[Senate Hearing 115-157]
[From the U.S. Government Publishing Office]
S. Hrg. 115-157
NOMINATION OF JEROME H. POWELL
=======================================================================
HEARING
Before The
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
ON
THE NOMINATION OF:
Jerome H. Powell, of Maryland, to be Chairman, Board of Governors of
the Federal Reserve System
__________
NOVEMBER 28, 2017
__________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
MIKE CRAPO, Idaho, Chairman
RICHARD C. SHELBY, Alabama SHERROD BROWN, Ohio
BOB CORKER, Tennessee JACK REED, Rhode Island
PATRICK J. TOOMEY, Pennsylvania ROBERT MENENDEZ, New Jersey
DEAN HELLER, Nevada JON TESTER, Montana
TIM SCOTT, South Carolina MARK R. WARNER, Virginia
BEN SASSE, Nebraska ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota JOE DONNELLY, Indiana
DAVID PERDUE, Georgia BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana CATHERINE CORTEZ MASTO, Nevada
Gregg Richard, Staff Director
Mark Powden, Democratic Staff Director
Elad Roisman, Chief Counsel
Joe Carapiet, Senior Counsel
Kristine Johnson, Professional Staff Member
Elisha Tuku, Democratic Chief Counsel
Laura Swanson, Democratic Deputy Staff Director
Corey Frayer, Democratic Professional Staff Member
Dawn Ratliff, Chief Clerk
James Guiliano, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
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TUESDAY, NOVEMBER 28, 2017
Page
Opening statement of Chairman Crapo.............................. 1
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 2
NOMINEE
Statement of Jerome H. Powell, of Maryland, to be Chairman, Board
of Governors of the Federal Reserve System..................... 4
Prepared statement........................................... 43
Biographical sketch of nominee............................... 45
Responses to written questions of:
Senator Brown............................................ 55
Senator Toomey........................................... 67
Senator Sasse............................................ 70
Senator Menendez......................................... 77
Senator Warner........................................... 82
Senator Warren........................................... 87
Senator Perdue........................................... 90
Senator Heitkamp......................................... 94
Senator Schatz........................................... 97
Senator Van Hollen....................................... 101
Senator Cortez Masto..................................... 105
(iii)
NOMINATION OF JEROME H. POWELL, OF MARYLAND, TO BE CHAIRMAN, BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM
----------
TUESDAY, NOVEMBER 28, 2017
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:07 a.m., in room SD-216, Dirksen
Senate Office Building, Hon. Michael Crapo, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN MIKE CRAPO
Chairman Crapo. And the Committee will come to order for
the hearing.
This morning, we will consider the nomination of the
Honorable Jerome, or Jay, Powell to be Chairman of the Board of
Governors of the Federal Reserve System.
Governor Powell, welcome, and congratulations on your
nomination. I see friends and family behind you, and I welcome
them here today as well.
Governor Powell has had an accomplished public and private
sector career in financial services. He served as an Assistant
Secretary and Under Secretary of the Treasury under President
George H.W. Bush, where he was responsible for policy on
financial institutions and the Treasury debt market, among
other areas.
He also has firsthand experience in investment banking and
was a partner at The Carlyle Group before being appointed to
serve on the Board of Governors in 2012.
During his years of service in Government and in the
private sector, Governor Powell has proven he is qualified to
lead the Fed. If confirmed, he will play an important role in
striking the proper balance between the need for a safe and
sound financial system and the need to promote a vibrant,
growing economy.
Over the past year, I have been encouraged to see Federal
regulators carefully and thoroughly evaluating current laws and
regulations.
Governor Powell has shared specific areas in the past where
the Fed believes some laws and regulations can be changed to
alleviate burden, including the Volcker Rule, stress tests, and
resolution plans, among others.
Several weeks ago, 13 Members of this Committee, including
myself, introduced legislation to improve our Nation's
financial regulatory framework and to promote economic growth.
Introduced by 10 Democrats and 10 Republicans, the bill
demonstrates very strong bipartisan support for tailoring and
simplifying regulations. Part of the bill tailors regulations
for smaller financial institutions and community banks, while
at the same time improving access to mortgage credit and
housing and ensuring strong consumer protections.
The legislation also addresses the $50 billion SIFI
threshold, for which Governor Powell, Chair Yellen, and many
others have expressed support.
On the monetary policy front, I was encouraged by the Fed's
June announcement detailing the approach it will use to reduce
its asset holdings in a gradual and predictable manner.
As the Fed continues its path to normalizing monetary
policy, which I hope it does continue, clear communications
should be a central priority.
I look forward to working with the Federal Reserve on some
of these issues and welcome any additional thoughts or ideas
that Governor Powell has on areas where the Fed and Congress
can act to further reduce unnecessary burden and promote
economic growth.
Congratulations again on your nomination, Mr. Powell, and
thank you and your family for your willingness to serve.
Senator Brown.
STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman.
Welcome, Governor Powell. Nice to see you. I want to start
off by thanking Janet Yellen, the Chair of the Federal Reserve.
She has done an excellent job leading the Fed. During her
tenure as Chair and as Vice Chair, the United States
experienced one of the longest economic expansions in its
history, an expansion we still enjoy.
As I said at the time of her nomination, Chair Yellen was
among the most qualified people to ever be nominated to be
Chair of the Federal Reserve. You do not have to have a
doctorate in economics to lead the Fed, but we were lucky that
both she and Chairman Bernanke were students of the Fed's
mistakes in the 1930s.
Her strong and steady stewardship of an independent central
bank following the worst financial crisis since the Great
Depression ensured that we did not repeat those mistakes.
Chair Yellen was, as we know, the first woman ever to serve
as Chair of the Board of Governors of the Federal Reserve. I am
disappointed that President Trump has broken with the tradition
of re-appointing the last President's Federal Reserve Chair.
This Administration has also broken with the tradition of
trying to make the Federal Government more diverse.
That said, those decisions, Governor Powell, were not
yours. I congratulate you on your nomination to be Chair of the
Federal Reserve Board of Governors.
We have had a good working relationship since you were
first nominated to be a member of the Fed by President Obama in
2012. I hope that will continue.
You have supported tough rules for the Nation's largest
banks as the Fed implemented Wall Street reform. For that, we
are appreciative.
As Chair of the Reserve Bank Affairs Committee, you worked
to put more diverse individuals in the top spots at the
regional Federal Reserve banks, on their boards, and throughout
the Fed's workforce. Much more needs to be done. There has been
progress.
And you understand the importance of an independent central
bank. You strongly opposed misguided congressional efforts to
micromanage the Fed and make other changes that undermine the
ability of the Fed to conduct its monetary policy. I hope you
will stick to those positions on these important matters and
others.
But there are good reasons to be concerned. The current
Administration does not appear to value independence in the
judiciary, the FBI, or the Federal Reserve. It is an
unprecedented way. The President has made comments about the
current Fed Chair as well as interest rates. The search for the
Fed Chair too often seemed like an episode of ``The
Apprentice.''
I am concerned about the direction of financial regulation
under the current Administration. While banks across the board
make record profits, once again paying executives big bonuses,
the Administration makes unfounded claims in order to justify
the rollback the reforms put in place after the crisis.
The new Vice Chair for Supervision at the Fed does not seem
to be inclined to support the current regulatory framework put
in place by the Fed since the crisis. He has troubling views on
stress tests and more generally the role of watchdogs in the
financial system.
Industry has an outsized influence. Industry, especially
Wall Street, has an outside influence on this Administration.
The individuals have put in charge--that the individuals that
they have put in charge as financial watchdogs are far too
often former bankers or former bankers' lawyers--or bankers'
lawyers. Some Federal bank regulators seem willing to abet
rather than combat regulatory arbitrage.
The June Treasury report on financial regulation put out by
Treasury Secretary Mnuchin was a big bank wish list. In
formulating the report, Treasury met with 17 industry
representatives for every consumer group representing ordinary
Americans--17 industry representatives for every consumer group
representing ordinary Americans.
Mr. Powell, even your schedule indicates you are meeting
far more frequently with industry than with consumer groups.
You have met with the Wells Fargo CEO more times than all the
consumer groups on your schedule combined.
This Administration has already forgotten the Americans who
lost their jobs and their homes and their retirement savings
less than a decade ago.
I take this personally. In many ways, I assist--Members of
this Committee have heard me say, my wife and I live in
Cleveland, Ohio, in ZIP Code 44105. That ZIP Code in the first
half of 2007 experienced more foreclosures than any ZIP Code in
the United States of America. I still see the blight 200 yards
from my house that happened in large part because of Wall
Street overreach.
The loss to so many Americans of jobs, of homes, of
retirements savings was particularly harmful to African
Americans and Latino communities, which have not recovered from
the financial crisis as quickly as white Americans.
The financial industry is doing better than ever. There
seems to be a collective amnesia in this room, in this
Committee, and this Congress, a collective amnesia about what
happened 10 years ago. But Americans still struggle because of
low wages, because of underemployment or unemployment and lack
of opportunities. Loosening the rules for some of the country's
largest banks is not the way to solve these problems.
Your record has been strong on a number of these issues. We
urge you to continue that record. I look forward to hearing
your views and the direction you will take monetary policy and
bank regulation in central bank decisions. I hope you will make
your decisions based on facts independent from the political
pressure from the President of the United States and from the
Treasury Secretary.
Thank you.
Chairman Crapo. Thank you, Senator Brown.
At this point, we will administer the oath. Governor
Powell, will you please rise and raise your right hand. Do you
swear or affirm that the testimony you are about to give is the
truth, the whole truth, and nothing but the truth, so help you
God?
Mr. Powell. I do.
Chairman Crapo. And do you agree to appear and testify
before any duly constituted Committee of the Senate?
Mr. Powell. I do.
Chairman Crapo. Thank you. You may be seated.
Your written statement will be made a part of the record in
its entirety, and I invite you to introduce your family in
advance of making your statement.
Governor Powell, you may proceed.
STATEMENT OF JEROME H. POWELL, OF MARYLAND, TO BE CHAIRMAN,
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. Powell. Thank you, Chairman Crapo and Ranking Member
Brown, and I will begin, as you suggest, by introducing my
wife, Elissa, without whose loving support and wise counsel,
someone else would be sitting here.
I will also introduce two of my five siblings here today,
my sister Libby and my sister Monica. The other three siblings
are here in spirit and all will later claim to have watched
this hearing live.
[Laughter.]
Chairman Crapo. Which I am sure will be true.
[Laughter.]
Mr. Powell. We will deem it true. Some stories are too good
to fact check.
So thank you again, Chairman Crapo and Ranking Member Brown
and other Members of the Committee for expeditiously scheduling
this hearing and providing me the opportunity to appear before
you today.
I would also like to express my gratitude to President
Trump for the confidence he has shown by nominating me to serve
as Chairman of the Board of Governors of the Federal Reserve
System.
The Federal Reserve has had a productive relationship with
this Committee over the years, and if you and your colleagues
see fit to confirm me, I look forward to working closely with
you in the years ahead.
As you know, I have served as a member of the Board of
Governors and the FOMC for more than 5 years, contributing to
our work in a variety of capacities, including most recently as
Chairman of the Board's Committee on Supervision and
Regulation.
My views on a wide range of monetary policy and regulatory
issues are on the public record in speeches and testimonies
during my service at the Fed.
Congress established the Federal Reserve more than a
century ago to provide a safer and more flexible monetary and
financial system, and almost exactly 40 years ago, you assigned
us the dual monetary policy goals of maximum employment,
meaning people who want work either have a job or are likely to
find one fairly quickly, and price stability, meaning that
inflation is low and stable enough that it need not figure into
households' and businesses' economic decisions.
I have had the great privilege of serving under Chairman
Bernanke and Chair Yellen, and like them, I will do everything
in my power to achieve those goals while preserving the Federal
Reserve's independent and nonpartisan status that is so vital
to their pursuit.
In our democracy, transparency and accountability must
accompany that independence. We are transparent and accountable
in many ways. Among them, we affirm our numerical inflation
objective annually, and we publish our economic and interest
rate projections quarterly.
