of our meetings are, and then we have a vote. On su- pervision, it is different. Most supervisory matters are really under the authority of the Vice Chair for Supervision under the law, so most of them don’t have to go to the Board for a vote. Mrs. KIM. What percentage of the Governors must vote in favor? Mr. POWELL. A majority. Mrs. KIM. The majority of them? Mr. POWELL. Yes. Mrs. KIM. Okay. The California Governor, prior to the depositor bailout for Silicon Valley Bank (SVB), reportedly identified that he had been in touch with the highest levels of leadership at the White House and the Treasury. The Governor also, on Sunday, March 12th, when the bailout was announced, issued his own statement praising that action. There have also been reports that the Governor and his wife, with respect to their business and per- haps other interests, may have had depositor interest in SVB. So when the Federal Reserve Board, the FDIC Board, and Secretary Yellen, in consultation with the President, recommended invoking the systemic risk exception for SVB, and then decided to provide blanket insurance even on uninsured balances, did the Fed or any others, to your knowledge, perform any conflict-of-interest due dili- gence? Mr. POWELL. No. We were in an emergency situation. On Mon- day morning, there was going to be and there was a run on banks that had high uninsured depositors. Mrs. KIM. Looking back, do you think there was any—— Mr. POWELL. We carried out our duties. Mrs. KIM. Yes. Mr. POWELL. I am pretty sure we did the right thing. Mrs. KIM. And you don’t think there was any conflict of interest, even looking back on that? Mr. POWELL. I have nothing. I have absolutely no knowledge on that. Mrs. KIM. Okay. Thank you. Thanks for being here. I yield back the balance of my time. Chairman MCHENRY. The gentlelady yields back. The gentleman from Texas, Mr. Gonzalez, is recognized. Mr. GONZALEZ. Thank you, Mr. Chairman, and Ranking Member Waters. And thank you, Chairman Powell, for being here with us this morning. The June Federal Open Market Committee report indicates infla- tion in the U.S. and abroad continues to ease but remains elevated. In response to the proposed interest rate increases up until June 14th, the recommendation is to pause interest rate hikes for the first time this year. Research has shown that the effects of mone- 18 tary policy decisions like raising interest rates can take, on aver- age, 42 months to be realized fully in the United States, meaning we may not fully understand the effects of this first increase in rates of March 2022 until next fall. With that in mind, how have our recently-tightened monetary policies impacted the strength of the U.S. dollar and how it is valued globally? Mr. POWELL. Let me say that there is a lot of uncertainty around how long it takes monetary policy to affect real activity. There is no agreement on 42 months or any particular time, and I think most people would say shorter than that. Are you asking how it would affect the dollar? Mr. GONZALEZ. Yes. Mr. POWELL. First of all, the Treasury Department has responsi- bility for the level of the dollar and the stewardship of the dollar as a currency. We don’t actually comment on that. We don’t look at any particular level. To us, it is a financial condition. A stronger dollar means certain things and a weaker dollar means certain other things. Mr. GONZALEZ. It continues to be a concern here in this com- mittee. Also, Chairman Powell, as you are aware, the Federal Re- serve’s core mission is to keep employment up and inflation down. Although I understand the calls for climate-related financial risk management from my colleagues, we should be focusing on the eco- nomic state of our country. The credit of the U.S. dollar is at jeop- ardy. And as you know, we have had global pressure recently, and we need to be sending a clear message that the world can rely on the full faith and credit of the United States dollar. We should be focusing on mitigating the calls to reduce dependency of the U.S. dollar. Monetary policy changes implemented in the U.S. are likely to cause a ripple effect throughout the global economy. With that said, would you agree that monetary policies to di- rectly address climate change should be made by Congress and not the Federal Reserve, and implementing monetary policies and su- pervisory tools to exclude energy leaders from capital and financial institutions would have a grave impact on local, State, Federal, and even global economies? Mr. POWELL. I strongly agree that we have quite a narrow role in climate change, and really, the important decisions about cli- mate change need to be made by elected people, not by the Fed. Mr. GONZALEZ. Thank you, and I yield back. Chairman MCHENRY. The gentleman yields back. The gentleman from Florida, Mr. Donalds, is recognized. Mr. DONALDS. Thank you, Mr. Chairman. Chairman Powell, thank you for being here. I really appreciate you being here. I have to say, first of all, it was good to hear from the other side of the aisle that the Federal Reserve should not even be engaging and using its tools with respect to climate change, or climate miti- gation, or whatever the case might be. You have a big enough job as it is, so adding anything like that to your job, I think, would be wholly detrimental to the American economy, so I, for one, am glad to hear that coming from the other side of the aisle. You have had a couple of questions already on capital, bank cap- ital, et cetera. Look, some of the current views are that continuous raises of bank capital will increase costs to our economy anywhere 19 from $50- to $200 billion. What is your view of the current desire or mode of Vice Chair Barr to fully implement the Basel III capital standards? Mr. POWELL. I think that is the next thing. Vice Chair Quarles was working on that. It didn’t get completed for various reasons. I think that is an international capital standard that we should go ahead and complete. As to the right level of capital, that is a dis- cussion we are about to have. Mr. DONALDS. At the Fed, are you kind of concerned about the fact that it now seems like the European regulators are starting to pull back from that, that they are starting to think about capital standards being too much for European banks and that they are starting to recede from what was, I assume, kind of a handshake agreement in years gone by? Mr. POWELL. I am not hearing that exactly. We will be watching that carefully, though. Mr. DONALDS. We have, in my view, aggressively gone through this process of increasing capital standards and capital require- ments on Tier 1 capital for banks. In retrospect, do you think that has been a net positive to the overall banking environment, or do you believe it has been a negative to the overall banking environ- ment? Mr. POWELL. I think it has been a net positive. And as I pointed out earlier, U.S. banks have competed very, very successfully through this period, despite what were pretty significant capital in- creases that we put in a few years back. So, it really has led to a very strong and also made it well through the pandemic period, I thought, and I think that was a pretty good test. So, even though the government did do a lot to support the economy, I still think that those capital hikes we made in the last cycle come through looking pretty good. Mr. DONALDS. Do you guys at the Fed—I say, ‘‘you guys,’’ be- cause I know you are the Chairman, but there are other members as well—have a view of the concern about community banking in the United States or lack thereof of community banking? It has been shrinking quite significantly over the past 10 or 12 years. Mr. POWELL. Very much so. It is a focus for us. We understand the importance of community banks, that they provide a different service and a really important service to smaller businesses and communities. And community banks have been consolidating for 30 years now, so it is really a secular trend as people have moved to bigger cities and things like that, but we don’t want to do anything to move that along. We think that the world is not a better place with fewer community banks, and we try to keep that in mind in all of the regulatory and supervisory things that we do. Mr. DONALDS. Do you think that Federal regulatory policy, apart from Congress, has led to a supercharging effect of diminished com- munity banking in the United States? Mr. POWELL. It has probably been a factor, but I do think there have been important demographic factors as well, and also having interstate banking. Interstate banking only became legal quite re- cently, and that also has led to consolidation. You can look back, again, look back 30-plus years, and you will see a very steady de- cline, so I think there are demographic and other factors driving 20 it. But regulation can fall as a fixed cost, which means that institu- tions need to be bigger, and I think that is probably part of the story. Mr. DONALDS. I don’t disagree with your conclusion. I am just concerned about the trajectory. I think just having larger financial institutions, larger banks, overall, with a diminishing smaller com- munity bank infrastructure is detrimental to lending to small busi- nesses, mom-and-pop businesses. It also could be parochial. I start- ed my career in community banking, so I saw heartfelt situations. Last question, since I’m running out of time, the SEC has pro- posed a rule that would, among other things, require banks to seg- regate client cash held in custody, pending, custody bank balance sheets, and by extension to the bank custody model. Are you guys at the Fed concerned about this proposed rule from the SEC? Mr. BARR. [presiding]. The gentleman’s time has expired. Chair- man Powell can respond in writing. Mr. POWELL. I will respond in writing. Mr. DONALDS. Okay. Fair enough. Thank you, Mr. Chairman. Mr. BARR. The gentleman from New York, Mr. Torres, is now recognized. Mr. TORRES. Thank you, Mr. Chairman, and thank you, Chair- man Powell. As you know, the U.S. has foreign adversaries, par- ticularly the Chinese Communist Party (CCP) that seem intent on de-dollarization. How seriously should the threat of de-dollarization be taken, in your view? Mr. POWELL. The status of the dollar as the world’s reserve cur- rency is a very important thing to us. I think the reason we have that status is largely due to our great democratic institutions, the rule of law, and the fact that we have, generally speaking, had strong levels of price stability. And I think that the dollar will re- main the reserve currency as long as those things are in place. Mr. TORRES. I want to explore that answer, because commenters often speak of the dollar as the world’s reserve currency as the cause of America’s economic dominance. Do you think of it as the cause of America’s economic dominance or as a consequence of it? Mr. POWELL. To me, it is more of a consequence. And also, there tends to be an equilibrium where one currency becomes the accept- ed global standard, and that has been the dollar for some time, and I expect that it will continue to be for some time. Mr. TORRES. It is often said that the Fed has a dual mandate of maximum employment and price stability. Do you view these man- dates as equally binding upon the Fed or does one supersede the other? Mr. POWELL. They are perfectly equal under the law. Mr. TORRES. And I am curious to know what it means in practice to have a 2-percent inflation target. The latest pause notwith- standing, does it mean the Federal Reserve will continue raising interest rates until the 2-percent target is reached, even if doing so comes at the expense of maximum employment as well as finan- cial stability? Mr. POWELL. No, it doesn’t mean that. It does not. The way we think about it is, most of the time, the two goals are aligned in the sense that if you are achieving one, you are achieving the other, 21 and if you are a little bit off, the other one, they move in the same direction. Today’s situation is unusual in that we are overachieving in effect the maximum employment goal, but we are far from achieving the inflation goal. In our system, we have a constitutional document, and what it says is that when that is the case, you look at how far you are from the goal, and you look at the speed with which you would move back to the goal. And that would tell you today that we should focus heavily on inflation. But as it becomes closer, as the two things become more aligned, then then they go back into perfect equality under the law. Mr. TORRES. So, the Fed engages in a delicate balancing act be- tween employment and inflation? Mr. POWELL. Yes. Mr. TORRES. To what extent do you factor in financial stability, safety, and soundness when raising interest rates? Mr. POWELL. You are right. We do have a financial stability man- date, but we try to—— Mr. TORRES. You have a financial stability mandate with respect to your role as a bank regulator when it comes to—— Mr. POWELL. Also, just generally, we are the lender of last resort. Central banks were originally created to support the financial sys- tem in times of stress and to make sure that you don’t get into times of stress. Sorry. What was your question before that? Mr. TORRES. To what extent do you factor in safety and sound- ness when setting interest rates? Mr. POWELL. Sorry. We really try hard to use our financial sta- bility tools for financial stability purposes and our monetary policy tools for monetary purposes. The reality on the ground is much messier than that. They are very much entangled and one affects the other. So, the separation is not at all perfect, but we do think of these as separate things with separate tools. Mr. TORRES. Do you think that the Silicon Valley Bank failure revealed a deeper tension between the safety and soundness man- date of the Fed as a bank regulator and the mandate of the Fed as an administrator of monetary policy? Mr. POWELL. I would say no, and I will tell you why. Interest rate risk is one of the most basic banking risks, and we supervise for it. Overwhelmingly, U.S. banks did manage their interest rate risk. Silicon Valley Bank didn’t, and even though the supervisors were pointing that out to them, the bank didn’t take action quickly enough. I would have thought that you can say that it was interest rate hikes that caused portfolio losses, but it was management that failed to hedge against those losses and failed to hold appropriate liquidity. Mr. TORRES. In the pre-COVID world, we had the best of both worlds: low unemployment and low inflation for decades. Do you believe that we could return to that best of both worlds, or are high interest rates the new normal in the American economy? Mr. POWELL. We will return to 2-percent inflation and maximum employment. What will be the level of interest rates there? That is a really good question. Mr. TORRES. Do you suspect it is going to settle at a higher level than we have known historically? 