Since 2011, the Chairman has conducted regular news
conferences to explain the FOMC's thinking. Additionally, we
are accountable to the people's representatives through twice-
a-year reports and testimony as well as through oversight and
audited financial statements. I am strongly committed to that
framework of transparency and accountability and to continuing
to look for ways to enhance it.
In addition, in our federated system, members of the
Washington-based Board of Governors participate in FOMC
meetings with the presidents of the 12 Federal Reserve Banks,
which are deeply rooted in their local communities, and I am a
strong supporter of this institutional structure, which helps
ensure a diversity of perspectives on monetary policy and also
helps sustain the public's support for the Federal Reserve as
an institution.
If confirmed, I would strive, along with my colleagues, to
support the economy's continued progress toward full recovery.
Our aim is to sustain a strong jobs market with inflation
moving gradually up toward our target. We expect interest rates
to rise somewhat further and the size of our balance sheet to
gradually shrink. However, while we endeavor to make the path
of policy as predictable as possible, the future cannot be
known with certainty. So we must retain the flexibility to
adjust our policies in response to economic developments.
Above all, even as we draw on the lessons of the past, we
must be prepared to respond decisively and with appropriate
force to new and unexpected threats to our Nation's financial
stability and economic prosperity, the original motivation for
the founding of the Federal Reserve.
As a regulator and supervisor of banking institutions, in
collaboration with other Federal and State agencies, we must
help ensure that our financial system remains both stable and
efficient. Our financial system is, without doubt, far stronger
and more resilient than it was a decade ago, with higher levels
of capital and liquid assets, with greater awareness of the
risks that banks run, and a greater ability on the part of the
banks to manage those risks.
Even as we have worked to implement improvements, we have
also sought to tailor regulation and supervision to the size
and risk profile of banks, particularly community institutions.
We will continue to consider appropriate ways to ease
regulatory burdens while preserving the core reforms of strong
levels of capital and liquidity, stress testing, and resolution
planning, so that banks can provide the credit to families and
businesses necessary to sustain a prosperous economy.
In doing so, we must be clear and transparent about the
principles that are driving our decisions and about the
expectations we have for the institutions that we regulate.
To conclude, inside the Federal Reserve, we understand that
our decisions in all these areas matter for American families
and communities. I am committed to making decisions objectively
and based on the best available evidence. In doing so, I would
be guided solely by our mandate from Congress and with the
long-run interests of the American public.
Thank you, and I will be happy to respond to your
questions.
Chairman Crapo. Thank you again, Governor Powell.
The Fed recently began the process of shrinking its balance
sheet, which currently sits above $4 trillion. In a speech
earlier this year, you cited long-run estimates of the
appropriate size of the balance sheet as about $2.4 to $2.9
trillion by 2022. Would you clarify what you do believe is an
appropriate stable size for the Fed's balance sheet and what
factors you expect to focus on in determining the pace and the
ultimate scope of the balance sheet reduction?
Mr. Powell. I will, Senator.
So the Fed's balance sheet is about $4.5 trillion now, and
we know that it will be much smaller than that when it reaches
its new sort of equilibrium side. It will be larger, however,
than it was before the crisis, and we have also said that it
will consist primarily, mostly of Treasury securities at that
time. And it will be no larger than it needs to be for us to
conduct monetary policy.
We will be shrinking the balance sheet by allowing
securities, as they mature, to roll off passively, and that
process should take 3 or 4 years before we reach our new sort
of stable level of the balance sheet.
And the factors that will determine that will be really, in
the end, the public's demand for our liabilities, particularly
cash and reserves. Those will be principal factors that will
decide what the final size of the balance sheet will be. We do
not actually know what that demand will be, but my own
thinking, it moves us to a balance sheet of in the range of, as
I mentioned, 2.5 to 3 trillion. Again, there is no certainty in
that.
Chairman Crapo. All right. Thank you very much.
And the last time you appeared before the Committee, you
stated that it is very important that the intensity of
regulation be tailored approximately for the risks that the
institutions present. There is bipartisan support to tailor
existing regulations and laws to ensure that they are
proportional and appropriate. Are there any specific areas that
you think could benefit most from tailoring?
Mr. Powell. Yes. First, let me say that tailoring of
regulation is one of our most fundamental principles. We want
regulation to be the most intense, the most stringent for the
very largest, most complex institutions, and we want it to
decrease in intensity and stringency as we move down through
the regional banks and of the community banks. So this is
something that we strive to achieve.
We are taking a fresh look at that right now, and I would
just point out a couple of areas. I think in certainly capital,
we require the largest banks higher capital, and we have less
stringent requirements as we move down and more simple capital
requirements as well.
I would also point out something like the Volcker Rule,
where really it can apply in its strongest form to the banks
that have very large trading books and much less stringently,
we believe, as we go to the smaller banks. In fact, I saw that
your proposed bill exempts banks under $10 billion in assets
from the Volcker Rule, which is something that we have been in
favor of.
Chairman Crapo. Well, thank you.
Actually, my next question is on that bill. As you just
pointed out, 2 weeks ago, 20 U.S. Senators introduced the
Economic Growth, Regulatory Relief, and Consumer Protection
Act, and I am not going to ask you to get into the business of
the politics of that act here with us. But I do want to know do
you believe--if you have had a chance to review it, do you
believe that that act, if enacted into law, will provide
significant regulatory relief to community banks, midsize
banks, and regional banks, while still giving the Federal
Reserve the authority it needs to supervise and regulate those
institutions?
Mr. Powell. I do. On both counts, Senator, I do.
Chairman Crapo. All right. Thank you.
And last for me, housing reform. After our economic growth
markup next week, housing finance reform will be one of my top
priorities for the remainder of this Congress. Earlier this
year, you gave a speech in which you outlined a few principles
for housing finance reform and, in your words, do whatever we
can to make the possibility of future housing bailouts as
remote as possible; number two, change the system, to attract
large amounts of private capital; number three, any guarantee
should be explicit and transparent and should apply to
securities, not to institutions; and number four, identify and
build upon areas of bipartisan agreement.
I strongly agree with these points that you made and
believe that there is bipartisan support to seek a solution in
that zone. Would you commit to work with the Committee on our
efforts to pass housing finance reform?
Mr. Powell. Yes, I will, Senator.
Chairman Crapo. And I guess I will just take my last 15
seconds to ask you one final question on that. I believe
housing reform is one of the most significant issues we need to
make next. That is why I said I would prioritize it. How would
you rank housing finance reform in terms of the importance that
we move to it and get it resolved?
Mr. Powell. I think it is a highly important piece of
unfinished business from the financial crisis, and I think
there have been a lot of great proposals. And I think, at a
time when the economy is healthy, this is a great time to move
forward on it, and I look forward to working with you on it.
Chairman Crapo. Thank you.
Senator Brown. Thank you, Mr. Chairman.
In 2013, you stated that, ``The Fed was created as an
independent agency. A broad consensus has emerged among
policymakers and other informed observers around the world
that''--and the most important part of the quote--``that better
economic performance is achieved when the conduct of monetary
policy is free from political control.'' What will you do, if
confirmed, to ensure that the Fed maintains its independence
from outside political influence, especially influence from the
White House? And be as specific as you can.
Mr. Powell. Senator, I am strongly committed to an
independent Federal Reserve, and I would add nothing in my
conversations with anyone in the Administration has given me
any concern on that front. And I just would plan, if confirmed,
to follow in the footsteps of distinguished prior chairs and of
our long tradition, really, to assure that we do conduct
monetary policy and financial regulatory policy, by the way,
without a view to political outcomes, but with a view solely to
the right answers.
Senator Brown. Thank you.
The Senate this week will vote on a tax bill that will
reduce Federal revenues substantially over the next 10 years.
When the country fell into the Great Recession a decade ago,
the Fed had to resort to extraordinary measures, in part
because of the tepid fiscal stimulus provided by Congress. Nine
years later amidst one of the longest recoveries on record and
low overall unemployment, some of my colleagues think now is
the time for $1.5 trillion in attempted stimulus.
What does the Fed anticipate will be the impact on GDP
growth over the next decade if the tax cuts are enacted along
the lines of the bill before the Senate?
Mr. Powell. Senator, we do not have an estimate of that,
and I would say these fiscal policies are important matters for
you and your elected colleagues to decide.
Senator Brown. Well, with all due respect, Governor, the
Fed's projection with long-term GDP growth now is 1.8 percent.
That is the stated Federal projection over the next 3 years. I
have to assume that with the staff, the highly skilled, not
tiny staff that the Fed has that you have done modeling and all
kinds of different ways, different legislation, different ideas
coming out of the House and Senate.
You have an FOMC meeting coming up in maybe 2 weeks. Are
you telling me the Fed has not modeled any of this, any of the
tax bill in these kinds of tax cuts and what it will do to
economic growth?
Mr. Powell. Senator, of course, we are monitoring these
discussions, but it remains unclear exactly what will pass, and
so it is really--in my view, it has been very difficult or
impossible for us to start to incorporate----
Senator Brown. But you know, Governor, that the overall
arching theme of this is $1.5 trillion in tax cuts, that it
will cause greater economic--it will cause a larger deficit.
You know that people on this side of the aisle claim, as they
always do, every time there is a tax bill that will grow out of
that. Do not you have a responsibility in an ongoing sort of
way to talk to us about the modeling that you have done, that
what this will mean to the fiscal situation of our country in
the years ahead?
Mr. Powell. I think our responsibility is to carry out the
mandate that you have given us, which is to achieve stable
prices and maximum employment and also look after the financial
stability of----
Senator Brown. But, of course, we rely on you for data all
the time.
Mr. Powell. Respectfully, Senator, I do not think you rely
on us to score fiscal proposals. That is not really our role,
and I do not have a forecast for you on that today.
Senator Brown. We have discussed the need for an
independent Fed. Do you believe it is important for the other
independent financial regulatory agencies to be free from
Administration pressure, the independent agencies to be free
from Administration pressure?
Mr. Powell. I think it is good for all supervisory
regulatory agencies to operate doing the best that they can
with their mandates and not to look at the politics of things.
Senator Brown. I cannot tell if that is a yes or no.
Mr. Powell. I would not want to hypothetically sort of
agree with your hypothetical that there is political pressure.
Senator Brown. Well, I am not saying--I am not asking that.
I am asking should regulators at the various independent
agencies be free from Administration pressure. Should they be
free from independent pressure? I am not asking you if they are
now.
Mr. Powell. Certainly. Certainly on individual enforcement
and matters like that, I think the Administration is well
within its rights to express its views on different regulatory
matters, but as it relates to supervision of individual
institutions, absolutely.
Senator Brown. Is independence well served by the
appointment of an interim agency head who holds another full-
time position that reports directly to the President and the
President's Chief of Staff?
Mr. Powell. Senator, I would have to say that is not
something that is in my bailiwick to deal with.
Senator Brown. Then you have no opinion of that?
Mr. Powell. Not today, no.
Senator Brown. OK. Tomorrow?
[Laughter.]
Senator Brown. I am concerned, as I think we all are, about
the Administration's attempt to push out a full-time
independent director at the CFPB in favor of a part-time
political appointee with a history of attacking the Bureau, and
I am concerned about that, that attitude infecting other
independent agencies. I am concerned about the tradition or the
potential--the way that the President could look at this and
begin to do this in other places, a nonconfirmed appointment,
like he is doing to the--trying to do--the judge will decide--
to the CFPB.
And I am concerned, too, Mr. Chairman, that one of the
first things that Mr. Mulvaney did as, quote/unquote, ``acting
director'' was to stop payments to consumers, to
servicemembers, to veterans, payments where they were wronged,
civil penalties payments, that they were wronged by banks and
that they need to be made whole, and this director stopped it.
And that kind of political interference--I bring that up, one,
because a lot of us in this country are very unhappy with what
happened, but second, I bring it up as a warning to all of us
that independent agencies need independent agencies.
I have watched your career. You have followed things with--
you have done things with integrity, but I do worry about White
House pressure and a White House we have never seen the likes
of in terms of not understanding the independent judiciary and
the independence of the FBI and the independence of CFPB and
the independence of the job you will have at the Federal
Reserve.
Thank you.
Chairman Crapo. Thank you.
And I did give the Ranking Member a little latitude on the
clock there.
Senator Brown. Thank you, Mr. Chairman.
Chairman Crapo. I am going to encourage the rest of my
colleagues to please recognize the clock.
Senator Rounds. Thank you, Mr. Chairman.
Mr. Powell, first of all, congratulations on your
nomination.
I think the first time that you and I met was when you were
a visiting scholar at the Bipartisan Policy Center here in
Washington, and I most certainly appreciate your thoughts and
common-sense approach to not only Federal policy with regards
to the budget, but I was very, very happy to see when you had
been appointed as a member of the Federal Reserve as one of the
Governors.
And I think the fact that you have worked with Chairman
Yellen and that you have worked through issues with her, I
think that speaks in terms of how you would handle a board and
in terms of how you would approach policy.
I am just curious. I was listening to your comments with
regard to that which Senator Crapo was visiting with you on.
One of the most common criticisms that I have heard about our
Government's current regulatory structure is that financial
regulations are not written according to the risks that they
are meant to mitigate.
Treasury Secretary Mnuchin talked at length about his--
about this during his confirmation hearing saying that bank
regulation should be tailored to activity, not just to the size
of the institution.
Many of the recommendations in the Treasury report on
depository institutions that was released in June also
discussed this issue with respect to a number of regulations.
Earlier this year, I was able to, once again, reintroduce
the TAILOR Act, which would require Federal regulators to more
precisely tailor the regulations they issue based on the risk
profile of the institutions that they are writing regulations
for.
In response to Chairman Crapo, you agreed that tailoring
regulations is important. Can you elaborate on this view as it
applies to asset thresholds, and should we have asset
thresholds to begin with?
Mr. Powell. So the decision over whether to have a
numerical threshold or now is clearly one for Congress, and
Congress has tended to--it provides clarity, of course. A
numerical threshold makes it very clear who is not covered
above a certain level, and that is nice.
If you go entirely with a discretionary approach, then you
are leaving the regulators a lot of room to decide things, and
so Congress has generally come down and done both. And I think
maybe both are appropriate.
I do think, though, that fundamentally, size is only one
indicator, and I think it is healthy. One indicator of the
riskiness of a firm and the possibility of it damaging the
financial system through its failure is through its activities.
So the business model really matters, and all sorts of things
matter. So I think we have a set of factors that we look at,
and I think it is healthy to look at those too.
We have said that we are willing to work with you on
numerical thresholds, on discretionary application of enhanced
prudential standards, for example, and we will work with you on
any of those combinations.
Senator Rounds. I am sure that you are aware, as the
Chairman has indicated, that a number of my colleagues on both
sides of the aisle and on and off of the Banking Committee have
recently come to an agreement on a regulatory relief package
that would right-size regulations for smaller financial
institutions and improve our financial regulatory framework.
I am pleased to see that we were able to reach agreement on
a number of priorities that I had, such as the HMDA data
reporting relief, the right-sizing of the enhanced supplemental
leverage ratio, reform to the way that municipal data is
treated in bank capital requirements, and relief from some of
the most arduous supervisory standards in Dodd-Frank.
From what you know about the agreement--and I understand
that you have had a chance to cursorily look through it--
Governor Powell, are there any additional reforms that you
would recommend the Committee include in this agreement or in
future legislation? Did we miss some things that were obvious?
And once again, this was a bipartisan plan, and that is
exactly what we want it to be. And it is a first step for us,
but are there some things in there that we should be addressing
that we have not really looked at?
Mr. Powell. Senator, we did get the text of the bill, just
before the Thanksgiving break, and we have all looked at it
quickly. We have agreed to come back to the Committee with our
technical thoughts and policy thoughts as well.
I will just say in response to your question, we will be
happy to do that. I think, generally, we look at the framework
as a workable one, as a sensible one, so we will try to come
back with very constructive thoughts on how to bring it
forward.
Senator Rounds. Very good. I look forward to supporting
your nomination, sir.
Mr. Powell. Thank you, Senator.
Senator Rounds. Thank you.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you, Senator Rounds.
Senator Reed.
Senator Reed. Thank you very much, Mr. Chairman.
Thank you, Governor Powell, for your service.
As you mentioned in your introductory statement, you do
have a dual mandate. One is maximum employment, but right now,
we seem to be doing fairly well. Your comments on where we are
with respect to maximum employment?
Mr. Powell. Maximum employment is, indeed, our statutory
goal, and I guess the thing I would say at the beginning is it
is kind of an imprecise thing. You cannot look at one
particular measure of what that is. So we look at a range of
things.
And I think, for example, 4.1 percent unemployment is at or
around or even below many estimates of the natural rate of
unemployment. So that is one data point.
There are other dimensions, though. For example, labor
force participation really matters and particularly labor force
participation by prime-age workers, particularly prime-age
males, and that is the one measure I think that stands out now
as suggesting that there may be more slack more people that can
come back to work. A wide range of other indicators suggest
that we are at or near or in the neighborhood of full
employment. We really cannot be more precise than that.
The other one, that was wages, of course. We look at wage,
and wages in one sense are at appropriate levels, given low
productivity and low inflation, but at the same time, we do not
see wages signaling any tightening, any tightness in the labor
market. There is no sense of an overheating economy or a
particularly tight labor market, so that is what I would say
about maximum employment.
Senator Reed. I think those are insightful comments, but it
raises a dilemma for both of us, both monetary policy and
fiscal policy; that is, as you point out, we have this large
number of people who seem to be out of the labor force but
years ago would be in the labor force. We have a group of part-
time workers who would like to be full-time workers, and wages
seem to be not rising at all. What can we do? I do not think we
can claim victory on, as you suggest, unemployment, but we have
to take steps, both monetary and fiscal steps. Any suggestions?
Mr. Powell. Senator, I would say that really the steps that
can be taken are steps for Congress and not so much for us. We
can manage demand through a business cycle, and we can try to
achieve our goal of maximum employment. But these are very
long-running trends.
For example, among prime-age males, participation in the
labor force by prime-age males has been declining for 60 years
kind of thing, and the opioid crisis plays a role in it now. It
is making it worse. So these are issues that we do not really
have the tools to deal with.
Senator Reed. You do not have to respond to this, but I
think we have identified some significant problems that affect
every household in this country. And the tax bill that is
before the Senate does not respond, in my view, to any of those
problems of how to raise wages directly, how to get people back
in the workforce, and, oh, by the way, how to prepare for a
future in which artificial intelligence, autonomous vehicles
are going to be more and more competing with human beings for
work. So we have got a lot of work to do.
Let me ask another question. Could you explain why you
think the orderly liquidation authority is so crucial and why
it must be retained?
Mr. Powell. Sure. My view is that bankruptcy should be the
preferred option for the failure of institutions, including
very large financial institutions. I think we have made
tremendous progress on that through multiple submissions of
living wills and such, much more progress than, frankly, I
anticipated we could.
However, there may come a time when bankruptcy is not going
to work in a very stressful situation that really threatens the
economic health of the country, just like happened in 2007, '8,
and '9, and in that case we really will need a backup in the
form of something like orderly liquidation authority. It is not
a perfect law or a perfect structure, but we need something
like that as a backup, which we can guarantee will be there for
really an emergency situation where bankruptcy is not going to
work.
Senator Reed. Thank you.
Let me make two quick points before my time expires. First
of all, we talked about this. I spent a lot of time--in fact, I
was aided by one of your key staff members who worked for
Senator Gregg at the time--in trying to develop the clearing
platforms for derivatives, and as you so wisely pointed out, we
have taken bilateral risk and we have made it mutual risk. But
we still have the problem with those platforms. So I would hope
that in your tenure, you would look very carefully at this
potential for systemic risk as you have indicated before. It is
critical.
A final point, which I think, unfortunately, probably
defines too much of what we do around here today, cybersecurity
is an issue that is not going away. It is going to be even more
dramatic in your tenure.
Chairman Clayton of the SEC has pointed out in his
testimony that this is something we have got to get on. I
sincerely believe we are way behind, and the Federal Reserve
has to take a very proactive position with respect to
cybersecurity. If you can in a very few seconds comment upon
your view of cybersecurity?
Mr. Powell. Well, I agree with everything you have said. It
is very, very important, maybe the most, single most important
risk that our financial institutions, our economy, our
Government institutions face. We are very focused on providing
the resources to deal with it and to make sure that the
financial institutions we regulate and supervise address it.
There could never be any sense of mission accomplished there.
It is just one of those things we are always going to be
feeling like we are doing as much as we can, but it is just not
enough. But we are very committed, both as it relates to the
Federal Reserve and as an institution and as to the
institutions we supervise.
Senator Reed. Thank you.
Chairman Crapo. Thank you, Senator Reed.
Senator Kennedy. Thank you, Mr. Chairman.
Good morning, Governor. Welcome.
Mr. Powell. Good morning.
Senator Kennedy. I have read those media accounts, too,
that in the past year you have met with 50 Wall Street
executives. How many community bankers did you meet with in
that time?
Mr. Powell. I do not have a number for you, Senator, but it
would certainly be in the hundreds, if you consider the State
delegations and the other meetings that we have had.
Senator Kennedy. What did the community banks do wrong,
contribute to the meltdown in 2008?
Mr. Powell. Fair to say that the community banks did not
contribute to the meltdown in 2008.
Senator Kennedy. OK. Then why as a Governor have you
repeatedly voted to punish them and regulate them half to
death?
Mr. Powell. I guess I would quibble with that
characterization of my votes and of the things that we have
done. I would like to think that I have been--and frankly, my
colleagues as well on the board have been very focused on
avoiding excessive regulation for community banks.
I actually chaired the subcommittee of the board that its
sole job was to make sure that the regulations that we put in
place for the larger institutions do not apply to the smaller
banks.
I understand that this is never a battle that you win. You
just have to fight it every day. We do fight it, and we are
committed to doing better.
Senator Kennedy. I mean no disrespect, Governor, in saying
this, but you need to fight harder. I think you have been in 44
Fed meetings. You have not dissented one time, and the
community banks in America have had to pay the price with the
overregulation. And I do not understand, given your public
statements that you want to help our community banks. I believe
you. I think you are sincere, but you have supported regulating
them half to death over the past 5 years.
Mr. Powell. Senator, I think we are well set up to make
progress on that, and I hope you will hold us accountable for
that.
Senator Kennedy. Do we still have banks that are too big to
fail?
Mr. Powell. I think we have made a great deal of progress
on that. As I mentioned earlier, I think if you think about
where we were before the financial crisis, where really no one
had thought, oh, what would happen if there is a run on one of
these big-money center banks, and really, the regulators had no
practical choice but to keep them from failing because they
would have brought down the whole financial system with them.
So you start from that place, less than 10 years ago, and
you look at where we are now. So we now have living wills.
Senator Kennedy. Yes.
Mr. Powell. We have the banks that----
Senator Kennedy. Please forgive me for interrupting, but we
are limited strictly to 5 minutes. And I understand what we
have done, but I want to ask you again. Do we still have banks
that are too big to fail in America?
Mr. Powell. Yes. I would say no to that.
Senator Kennedy. OK. I want to ask you about in 1991,
Governor. You were working for the Treasury Department, and by
the way, while we are on that subject, what role did Secretary
Mnuchin have in helping you make decisions if you are
confirmed?
Mr. Powell. He would have no role in that.
Senator Kennedy. None?
Mr. Powell. I do not believe so. No. I cannot----
Senator Kennedy. Zero?
Mr. Powell. I cannot think of any.
Senator Kennedy. Nada?
[Laughter.]
Senator Kennedy. All right. In 1991, while working at
Treasury, you dealt with the collapse of the Bank of New
England. You prevented a bank run. You decided to guarantee all
deposits. How many of the bankers went to jail?
Mr. Powell. There was some jail-going. I cannot put a
number on it for you.
Senator Kennedy. OK. In that same year while you were at
Treasury, there was an auction rate bond, big bid-rigging
scandal. Do you remember that? You know what----
Mr. Powell. Very well. I do, indeed.
Senator Kennedy. Yeah, I bet you do. I do too. Maybe some
other time, we can talk about what an auction rate bond is.