22 Mr. POWELL. I think it is really hard to know. It is a great ques- tion. We talk about this a lot. The people who argue that rates will move back down just point to the fact that it was really global fac- tors that drove rates down in the first place. Maybe the truth is somewhere in the middle. It is hard to know. Mr. BARR. The gentleman’s time has expired. The gentleman from Nebraska, Mr. Flood, is recognized. Mr. FLOOD. Thank you, Mr. Chairman. Chairman Powell, I would like to discuss the continued efforts to unwind years and years of quantitative easing and what it has done to our Federal Reserve balance sheet. If you take a look at the size of the Federal Reserve’s balance sheet since the 2008 financial crisis, we have seen an alarming increase from around $800 million to today’s $8.3 trillion in assets. Back in 2018, you did start the work of winding down the bal- ance sheet. You managed to offload roughly $700 billion of assets between the beginning of your time as Federal Reserve Chair and August 2019. The problem was, shortly after your efforts began, we had another major economic shock, the COVID-19 pandemic, that caused the Fed to once again return to quantitative easing as a form of economic relief. Pretty soon, the Federal Reserve’s balance sheet had increased another $4 trillion in size. That is how we made it to the balance sheet level that we are at today. I understand you have started working to shed some of the Fed- eral Reserve’s balance sheet, and I appreciate that work. That being said, the scale involved here, to me, is startling. My concern, Chairman Powell, is that efforts to shed assets from the Fed’s bal- ance sheet have never been anywhere as quick as efforts to build it back up. Our economic cycle does go through recessions from time to time. It is not always boom, but some bust, too. If we con- tinue a pattern of rapidly building up the Federal Reserve’s bal- ance sheet in bad times and slowly shedding assets in good times, we are going to see the balance sheet grow significantly over time. Chairman Powell, is this a concern of yours? And to pair with that question, long term, how can we avoid an environment where any effort to unwind the Federal Reserve’s balance sheet is undone anytime there is an economic shock? Mr. POWELL. It is a concern. This time, the balance sheet roll- off is much, much faster than it was back in the first episode. We also know more. We hadn’t grown our balance sheet like that, and we hadn’t shrunk it before. Now, we have experience with that, so we are moving back down to a level that will be appropriate for our new framework. By the way, we won’t go back to a framework where we were dealing with scarce reserves. We like the adminis- trative rate framework that we are in now, but it is important that the balance sheet not just grow with every cycle, and I think I am very conscious of that. Mr. FLOOD. Chairman Powell, do you have an optimal Fed target for the size of what the balance sheet should look like, a number? Mr. POWELL. I will give you the idea, and that is, you find the number, but the idea is that it is smaller than now. It is a place where reserves are abundant and also have a little bit of a buffer on top of that so that we don’t accidentally run into reserve scar- city. Demand for reserves can be volatile, and you don’t want to 23 find yourself, as we did a few years back, suddenly finding that re- serves were scarce, and we didn’t see it coming. And we then had to put more reserves into the system at a time when we didn’t want to be doing that. I think you want to have a level where we have ample reserves plus a buffer, and that will be a percent of GDP that we get down to, and we are moving in that direction pretty, pretty smartly. Mr. FLOOD. Chairman Powell, realistically, how quickly can the Federal Reserve unwind its balance sheet? What is the threshold beyond which an asset sell-off by the Federal Reserve would dis- rupt our markets? Mr. POWELL. We don’t sell assets. What we do is we allow them to mature and passively roll off, and that is what we are doing to the tune of about a trillion dollars a year, and we are in the middle of that process. Now, as it is an empirical question, you are going to find a level that is still ample plus a bit of a buffer, and that is how we are thinking about it. Mr. FLOOD. Thank you, Mr. Chairman. I would just reiterate my concern on this issue. I fear that having the Federal Reserve back- stop so much of our economy through the holding of Treasuries and mortgage-backed securities is not sustainable long term. Thank you, Mr. Chairman. I yield back. Mr. BARR. The gentleman yields back. The gentleman from Ne- vada, Mr. Horsford, is recognized. Mr. HORSFORD. I thank the chairman and the ranking member for holding this important hearing, and thank you, Chair Powell, for appearing before the committee today. Before I begin, I would like to ask permission to enter into the record an editorial by the Las Vegas Sun, entitled, ‘‘Economy, in- frastructure thrive when Dems have the reins,’’ dated June 16, 2023. Mr. BARR. Without objection, it is so ordered. Mr. HORSFORD. During this time of increased economic uncer- tainty, it is more important than ever that the Federal Reserve ful- fills its dual mission of maximizing employment and supporting price stability. There is no doubt that it is difficult, and the needle that has to be threaded is very specific. However, the human cost is simply too great for us to get this wrong. Sometimes, we need to be reminded that there are real people behind the economic data, and that the actions taken by both Congress and the Fed have real consequences for everyday Americans, everyday Ameri- cans who want to know that myself and my colleagues are dedi- cated to creating an economy that actually works for them, which is why I was pleased that last week the Federal Reserve decided to pause your interest rate hikes and take stock of the overall eco- nomic picture. Now, don’t get me wrong, there is certainly more work ahead of us, but with 13 million jobs added since President Biden took office, we should be rooting for America to succeed and not to fail. The strength of the labor market continues despite the multiple concur- rent shocks that continue to reverberate throughout the global economy. And I believe our economy remains resilient, thanks to the historic investments that were included in the legislation passed last Congress and signed into law by President Biden. The 24 beneficiaries of these investments were the people, the middle class, not special interest. The Bipartisan Infrastructure Law is creating construction jobs and projects that will help ease supply chain challenges and ensure safer transportation for everyone. President Biden and congres- sional Democrats are investing in technology that will define the 21st Century, components to generate solar and wind energy, semi- conductors, and electric vehicles that will all be made here in America. Just last week, Treasury Secretary Yellen was before this com- mittee and described how the transformational investments from the Inflation Reduction Act are ushering in a renaissance of domes- tic manufacturing. These are good-paying jobs, union jobs that are expanding our production capacity here at home, while reducing our reliance on goods imported from abroad. As I indicated, the edi- torial by my hometown newspaper, the Las Vegas Sun, remarks that annual investments in manufacturing construction has more than doubled its pre-pandemic levels. Furthermore, when we narrow the focus to the region including Nevada, the U.S. Census Bureau estimates that in just 2 years, private manufacturing construction increased almost tenfold. So, if we want to rebuild the American middle class, we must do so from the middle out, by investing in modern infrastructure and modern manufacturing facilities. But this does not mean that everything is improving equally. I have heard time and again from my constitu- ents about the cost of housing being one of their biggest pain points. Our Monetary Policy Report points out that housing serv- ices prices have risen a shocking 8.5 percent over the 12-month pe- riod ending in April, and in my district, it is even worse. So, Chair Powell, at a time where it has become increasingly dif- ficult for working Nevadans to purchase a home, I worry that ris- ing mortgage rates will put working families even further behind on accessing the wealth and equity that a house provides. While higher rates have cooled some housing markets across the country, what do you see as the biggest remaining upward pressure on housing services, and what can we do in Congress to incentivize new home starts to hopefully moderate the imbalance between sup- ply and demand in the housing market? Mr. POWELL. I think you are talking about largely longer-run fac- tors here, and I think there has been for some time a shortage of housing. It is harder to get lots, it is harder to get workers, and in the pandemic, it had been harder to get materials and things like that, so there is certainly a need for more housing. I think dur- ing the pandemic, you had people wanting to live in houses rather than downtown in apartments because of COVID. You had low rates, and so you had 2 or 3 years of very, very high price increases for housing, and now that has flattened out a lot as we have raised rates and—— Mr. BARR. The gentleman’s time has expired. The gentleman from New York, Mr. Lawler, is recognized. Mr. LAWLER. Thank you, Mr. Chairman. Chairman Powell, you, the Fed’s Vice Chair for Supervision, and many others have indi- cated that the banking system is well-capitalized. Bank capitaliza- 25 tion remained robust during the COVID shock and related shut- downs of economic activity, and in severe Fed stress testing. Nonetheless, the Vice Chair for Supervision wants to increase capital and other requirements on financial institutions. This will have substantial economic effects that will begin immediately, while you are still focusing on bringing inflation back to the Fed’s 2-percent target. Excessively-high capital requirements will con- strain credit provision to the economy, costing jobs, incomes, oppor- tunities, and living standards. As my colleague, Mr. Garbarino, pointed out, a 1-percent increase in capital requirements could po- tentially reduce GDP by up to 16 basis points, based on the Basel Committee literature. On January 21, 2021, a 30-year fixed-rate mortgage had an in- terest rate of 2.77 percent. Now, for the same loan, individuals are looking at a 6.69 percent interest rate for a 30-year fixed-rate mort- gage. For the median home valued at $436,800, the difference from less than 21⁄ 2 years ago to now equates to over $300,000 more over the course of the loan. For the median household making around $71,000 a year, that extra $10,000 a year out-of-pocket in mortgage costs is crushing. Some areas, like my district, are even harder hit due to the high cost of living and the lack of housing. Combine that with inflation at or above 4 percent, and these factors are taking a real toll on the average American family, including in the Hud- son Valley. Further decreasing the availability of credit to house- holds and businesses across the country would likely only worsen this crisis. So, Chairman Powell, do you agree that excessively-high capital levels constrain banks’ lending capacity, with spillover effects on jobs and living standards for Americans, and that effects would begin immediately independent of any proposed phase and timing? Mr. POWELL. I do think that, as I mentioned earlier, there is a tradeoff between safety and soundness and availability of capital, and you want to get that balance right. Mr. LAWLER. But respectfully, you have testified that there was more than enough capital in these banks. Where are we unsafe and unsound, that we would require more capital requirements? Mr. POWELL. As I mentioned, that is the question we are going to be asking, as we review the proposals when they do come for- ward. We don’t have a proposal in front of us at this point. And I think, as I mentioned, any increase in the capital for the large banks will need to be justified. I don’t know that there will be much in the way of capital increases proposed for banks, other than the very large banks, but we will have to see. Mr. LAWLER. So, you don’t believe regional and community banks will face the same requirements? Mr. POWELL. Very different requirements, I would think, as they do now. Mr. LAWLER. But you are not looking to increase the require- ments on them? Mr. POWELL. We will have to see what the proposals turn out to be, honestly. They are still, to some extent, in motion, and once they are out, we can have lots of conversations about the specifics. But until they are, it is tough to do that. 26 Mr. LAWLER. And you will commit to providing this committee with all such analysis before any proposals come out? Mr. POWELL. I think there will be a proposal that comes to the Board sometime this summer, and the Board will vote on that, and we will obviously share whatever analysis we have. Mr. LAWLER. Are you concerned that any significant increase in capital could significantly jeopardize the Fed’s efforts to rein in in- flation? Mr. POWELL. The thing about capital requirements is there would be a 90-day comment period, roughly. Something like that could be in that range, and then there would be a long period of considering the comments that are made, and then there would be movement toward coming to an agreement about what to finalize, so that would take many months. And then, you would be into a situation where there would be long phase ins, so I don’t really think capital requirements play into the near-term economic situa- tion the way interest rate hikes do. Mr. LAWLER. According to the Bureau of Labor Statistic’s CPI In- flation Calculator, it takes $1.16 today to buy the same consumer goods and services as $1 purchased when President Biden took of- fice in January of 2021. Do you agree that the outsized inflation we have seen since early 2021 has caused and continues to harm workers, retirees, and families trying to make ends meet and pay their bills? Mr. POWELL. I strongly agree with that, and that is why we are taking the measures we are taking. Mr. LAWLER. Thank you. Mr. BARR. The gentleman’s time has expired. The gentleman from North Carolina, Mr. Nickel, is recognized. Mr. NICKEL. Thanks, Chair Powell, for being here with us today. Back in 1995, I worked here in Congress as an intern for Dick Gephardt. I was in his press office, and we had newspapers, and my job was to clip out the articles and paste them on a sheet. But when I was here in 1995, the Grateful Dead were playing. It was one of Jerry Garcia’s last concerts, and I was just so disappointed that I missed that concert, but was excited to see from public re- porting that you were at the most recent Dead & Company show. I have been to this version with John Mayer and enjoyed it, but we weren’t there. How was the show? Did you like it? Mr. POWELL. Oh, it was terrific. What can I say? It was great. I have been a Grateful Dead fan for 50 years. Mr. NICKEL. I have found one universal truth, which is that I like people who like the Grateful Dead. Having said that, I have limited time, but do you want any time to go back to some of the questions that you had? Do you want to elaborate on anything that you have said here so far today? Mr. POWELL. You are very kind to offer, but I am fine with the answers I have given so far, I believe. Mr. NICKEL. Well, back to that show, a lot of people there in Vir- ginia, like my constituents, are very concerned about this economy. They are worried about the cost of groceries, rising inflation, and interest rates going up, and when we do these hearings, it is al- ways big news. Things you say move markets and are very impor- tant, but Fed-speak is just so hard for my constituents and the 27 American people to understand. What can you tell the American people who are concerned about the economy in a way that they can really understand about where this economy really is heading? Mr. POWELL. I guess I would say this economy is very strong, and what is driving it now is just a very strong labor market. There is still significant demand for workers, there are more job openings than there are unemployed people, wages are moving up, and that is really what is driving the economy forward. People’s disposable incomes are coming up. Inflation is moving down gradu- ally. The thing that troubles people, and I think the thing that ac- counts for the surveys you see, where, despite a historically-strong labor market, people are still concerned about the economy, it is really inflation. It is our job to bring inflation down. The way we do it, is by rais- ing interest rates. And while that can be painful, what it does is it gradually slows down demand so that supply and demand can get back into alignment and so that we can have inflation running at 2 percent, and people can get on with their lives and basically not have to think about inflation. That is the definition of, ‘‘price stability,’’ from one standpoint is just that people can live their daily lives without thinking about inflation all the time. We want to get back to that place, and we are on a journey to get there. We have quite a ways to go, but we are making progress. Mr. NICKEL. I have always wondered this, and I think there is a pretty simple answer, but if Congress was in charge of setting interest rates and it became a political thing, do you think that is something that we could handle as a legislative body? Mr. POWELL. I wouldn’t want to comment on that. Mr. NICKEL. That is a safe answer. And I do want to just join in the chorus with a lot of my colleagues on both sides of the aisle here about capital requirements for banks. I brought this issue up with Vice Chair Barr, with Fed Governor Bowman, and in your written questions from the last time you were here. I didn’t get a chance to ask questions because of my seniority here on the com- mittee, but you answered in writing, and you said we have to be mindful of the tradeoffs associated with adjusting capital levels as it could, ‘‘cause banks to reduce the availability of credit or to pass higher costs of credit on to consumers.’’ And you also said, ‘‘Capital and liquidity levels at our largest, most systemically important banks are at multi-decade highs.’’ My constituents sent me here to lower costs for working families, so increasing borrowing costs really hits them hard. As the Fed considers new capital requirements, how do you intend to strike that balance between the tradeoff that you talked about in your written response? Mr. POWELL. That is the balance. You said it very well. Stronger capital requirements mean we have a stronger banking system, and means it is more resilient to downturns and crises and things like that, so banks can continue to lend during even stressful times. That is very important, and we put a high value on that. And yet, of course, we know that at the margin, the cost of capital goes up for banks, and the cost of credit will go up. So, it is a bal- ancing thing, and there isn’t any one simple model or answer. You 28 just have to make a judgment call based on that, and that is what we will be doing as these proposals are made and then assessed. Mr. NICKEL. Thank you. I yield back. Mr. NUNN. [presiding]. The gentleman’s time has expired. Thank you, Mr. Nickel. I look forward to joining you at the next concert with Chairman Powell. We will see how that works out. Chairman Powell, thank you very much for taking the time to be with us here today. I recognize, first of all, that you get feedback from every sector on how you are doing your job. You are charged with two mandates: price stability; and combating unemployment. As my colleagues have discussed today, the labor market is clearly very tight, and you should be credited with succeeding in maximum employment and being a partner in this. Unfortunately, as we have also heard and as the country is experiencing, we haven’t collec- tively been as lucky in terms of price stability. Core CPI is still over 4 percent, and services and housing costs remain very sticky. Given the economic uncertainty on how the Fed will bring infla- tion to its 2-percent mandate, can you quickly touch on how the bank capital requirements Vice Chair Barr is proposing—and I will be specific here. My Main Street businesses, especially farmers, family farms, and Iowans back in my district, really provide a backbone on this, and they depend heavily on this area. Do you think that they will be facing a more difficult and expensive credit environment as a result of this? Mr. POWELL. I don’t think so, particularly in the near term. First of all, many of those people will be dealing with regional and com- munity banks rather than with the G-SIBs. But even with the G- SIBs, as I mentioned, the phase in for higher capital, the process of publishing and then getting comments and evaluating those comments, and then coming to a broad agreement and consensus on what to implement and over what time period, that takes time, and so it will not be important. During this period of the next year or two when we are getting inflation back down to target and the economy is kind of normalizing, I don’t think the capital changes will have much of an effect in the near term. Mr. NUNN. Mr. Chairman, let me be sure that I am hearing you correctly. Vice Chair Barr is engaging with small businesses throughout the Midwest right now on potential knock-on effects from this holistic review. Some economic studies have found these knock-on effects will increase borrowing between $50 billion and $200 billion. As we look to cut this in half, is that the right thing to be doing? Mr. POWELL. Sorry, cut in half? Mr. NUNN. The inflation rate. Mr. POWELL. Honestly, I don’t think the two are really in con- flict. We have an obligation to bring inflation back down to 2 per- cent over time, and we will do that, and we will use our tools to do that, but I think the question of bank capital is real. I don’t see it as a key factor in how we think about inflation because, again, it will take quite a while to decide what to do and then to imple- ment. Some of the changes we are talking about will have multiple- year phase-in periods, for example. Mr. NUNN. Mr. Chairman, let me ask you on that implementa- tion timeline, particularly for new capital standards, you said it 29 would be some years before it would go into effect. According to a report published last year by the Federal Reserve Bank of Cleve- land, in the case of the implementation of Basel III, banks began to increase their capital ratios, ‘‘prior to the publication of specific language applicable to U.S. banks, and the bank responses we esti- mate to take place well before Basel III rules started to come into force after 2014.’’ Do you agree with the Cleveland Fed, and do you believe that our banks will begin to adjust as soon as the proposal is released? Mr. POWELL. Yes, I do, and it is not an absolute thing where they will wait until the effective date. They will certainly, and they may even be starting, but I would think the earlier you start, the more gradual the path will be. Mr. NUNN. Very quickly, I want to turn to a different subject which has been brought up by a number of my banks back home relating to a central bank digital currency (CBDC) or any Federal- issued coin. We have seen how this Administration in the last Con- gress wanted to require anyone who made more than $600 on a third-party settlement organization like an eBay purchase has to report that to the IRS. The existing threshold before the law was modified was $20,000. That is how far this Administration wants to peek behind the curtain of what my constituents are spending their money on. And $600 in Iowa doesn’t go a long way. It is the equivalent of a PlayStation or paying for your kid’s dance classes. I am a dad of six. I digress on this, but I do want to know, specifically for my constituents back home, your thoughts on creating a central bank digital currency that tracks individuals, and if the Fed were to offer a direct individual account to citizens, wouldn’t that be a di- rect threat to the financial privacy of many Americans? Mr. POWELL. Potentially, and that is why it is not something we support. We would not support accounts at the Federal Reserve by individuals. If we were to—and we are a long way from this—sup- port that at some point in the future, a CBDC would be one that was intermediated through the banking system and not directly at the Fed for exactly the reason you point out. Mr. NUNN. I am very happy to hear that. I think that is a good partnership with the individuals there and a respect for Americans across-the-board. With that, I yield back. I now recognize the gentlewoman from Colorado, Ms. Pettersen, for 5 minutes. Ms. PETTERSEN. Thank you, Mr. Chairman, and thank you, Chair Powell, for being with us again today. I come from Colorado. I was in the legislature for 10 years, and when the pandemic happened, I was one of the people who were unfortunately elected during that difficult time. When I think about what our country was going through a few years ago, where our economy was almost in free fall, completely shut down, our local governments were slashing their budgets, they were laying people off, and what that moment meant that we had to do in step- ping up at the national level to infuse dollars to save our country’s economy. My frustration here is that we continue to talk about in- flation as if it was spending just to spend money, instead of ac- knowledging the urgent crisis that this country and this world was 30 in, and what we needed to do in the moment to make sure that we were able to recover, keep our small businesses afloat, our local governments, and ultimately recover much more quickly than oth- ers. Since we talk about this often. I would like to know, if you look to other countries around the world who didn’t infuse dollars like we did, are there countries that we can look at to compare what the outcomes would be and what their recovery is like now? Mr. POWELL. Our recovery is by far the strongest of any country, and I would say the inflation that we have—actually, everybody has very high inflation, the United Kingdom, and many countries within Europe as well. Ms. PETTERSEN. Thank you. That was my next question, how we compare to other highly-developed economies on our recovery. It sounds like in the emergency that we were in, the hopefully once- in-a-century global pandemic, that the United States ultimately met the moment, and that when the American people look at what has been done, we should feel really good about where we are, but we know we have a long way to go. I also want to acknowledge something that comes up often, that rising debt leads to higher rates of inflation. Doesn’t that also in- clude tax cuts, trillions of dollars of tax cuts that we couldn’t af- ford, that went on our rising debt? Mr. POWELL. In terms of today’s inflation? To your point, I think if you look around the world, there is a common factor that has driven inflation very high in lots of advanced economies, and it is the pandemic and it is everything about the pandemic: the closing of the economy; the reopening of the economy; the fiscal support; the monetary support; all of the things that happened went into high inflation. And inflation is coming down. We will look back on this, and we will be able to look back at a period of very high infla- tion, but I think it is not just monetary and fiscal policy. It is also just things to do with the pandemic, various shocks. Ms. PETTERSEN. Absolutely. It is hard to believe where we were a few years ago and where we are now, although we do have chal- lenges ahead. Another frustration that I have here is our failed policies around immigration reform and providing legal pathways for workers here in this country. When I talk to business leaders across the country, they say that the number-one thing that we could do to address inflation is to address legal pathways for people who want to work here. You say your job is to address inflation. You are still limited only within the tools that you have. My ques- tion to you is, would an increased labor supply help supply chain issues and inflation in this country? Mr. POWELL. We are seeing that now very much. A little bit to our surprise, we have seen a bounce-back in labor force participa- tion and also a significant return to the prior trend in immigration. And that, we believe, and most analysts would say, is part of why employers are finding the labor market to be a little bit less tight now. It is still extremely tight, but more labor supply is helping the labor market get back into balance, including through immigration. Ms. PETTERSEN. Great. Thank you. Another concern that I have is our inability to address legal pathways toward the United States and the consequences of not doing that to our economy, I really 31 worry about, in the long term, if we don’t address our labor short- age. I would like to know, if we are unable to provide these path- ways, looking at the needs of this country, do you see this contrib- uting to the rising costs and inflation here in the United States in the long term? Mr. POWELL. I am not sure about the long term, but I would say that, right now still, employers are reporting a very significant ex- cess of demand for workers over the supply of workers, and so there is a lot of demand out there for people to work. Mr. NUNN. Thank you, Mr. Chairman. The gentlelady’s time has expired. I now recognize the gentlelady from Texas, Ms. De La Cruz, for 5 minutes. Ms. DE LA CRUZ. I thank the chairman for holding this impor- tant hearing today. It is critical that this committee continue to ex- plore how the Biden Administration’s ill-conceived policy and regu- latory approaches are harming our nation’s economy. And thank you, Chair Powell, for appearing before us today. I would like to lead off with a question that I posed to Vice Chair Barr when he recently appeared before this committee. As the Rep- resentative for a largely-rural district where my constituents, of which 86 percent are Hispanic, heavily rely on smaller institutions or community banking institutions for their financial needs, I am concerned about Mr. Barr’s focus on factors that aren’t necessarily material to the recent bank failures. His report on Silicon Valley Bank seemed to go out of its way to advocate for higher capital lev- els as a cure for the recent bank failures instead of the failures of regulators and bank mismanagement. In fact, one of your other Federal Reserve colleagues, Governor Bowman, echoed these concerns in recent remarks when she said, ‘‘The unique nature and business models of the banks that recently failed, in my view, do not justify imposing new, overly complex reg- ulatory and supervisory expectations on a broad range of banks. If we allow this to occur, we will end up with a system of significantly fewer banks serving significantly fewer customers. Those who will likely bear the burden of this new banking system are those at the lower end of the economic spectrum, both individuals and busi- nesses.’’ Just a couple of moments ago, Representative Donalds asked you a couple of questions, and your response was that you mentioned how important community banks are and that you are keeping them in mind with all that you do. As I speak with my local com- munity and regional banks, they say that the increase in regula- tions and in capital requirements will really hurt them. With that being said, what I find being an outsider in politics, new to the po- litical arena, is I find that people here in Washington, people who hold leadership positions, are often out of touch. So I want to ask you, Chair Powell, do you personally bank with a community bank? Mr. POWELL. I have, over time. Not currently, but yes, the last mortgage that my family and I had was—you would like the story; I can tell you someday—but we had a very large bank which sort of failed at the last minute to come through with our mortgage, and we went to the local community bank. And they knew my fam- ily and they knew the house, and they were able to give us a mort- 32 gage without any difficulty within a few days. So, I have had a very positive experience with community banks. Ms. DE LA CRUZ. With your relationship with community banks in the past, how do you feel that increasing regulatory burdens would have consequences to these community banks? Mr. POWELL. I really think that the things we are looking at are not about community banks. They are about the very largest banks, and, to some extent, banks in the Silicon Valley Bank range, sort of $100 billion to $250 billion. I would consider a com- munity bank to be under $50 billion and probably under $10 billion in assets. Those are not the focus of the regulatory reforms, I be- lieve, that are going to be proposed to the Board for consideration this summer. Ms. DE LA CRUZ. And I will also hope that to be true because, as I said, in my district, we have a lot of community and regional banks that would suffer with increased regulation and capital re- quirements. I have very little time left, so I will yield back to the Chair. Thank you. Mr. NUNN. The gentlelady yields back. I now recognize the gen- tleman from California, Mr. Sherman, for 5 minutes. Mr. SHERMAN. I want to comment on one success story. Several years ago, there were $16 trillion of London Inter-Bank Offered Rate (LIBOR) instruments where the amount the debtor was sup- posed to pay the creditor was to be determined by the London Interbank Rate, and as of June of this year, that rate will no longer be published. Something unusual happened here in Washington. A year-and-a-half before the LIBOR hit the fan, Congress acted. You published your regulations in February, and the problem is solved. I want to pick up on the ranking member’s comment that it is critical that we deal with housing. There is a lot we can do in Washington, but we also need to get cities to allow the construction of apartment buildings and condos. Someone here has talked about the de-dollarization. We need to compete against the euro and against the yuan, but one place where Congress can act is with re- gard to crypto. The crypto billionaires have told us they want to displace the dollar. They are working for de-dollarization, and when billionaires tell you they are trying to hurt your country, you should believe them. There has been a discussion here as to whether it is the pan- demic or Washington, D.C., policy that has caused the inflation. We have a perfect test case. Our annual inflation rate is now at 4 per- cent. The European Union—where Mr. Biden is not President and Mr. Powell is not head of their Federal Reserve—in May had 7.1 percent inflation. The unemployment rate in the United States is 3.7 percent. The European Union is at 6 percent. And since the pandemic began, GDP has grown in the United States 5.3 percent, and in the European Union, only 3.1 percent. I think it is pretty apparent that our policy has turned out to be actually better than Europe’s policy. Banks and bank regulators have said, oh, how could we possibly have anticipated the inflation and interest rates of 2023. Today, we have 4-percent inflation. That is almost exactly the average infla- tion rate over the last 50 years, much lower than it was in the Reagan Administration when we had 13.5-percent inflation, and 33 16-percent interest rates. And that is why I blame the management and also the regulators at Silicon Valley Bank for telling us that, oh, this was an unanticipated circumstance. It is certainly one of the things they could have anticipated. I will point out that the Congressional Budget Office and the University of Pennsylvania Wharton School of Business’ models both show that the estimated effect of the Inflation Reduction Act on inflation will be statistically indistinguishable from zero. So, we will accomplish a lot for the environment and not increase infla- tion. Of course, the recent action by Republicans to take away IRS enforcement will lead to higher deficits and higher inflation. The chairman of the committee tells us we don’t need regulation of our well-capitalized banks. Why are they well-capitalized? Because of our regulation, and I do want to focus on whether our banks really are well-capitalized. Mr. Powell, are our banks well-capitalized if you value their as- sets at today’s fair market value, where we have experienced high- er interest rates and the value of the debt declines? And are they well-capitalized even if you assume that depositors are not just going to leave their money lying in the banks, but that the obliga- tion the bank has to its depositors is valued at full face value, but the marketable securities and loan portfolio is priced at today’s in- terest rates? Under those circumstances, do we have a well-capital- ized banking system? Mr. POWELL. I think you have to take the capital requirements as they are for purposes of this question. Mr. SHERMAN. That is the problem. Our capital requirements hide the facts that are unpleasant. Mr. POWELL. Right. Mr. SHERMAN. If you don’t hide the facts, are we well-capitalized? Mr. POWELL. Traditionally, as you know, a rising rate environ- ment has increased the value of the deposit franchise, which more than, or at least, offsets any portfolio losses. Mr. SHERMAN. So, we are well-capitalized if depositors continue to be lazy and stupid? Mr. NUNN. The gentleman’s time has expired. Chairman Powell can submit any additional responses for the record. We now recognize the gentleman from Tennessee, Mr. Ogles. Mr. OGLES. Thank you, Mr. Chairman. Mr. Powell, as you know, when the COVID-19 pandemic started, the Federal Reserve began a round of quantitative easing referred to as QE4. Like many COVID policies, this program dragged on, not ending until March of 2022. To conduct this program, the Federal Reserve expanded its balance sheet with short-term, interest-bearing liabilities on one side, and long-term, interest-bearing assets on the other, and this was at a time of historically-low interest rates. When, predictably, expansionary fiscal monetary policy sent inflation to the highest level in 40 years, the Fed was forced to raise interest rates rapidly. Now, going back to one of my colleague’s questions about the bank losses and the result of that being poor management and fail- ing to hedge against the interest rate environment, is it a fair sum- mation that management and failure to hedge is what caused some of the bank losses? 34 Mr. POWELL. Certainly, many banks managed the interest rate risk that came along through that technique. Mr. OGLES. But some did not. Is that correct? Mr. POWELL. Some did not. Mr. OGLES. In October, the Fed suspended its remittances to the Treasury due to losses. The Mercatus Center estimates that the lost revenue for the Treasury will result in $760 billion over the next 10 years. So, it does concern me that Treasury is blaming banks for mismanagement when you, yourself, had to stop remit- tances and will suffer losses. When the Fed prepared its Semi-Annual Monetary Policy Re- ports through the time of QE4, none of those reports mentioned that interest rate risk would impact the government’s finances. Should that have been disclosed, or did the Fed not understand its own risk and the correlation to the interest rate environment? Mr. POWELL. What we do is, we remit all of our profits, and in the era of QE, those profits were enormous. We remitted something like $1.2 trillion in profits to the Treasury Department because we are funding purchases of long-term assets with issuance, as you pointed out, of overnight, lower-rate instruments. In a way, that is what was happening during the QE era. As we now enter an era of raising rates, that will turn around a little bit, but ultimately, we don’t manage at all for fiscal reasons. What we are managing to is maximum employment and price stability, and we are using our tools to achieve that. So, we don’t think of our- selves as trying to attain some kind of fiscal goal one way or the other. Mr. OGLES. I guess I will ask this question: When you look at the roughly $700 billion and below to the Treasury, how is that going to impact the President’s and Congress’ economic plans and policies going forward? Is it going to impact them negatively? Mr. POWELL. It doesn’t affect spending. Congress appropriates money, and the Executive Branch spends it. So, it will mean that more borrowing has to take place, and that could raise rates very marginally at the margin. That is how it would affect the budget, but it wouldn’t have a major effect on the budget. Mr. OGLES. I didn’t ask about the budget more over than our overall economic goals. And what I think a lot of us are getting at is when you look at Main Street America, and when you look at mortgage rates and how they are impacting a family’s ability to get a mortgage, you will see that someone who was eligible for $300,000 to buy a home now is no longer eligible for that home. You have people who are now upside down due to this expan- sionary interest rate environment. And I have concerns about fu- ture raises and the impact that is going to have on small busi- nesses, the availability of credit, and, again, your average home- owner. The people who pay that or bear the burden of that are your lower-income and your middle-class families. Now, when you look at Silicon Valley Bank, which is supervised by the Fed, again, I get back to when you look at the interest rate increases, why there was not more warning or hedging from you as to the impact it may have on the fiscal system, the financial sys- tem and the banking system, because, as we well acknowledged on both sides of the aisle, there was some poor management, but the 35 regulators and the communication from the government was lack- ing. Mr. Chairman, I am out of time. Mr. Powell, thank you for being here, and I will yield back. Mr. NUNN. Thank you, Mr. Ogles. With that, the Chair recog- nizes the gentleman from Massachusetts, Mr. Lynch. Mr. LYNCH. Thank you, Mr. Chairman, and I thank the ranking member. Welcome, Chairman Powell. It’s good to see you again. Chairman Powell, I heard some of your comments over the last couple of days about the Fed seeking a softening in the labor mar- ket. And as a former union president for the iron workers, I always took a dim view of softening of the labor market because it reduced targeting power and that sort of thing. But I do admit that right now, unemployment rates are historically low all across the coun- try. I think in Massachusetts, the Fed number is at 2.8 percent un- employment, Arkansas even less, and Alabama even less, so I un- derstand the need for your position. But when you look at the Black and Latino unemployment rates in some of these major cit- ies, they are double that. And I can’t help but see this as an oppor- tunity to perhaps redouble our efforts to pull workers who don’t traditionally have strong connections to the job market and make things happen. At the Federal level, we fund about 25,000 job training programs, and according to the Government Accountability Office (GAO), we don’t do a very good job. I think the average program produces about three workers per year, but I am aware of the work that the Boston Fed is doing with the Gateway Cities Program. Susan Col- lins is running that in the Boston area. And the Fed actually helps us with data and coordination in cities like Brockton, Massachu- setts, in my district, but also Fitchburg and other more rural areas. The Fed comes in and actually provides a great amount of exper- tise and has done wonderful, wonderful work. I am just wondering, are there other tools in our toolbox that the Fed could use to help? You could soften the labor market by adding workers as well, and I would rather see that on the supply side than simply restrict credit and squeeze companies into a position where they have to lay people off. And I am just wondering if there are other tools that you think might be available to us to accom- plish that? Mr. POWELL. I will say two things. First, the softening that we have seen so far in the labor market has been around job openings declining. It has not been around unemployment increasing. We have seen some wages moderating back toward more sustainable levels. You will remember well the labor market before the pan- demic where we had 2-percent inflation and a really, really tight labor market with no inflation, and a lot of the gains were going to people at the lower end. That is where we all want to get back to because what we have now is a very tight labor market, but in- flation is so high that it is eating up the wage gains that these peo- ple make, so we need to get away from that. In terms of other tools, I visited East Hartford, which was an- other one of those cities. And I agree with you, we are not spending taxpayer money on this. We don’t have the authority to do it. We 36 convene people who have private-sector funds and we focus on a city, and I was really impressed. I don’t know if you have—it sounded like you have visited one or more of these cities. It is amazing what you can do, but as a convener really, rather than as an agency that has the authority to spend money on people. We do think about these things. We think that the most important thing we need to do for working people is to get inflation back under con- trol because it is the people at the lower end of the income spec- trum who suffer the most from high inflation. Mr. LYNCH. Yes. I just think there are deeper structural prob- lems in the limitations within our workforce. I met yesterday with the International Brotherhood of Electrical Workers (IBEW) Local 103 in Boston, and I talked to new electrician apprentices, mostly women of color, who are working days and their husbands are working nights, and it reflects in that very, very low unemploy- ment number. You are getting around 2 percent. It is really people who are in between jobs, so there is no real reservoir of unem- ployed workers there that you can rely on. And I do appreciate the way the Fed came in and the Boston Fed came in and big-footed the situation in Fitchburg, where they brought a bunch of people together, and they accomplished a lot without spending Federal taxpayer money. And I am going to con- tinue to try to find ways that we could use the resources that you have available. Mr. Chairman, I yield back. Mr. NUNN. Thank you, Mr. Lynch. The Chair recognizes the gen- tleman from Georgia, Mr. Loudermilk. Mr. LOUDERMILK. Thank you, Mr. Chairman. Mr. Powell, it’s good to see you again. Thank you for being here. I want to continue a dialogue that you and I had about FedNow, and I also want to continue voicing my concern that this product is a solution to a problem that the private sector is already ad- dressing. The Real-Time Payments (RTP) network is already capa- ble of instant settlement with a much greater degree of connectivity than FedNow will have at launch next month or in years to come. And my concern is also that the Fed has an undeni- able advantage over the private sector in the payment space as it can clear transactions through Fed master accounts. Furthermore, the Fed already has options to improve transaction speeds through existing