But you were in charge of dealing with the scandal by
Salomon Brothers, and you did iron out an agreement that
penalized the bank. But what about the people who did it? Did
anybody go to jail?
Mr. Powell. Indeed, they did. Indeed, they did.
Senator Kennedy. OK. Well, that is good to hear. How many?
Mr. Powell. Again, I am not sure. I know--maybe just one,
but it might have been more than one. For sure, though, one in
particular did jail time over that.
Senator Kennedy. Is not it true that throughout this entire
auction rate bid-rigging process, which cost taxpayers in this
country billions of dollars--and States--that less than five
people who participated in these bid-rigging went to jail?
Mr. Powell. I am not sure what scandal you are referring to
now, and the Salomon scandal was something quite different than
that. I am not actually sure which----
Senator Kennedy. Do you know what an auction rate----
Mr. Powell. I do. Do you mean--this is from--OK. The
auction, OK. Yeah. Honestly, I was not----
Senator Kennedy. I am over. I want to try to stick to my
time. Forgive me for being so direct, but this is obviously an
important job, Governor.
Mr. Powell. Thank you, Senator.
Senator Kennedy. Thank you, Mr. Chairman.
Chairman Crapo. Thank you, Senator Kennedy.
Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman.
Governor, congratulations on your nomination.
In a speech that you gave in June, you noted that the
average hourly wages are rising only about 2.5 percent per
year, slower than before the crisis, and while the Nation had
experienced the longest post-war economic expansion on record,
corporations have raked in record profits. Many families in New
Jersey and throughout the country are still waiting for a
raise.
Some claim that if we give corporations a massive tax cut,
families will see their wages rise by an astounding $9,000.
Now, I have not seen any evidence that that is credible. In
fact, a 2016 Federal Reserve Board study found there is no
evidence that corporate tax cuts boost economic growth unless
they are implemented in mid-recession.
So, in reality, what this comes down to is hardworking
families already squeezed with rising housing, medical, and
education costs whose paychecks will now have to foot the bill
for a bad deal.
So my question is, assuming that there is a plan in which
families making less than $75,000 a year would collectively
lose more than $59 billion in household income, an income loss
that would be as high as $1,350 per year for certain
households, explain to us the potential negative economic
impacts of such an outcome for middle-class families.
Mr. Powell. Well, Senator, I guess I would start by saying
that part of the deal when you are an economist at the Federal
Reserve Board is that you have time to do your own research,
and I think the paper you are referring to, if it is the one I
am thinking of, was the research of three or four individuals,
and it does not represent a position of the board. It is just
someone's research, so I would not--do not associate that with
a position of the board.
More broadly, as I discussed earlier, we do not have a
model of the effect of these tax bills. That is just not
something that we do. We will incorporate when it is done,
fiscal changes that are made. There will be one of many factors
going into a model.
Senator Menendez. Well, let me refine my question. So what
I am asking--it is not a trick question. So what I am asking
very simply is, Do you think it is good or bad for the economy
if middle-class families were to lose $59 billion in household
income year after year?
Mr. Powell. Well, that, I think is an easy one, and yes, I
think it will be bad.
Senator Menendez. All right. Now, what also do you view are
the economic risks both at a household and macro level if we
would add an additional $1.5 trillion in debt?
Mr. Powell. Again, without commenting on any particular
bill, like all of us, I am concerned about the sustainability
of our fiscal paths in the long run, and it is something that
needs to be attended to over time. Very concerned about that.
Senator Menendez. But it would be a negative consequence to
further add to the debt which already exists?
Mr. Powell. I think we need to be concerned with fiscal
sustainability over the long term.
Senator Menendez. Now, in a speech you gave in June, you
said with regards to monetary policy, and I quote, ``The
problems that some commentators predicted have not come to
pass. Accommodative policy did not generate high inflation or
expensive credit growth. Rather, it helped restore full
employment and return inflation closer to the 2 percent goal.''
That is not a study. That is your comments.
Mr. Powell. That is right.
Senator Menendez. So can you explain how in your view the
Fed's monetary policy stance over the last 5 years helped
contribute to economic expansion, and how will this inform your
approach to monetary policy decisions going forward?
Mr. Powell. Yes. Thank you, Senator.
I think the Fed remained committed after the financial
crisis to provide significant accommodation to the economy as
it recovered. When I joined in 2012, which is about 5 years
ago, I think unemployment was still above 8 percent, and I
think we have been patient in removing accommodation. And I
think that patience has served us well.
I think now the economy is strong. Unemployment is low.
Growth is strong. In fact, it appears to have even picked up,
and so it is time for us to be normalizing interest rates and
the size of the balance sheet as well.
But I do think that that policy that we have had in place
has generally served us well.
Senator Menendez. OK. So let me ask----
Mr. Powell. Served the country well, rather.
Senator Menendez. Let me ask you this finally. As you know,
healthcare accounts for nearly 20 percent of U.S. GDP,
including not only the delivery of life-saving and life-
enhancing health services but also fueling innovations in
patient care, diagnostic, preventative health, research and
development of curative diseases.
Earlier this year, I asked Chair Yellen about the impacts
both at a household and macro level of a spike in the number of
uninsured Americans, and she said that large-scale loss of
access to health insurance could have a significant impact on
household spending for goods and services as well as impact job
mobility. Do you agree with her assessment?
Mr. Powell. I think she was referring to some research, and
if Chair Yellen was referring to research, we can be pretty
confident that she was accurately reflecting what that research
said. It sounds right to me.
Senator Menendez. Thank you very much.
Chairman Crapo. Thank you.
Senator Heller.
Senator Heller. Mr. Chairman, thank you, and, Governor,
thank you for being here. Appreciate you taking time and glad
to have your family here also. Welcome to them also.
You are about to become the most important economic
policymaker in the world. How do you feel about that?
Mr. Powell. I feel fine about it, Senator.
[Laughter.]
Senator Heller. I am glad to hear that.
Historically, I did not support your nomination in 2012 nor
in 2014, worried about the Wall Street bailouts, concerns about
new bailouts and new regulations, but what I am trying to do--
and as we talked personally--is to try to figure out how to get
yes on your nomination this time, and I will continue to look
for that. But I do have some questions for you.
You talked a lot in your opening statement about clarity
and transparency with the Feds. The question I have is, Do you
continue to oppose audit-the-Fed legislation?
Mr. Powell. I do, and I will tell you why. The Fed, of
course, is audited, and in fact, I chaired the committees of
the board that oversee the audit of the Reserve banks and the
audit of the Board of Governors. So we are audited in the sense
in which the general public would understand that world--word.
It means something very different in the current context, and
in this context, what it means is Congress has chosen to shield
monetary policy from a policy audit by the General Accounting
Office. General Accountability Office, we call it now. And that
is I think a wise choice that has been made as a way of showing
respect for the independence of monetary policy.
I think a GAO audit at the request of any Member of
Congress would be a way for Congress to insert itself into the
making of monetary policy on a meeting-by-meeting basis. This
is not something I think would serve us well.
Senator Heller. Do you still largely support the Dodd-Frank
reforms?
Mr. Powell. That is a big, broad bill. That is a thousand
pages of bill there.
Senator Heller. Yes.
Mr. Powell. I guess I would say that if you look at the--
let me broaden it out, if I may, Senator, to the post-crisis
reform program, which is broader than just Dodd-Frank. It talks
about Basel as well.
Senator Heller. Yes.
Mr. Powell. I think the things that we have done--our
capital, higher liquidity, stress testing, resolution--I think
those are important pillars of reform. We can make them more
transparent, more efficient and that sort of thing. I think
other things, we can do more tailoring, and that is really what
we are involved in right now. But generally speaking, as I
said, I think the financial system is quite strong.
Senator Heller. You said on October 5th that more
regulations is not the best answer to every problem. Do you
continue to believe that, and if that is the case, would you
work with us to consider changes in Dodd-Frank?
Mr. Powell. I do strongly believe that and will work with
you, as appropriate.
Senator Heller. Going back to what the Ranking Member was
talking about on GDP, what do you anticipate the GDP being next
year?
Mr. Powell. Next year.
Senator Heller. You got to make a decision in December
whether or not to raise rates, don't you?
Mr. Powell. Yeah. So I----
Senator Heller. So I am assuming that you have some
forecast of GDP over the next 3 years.
Mr. Powell. I do. So I would say that this year, I expect
GDP to come around--coming around 2.5 percent, in that range,
plus or minus. As you look forward, I would expect something
pretty close to that, and the reason is we continue to see high
confidence among businesses and households, accommodated
financial conditions. The stock market is strong. It feels like
we are going to see continued strength next year.
Senator Heller. I want to continue to push on this tax bill
that we have here. I am assuming you are going to tell me the
board does not have a position on the tax bill.
Mr. Powell. Yes, Senator, I am.
Senator Heller. How about personally? Do you have a
personal position on the tax bill?
Mr. Powell. No, Senator, I do not.
Senator Heller. OK. So let me ask you this question. Are
you going to raise rates in December and next year?
Mr. Powell. You know, I have made it a practice not to talk
really specifically about individual meetings because that is
why we have the meeting. We are all supposed to hold back on
that final decision and then go in and listen carefully to each
other's views, all the Reserve bank presidents and all the
Governors. That is how we do it out of respect for each other.
I will say, though, Senator, I think that the case for
raising interest rates at our next meeting is coming together.
Senator Heller. Do you anticipate we will be raising rates
in December?
Mr. Powell. Well, to repeat myself, Senator, I am not going
to give you a really specific answer on December because
again----
Senator Heller. I do not know what ``coming together''
means. That is why I asked a second--the question again.
Mr. Powell. It means I think the conditions are supportive
of doing that, but we need to go and have the meeting and
listen to each other. We generally have a rule. It is a
communications rule that we are not supposed to be saying
exactly what we are going to do before we go in and listen to
one another's views.
Senator Heller. All right. I respect that.
Governor, thank you for being here. Thanks for taking time.
Mr. Powell. Thanks, Senator.
Senator Heller. Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Warren. Thank you, Mr. Chairman, and, Governor
Powell, welcome, and congratulations on your nomination.
So before the 2008 crisis, the Fed had a lot of authority
to regulate and supervise the biggest banks in the country, but
they filed to use that authority. When times were good, it
looked like maybe we did not need strong rules to protect the
financial system, and then when things went south, the Fed's
failure to put strong rules in place ended up costing millions
of people their jobs, millions of people their homes, and
millions of people their savings.
Under Chair Yellen's leadership for the last 4 years, the
Fed has adopted a number of rules to reduce the risk of another
financial crisis, and you have supported those rules and helped
implement them. I understand that now if you are confirmed, you
intend to take another look at those rules. In your written
testimony, you say that you will--and I will quote you--
``continue to consider appropriate ways to ease regulatory
burdens.''
So let me ask this. You specifically say that you will look
for ways to roll the rules back. Are there any rules you
believe should be made stronger?
Mr. Powell. Well, I do--yes. I would say if you think of
the four principal pillars of reform, I think they can all be
made stronger and all be made more transparent, clearer, more
efficient. I have also said there are a number of things that I
would not roll back.
Senator Warren. So what are the rules that you said you
would make stronger?
Mr. Powell. Well, I think if you think about resolution, we
will expect firms to continue to make progress in
resolvability.
On stress testing----
Senator Warren. So you would want to see rules that are
more aggressive on the living wills, for example?
Mr. Powell. Yeah. And I am not so much thinking of more
aggressive rules as our expectation.
Senator Warren. Well, but that is the question I am asking
about. If you are going to revisit the rules for rollback
purposes, which is what you said in your testimony, the
question I am asking is the reverse. I do not want to see a
one-way street here where it is all about rolling-back rules
and it is not considering the places where the rules need to be
stronger.
Mr. Powell. OK. I get your question. I would say that there
are a lot of problems that we need to address in the banking
system.
I do think we have had 8 years now of writing new rules,
and honestly, I cannot really think of a place where we are
lacking an important rule. I think we filled out the rules that
we need, and it is really a question now of dealing with things
from a supervisory standpoint.
Senator Warren. So of all the rules the Fed has issued
during your time here--you have been there for 5 years--on
capital, on leverage, on liquidity, on stress test--you do not
think a single one should be made tougher?
Mr. Powell. Honestly, Senator, I think we have--I think
they are tough enough.
Senator Warren. Well, OK. I got to say this worries me, but
let me take a look for just a minute here, then, at the rules
you say you want to roll back.
A few years ago, the Fed and other agencies finalized the
Volcker Rule, with your support on that. It prohibits banks
from trading on their own account unless it is directly related
to customer service, and this addresses one of the main ways
that banks got into trouble during the buildup of the financial
crisis that sent them to Congress for a $700 billion bailout.
Do you support significant changes in the Volcker Rule that
apply to big banks, for example, by exempting additional forms
of trading?
Mr. Powell. I do support a rewrite of the Volcker Rule. I
do believe we can do that in a way that is faithful to both the
language and the intent of the Volcker law.
Senator Warren. So you would favor exempting more trading,
for example?
Mr. Powell. I would favor tailoring the application of the
proprietary trading.
Senator Warren. OK. I think I would call that weakening the
rule, but I will tell you what. My time is nearly up, and I am
going to follow up with questions for the record here.
But I am deeply concerned that you believe that the biggest
regulatory problem in the country right now is that the rules
are too hard on Wall Street banks. That kind of mindset led the
Fed to ignore the financial system risks before 2008. It helped
lead to the financial crisis, and it helped lead to the
recession that followed it.
So I am worried that we not go down this path again because
if we do it is going to be the same thing, and that is that
millions of families are going to pay the price while the banks
end up, once again, getting bailed out and with record profits.
So I will submit additional questions for the record, Mr.
Chairman, on this line. Thank you.
Chairman Crapo. Thank you, and I note you have 15 seconds
credit, but it only lasts for this hearing.
Senator Warren. But we do get a second round.
Chairman Crapo. Maybe, maybe.
[Laughter.]
Chairman Crapo. Senator Scott.
Senator Scott. Thank you, Mr. Chairman.
Governor, good to see you again. Thank you for your
availability in the recent past.
We have talked about these issues before, and very much
like Mr. Kennedy, I have had some concerns that relates to past
performances. But I do want to talk about specifically the
interest rate environment that we have currently.
Senator Heller asked a couple specific questions as it
relates to increasing the interest rate in the next meeting. As
opposed to asking that specific question, I want to paint a
story, paint a picture, and then ask a question about the
interest rate environment overall. If you are a retiree in
South Carolina--by the way, a great place to retire whenever
that time comes--it certainly has a high quality of life, good
economy, wonderful places to live. But if you are on a fixed
income in Saluda, South Carolina, and you are retired, the
current interest rate environment cuts really into your ability
to live off of your interest income.
As an example, someone with a $10,000 CD, 12-month CD
today, earns about .25 percent interest. If you extend that for
5 years, it is still less than 1 percent.
Said differently, if your nest egg is a half a million
dollars or a million dollars and you are earning 1 or 2
percent, you are living off of $220,000 a year. So the
significant impact of the artificially, in my estimation, low
interest-rate environment has a negative unintended
consequence, I assume, in the current marketplace.
I do realize that the advantage of a low interest-rate
environment helps spur economic activity. Folks are more likely
to buy homes, but that knife cuts both ways.
I would love for you to talk to me about the principles or
the characteristics of an economy that would require or
encourage a more normalization of our interest rate
environment.
Mr. Powell. Thank you, Senator.
I think we have that economic right now, and that is we
have low unemployment, 4.1 percent unemployment. We have got
strong growth. The very low settings of interest rates that
were appropriate during the crisis and after to support
economic activity are no longer appropriate, and that is why we
are raising interest rates now on a gradual path. And I expect
that that will continue.
But I agree. As we discussed, I guess, yesterday or the day
before, the interest rates are a blunt instrument that we have,
and so while interest rates, low interest rates support
economic activity, they lower people's interest bills, they
support investment by businesses, it generally has supposed a
pretty strong recovery, particularly in the labor market.
If you really are dependent on a fixed income and bank
deposits and short-term interest rates, then it has been a
burden for you, unfortunately. But I think, overwhelmingly,
people are helped by lower interest rates and have been. I
would just say help is on the way. I do expect that rates will
continue to go up, and that will feed through into the interest
rates that your constituent is having.
Senator Scott. Thank you.
As it relates to the balance sheet of the Fed, over the
last decade, we have seen that balance sheet balloon, and I
know we talked a lot about starting--creating a new starting
place for a conversation about unwinding that balance sheet and
then getting to a number that would be perhaps our new normal,
not necessarily the $1 trillion that I believe it was
beforehand. But can you walk me through what you see as a
snapshot in about 30 seconds or less, since my time is running
out, of what you see happening with that balance sheet?
Mr. Powell. Sure. As we have announced, we are allowing--as
bonds mature, we are allowing them to just--we are just giving
the money back to Treasury, and so our balance sheet is
shrinking passively and gradually. The market has not reacted
to that, and on that path in about 3 or 4 years, we will be
down to a new normal.
Now, what will that new normal be? It will be much smaller
than the balance sheet of today. It will be much bigger than
the balance sheet of 10 years ago, and ultimately, that level
will depend on two things. It will depend on the public's
demand for cash, which to us is a liability, to them an asset,
and also on banks' demand for reserves, which is going to be
much higher than it was before the crisis. Demand for cash has
more than doubled in 10 years. So those two things are the
reasons why the balance sheet will be bigger.
And I said earlier my guess is--and it is a guess--is that
it will be somewhere in the $2.5 to $3 trillion range, but the
truth is we do not really know.
Senator Scott. With my last 15 seconds, there are two
points. One, I am encouraged by your thoughtfulness about
taking a look at the asset thresholds that may be a part of
Senator Crapo's legislative package and looking for ways for us
to perhaps increase the thresholds that have stringent, prudent
regulations.
The second thing I would say is I would encourage, as we
look at the SIFI designation in the nonbank arena, having spent
a quarter of a century in the insurance industry, I would
suggest that clarity on what makes you--gets you designated and
clarity on how you lose that designation would be incredibly
important.
Mr. Powell. Thank you, Senator.
Chairman Crapo. Thank you.
Senator Schatz.
Senator Schatz. Thank you, Mr. Chairman.
Thank you, Governor, for your willingness to continue to
serve. I thank you for the conversation we had last week.
I want to give you some data points. According to the FDIC,
banks had record-breaking profits in 2016 and the highest
return on equity in years. Data from 2017 shows that banks are
likely to do even better this year across the board. Banks have
increased their dividends to shareholders by 17 percent.
Community banks' earnings have also been increasing. They were
up almost 10 percent this quarter compared to last year.
Household credits such as home loans, car loans, credit
cards has surpassed pre-recession highs, and according to the
Fed, sluggish loan growth in the commercial sector is due to a
lack of demand.
And so the question follows on Senator Warren's question
which is, What problem are we solving with deregulation?
Mr. Powell. I am not going to characterize what we are
doing as deregulation. I would rather think of it as looking
back over 8 years of what is very innovative regulation in many
cases, things that have never been done, like liquidity
requirements and resolution and stress testing. All of those
are brand-new, and looking back, as I think it is our
obligation to do, and making sure that what we did makes sense.
Senator Schatz. Right. But is not the objective to get all
these metrics up, and are not these metrics already up? And so
does it not make sense to err on the side of caution?
I understand in principle--some people in principle believe
that too much regulation is a problem, and it ought to be
eliminated almost as an ideological precept. But if you are
looking at, as a practical matter, are not these the data
points you want? Are we not where we want to be in terms of
bank profitability? In fact, is not bank profitability not the
problem? But to the extent that there was net income among the
10 bank holding companies in the United States, 99 percent of
their net income was distributed in the form of dividends and
stock buyback.
So I ask the question again. What are we fixing, and for
whom?
Mr. Powell. Let me agree that the banking system is
healthy. It is great to see. That was not the case a few years
ago, and it is nice to see banks profitably serving their
customers again. So we are not looking to change that.
And I would also agree that we do want to err on the side
of caution, and we think we are doing that. But even consistent
with that, it does not help anyone for banks to waste money, if
you will, to spend more money than they reasonably need to
spend to accomplish these safety and soundness objectives.
Those costs will fall on customers and borrowers and such. So
it is our obligation among other obligations to make sure that
regulation is efficient.
Senator Schatz. You are just saying it is too much
paperwork, too much compliance?
Mr. Powell. Yes. You hear that a lot on different issues.
It is different things on different issues, but there is
certainly just a lot of regulatory burden. And a certain amount
of it is unavoidable, but our job is to be efficient and
effective as well as protecting the safety and soundness.
Senator Schatz. I guess my concern is that if you are a
bank, both sort of dispositionally and from the standpoint of
wanting to make profits, you want to reduce paperwork burden.
And no doubt, when you lay down a whole new matrix of
regulation, there are going to be instances in which it is a
pain for a bank, small or large, to comply.
But, again, they have managed record profitability, even
despite whatever paperwork and compliance burdens there may be,
and there is zero evidence that if we reduce the paperwork
burden or the compliance burden that they will pass on the
savings in the form of increased lending or increased
remuneration in whatever form to their customers.
I only have 50 seconds left, and I just want to follow up
on a question that I asked you in private. When the Fed
formulates monetary policy, it takes a broad look at the
economy and identifies short- and medium-run risks and trends.
I have a copy of the minutes from the most recent meeting,
and there is a brief discussion of the economic impact of
hurricane-related disruptions as well as dislocation from
wildfires. The minutes indicate that in the past, these have
only had a temporary impact. So I will take these--I will offer
the questions and then take the answer for the record. How many
events would it take to have a material impact on the economy?
Has the Federal Reserve considered what number would be--what
number that would be in terms of the number of events or the
total cost of the damage? And have you worked with NOAA or
other science agencies about the likelihood of the number of
severe weather events increasing?
My basic point is that I understand this is difficult to
quantify, but you are in the business of analyzing things that
are difficult to quantify. And I think we now believe that this
is material, and I would like you to consider it. And I will
take those for the record.
Chairman Crapo. Senator Tillis.
Senator Tillis. Thank you, Mr. Chair and Mr. Powell. Thank
you for being here. Also, thank you for being so generous with
your time in the meetings that you have had in my office.
I have covered some of this in the meeting that we had in
my office, but I want to go back to it again. You have been
nominated to a position where you are ultimately going to be, I
believe when you are confirmed, Randy Quarles' boss. You also
said in the private--in our meeting in the office that you are
going to rely a lot on him to take a look at regulatory reform
issues, regulatory right-sizing. In that first meeting that any
boss has with somebody that they are working with, they try to
give them some direction.
So, thematically, what are you going to talk about when it
comes to recalibration of regs post-crisis? I am kind of
curious, your comments on Basel Committee and the so-called
Basel IV. Actually, just if we could start with that and a
general discussion about how regulations--it is not about
repealing regulation. Some of them need to exist, and if they
had been in place in 2008, we probably would not have had a
crisis of the magnitude that we had.
But now it is almost as if we either have too many people
regulating the same regulations, too many organizations, or we
are not really clean in our executions, which is making it very
costly, very difficult for businesses, and distracting from
what they want to do is run their business. So that was a
compound question. You can answer any part of it or all of it.
[Laughter.]
Mr. Powell. OK. I will start by saying my relationship with
Randy Quarles goes back so far, I cannot think of what a first
meeting would be like. I actually hired him at Treasury 25
years ago, and he has been a close friend all that time. I
think we are very well aligned on our approach to the issues
that he will face as Vice Chair for Supervision.
You asked about Basel. My understanding--and Vice Chairman
Quarles has the lead on this now, but my understanding is that
there is significant progress toward an agreement among all of
the principal participants at Basel around uniform floors for
particular risk categories, and that would give us a way to
wrap up Basel III. And I think that would be very much in our
interest to do so. It is other countries that have lower floors
and lower risk weightings on their assets, so this really helps
us.
Senator Tillis. I just came from a press conference
promoting the tax plan that we hope creates economic activity,
but in my own personal experience in North Carolina, the two
things that really combined creates a great economic activity
were tax reform and regulatory reform.