services. For example, the Fed has discussed extending the operation hours for the National Settlement Service since 2015. My first question is, why not respond to industry demand by im- proving existing services instead of launching a new one that can compete with private industry? Mr. POWELL. As you may remember, we surveyed all of the banks, not just the large banks, who set up RTP, which was a very positive development that we supported, and, overwhelmingly, the smaller banks wanted us to set up FedNow. This was a very over- whelming few among smaller banks. They wanted a Fed alter- native to RTP, so we set it up. And I would agree with you that that is not a reason not to work on the efficiency of our other pay- ment services, and I hope we are doing that—I know we are doing that. 37 Mr. LOUDERMILK. We had also discussed in the past about set- ting up some guardrails to protect customers from accidental or fraudulent transactions, and we know that is a big issue across the entire financial services sector. And in response to that, you know that the banks already have procedures for customers to report un- intentional transactions, and FedNow will come up with a suite of features as well to help institutions investigate and remedy any unintentional or fraudulent transactions. However, with real-time settlements, this becomes a whole lot more difficult than just deb- iting the account that receives funds by mistake. Can you elaborate on how you are going to handle this protection? Mr. POWELL. Yes, and of course, RTP faces the exact same issues. It is a problem with real-time payments. You just have to have very high, extra high levels of security around the payments, whom the payee is, and that sort of thing. And we do think we can master that and build that in, again, as any faster payment. Mr. LOUDERMILK. Do you have any ideas of the direction that you are looking to go? How are you going to be able to resolve it, or is this just something you are beginning to look into? Mr. POWELL. No, I think we have built in very strong safeguards. I can’t give you the technology answer, but we will be happy to supply that. Mr. LOUDERMILK. Yes, if you could supply that, I would appre- ciate it. I just have a couple of other questions. Will the Federal Reserve itself use FedNow for real-time payments between banks in the System? Mr. POWELL. I’m sorry, will it—— Mr. LOUDERMILK. Are you going to use FedNow for real-time payments between banks within the System? Mr. POWELL. Yes, that is what it is for, it is an interbank pay- ment system that allows banks to offer real-time payments to their customers. Mr. LOUDERMILK. Okay. With that, I am going to diverge just a little bit. I have dealt, in the past at the State level, with govern- ment competing with private industry. We run into this problem where the government has an undeniable advantage. In this case, it had to do with internet services, where city governments had gotten involved in internet servicing and started competing against private providers. And the issue came that the city governments were undercutting the private providers because of the poll access fee. So, we passed legislation in the State of Georgia which re- quired that any municipal government that provides a service that competes with private industry has to assess themselves the same fees. With that in mind, will transactions between Federal Reserve Banks be subject to the same rules and fees as other banks? Are you going to charge yourself the same fees as private industry and abide by the same rules as private industry? Mr. POWELL. I don’t know the answer to that. In the payment space, there are many, many instances of a government-operated payment system operating side by side with a private-sector one. It is not something I would advocate broadly for in the economy. Think about the Automated Clearing House (ACH). Think about 38 Fedwire. There are private-sector and public-sector payment utili- ties operating next to each other in the United States and around the world. Mr. LOUDERMILK. Okay. Thank you. My time has expired, so I yield back. Mrs. WAGNER. [presiding]. The gentleman yields back. The gen- tleman from California, Mr. Vargas, is now recognized for 5 min- utes. Mr. VARGAS. Thank you very much, Madam Chairwoman. I ap- preciate the opportunity. I want to thank the ranking member, too. Thank you. Chairman Powell, I have always had great confidence in you, and I have told you that personally. Now that you are a Deadhead, though, I am not quite sure. This is after 50 years. Anyway, again, thank you very much for being here. I appreciate the service you have done for our nation. One of my colleagues was talking about the difference in infla- tion rates in the United States and Europe, on both sides, actually. One of my colleagues on our side talked about that. And I was won- dering if you saw the headline today in the New York Times about the U.K. inflation rate, and you saw that they are running, I think, at 8-something percent. Mr. POWELL. Yes, I did see that. Mr. VARGAS. And you were asked a question by the gentleman on the other side of the aisle about how when the Biden Adminis- tration took over, what you could buy for $1 now costs $1.16, and that was hurting consumers. And you said, ‘‘I strongly agree.’’ But the question obviously inferred that that inflation was the fault of the Biden Administration. That is the whole point of the question. Mr. POWELL. That wasn’t the question I answered, by the way. Mr. VARGAS. That is right. And I was going to say that, and I will give you an opportunity to answer that because you later said that the pandemic was the issue all around the world. Is the Biden Administration the cause of all this inflation? Mr. POWELL. Just to be clear, the question I answered was, is in- flation hurting people? It was nothing to do with the cause of the inflation. Mr. VARGAS. But to infer, Mr. Chairman, when you say that this has happened during the time of the Biden Administration, I think the question clearly infers that. Mr. POWELL. I think you understand the question I was really answering. I guess I would say, again, people are going to be un- packing the causes of this inflation. Many academic careers will be built on new ways to look at this. Former Fed Chairman Bernanke delivered a paper with a colleague just a couple of weeks ago at the Brookings Institution on this, and I just think you see inflation ev- erywhere in the world. There is a common factor here, which has to do with the pandemic. There is also room for fiscal policy, and there is room for mone- tary policy in the explanation, and I just think it is very hard to unpack that. We don’t render judgment on fiscal policy. We don’t support it. We don’t criticize it. We take it as something that ar- rives at our front door. No matter who is President, no matter what 39 fiscal policy is, it is not something we play a role in commenting on or criticizing or praising. Mr. VARGAS. I appreciate the answer. I wanted to give you an op- portunity just to make sure if there was any confusion about that. The confusion was cleared up, and I think you have cleared it up. Now, I want you to answer a question that you didn’t answer, that you passed on. The question was if Congress should be in charge of setting the Federal funds rate. I can’t think of a worse idea. The only worse idea, I think, might be another idea that was set forward earlier, that maybe we should be involved in super- vising the banks. In Congress, we can’t even figure out appliances here. We closed down the government over appliances. We can’t even figure that out. I don’t know how in the world we would be setting rates and how in the world we would be supervising banks. Again, I think you guys can do a tighter job of supervising banks. I do think that there were, and you guys have admitted to that with the Silicon Valley Bank, and I hope you do, and I know you are looking at these regulations. It was brought up that since 2008, 2009, the capital requirements have gone up, and the banks gen- erally have done well in the stress test. What was the law that caused the rates, the capital requirements to go up? Mr. POWELL. It was a combination of the Dodd-Frank Act and also the Basel Committee. Mr. VARGAS. Of course. And those are the two things that I have heard from colleagues on the other side, that they just keep beating up on. They don’t do it as much now. It is the Consumer Financial Protection Bureau (CFPB) now. But that was the choir, again, once again, just saying it is a terrible Act, but the reality is it probably saved banking in the United States, and I appreciate it. Lastly, I would just comment, and you don’t have to comment. I am just going to make this comment. Obviously, your focus is narrow and should be, but the notion of climate change is impor- tant. I do think that it is affecting the economy. I do think that it is affecting our world. And I do think that we have had our head in the sand for way too long on this issue, and we have to do some- thing about it. Obviously, that is not your mandate, but obviously, it is important, and I hope we do something about it. We don’t have the courage to do that in Congress. That is why I think others are doing it for us, but we have to do something. We see the bigger hurricanes. We see these things happening and it is because of our participation in making it happen. Thank you very much. Mrs. WAGNER. The gentleman’s time has expired. The Chair now recognizes the gentleman from Oklahoma, Mr. Lucas, for 5 min- utes. Mr. LUCAS. Thank you, Madam Chairwoman, and Chairman Powell, it is good to see you, as always. Mr. POWELL. You, as well. Mr. LUCAS. Many of my colleagues today, of course, have ex- pressed their concerns about the upcoming Basel III revisions, and I hope you will continue this dialogue with the committee once the joint rule is proposed and is open for public comment. I would like to follow up with a topic we discussed back in March. I am sure you are keenly aware of how important it is for banks and companies to manage interest rate risk, particularly 40 over the last several years. The Silicon Valley Bank made that very clear. Could you speak generally to how hedging interest rate risk is an important risk management tool for U.S. banks and compa- nies? Mr. POWELL. I think you see the reality of it here. When rates go up, banks are encouraged by their supervisors and their own in- ternal personnel and risk committees that they need to manage that risk, and most U.S. banks did a good or adequate job of that. I would say it is a fundamental risk of banking, one of the most basic risks, along with credit risk. Mr. LUCAS. Exactly. And on that point, I have heard concerns that the Fed’s Basel III revisions could increase costs for deriva- tives end users. Whether hedging interest rate risk or commodity price risk, I am optimistic that these concerns will be addressed. Having said that, these revisions to capital requirements do not exist in a vacuum. The SEC is proposing major changes of their own. Last week, I asked Secretary Yellen if Treasury is coordi- nating with the Fed and the SEC on economic analysis as nec- essary to understand the potential consequences of U.S. banks im- plementing both significant market structure changes and in- creased capital requirements associated with market activities. The Secretary responded that the Fed is, in fact, coordinating with Treasury on this analysis. Are you aware of this coordination, and have you personally been a part of these conversations? Mr. POWELL. I have not been a part of those conversations, but I do understand that that is correct. Mr. LUCAS. Okay. Chairman Powell, I would like to follow up with you on your conversation with Congressman Gonzalez from earlier today. You have assured this committee that the Fed is not a climate policymaker, and I appreciate your commitment to this. However, I am concerned that the Fed’s regulatory toolkit would be utilized in a way that would, in effect, require the Federal Reserve to make policy decisions on climate change. We have seen other U.S. financial regulators embark on significant climate rulemakings, such as the SEC. Chairman Powell, are there principles you keep in mind when ensuring that the Fed doesn’t give in to, shall we say, political pressure around things like climate change? Mr. POWELL. There are. And for a starter, one would be that we don’t see it as at all appropriate for us to tell banks what legal businesses they can lend to; that is not our role. We don’t allocate credit, so what we do is we supervise banks to make sure that they understand and can manage the risks that they are running. And we are thinking of that as our point of contact with climate change in the sense that it is another risk that over time, banks need to be able to analyze and assess. Fundamentally, though, as I mentioned earlier, climate change is going to be a very important issue for a long time, and it needs to be addressed principally by elected people because it has enormous distributive consequences, and we don’t have a mandate to deal di- rectly with climate change as a policymaker. It does arise in con- nection with bank supervision, but that is not the heart of bank su- pervision. That is just a small part. 41 Mr. LUCAS. I very much appreciate those comments. On another topic, I would like to discuss the Fed’s balance sheet, which cur- rently stands at around $8.5 trillion. As you know, the size of the balance sheet more than doubled as the Fed worked diligently to stabilize markets during the height of the pandemic. Now, as the Fed begins to reduce the balance sheet, could you explain this proc- ess and describe the levels of securities that the Fed would look to maintain in the long term? Mr. POWELL. The way the process works is that securities ma- ture and they roll off our balance sheet, and that is the way it works, and there is a cap for mortgage-backed securities and also for Treasuries so it doesn’t get too large. And if you hit that cap month upon month, it works out to roughly a little less than a tril- lion dollars a year in shrinkage, which is a whole lot faster than what we did in the last cycle. But then again, the balance sheet is that much bigger. In terms of the level, we are thinking about a level that will allow us to operate our abundant reserves regime with enough of a buffer on top of it so that reserves won’t acciden- tally become scarce. I can follow up more with you on this. Mr. LUCAS. Thank you. My time has expired, Madam Chair- woman. Mrs. WAGNER. The gentleman yields back. The gentlewoman from Ohio, Mrs. Beatty, is now recognized for 5 minutes. Mrs. BEATTY. Thank you, Madam Chairwoman. And thank you, Chair Powell, for being here today. I have two questions I am going to try to quickly get through. The first question on the U.S. dollar dominance is kind of a follow-up to Congressman Torres’ question. Chair Powell, in our National Security Subcommittee, of which I am the ranking member, we have been discussing the importance of preserving the U.S. dollar’s status as the global reserve currency. Can you share with us the current status of dollar dominance as it stands today and whether there are risks to the strength of the U.S. dollar in the international financial system? And if so, what are some of the risks? Mr. POWELL. The U.S. dollar is still the dominant reserve cur- rency in the world, and that is principally thought to be as a result of our liquid capital markets, the rule of law, strong democratic in- stitutions, price stability over the years, and, critically, its open- ness; money can come in and out of the United States without all sorts of legal restrictions and things like that. All of those things are necessary to provide the world’s reserve currency. We have them. There is not another economy that has all of those features. So as long as we are a country of rule of law, and relative price stability, and strong democratic institutions, and open capital ac- counts, we can continue to be the world’s reserve currency. History shows that this is not a permanent status, but it is a lasting one. And I think in the case of the United States, as long as we main- tain those characteristics of our government and our country, then we can continue to be the world’s reserve currency. Mrs. BEATTY. Okay. Thank you. Let me go to another question that will not be foreign to you. As the former Chair of our Sub- committee on Diversity and Inclusion, I asked you and others of your colleagues, and let me just say for the record, Madam Chair- woman, that Chair Powell was always on point, and went out of 42 his way, in my opinion, to make sure that there was fairness and equity for all people. In light of that, I would like to follow up with Ranking Member Waters’ comments, and maybe Congresswoman Velazquez—maybe what she was talking about. Several of our colleagues here and in the Senate felt that the person who preceded you—it had been stated by many of us that we thought, through banking deregulation, he was enabling risky banking practices and failing to combat lending discrimination, which might have perpetuated racial inequities. A few weeks ago, Chairman Powell, on June the 7th, you said that, ‘‘We understand at the Fed that our actions affect communities, families, and busi- nesses across the country, and everything we do at the Fed is in the service to our public mission.’’ Could you maybe elaborate, since the time ran out with Ranking Member Waters—is there any- thing you would like to share with us that you do at the Fed that would dispel that there are things that you are not looking at that cause one or more Members of Congress to think that it is perpet- uating racial inequities? Mr. POWELL. As you know, we do call out disparate economic characteristics of different demographic groups, including by race, and we want those facts to remain present in the room as we are making our decisions. We try to think of maximum employment, we do think of it as a broad and inclusive goal, meaning we are not just looking at the aggregate level. I think it is important to keep those facts in your head as you think about monetary policy. I will say, though, that we have one Federal funds rate, and we don’t really have tools that address distribution and historical in- equities and things like that. Really, the Fed is not an agency that has those things. The best thing we can do for everybody, includ- ing, in particular, low- and moderate-income communities, is to maintain price stability over a long period of time, and on top of that, to maintain a very, very strong labor market. Strong labor market conditions are the single biggest contribution we can make in this area. Mrs. BEATTY. Thank you. And let me end by saying I appreciate your comments when you said that you realize that high inflation imposes hardships as it erodes purchasing powers for food and housing from the least of us. Thank you so much for being sensitive to everyone. Mrs. WAGNER. The gentlelady’s time has expired. The Chair now recognizes the gentleman from Michigan, Mr. Huizenga, for 5 min- utes. Mr. HUIZENGA. Thank you, Madam Chairwoman, and, Chairman Powell, it’s good to see you again. I wanted to follow up on an exchange that we had back in March, this past March, where we were discussing the parameters high- lighted in the Federal Reserve Board’s legal opinions that outlined how asset managers can operate without being deemed, ‘‘in control of a regular bank or a bank holding company.’’ Letters from the Fed’s legal division also include certain commitments made by these asset managers to ensure the same result. However, it is no secret that this percentage of ownership held by asset managers will constantly fluctuate as shares are purchased and sold on a daily basis. 43 With the ever-changing ownership structure, someone must en- sure asset managers are complying with not only these opinion let- ters—your opinion letters prepared by your own staff—but also with the statutory and regulatory framework that the letters out- line. So, Chair Powell, I would like to ask you again, is the Fed taking any steps to assess or monitor whether Vanguard, BlackRock, and others are complying with these commitments made in November of 2019 and December of 2020, respectively? Is that ongoing? Mr. POWELL. Can you give me one second? Mr. HUIZENGA. Okay. Mr. POWELL. Sorry. That is a very specific question, and I didn’t know the answer. I would say this: We are broadly monitoring the situation. I don’t know that we have a particular focus on the asset managers. Mr. HUIZENGA. Okay. Those were opinion letters put out by your folks outlining very specific things that could or could not happen. And back in March when I brought this up, and now again today, I am looking to find out who is actually minding the store on that, and it is a little concerning that we don’t have an answer on that. I guess we will continue this conversation, and maybe you can an- swer this: What Division at the Fed is responsible for reviewing and monitoring an asset managers’ compliance with these opinion letters issued by the Board’s legal division? Mr. POWELL. It would be the General Counsel’s office. We don’t have any reason to think that they are not in compliance, by the way. Mr. HUIZENGA. But nobody is checking? Mr. POWELL. We will check. Mr. HUIZENGA. Okay. Mr. POWELL. I think we know what we are going to find. Mr. HUIZENGA. I would like to know what you are going to find, not what you think you are going to find on that, so thank you. I will be following up with a letter to include some more detailed questions on the topic, and I assume you will commit to getting us a timely answer to that. Mr. POWELL. I think we offered your staff a briefing on this, by the way. Mr. HUIZENGA. Yes, and there was a briefing, and let me be clear, I appreciate the cooperation that has happened. We have also had some other briefings. There have been a number of briefings that we have requested, and, frankly your division of government has been more helpful than others, shall we say. I am going to quickly pivot to the committee’s investigation of the Silicon Valley Bank failure. Your staff has been working to get us some answers on our outstanding questions. You did your own re- port. Now, it is our turn, and can you appreciate that our com- mittee, is conducting its own independent review of what happened in March? Mr. POWELL. Yes, very much so. Mr. HUIZENGA. Okay. Thank you. Will you commit to producing the interview notes and allow us access to the staff who partici- pated in the interviews conducted for the Fed’s own internal review of the bank supervision report? 44 Mr. POWELL. I am not in the middle of that discussion. I don’t know where that stands, so I don’t want to make commitments that I can’t back up. But I will be happy to find out where that discussion stands and try to work with you. Mr. HUIZENGA. Okay. We are going to be following up for sure on that. When Vice Chair Barr concluded that a, ‘‘culture shift’’— his words—‘‘happened,’’ do you know if the Fed officials spoke with examiners of other banks, or was this conclusion made solely after the review of SVB? In other words, did they find some systemic problem throughout the Fed? Mr. POWELL. The thing is, I didn’t play any role, by design, in the preparation of the report, and I am reluctant—I think I know the answer, but I don’t want to guess. We can provide you with a 100-percent clear answer on that, and I would rather not speculate. Mr. HUIZENGA. Okay. Along with the FDIC and the Department of the Treasury, you invoked the systemic risk exemption (SRE) for both Silicon Valley Bank and Signature Bank, guaranteeing all de- positors would be made whole. For example, regulators could have used the Orderly Liquidation Authority (OLA), the very tool Dodd- Frank intended to resolve the too-big-to-fail institutions, while pro- tecting taxpayers. Why was the decision to use SRE made, and do you think that we have now lowered the bar to use SRE in future bank failures? Mr. POWELL. I hope we don’t have to face that question again as long as I live. Mr. HUIZENGA. We all do. But has a new bar been set? No pun intended. Mr. POWELL. I would say this. This happened with no warning in the middle of the night, Thursday night, and less than 12 hours later, we were on the phone with the FDIC, and they were deciding to close the institution and to haircut uninsured depositors. So, it was an emergency situation over that weekend. We could see that there was an electronic run building up, and we did what we had to do to address that and, I think, successfully. Mrs. WAGNER. The gentleman’s time has expired. The Chair now recognizes the gentleman from Illinois, Mr. Foster, for 5 minutes. Mr. FOSTER. Thank you, Madam Chairwoman, and thank you, Mr. Powell for being here today. Wars have historically been associated with elevated levels of in- flation worldwide, although the relationship is complicated and wars can have impacts on both supply and demand. Higher infla- tion may just be one of the many prices that humanity pays for the decision to go to war. Now, we don’t have boots on the ground, but there is no doubt that in terms of supply disruption and military spending, both Eu- rope and the U.S. are effectively at war in support of the freedom of the people of Ukraine. My question is, is the 2-percent inflation target a realistic and appropriate goal during a time when much of the world is effectively at war, or should the 2-percent goal be thought of as a goal for normal times, with policies being put in place that will return to 2 percent when the war is over, or at least when we have decoupled adequately from the Russian economy? Mr. POWELL. Two percent is our goal, and it will remain our goal. It is a medium-term goal, so we are using our tools to get the infla- 45 tion level back down to 2 percent. We are not considering changing it because of the war in Ukraine, and I don’t know that that is playing a particularly important role in inflation today, although when energy prices and commodity prices went up at the beginning of the war, it certainly was. Mr. FOSTER. And certainly, it is an important factor for Europe still—— Mr. POWELL. Yes, the disruption particularly. Mr. FOSTER. Just more generally, you have been trying to deal with this question of how you balance your dual mandate, and whenever you are trying to optimize simultaneously two different things, the first step is to put them into common units. Just to be specific here, let’s say that you are missing your unemployment goal by 1 percent, and you are missing your inflation goal by 1 per- cent in the opposite direction. At some point, do those two cancel each other out? Is 1 percent in one goal equivalent to 1 percent in the other, or do you need a 2 percent missing of the unemployment target? There must be that coefficient there in the Taylor Rule and things like this that try to predict your behavior, but internally, how do you view the difference between a 1 percent unemployment missing of the target versus a 1 percent of inflation? Mr. POWELL. The Taylor Rule is a pretty good place to start there, with the same coefficient on both variables. Mr. FOSTER. Is that really true? I don’t know. I would have to go look at it. Mr. POWELL. In the original Taylor Rule. Mr. FOSTER. Okay, because it is a coincidence if the coefficient is 1, because you could choose a quarterly inflation target or an an- nual or a decade-old inflation target numerically and get very dif- ferent numbers. Mr. POWELL. There is significant amount of research about the relative social costs of inflation and unemployment, and you wouldn’t want to ignore that research either, so I think there will be a lot of judgment in this. At the current moment, it is not a question, because the labor market is extraordinarily strong, and we are very far from our inflation targets. Mr. FOSTER. But you are getting complaints from business that the labor market may be too tight. At least, it is viewed, from the Taylor Rule point of view, that there is a penalty that you pay when the unemployment gets too small. There is a target you are trying to hit. Mr. POWELL. But both sides are calling for tight policy. Mr. FOSTER. Yes, that is correct at present, but you can certainly foresee times when they will be in tension and they historically have been. So, you are saying that pretty much it is a 1 percent on both? Mr. POWELL. I think that is a starting place. I think it doesn’t lend itself to that level of precision. Mr. FOSTER. It is either that or you have to face questions like you have been facing for the last decade, and just how do you bal- ance this? In terms of the internet or electronic runs on banks, it seems like that is a new thing that is going to have to inform bank capital and liquidity providers. The first question is, if you get a significant electronic run on a significant size bank, is there anyone 46 but the Federal Reserve that can provide that emergency assist- ance, or do you pretty much have to be the only line of defense against big internet runs? Mr. POWELL. I think regulation and supervision can play a role in that as well. Mr. FOSTER. That has been stopping the run from starting, right? Mr. POWELL. Yes. Mr. FOSTER. But part of that stopping the run from starting is knowing that if it starts, there is someone or some entity that can stop it. Mr. POWELL. Or the lender of last resort, and that is something that only the central bank can be or do. But I would say changes to regulation to ensure that you don’t have this mismatch between runnable liabilities and available cash to fund their running is something we can address and will address through regulation and supervision. Mr. FOSTER. Thank you. I yield back. Mrs. WAGNER. The gentleman’s time has expired. The Chair now recognizes herself for 5 minutes for questioning. Welcome, Chairman Powell. I want to start by asking about the Federal Open Market Committee’s (FOMC’s) latest forecast. It pre- dicted the core inflation will fall below 3 percent within a year. This forecast has been the exact same for each Fed meeting over the past 2 years and has been wrong each and every time. Why do FOMC participants continue to make the same forecast, sir, and what data are they reviewing to make this forecast? Mr. POWELL. In the world of economic forecasting, we don’t really have any advantage over private-sector forecasters who have been at this. There are a number of private-sector forecasters that are well-resourced, and the data are all public. We don’t have private data. That is not how this works. And I think, essentially, all fore- casters have made the same mistake, which is at the beginning, thinking that the supply chain problems would be resolved quickly, and workers would come back to work quickly, and things like that. Inflation has consistently surprised us, and essentially all other forecasters, by being more persistent than expected, and I think we have come to expect that and expect it to be more per- sistent. Mrs. WAGNER. It seems that we have moved way past the whole transitory thing. And for the 2 full years down, they have been say- ing it is going to be under 3 percent, and clearly, they have missed that, so it was just a little concerning to me if there was something that we are missing. Let me move on. In your press conference last week, sir, you stated that, ‘‘The conditions we need to see in place to get inflation down are coming into place.’’ What conditions are you seeing that show that we are moving in the right direction, because I can tell you, my constituents are still feeling great pain from this inflation that continues to persist? Mr. POWELL. There are underlying conditions that I will mention, but the point is, you get them in place, and then the process of in- flation moving down will take a significant amount of time, and we have been consistent in saying that. And the conditions I men- tioned would be: first, we need economic growth to be slower than 47 to be modest, and it has been at a modest level, so that is hap- pening; second, we need the supply chain bottlenecks to go away and get better and improved; and third, we need the sort of mis- match between demand and supply in the labor market to dimin- ish, and that has been happening. So, all of those things are happening much later and much more slowly than we would hope. And my Committee and I do believe that the process of bringing inflation down is going to be a rel- atively lengthy one, longer than we expected. Mrs. WAGNER. It is clear that the spending on consumer services, for example, a car oil change, a haircut, or a concert ticket, remain almost unresponsive to rate hikes. Do you have a projection for when we might see this spending go down? Mr. POWELL. Non-housing services, the broad service sector is fa- mously less responsive to and less focused on rate hikes and the cost of capital. So, what we think that is about half of the core in- flation, a little bit more than. We think, and I think broadly that this is what forecasters think, that it will take some softening in labor market conditions because in that service sector, it is very labor-intensive. By far, the largest cost from most service compa- nies is labor, so what you want to see is rebalancing. So, the de- mand for labor and supply, a lot of that can happen through fewer job openings and things like that, and we do see it happening. Mrs. WAGNER. The Consumer Price Index (CPI), which measures the price of everything from groceries to cars and to rent, has, in fact, declined from its peak. But the Personal Consumption Ex- penditures (PCE) Index, which measures, as we were talking about, consumer spending, remains historically high. How else can you account for this difference when it comes to a rate hike pause? Mr. POWELL. We never used the word, ‘‘pause,’’ and I wouldn’t use it here today. What we did was we agreed to maintain the rate at that meeting. Almost every single one, 16 of the 18 participants on the FOMC, wrote down that they do believe it will be appro- priate to raise rates, and a big majority—— Mrs. WAGNER. Yes. Mr. POWELL. ——raise rates twice this year. And I think that is a pretty good guess of what will happen if the economy performs about as expected. Mrs. WAGNER. Yes, I think it is right. More rate hikes likely are needed to bring inflation back down to the 2 percent, and we are concerned about a hard landing, about a recession. Anyway, my time has expired, and I now recognize the gen- tleman from Illinois, Mr. Casten, for 5 minutes. Mr. CASTEN. Thank you, Madam Chairwoman. And thank you, Chair Powell for being here. In June of 2021, at the Green Swan conference, you said, ‘‘Cli- mate change poses profound challenges for the global economy and the financial system.’’ In October of 2021, FSOC’s report on Cli- mate-related Financial Risk, for the first time identified climate change as an emerging threat to U.S. financial stability. And in De- cember of last year, the Fed released climate supervisory principles for large banks that said, ‘‘The financial impacts that result from the economic impacts of climate change and the transition to a lower carbon economy pose an emerging risk to the safety and 48 soundness of financial institutions and the financial stability of the United States.’’ You have made many comments today that I think are broadly consistent with that in your role, and I appreciate the comments you have made in that capacity. Can I safely conclude that in June of 2023, 6 months after that release, the Fed’s position is still that climate change presents a risk to the global economy and the finan- cial system? Mr. POWELL. Yes. I hasten to add, though, that our role in this is an important but quite small one around bank regulation. Mr. CASTEN. Understood, and I am not asking for the role. I just want to clarify that the reason I asked that question is because on May 11th, your colleague, Christopher Waller, at a speech in Spain said, ‘‘Climate change does not pose a serious risk to the safety and soundness of large banks or the financial stability of the United States,’’ and went on to say that the risks posed by climate change are not sufficiently unique or material to merit special treatment relative to others. Should we understand as we sit here that Mr. Waller was speaking in his personal capacity and not as a designee of the Fed, if indeed, Fed policy hasn’t changed since December 2022? Mr. POWELL. I don’t comment on any of the things that my col- leagues say. Mr. CASTEN. I understand, but you understand the concern that if markets and regulators are to understand that the Fed has a consistent policy, and one of the members of the Fed is saying something that appears to be directly opposed to Fed policy from 6 months earlier, that is a concern. Mr. POWELL. Again, Governors have always had the ability, and Reserve Bank Presidents as well, the ability to have their own views on things. And that is going to happen, and that is probably a good thing that we have a diversity of perspectives. I think there may be less than that difference than you suggest. Again, what I am saying is, to the extent we have a role, it is to ensure that banks understand and can manage the risks that they do face from climate change. Mr. CASTEN. Okay. I don’t want to create internal tension, but I think we are all aware that you, above anyone, is aware that your words are closely scrutinized, and we were concerned with the words of your colleagues there. Madam Chairwoman, I would like to introduce for the record a working paper from the European Central Bank entitled, ‘‘The Im- pact of Global Warming on Inflation.’’ I don’t know if you saw this report that just came out recently, but it says, among other things, that climate change poses risks to price stability by having an upward effect on inflation, both food prices and headline inflation. And what I wonder is, without opin- ing on their math, if, in fact, we are looking at a world where cli- mate change for the European Central Bank is going to increase inflation, and were we to find ourselves in that world going for- ward, would the Fed or other central regulators say we have the tools to address this, or we are going to say, well, that is non-core inflation? What are we going to do in hindsight, because it feels to me like we have a major bank regulator saying climate change is 49 running the risk of inflation? But I don’t even know what tool you would use to address that. Mr. POWELL. What I can just say is that for now, this doesn’t enter my thinking in any way that we would, in the near term, change our inflation goal because of climate change or the need to deal with it. There is a lot of thinking and research that over a long period of time, really, the process of investing very large amounts of money in a green transition could drive inflation up, but that is not something we are thinking about today. During our FOMC meetings, we are not thinking about climate change as something that is relevant to current inflation or to current mone- tary policy. Mr. CASTEN. Sure. Mr. POWELL. And our focus today is inflation. Mr. CASTEN. I guess what I am struggling with is that if we agree that this is a systemic risk, if we agree that this leads to in- flation, and we don’t really know what role you would have with tools, there is a concern there. The last thing I want to end with is, in April of 2023, in the re- port on SVB, one of the lessons that was noted in the Fed review said that this is an opportunity for regulators and bank managers to be more willing to adopt a precautionary perspective and that the Fed must strengthen its supervision based on what we have learned. I am trying to figure out with climate change, if we agree that this is a forward risk, how do we get the Fed the tools to apply a precautionary perspective? Mr. BARR. [presiding]. The gentleman’s time has expired. Chair- man Powell can submit an answer in writing for the record. And I now recognize myself for 5 minutes. Chairman Powell, in March, you confirmed to me that the Federal Reserve is a con- sensus organization built on garnering broad support before agree- ing to any proposal. And given the breadth and scope of the poten- tial changes to the capital framework that is under review right now, that consensus-driven approach seems to be all the more im- portant. I am concerned that the Vice Chair for Supervision has seemingly been given far too much latitude to act unilaterally, es- pecially in light of Section 1107(a)(1) of the Dodd-Frank Act, which provides the Vice Chair for Supervision authority only to develop recommendations for the Board and oversee supervision and regu- lation. Can you speak to the process that is underway? Is the Vice Chair acting unilaterally, or is that a wrong characterization? And if so, if it is just a recommendation, can you walk us through the steps that the Board will take from recommendation to a vote? Mr. POWELL. Sure. I think what you see is very much the way the statute works, which is the Vice Chair for Supervision has the responsibility, the obligation to develop regulatory proposals for the Board that will be considered by the full Board. As I mentioned be- fore in another context, he is not the Comptroller of the Currency. He brings proposals to the Board, and the Board votes by majority vote to support them or not, which is how that works. In terms of provision—— Mr. BARR. Is he including other members of the Board currently? 50 Mr. POWELL. I think all of us have been getting briefings on what is developed, but ultimately, the job is to present something to the Board for consideration by the Board. Mr. BARR. Once he presents his recommendations, how long will there be debate/deliberation, and is that transparent to the public? Mr. POWELL. There will be a meeting—it could be a virtual meet- ing—this summer to vote on these things. In the meantime, there is a lot of conversation going back and forth now, and we are sort of in that process now, but things are still moving around. Mr. BARR. Our concern, Mr. Chairman, is that it seems like right now, the Vice Chair is writing personalized assessments of bank failures and results of new Fed climate scenario experiments with- out a whole lot of collaboration with other Governors. And given that this new scheme could raise capital requirements by as much as 20 percent, in an already well-capitalized banking system, and that the cost of such changes could be $100 billion or more in lost GDP, I am concerned with your testimony that this would only be a virtual vote. Shouldn’t this be a more transparent public Board meeting and a deliberative process that includes all members of the Board? Mr. POWELL. It is really just a question of calendars and where will people be in the summer. We haven’t decided what form the meeting would take, whether it would be virtual. Mr. BARR. Given that it is a pretty big decision, and that the law requires the full Board to make this decision and not one Board Member to act unilaterally, we would hope that the Fed would hold public meetings on the new proposal. Will you and the Federal Re- serve Board commit also, when the proposal is voted on, to also in- clude your economic analysis that would justify whatever capital changes are made in a quantitative form? Mr. POWELL. I don’t know that. I am not sure we will have ex- actly what you are looking for. But we will create a public record that supports the proposal, whatever it turns out to be, and the votes will be what they are, and it will be subject to public com- ment and analysis, no doubt. Mr. BARR. Well, in order for the notice-and-comment period to be meaningful, I think market participants will need to understand, on a quantitative basis, what the justification is for additional cap- ital requirements if, in fact, that is what the proposal is, given the fact that we already have a very well-capitalized system. I don’t have much time left, but will you also commit to proposing appro- priately-tailored regulatory requirements based on the complexity and size of the financial institution? Mr. POWELL. I will commit to supporting that. I can’t commit to what the final product will be, what the vote will be. But as I men- tioned at the outset, I do think we benefit hugely from a very di- verse banking system, and I wouldn’t want to do anything to jeop- ardize that. Mr. BARR. Finally, earlier this week, the Wall Street Journal published an article that stated that, unlike your predecessors, you have not focused on fiscal responsibility. Would you like to correct the record regarding that? Mr. POWELL. I would. Thank you very much. It was just an op- ed, but it was factually incorrect. There are countless times that— 51 and you have heard me do this—I have said the same thing that my predecessors have said, which is that the United States’ Fed- eral budget is on an unsustainable path, which means that the debt is growing faster than the economy. And that we are going to need to fix this, and sooner is better than later. Mr. BARR. The time has expired. Thank you. And the gentleman from New Jersey, Mr. Gottheimer, is now recognized. Mr. GOTTHEIMER. Thank you, Mr. Chairman. And thank you for being here today, Chairman Powell. I am particularly concerned that the current regulatory environment disadvantages small and regional banks. Specifically, with First Republic receivership, I am concerned that the largest banks were given preference in the bid- ding process, thereby enabling the larger banks to grow even big- ger. My understanding is that certain regional banks were unable to bid on First Republic because of an extensive and time-con- suming vetting process put in place by regulators that put them at a disadvantage in the bidding process. Mr. Chairman, are you aware of a regulatory-mandated, pre-ap- proval process that banks must complete to bid on firms going into receivership? And is there a notification process for informing banks that they can go through this process, because I am con- cerned that some who wanted to bid were unable to do so. Mr. POWELL. This is entirely something within the jurisdiction of the FDIC. We play an important role here, but when it comes down to selling a closed institution, that is just something the FDIC does, according to our own procedures. To my knowledge, there were a bunch of regional banks involved in bidding for First Republic. Mr. GOTTHEIMER. Do you know of any where they said they could not participate, or was your understanding that anybody could par- ticipate? Mr. POWELL. I am not aware of any. That is the heart of what they do. They have the law. They have the people who have the experience and everything. Mr. GOTTHEIMER. Thank you. Small and medium banks are a