So I am hopeful over the course of this year within your
lanes, you are doing everything you can to question how
regulations get executed, right-sizing them to the point, to
the minimum lightest touch necessary so that we are reducing
what is an increasing cost in regulatory compliance, but by
definition, with all due respect to my friends and colleagues
at Pricewaterhouse, many of those compliance jobs are, by
definition, nonproductive jobs. All they do is count whether or
not all the productive activities were cross-tied right.
So, hopefully, we can see some leadership on your part with
respect to the Fed and the other regulatory agencies about more
clarity, and I think a more tip of the spear--we had the
discussion about tip of the spear, regulators staying within
their lanes and relying on other ones to the extent they need
the information to complete their responsibilities.
Now, I have a question about the goal of the Fed over the
last 9 years. It has been an increase in inflation and not
growth, but what has a more corrosive impact on the middle
class? Low inflation or low growth?
Mr. Powell. Well, low growth.
Senator Tillis. And so outside of the things that you are
directly responsible for on the supply side, what sorts of
things should we be looking at to help stimulate growth?
Mr. Powell. Let me just amplify our mandate is inflation
and maximum employment, stable prices and maximum employment.
It is not growth. So really the things that can increase the
stable--the sustainable growth rate of the U.S. economy are
things that are really in your lane, not so much ours, and I
would boil that down into a couple of things.
One is labor force participation, and the other is
productivity. If you think about it really you want as many
people as possible taking part in the labor force not just for
the overall U.S. economy's good, but for their own good. People
are happier and healthier if they are in a labor force, and
there are policies that can affect labor force participation.
Productivity is very, very difficult to forecast, and it
comes down to a technological advance and its effect on
economic growth--very, very hard to forecast. It is also,
though, the skills and aptitudes that our labor force brings to
the job, and that is something that you can affect. It is
policies that promote investment, investment in infrastructure,
private investment by companies, and I think all of those
policies are really in the hands of Congress. I think it is
important that we have a long-run focus on increasing our
sustainable growth rate.
Senator Tillis. So it is outside of your lane, but just a
quick question. If you reduce the tax and regulatory burden on
certain businesses, in your opinion, will there be more or less
investment in productivity?
Mr. Powell. I mean, I think there clearly are ways in the
Tax Code to support different kinds of activity, and certainly,
investment is one of those.
Senator Tillis. Thank you.
Chairman Crapo. Thank you.
Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman and to the
Ranking Member, and congratulations, Mr. Powell, on your
nomination.
You know, both your immediate predecessors at the Fed,
Chairman Yellen and Chairman Bernanke, repeatedly testified
before congressional committees about their concern and the
impact of the rising debt, national debt, on the economy.
Here is what Chairman Bernanke told the Joint Economic
Committee in June of 2012. He said, ``Large deficits in debt
over a long period of time raise interest rates above levels
where they normally would be and crowd out private investment
and are bad for growth and productivity. They also may involve
borrowing from foreign, foreign lenders, which is also a drain
on current U.S. income,'' unquote. Do you agree with Chairman
Bernanke's statement?
Mr. Powell. Yes, I do.
Senator Van Hollen. And here is what Chairman Yellen said
this year on July 12th before the House Committee on financial
services expressing he concerns about rising debt. She said,
``Current spending and taxation decisions will lead to an
unsustainable debt situation with rising interest rates and
declining investment in the United States that will further
harm productivity, growth, and living standards,'' unquote. Do
you agree with that statement?
Mr. Powell. I do.
Senator Van Hollen. All right. Obviously, if we increase
the national debt, we are going to make those problems even
worse; in other words, the long-term debt impact harming
economic growth. Is not that the case?
Mr. Powell. Yes. I think the idea would be to get GDP
growing faster than the debt over a long, long period of time.
Senator Van Hollen. Do you have any reason to doubt the
Congressional Budget Office's analysis of the debt increase
that would result from the bill that has been proposed here in
the Senate by Republican Senators?
Mr. Powell. To tell you the truth, Senator, I have not
looked at that. it is not something that we are responsible
for.
Senator Van Hollen. No. So you have no reason to doubt
those numbers, do you?
Mr. Powell. I have no reason to know those numbers, let
alone doubt them.
Senator Van Hollen. Do you have a concern about what the
debt impact of actions the Senate and the House take, whether
on the tax side or the spending side, with respect to the
economy?
Mr. Powell. It is a bit of a fine line that we have to walk
on this, and I am hoping I can walk it. And that is, clearly,
the debt needs to be on a sustainable path. We all know that. I
think we all agree on that.
On the other hand, it is not for us to be taking part in
the discussion that you and your other elected colleagues are
having over this. It is not our role, and there are agencies
who have that role. It is really not for us.
Senator Van Hollen. OK. Well, both of your immediate
predecessors commented repeatedly about their concern over the
impact of rising national debts, and you just indicated that
you shared their concern and agreed with their earlier
statements.
So putting aside whether or not you think the CBO analysis
of $1.5 trillion addition of the debt is correct or not, if
there was another $1.5 trillion addition to the debt, it would
make a bad situation worse, would it not?
Mr. Powell. It would, all else equal.
Senator Van Hollen. And as Chairman Bernanke said a number
of years ago, he said--and I quote--``So, at some point,
Congress is going to have to make a tradeoff between what its
spending programs are and what taxes it is willing to''--he
said at that time ``raise.'' We are now talking about reducing
the amount of revenue coming into the Federal Treasury, but the
basic math remains the same, does it not?
Mr. Powell. It does.
Senator Van Hollen. So if we want to avoid making the debt
even worse and you are going to add $1.5 trillion to debt, the
only way to deal with that is to then cut things like Social
Security, Medicare, Medicaid. Is not that the case?
Mr. Powell. You know, there are a lot of moving pieces in
it. As I mentioned earlier, what the country really needs is to
have debt growing faster than GDP. What matters is our debt-to-
GDP ratio. That is what makes us on an unsustainable path, so
growth also enters into the equation.
Senator Van Hollen. That is right. And the Congressional
Budget Office, they have their own projections, as you do, as
was indicated earlier of what the projected growth path would
be. There are things that we may or may not be able to do to
improve that, but there is no analysis out there, no credible
analysis that suggests that when you have a massive tax cut
primarily going to major corporations that the result is
actually going to be a growth that actually makes up for the
lost revenue in terms of debt. Do you know of any credible
analysis that shows that?
Mr. Powell. Senator, honestly, I have not been following
the analysis.
Senator Van Hollen. Do you know of any credible analysis
that indicates that this tax cut would, quote, ``pay for
itself''?
Mr. Powell. I am not an expert on what analysis is out
there about this tax bill, this proposal, this set of
proposals.
Senator Van Hollen. All right. Well, I would urge you to
follow the tradition of your predecessors, who were very
careful not to have weighed into the specifics of the fiscal
decisions made by Congress but did express this concern about
rising debts.
And I thank you for your testimony.
Thank you, Mr. Chair.
Chairman Crapo. Thank you.
Senator Perdue. Thank you, Mr. Chair, and thank you,
Governor Powell, for being willing to take on this
responsibility.
I am encouraged that we are having a conversation about our
debt, and I appreciate the conversation you and I had privately
about it. And I like your considerations on that.
I would like to remind the Committee in the last 16 years,
we have added $14 trillion to a $6 trillion debt at the end of
2000, 4 under President Bush and 10 in the last Administration.
And in that last Administration, we had the lowest economic
growth in United States history.
In the next 10 years, if we do nothing from today, this
Federal Government will add $11 trillion in current dollars to
the current debt. So we will end up--right now, the current
projection is if this Government does not change the way it
does business, we will add $11 trillion to the debt.
In 2000, the size of the Federal Government, Governor, was
$2.4 trillion in constant dollars. Last year, it was $4
trillion. There is our problem. We collected more tax last year
than any time in our history, and the year before that, we
collected more tax than any other time in our history.
Globally, we have $200 trillion of debt. Of that, 60 is
sovereign debt. Of that, $20 trillion is U.S. debt, and yet a
number of countries have interest rates in their sovereign debt
that actually are put out at negative interest rates. And I do
not think the world has ever seen a situation where we had the
four major central banks with somewhere around $18 trillion on
their balance sheets, in a situation where we have $200
trillion of debt, of which 60 is sovereign, and of that, a
significant number is let out at negative interest rates.
As you think about restructuring your balance sheet, what
concerns you relative to the size of Government debt, sovereign
debt around the world, and of that, the United States being
one-third of that sovereign debt in terms of how you are going
to manage one of the four major central banks going forward?
Mr. Powell. Thank you, Senator.
I think we have a good plan, and I think the market agrees
to shrink our balance sheet. We have laid out very clearly in a
series of public minutes over three meetings over the last
year. I think we were quite careful to socialize the plan, and
the market has accepted it. And it will lead to a much smaller
balance sheet, and it will do so over what in these matters is
a fairly quick period of time, 3, 4, 5 years, kind of a range
of things, so----
Senator Perdue. Are there any--I am sorry to interrupt. Are
there any assumptions in that calculation or in that thought
process of the freeing up of capital on the private side in
terms of the money that is withheld from being active in the
economy today? Some estimates as high as $6 or $7 trillion are
not at work in the U.S. economy right now because of fiscal
policy, not monetary policy. Does that weigh into that
decision?
Mr. Powell. Actually, it does not. What happens, Senator,
is that when we allow a security to roll off, Treasury will
reissue a comparably sized security or in bulk. The same amount
will--the U.S. Government debt will remain the same. It will
just be issued to the public rather than being on our balance
sheet. That is what will happen. So it does not add to capital.
You point to the other central banks, and there are big
balance sheets, but they are some way behind us. Ideally, over
time, all of our balance sheets can shrink.
Senator Perdue. But all four of the balance sheets are
around $4.5 to $5 trillion right now. It is the highest they
have ever been, and so I applaud your background and applaud
your ability to deal with that.
I would like to change subjects, in the minute I have got
left, to talk about blockchain technology. It is a little bit
off the wall, but I think I am very--I am beginning to be very
concerned that we have another bubble that is some four or five
times the size of the dot-com bubble in the late '90s, and that
has to do with the cryptocurrencies like Bitcoin. Bitcoin's
market value now is bigger than all but 29 of the S&P 500
corporations in America. Assuming that this continues and
talking about that bubble and the size of--and the growth of
the use of these cryptocurrencies, if that continues to grow,
to what extent will that affect your ability to affect results
from your typical monetary policy options that you typically
have as a central bank?
Mr. Powell. You know, in the long, long run, things--
cryptocurrencies of that nature could matter. They do not
really matter today. They are just not big enough.
Senator Perdue. Right.
Mr. Powell. There is not anywhere near close to enough
volume for it to matter for us.
Senator Perdue. Well, that was the problem with the dot-com
bubble, too, on a different level, was there were so few
entities, and there was so much money interested in chasing.
And that is what is happening right now in the Bitcoin area,
but the growth of that area was much, much faster than anybody
thought at that time, too, in the late '90s.
Mr. Powell. Yes. There is no question the valuations have
really gone up quite a lot in the last year or so. I do not
have a view on the appropriate level of the valuation, of
course, but again, from our standpoint, cryptocurrencies are
something we monitor very carefully. We actually look at
blockchain as something that may have significant applications
in the wholesale payments part of the economy, something we pay
close attention to.
Senator Perdue. So you are watching what Ali Baba is doing
in Asia today relative to the blockchain technology?
Mr. Powell. We are watching all of those technologies. It
is something we have to do, I think, and it is something that
is actually kind of enjoyable and interesting to do.
Senator Perdue. Well, thank you for being willing to do
this. Thank you.
Thank you, Mr. Chairman.
Mr. Powell. Thank you, Senator.
Chairman Crapo. Senator Cortez Masto.
Senator Cortez Masto. Thank you, Mr. Chair.
Welcome, Governor Powell. It is good to see you again.
Thank you for taking the time with me. Welcome to your family.
It is great to see you here as well.
So I am going to start with something, a little topic, a
little different. President Mester of the Cleveland Federal
Reserve gave a speech earlier this month where she noted that
more immigration is needed to drive the U.S. economy at a time
when the population is aging and productivity is stalling.