large portion, as you know, of our country’s commercial real estate loans. The Federal Reserve’s May financial stability report said that the higher interest rates may be increasing the risk that com- mercial borrowers are not able to refinance their loans, and that a correction in property values could lead to losses by banks that hold commercial real estate debt. I am particularly concerned that such a correction threatens the stability of lenders and thousands of jobs in my district in Northern New Jersey. How is the Fed look- ing at this and helping small, medium, and regional banks manage their portfolios or think about the risks of commercial real estate loans, and what guidance is being provided to banks, given that nearly $1.4 trillion in commercial mortgages are set to mature in the next 2 years? Mr. POWELL. We are following it very, very closely, and I think you have put your finger on it, this is a problem more for smaller banks, and not for all smaller banks, but it is the banks that have high concentrations. There will be losses, particularly in the office and some of the mall sectors. And what we can do is, there is a supervisory playbook, so the supervisors are in there, and they are working with the company to help it preserve capital and do the 52 right things to get through what may be a difficult time for some banks that have a high concentration. Mr. GOTTHEIMER. Thank you so much. As we have discussed today, there are concerns obviously that the banks may be tight- ening their lending processes and tightening what is available. Are you concerned that higher rates and the recent instability in the banking system will lead to a credit crunch that can make it hard- er for small businesses to finance their operations, and potentially lead to rolling blackouts of loan defaults across industries? Mr. POWELL. We are watching that very carefully. Bank credit conditions have been tightening for a year, and that is partly as a result of our rate increases. We are very alert to the possibility that the sort of shocks that happened in March might exacerbate that. We don’t see a lot of evidence yet on that, but we wouldn’t have expected to. So, it is something we are going to continue to monitor carefully. Mr. GOTTHEIMER. Are you concerned at all about the nonbanks and the crunch that could happen on that side? Mr. POWELL. Yes, the banks are obviously highly regulated and have capital and that kind of thing, and some of the non-bank lend- ers are in a very different place. But we don’t regulate and super- vise them, and so it is something we are watching. Mr. GOTTHEIMER. How do you think we as a Congress should be looking at the nonbanks? Are there any recommendations? Mr. POWELL. Where there is same activity, there really ought to be same regulation. You shouldn’t be able to conduct the same ac- tivity. We regulate these things for a reason, and if we are not reg- ulating them appropriately, then that should be changed. But if you can just go across the street and start a business that does the same thing without the regulation, then that is not going to be ef- fective or fair. Mr. GOTTHEIMER. With Basel III conversations up and running, and obviously driving towards some conclusions or recommenda- tions, is that something that you have been watching? Obviously, you have Fed representation there. What are your biggest concerns in terms of requirements, and how you are thinking through that right now? Mr. POWELL. I think these are going to be very important. A number of very important proposals are coming, and I would just put out a couple of principles. And that is, our banks are strong, and they are well-capitalized. I think that is pretty broadly agreed upon, and I think we are going to want to understand how even higher capital is justified. There will need to be a case made for that. Almost as important as that or maybe more important is that we need to respect the diversity of institutions that we have in this country. And we benefit from having banks of all different shapes and sizes, and we don’t want to push regulation or capital, for that matter, to a place where only the biggest banks have a viable bank- ing model. We are a long way from it. I just think we need to keep that in mind. Mr. GOTTHEIMER. Or be disadvantaged compared to our foreign banks? Mr. POWELL. Yes. Thanks. 53 Mr. GOTTHEIMER. Okay. Thank you so much. I yield back. Mr. POWELL. Thank you. Mr. GOTTHEIMER. Thanks. Chairman MCHENRY. Chairman Powell, we have two more Mem- bers here, but unfortunately, you have a hard stop at 1:00. Can we go over just by 5 minutes? Is that okay? Okay. No good deed goes unpunished. So, we will go to Mr. Davidson from Ohio for 5 min- utes, and Ms. Garcia from Texas for 5 minutes, and then we will wrap up. Thanks. Mr. DAVIDSON. Thank you, Mr. Chairman. Chairman Powell, thank you. Thanks for the extra time so we get all these questions in. And just picking up where my colleague, Mr. Gottheimer, left off talking about nonbanks and banks and kind of the regulatory framework, you recently published online the list of master ac- counts that the Fed has. Are any of those master account holders, non-FDIC-insured entities? Mr. POWELL. Are any of them? I don’t know. Mr. DAVIDSON. Could you get that answer back to us, please? Mr. POWELL. Sure. Mr. DAVIDSON. Okay. Thanks. When I think about some of the dynamics that are going on in the market related to banks, nonbanks, securities, not securities, one agency in particular has been very active in this space over at the SEC, and it is kind of tangentially related to the Fed. But crypto and digital assets in the U.S. has a market cap of around $1.1 trillion right now. It has been there for a bit. Do you acknowl- edge that this asset class has staying power in the U.S. economy? Mr. POWELL. It appears to have some staying power. Of course, that $1.1 trillion was—what was that, a year ago—a lot higher. Mr. DAVIDSON. Yes, it has had some volatility, in large measure due to the lack of legal clarity. So hopefully, this committee will help that quite a lot here this summer, with at least two bills, one on stablecoins and one on market structure. And it will be clear, not just for Congress, but for regulators, including Chairman Gensler and obviously, market participants, whether they are form- ing the ideas or investing in the ideas or participating in the activi- ties in the space. But when I think about participating in activities, one of the core functions that has taken place for a while now is the reverse repo market. It has hovered just over $2 trillion for the first half of this year, and it follows kind of exponential growth that we have seen over the past few years. What is your assessment on the implica- tions that the reverse repo market has on our economy? Mr. POWELL. Not much. It is just a place that holds money on the Fed’s balance sheet. It is like a mutual fund. In fact, it is, as the Treasury has been issuing bills to refill the Treasury General Account, we have actually seen the Overnight Reverse Repo Facil- ity declining. Mr. DAVIDSON. Isn’t there some sort of conflict with higher re- serve requirements, liquidity and lending in the market, or is there any tension there? Mr. POWELL. I don’t believe so. It is just a place for where, large- ly, money market funds have been putting their money. And as rates normalize in the economy, we are likely to see the Reverse 54 Repo Facility shrink dramatically, and I think without particularly important macroeconomic effects. Mr. DAVIDSON. When you think about the implications, the Fed had to intervene in September of 2019 to provide stability and li- quidity to that market. The fact that the Fed needed to use an emergency facility to intervene in the market would normally indi- cate some cause for alarm. Do you feel like that was an aberration, and there is no more cause for alarm, that everything has been set- tled? Mr. POWELL. That was about suddenly finding ourselves in re- serve scarcity. We had been monitoring the level of reserves really carefully, and thinking that we knew where scarcity would start to appear, and the problem is that demand can be very volatile. So, demand spiked and there weren’t enough reserves, so you had a situation where we had to supply reserves in big quantities. The Reverse Repo Facility was at zero for a very long time, and I think it is shrinking. Now, we don’t know how much it will shrink. Mr. DAVIDSON. I think the growth of it kind of highlights some of the related concerns for inflation and tension between liquidity, and, frankly, when you look at the requirements for capital, in the alternative, returns in the market, there is concern that all that capital can’t be deployed in the same place. When you have to pick places for it to be deployed, then it certainly has implications. I would love to follow up with you on that, and maybe align my own views with the thinking at the Fed and with some market partici- pants. When I think about the Federal Reserve, of course, I think about monetary policy. And we want Fed autonomy on monetary policy to some extent, a lot of non-market intervention that, to me, con- tinues to be a cause for concern, continued purchases of mortgage- backed securities, for example, prevent real price discovery. Is Fed purchasing propping up prices, or is it holding them artificially low? It is a non-market influence, and I think it has some distor- tions. As Chair of our Housing and Insurance Subcommittee, I con- tinue to be concerned about that, but the other thing is really the big concerns of the regulatory side. Chairman MCHENRY. The gentleman’s time has expired. Mr. DAVIDSON. I yield back. Chairman MCHENRY. We will now recognize Ms. Garcia for the ultimate questions of the day. Ms. GARCIA. Thank you, Mr. Chairman, and thank you, Chair- man Powell, for being here today. It is always a breath of fresh air to have you here to give us the latest report from the Fed. I first want to thank you personally for working on a topic that has always been near and dear to my heart, and near and dear to the heart of the Congressional Hispanic Caucus. I know several Members have already touched a little bit on issues related to di- versity and inclusion, and you, yourself, said something, and I real- ly was struck by the words you used, that when you look at setting the interest rate, you want to reflect all Americans in the room when you do it. And in my view, the best way to do that is to make sure that the people at the table making those interest rates deci- sions reflect what America looks like. 55 Last month, joining you was Adriana Kugler, who was nomi- nated as the first Hispanic to ever serve on the Federal Reserve Board of Governors in its 109-year history. It took a while, but we are there now. And hopefully, that will help ensure that when deci- sions are being made, all Americans are indeed in the room with you. So, I want to thank you and the President both for making sure that that happens. I know that in my district that is 77-per- cent Latino, we are really proud of that fact. But, Mr. Chairman, I wanted to see if you could provide me an update on the Federal workforce, particularly within the Fed Sys- tem, because I think in that area, and you may recall we have dis- cussed it before in prior times that you have been here, the work- force doesn’t quite look like America. Could you give me an update on where you are at with diversity and inclusion issues related to Latinos in the Federal workforce for the Fed? Mr. POWELL. Sure. I guess the place I would start is a good part of the story, which is with the Directors of the 12 Reserve Banks around the country; that is an area where we have focused heavily on diversity and inclusion, and I think met with a great deal of success, with relatively high numbers. We would be happy to get you the numbers. Relatively high numbers of both Hispanics and African Americans and other minorities, and women, so that has been an area where we have a free hand to act and we can do that. I think in terms of the workforce, we actually had a particular focus at the Federal Reserve Board on Hispanics and working hard, particularly devoting ourselves to a tight focus on generating more Hispanic contact and more Hispanic employees, and I think we had some success with that. And it is very important. It is not a coinci- dence that the most successful organizations in American society have seemed, to me, to be the ones that have pretty advanced di- versity and inclusion programs, so that they do have all different parts of America represented around the table. Ms. GARCIA. Great. Another area of concern for me has always been affordable housing. I know that this is a challenge for us in Houston, and also the challenge of combating the homelessness cri- sis across America. I know that this morning, Ranking Member Waters filed some bills related to seeking increased monies, dollars for affordable housing and dollars for tackling the homelessness problem. Do these issues impact the inflation rate and the work that you are doing to lower the cost of housing for all Americans? Mr. POWELL. I think it may have a marginal effect on inflation. I would point to things like workforce participation; people need housing so that they can get to the places where the jobs are. And in many metropolitan areas, the rents are very high, so people are having to drive very long routes to get to work. And labor force par- ticipation has an important effect on labor supply, which has an ef- fect indirectly on inflation as well. Ms. GARCIA. How long have we had the 2-percent goal for infla- tion rate? Mr. POWELL. Unofficially, for a quarter of a century, and offi- cially, since 2012, and other central banks—— Ms. GARCIA. What factors would have to occur for you to recon- sider the 2 percent, since it is been there for so long? Mr. POWELL. What would have to happen for us to reconsider it? 56 Ms. GARCIA. Yes. Mr. POWELL. I can’t really think of anything. Nothing during my tenure will happen to cause me to want to reconsider it. If you come back in 100 years, it will probably be different, but it is some unforeseen circumstance, I would say. Ms. GARCIA. Thank you. Chairman MCHENRY. The gentlelady’s time has expired. Ms. GARCIA. Thank you, Mr. Chairman. I appreciate it. Chairman MCHENRY. I would like to thank Chair Powell for his testimony today. The Chair notes that some Members may have additional ques- tions for this witness, which they may wish to submit in writing. Without objection, the hearing record will remain open for 5 legis- lative days for Members to submit written questions to this witness and to place his responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous mate- rials to the Chair for inclusion in the record. Chair Powell, I ask you and your team to please respond no later than July 30, 2023. And with that, this hearing is adjourned. Mr. POWELL. Thank you. [Whereupon, at 1:08 p.m., the hearing was adjourned.] A P P E N D I X June 21, 2023 (57) 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100

Jerome H. Powell (2023, June 20). Congressional Testimony. Testimony, Federal Reserve. https://whenthefedspeaks.com/doc/testimony_20230621_chair_the_federal_reserves_semiannual

@misc{wtfs_testimony_20230621_chair_the_federal_reserves_semiannual,
  author = {Jerome H. Powell},
  title = {Congressional Testimony},
  year = {2023},
  month = {Jun},
  howpublished = {Testimony, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/testimony_20230621_chair_the_federal_reserves_semiannual},
  note = {Retrieved via When the Fed Speaks corpus}
}