Governor Powell, do you agree with President Mester that we
need more, not less, immigration to help drive our country's
long-term economic growth?
Mr. Powell. Senator, as I mentioned earlier, the size of
the labor force is an important determinant of our potential
growth over time. Labor force growth is really slow these days.
It is about a half of 1 percent. You go back 30 years, it was
2.5 percent. So it is a big reason why our economy has slowed
down, and immigration has been a real contributor to that.
Having said that, immigration is another one of those
issues that is really not in our lane, and really those
decisions are for you and your elected colleagues.
Senator Cortez Masto. No, I appreciate that, but we have
been talking about growing the economy, and part of your
purview is labor. And I appreciate your comments that
immigration is an important part of that labor force that grows
our economy, so thank you.
As Chair of the Fed's committee overseeing the Federal
Reserve Bank's operations, including the Presidential search
processes, we have seen some improvement in the diversity of
the regional bank presidents, the boards of directors, the
banks' workforces, and better interactions with advocacy groups
in the banks' communities. If confirmed, what will you do to
increase the diversity of the leadership workforce and opinions
in the Federal Reserve system?
Mr. Powell. Thank you.
As I mentioned, I am a big supporter of the Federal Reserve
system and also of diversity. I think we make better decisions
when we have diverse voices around the table, and that is
something we are very committed to at the Federal Reserve, both
at the Board of Governors and in the Reserve banks. And that is
something I have been deeply involved in during all my time
there, and I would say that--so I have had a chance to--this is
something people have been working on for decades now, and you
begin to see what works. And so my view of what works is a lot
of private companies have been very successful in advancing
diversity, and what seems to work is to have a holistic plan
that you stick with over a long period of time, and it is about
recruiting. It is about going out of your way to bring people
in. Once they are in, it is about giving them paths for
success, and it is about having an overall culture and company
that is very focused on diversity and that sticks with that
focus for a long period of time. That works.
Senator Cortez Masto. I appreciate that.
Mr. Powell. It is not something you can do overnight.
You mentioned the Reserve bank president searches.
Senator Cortez Masto. Right.
Mr. Powell. That is something that I have been responsible
for, and I assure you, we always have a diverse pool of
candidates.
Senator Cortez Masto. And I agree, and I appreciate it. It
is not just check the box. It is a cultural change that is
constant, so thank you for your comments there.
Congressional Republicans are set to pass, as we have
discussed today, a tax cut bill geared toward large
corporations. At the same time, this Committee is about to
consider legislation to roll back rules for some of the
Nation's largest banks. What can you do at the Fed to ensure
that this tax windfall and this deregulation actually benefits
workers and does not just translate into more executive bonuses
and stock buybacks?
Mr. Powell. Well, our tools are what they are. So we have
monetary policy, which can shove the economy in the direction
of stable prices and maximum employment, and we have regulatory
policy, which can ensure safety and soundness of institutions.
When institutions become more profitable, just taking your
suggestion, some of that is going to go to shareholders. Some
is going to go to customers. Some is going to employees. But we
do not really have tools that affect the distribution of
profits.
Senator Cortez Masto. Right. But you do have a component of
consumer protection.
Mr. Powell. We do.
Senator Cortez Masto. And you do have a concern about the
workforce and growing that workforce and making sure there is a
strong workforce, correct?
Mr. Powell. Yes.
Senator Cortez Masto. So part of the concern that I am
hearing--and I did not have--I really have not heard a lot of
that discussion--is what you are going to do to address
specifically those consumer protection issues and particularly
also protecting the workers in that work force.
Mr. Powell. Consumer protection, we have not actually
talked much about. We have been assigned an important role in
consumer protection. We take it very seriously. I am committed
as chair, as I have been as a Governor, with responsibility for
our budgets that consumer protection will have the resources it
needs to do its job. Whatever Congress assigns us, we will try
to do well and aggressively, and that is my undertaking to you.
Senator Cortez Masto. I appreciate that.
I know my time is running out, and I will submit the rest
of my questions for the record. But I, like many of my
colleagues, do have concerns. I come from Nevada. Dodd-Frank
was there for a reason, because we had a horrific crisis, as
you well know. We talked about this, and the deregulation of
Dodd-Frank and many of these regulations that were put in place
to protect individual consumers are so important. And I am
concerned about rolling back any regulations that is going to
open that door in lessen any type of consumer protection, any
type of work that we have done particularly in Nevada process
country to protect individuals.
So I look forward to having further conversations with you
with respect to the idea of tailoring your regulations as well.
Thank you.
Mr. Powell. Thank you, Senator.
Chairman Crapo. Thank you.
Senator Shelby.
Senator Shelby. Governor Powell, congratulations. I look
forward to voting for you and helping in any way I can to get
you confirmed. I think it will not be long, hopefully, that you
will be over at the Fed as the Chairman, and you will have a
full complement over there, which you will need. You will put
your stamp on the Fed, and I hope it will be in a good way
based on your experience in the past.
We have talked about a lot of things here, but I am going
to get back to basic inflation scares, if any, price stability,
which is so important, as one of your mandates. A lot of
economists are puzzled by the outlook of inflation statistics.
At a time, you mentioned or alluded to that there is not real--
these are my words, not yours--not real pressure on wages,
which is always a big factor. I do not see a lot of--myself, a
lot of pressure from energy cost and so forth.
We are in a different economy than some of us grew up in,
with the globalization of things. You alluded to the fact that
you would have an open market meeting soon, and you could bump
up the interest rate some. I hope you will not spook the bond
markets in doing this gradually because certainty is important
in the economy and predictability.
So where do you see the specter of inflation? I do not see
the psychology of inflation out there, which is a dangerous
thing. I do not see the wage stuff and other things I already
mentioned. What do you see there that maybe we do not that you
can tell us about?
Senator Shelby. OK. Thank you, Senator.
So inflation has been below our 2 percent objective. I
think every single month or maybe every single month but once
since I joined the Board of Governors in May 2012, and for most
of that time, it has been in the range of 1.5 percent. It is
actually really important that we achieve our 2 percent target
because our credibility is important on that front.
Lately, inflation was moving up, and it got pretty close to
2 percent at the beginning of this year, and then this year
came, and we have actually stronger growth. We have a healthy
labor market, but to my surprise, to all of our surprises, I
believe, inflation readings started to come in weak. And that
was a surprise, and the question is why. There are multiple
possible explanations. One is that these are just idiosyncratic
factors, like the ones that you hear about are--there was a big
drop in pricing for mobile telephone services because of a
price war and also a change in the way that they calculate
that; in addition, pharmaceutical prices.
Basically, underlying inflation moves according to a slowly
changing, evolving trend, but then there are these factors that
move around a lot. And we happen to have had a number of
factors that push it down, and there are different views. We
have been very public about this debate that we have been
having in the FOMC and in our public remarks, as you mentioned.
One question is: Is it transitory, or are there more
fundamental things at work here? I think we are all watching
carefully to see, and we will have to be guided by the data as
they come.
Senator Shelby. We really do not know yet, do we?
Mr. Powell. No, we do not.
Senator Shelby. Is it transitory, or is it a larger trend?
But you will be watching it day by day, right?
Mr. Powell. We will, and that is what will dictate the path
of our policy. We can afford to go more slowly if we determine
that inflation is going to perform lower than we thought, and
we can move more quickly.
Senator Shelby. Let us talk about the balance sheet just a
minute. I think you are on the right trajectory. I think you
used the term that you might draw the balance sheet down to
$3.5 trillion, something like that, whatever. Is that the new
norm? Because that was not the norm. That is still a pretty
high threshold, and if you did draw it down to, say, $3.5
trillion, does that hamper you down the road in case you had
some drastic things to do?
Mr. Powell. Senator, I would say that we do not really know
with any certainty what the new normal will be. My own guess
would be--and this depends on a number of things that I will
mention, but would be more in the range of $2.5 to $3 trillion,
which is $1.5 to $2 trillion smaller than our current balance
sheet.
Ultimately, what will dictate the size of the balance sheet
is going to be the public's demand for our liabilities,
particularly cash, which has been growing surprisingly fastly
in world--quickly in a world where everyone seems to use
electronic cash. Nonetheless, people like paper cash a lot--and
also demand for reserves, which are going to be higher than
they were because the requirements for banks to hold high-
quality liquid assets. The highest-quality liquid asset is our
reserve.
So somewhere in that range of 2.5 to 3 might be the answer.
It might be a little higher or a little lower.
Senator Shelby. In the area of the other mandate you are
all involved in is the regulatory area. Is it important when
you come through the Fed or FDIC or anybody comes through with
a regulation, proposes a regulation, that they have some type
of serious cost-benefit analysis before they implement a
regulatory change?
Mr. Powell. It is, Senator, and we always try to implement
the laws that you pass. We try to turn them into regulations as
appropriate, and we try to do it in the most efficient, least
costly way that we can that is consistent with Congress'
intent.
Over the last 3 or 4 years, we have really raised our game,
I think, significantly on this, and we are doing more of that.
We have been putting out, for example, white papers in
connection with big rules like the G-SIB surcharge or the
others I could mention, and they explicitly solicit comment on
cost-benefit analysis.
We have also started a unit of economists and policymakers
that is going to focus very particularly on cost-benefit
analysis. So I think we are always trying to be better at that.
We regard it as a very fundamental part of what we do.
Senator Shelby. You also mentioned the word ``capital,''
which is very important to any financial institution, and I
think it is key to bank survival and financial survival. But
liquidity is important too, is it not? You can have all the
capital in the world, if you cannot have liquidity--do they not
kind of go together to have a strong institution?
Mr. Powell. They do, and in fact, liquidity, as you have
suggested--liquidity runs is really what kills banks when they
die, but having higher capital makes it much less likely that
there will be a run on the bank in the first place. So that is
the sense in which I agree with you that they do work together.
They are both important.
Senator Shelby. Thank you.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you, Senator.
Senator Tester.
Senator Tester. Yeah. Thank you, Mr. Chairman, and thank
you for being here, Governor Powell.
I want to start my comments by echoing the Ranking Member's
comments on Janet Yellen. I think she has done an incredible
job and in a very difficult situation when she came on board,
and she needs to be recognized for that.
Governor Powell, I appreciate you being here today. I guess
the debt is about $20 trillion. Could you give me any idea on
what an additional $2 trillion would impact, how that would
impact the economy, another $2 trillion in debt?
Mr. Powell. Holding all else equal?
Senator Tester. Yeah.
Mr. Powell. Well, you would have higher interest costs,
obviously. If you hold all else equal, then you have higher
interest costs and either taxes will have to go up to pay for
that or you will have even more debt, and that will crowd out
private capital and private investment.
Senator Tester. Is there any numbers that you have on
potential impact to the economy, the higher the debt goes? Is
it half percent, a quarter percent, a full percent per
trillion? Do you know?
Mr. Powell. I do not have that handy, no.
Senator Tester. OK. I mean, the reason it is important is
because about a third of our current debt is due to the last
tax cut that was done during the Bush administration, and so I
think we need to get the right information.
I do not know that there is anybody on this side of the
aisle that does not want to see a more simplified Tax Code and
want to see a Tax Code that does not drive the economy in a
positive direction, but I think the reason the Ranking Member
asked you the questions he asked you, the reason I asked a
question is because there is just not a lot of information out
there on what the impacts are going to be, and after it is
done, it is too late. And I just wanted to make that point. It
is not in your portfolio, but it will impact your portfolio
very significantly moving forward.
There is a bipartisan bill out that we are probably going
to address, I think, later this week or next week called the
Economic Growth, Regulatory Relief, and Consumer Protection
Act. Have you had a chance to take a look at that bill? It is a
bipartisan bill. I think there are 20 cosponsors, 10 D's, 10
R's. Have you had a chance to take a look at it at all?
Mr. Powell. Yes, I have, Senator.
Senator Tester. OK. And I was not here earlier, so if this
has been asked before, I apologize. But as you looked at this
bill, are we doing anything that is going to put our
financial--since I am a cosponsor, I say ``we''--putting our
financial system at risk with the regulatory relief that is in
that bill?
Mr. Powell. I really do not see anything. You know, we are
looking at it carefully. We are going to offer technical
comments, but I do not see anything, no.
Senator Tester. OK. Part of that bill is eliminating the
Volcker Rule of compliance for community banks with less than
$10 billion as long as they have less than 5 percent trading
assets and liabilities. Any concerns there?
Mr. Powell. None.
Senator Tester. OK. There is an EGRPRA process that the Fed
completed earlier this year. A portion of that review talks
about synchronization, streamlining, I think something that
everybody can get behind. I think it is key that the regulators
need to work to share information so that they are not being
duplicative. It is something that I hear a lot from community
banks.
Do you have any plans as Chairman, because I think you will
be confirmed--but do you have any plans as Chairman to update
and modernize the examination process between regulators?
Mr. Powell. Between regulators?
Senator Tester. Yep. So that there is not that duplication.
Mr. Powell. Assuming that I--if I can assume for a second
that I will be confirmed----
Senator Tester. Yes.
Mr. Powell.----then that is something that I am committed
to trying to do better on. We are blessed with a lot of
regulatory agencies in our system, and some of that is good,
but it does lead to overlap and duplication. I will be
committed to improving on that.
Senator Tester. As you look at your position--and you are
no rookie to this. You have been around the block a time or
two. Would you say that the number one job that you have to do
as Chairman of the Fed is to make sure that consumers are not
harmed without harming the safety and soundness of our
financial system?
Mr. Powell. I cannot disagree with that.
Senator Tester. OK, good.
Just real quick--and I have got about 50 seconds here.
Senator Heller and I introduced the International Insurance
Capital Standards Accountability. It would require the Federal
Reserve to create an advisory committee on international
insurance standards. It would require more transparency
surrounding the process when the standards are being set.
As Chairman of the Fed, how would you work with prudential
regulators to ensure that the Fed fully understands the nature
of these entities and their current regulatory oversight?
Mr. Powell. For insurance companies, I think we have
acquired a significant amount of insurance talent at the Fed
and in the other agencies and on the FSOC, and we would be
committed to understanding the industry as best we can, and by
the way, for our regulation of insurance, of the insurance
industry to be as transparent, ex ante as we can make it.
Senator Tester. And so you would agree that the insurance
capital standards would be different than financial capital
standards----
Mr. Powell. Yes.
Senator Tester.----financial institutions?
Mr. Powell. The risks of those institutions are quite
different. We are aware of that.
Senator Tester. Yeah. Thank you. Thank you very much.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
That concludes a first round. There have been several
Senators who have asked for a second round, and so we will do
that.
I will forego, although I may--I reserve the right to jump
back in, but I am going to go immediately to our Ranking
Member, Senator Brown.
Senator Brown. Thank you, Mr. Chairman, and again, thank
you for being here, Governor.
I want to follow up somewhat on Senator Cortez Masto's
questions, comments. Since Kennedy and also I think, Senator
Schatz and Van Hollen mentioned some of this--since 2008, bank
profits are up, executive compensations rebounded. The wages
for working people are stagnant. The wealth gap between whites
on the one hand and African Americans and Latinos on the other
has not narrowed. Many people in my State have yet to feel the
impact of the economic recovery. You know all those things. I
hope they are central to your chairmanship.
Past Fed Chairs Bernanke and Yellen cited inequality not
just as a humanitarian personal problem, but also a pressing
economic problem. There is not really a consensus among
economists that income inequality and wage inequality is a drag
on growth. Do you agree with that, and if so, what do you do to
address income inequality?
Mr. Powell. I do agree with that, Senator, and I would say
to me, the most compelling factor--I think a number of factors
are at work here, but if you look at the flattening out of U.S.
educational attainment in the '70s and '80s and you look at the
rise in inequality of the stagnation of middle-class incomes,
median incomes, those two stories fit together so well that I
think that the way for U.S. workers to compete in the global
economy is through having skills, the best skills, the best
education in the world, and in a sense, that is a big part of
the story behind inequality.
Senator Brown. OK. But the question was what do you do? You
are not President. You are not a Member of Congress that should
do more to invest in retraining and education, in early
childhood education. What do you do to address income
inequality?
Mr. Powell. We do not have a lot of tools to address the
income inequality. We do not have tools to address
distributional effects really at all, but I would say that our
commitment to our dual mandate in particular, to the maximum
employment mandate is to make sure that anyone who wants a job
either has one or can find one relatively easily. That should
help.
Senator Brown. Does that give you pause when some day you
can raise interest rates because we are at full employment,
knowing full employment may be for people that look like me
that get to go to college? Full employment is full employee,
but people that are people of color, people that have left the
workforce, have given up on a job, that it is not full
employment for them, does not that construct give you pause for
thinking about increasing interest rates?
Mr. Powell. Yes, of course. We are very focused on pockets
of people and different pockets of people for whom the recovery
is not real yet and people who have--such that groups have
higher unemployment rates than others and higher poverty rates
than others and that sort of thing.
I think we do deal at the aggregate level, and it is
important to say that we are raising interest rates now because
the economy is strong, and if we wait too long--I am not saying
we are waiting too long now, but if we were to wait too long,
the economy could overheat. We would have to raise rates, and
the economy would have a recession. That would not help those
people.
So the best way to sustain the recovery, I believe, is to
continue on this path of graduate interest rate increases.
Senator Brown. As I asked you privately about coming to
Cleveland, as your predecessor did, in seeing Ohio high tech,
good, strong, productive, efficient Ohio manufacturing, I would
echo what Pope Francis said in exhorting his parish priests
soon after he assumed the papacy. He said, ``Go out and smell
like the flock,'' and I would ask you to think about doing some
of the things that she did, not that you pattern your
chairmanship after any one of your predecessors, but to really
talk to people and see people who still are not in this
economy. It has been pretty good for people like us but not so
good for others.
One other question. Financial crisis, as we know, was not
the result of a single bad decision--dozens of small choices,
including by regulators, to change the rules and weaken
supervision for the big banks. We know that.
Earlier this month, FDIC Chairman Gruenberg said he is
feeling, quote, ``a certain sense of deja vu,'' unquote, with
bankers and policymakers becoming complacent to risk the
financial system.
Between this legislation, this Committee is set to consider
that the Chairman and you talked about and all the deregulation
and the works by the Administration and regulators. Look whom
the President has put on some of these--and boards and
regulators--were on course to weaken the rules for large
regional banks, were on course to make stress tests and living
wills easier for global banks or on course to insert yet more
exemptions under the Volcker Rule. Are you certain that all
these changes are not paving the way for the next financial
crisis?
Mr. Powell. Certainty is kind of a high standard, but I am
confident that we are not. That is really not the intent, and I
do not see how the kind of things we are talking about doing
would push us in that direction particularly.
Senator Brown. Potentially fewer stress tests?
Mr. Powell. Well, that is not something we have decided. I
think stress testing is a really important post-crisis
innovation, maybe the single most successful, and the banks
will say that to you privately.
Senator Brown. I know you have said it, and I know the
banks have said it.
Mr. Powell. Yes.
Senator Brown. So should we be even considering pulling
away from stress tests and even the regional banks?
Mr. Powell. Well, I think I would go back to tailoring. We
really want the most stringent things to be happening at the
systemically important banks, the most stringent stress tests
in particular, and we want to tailor, or taper as we go down
into less significant, less systematically important
institutions.
Senator Brown. Were not some instructions like Countrywide
smaller--and I think Wash Mu, if I remember right--smaller than
some of these regional banks that will have a relaxed stress
test or a less frequent, less than annual stress test?
Mr. Powell. Well, again, we have not--that is not something
we have decided.
Senator Brown. But it is something you weighed in on a
moment ago and a bill that Congress is looking at.
Mr. Powell. I think you are referring to the idea of having
regular stress tests as opposed to annual.
Senator Brown. ``Periodic,'' I think is the word, which is
a very different word from ``annual.''
Mr. Powell. Yes.
Senator Brown. Does that concern you, or does that give you
discretion to decide?
Mr. Powell. I have not had a chance to--as we discussed,
that is not something that we have looked at yet. The bill----
Senator Brown. Well, but you are coming to this Committee.
With all due respect, Governor, you are coming to this
Committee saying you support this legislation, and now you are
saying, well, you have not had time to really look at it. So I
guess that means you are not publicly yet supporting this
legislation, but you might, after digesting it as the Chairman,
decide to support.
Mr. Powell. Well, it is not the legislation. It is what we
do with the legislation after it were passed. I think it will
be in our discretion to decide--if I understand the legislation
correctly, proposed legislation--to decide how frequent stress
tests would be. They would be periodic, and I do not know what
we are going to decide about that.
I mean, we have not looked at the question is what I am
saying. We are going to exempt banks below--I guess it is $100
billion from stress testing. So that makes some sense to me.
Those banks are not systematically important. Between 100 and
250, we will do something else, and I honestly do not know what
that will be. My strong preference will be that we will
continue to have meaningful stress testing for them because I
think it is a successful tool.
Senator Brown. Thank you.
Chairman Crapo. Senator Warren.
Senator Warren. Thank you, Mr. Chairman.
So I want to follow up on Senator Brown's questions about
full employment. As you know, Congress gave the Federal Reserve
a dual mandate to pursue maximum employment and to keep prices
stable. The official unemployment rate is now 4.1 percent. Many
economists are predicting the rate will dip below 4 percent in
the near future. An unemployment rate this low in the past
would have been considered full employment, which would be good
news for the workers that should be accompanied by higher
wages, but wages have barely budged.
So let me start by asking, Mr. Powell, given that wage
growth is so weak, do you believe that the labor market is
currently at full employment?
Mr. Powell. Full employment is not sort of a precise
concept in our thinking, in my thinking, and I think a number
of indicators would suggest that we are at or around full
employment.
But I will point to a couple that suggest that maybe there
is more room for growth in the labor market, and those would
be, in particular, wages which you cited. There is no
indication in wages that the labor market is overheating or
even hot and that there is----
Senator Warren. How about stone cold?
Mr. Powell. Well, we have----
Senator Warren. To people who are trying to live on those
wages, I think that is how they feel.
Mr. Powell. You have growth of about 2.5 percent, which is
roughly in keeping with increases in productivity and
inflation, but nonetheless, it is not as fast as--that growth
is not as fast as it was at other cyclical peaks or before the
crisis. But that is an indicator, I would agree with you, that
suggests a lack of tightness in the labor market.
Senator Warren. So let me just push on that a little bit
because one possible explanation for the breakdown in the
relationship between low unemployment and increasing wages is
that the labor market is not actually that tight. As you know,
individuals who are not actively looking for jobs are not
counted as unemployed under the traditional U3 unemployment
measure that the Federal Reserve relies on.
A better measure of the strength of the labor market might
be the prime-age employment rate, which is simply the
population age of 25 to 54, who actually hold a job. As of last
month, the prime age of employment rate was only 78.8 percent.
In other words, almost one in four prime-age workers--that is
24 million Americans--do not have a job, and while the prime-
age rate has been increasing, the proportion of prime-age
workforce who actually have jobs is well below the high that
was set back in 2000.
So, Mr. Powell, there are a lot of reasons why the prime-
age employment rate is so low, but I want to focus on one that
is not typically on the Federal Reserve's radar. According to
recent research by Princeton economist Alan Kreuger, about 44
percent of prime-age, out-of-work men said they had taken pain
medication within the preceding 24 hours, and about two-thirds
of them are taking prescription pain medications.
So, Mr. Powell, if you are confirmed as Chair of the Fed,
how does this affect what you will do as Fed Chairman to
achieve full employment?
Mr. Powell. Well, let me just agree with everything you
said about prime age. Prime page participation--that is the
other place I was going--is a full percentage point lower than
it was before the crisis, and there is no real obvious reason
for that. That also suggests some slack.
In terms of participation by prime-age males and
particularly Alan Krueger's research, what we can do is we can
push harder on maximum employment. I think we are doing that. I
think we are looking at an economy that is going to go under 4
percent unemployment.
Ultimately, though, the tools for dealing with the opioid
crisis and with the long-term 60-year decline in participation
by prime-age males, those are tools that Congress really has to
wield, not so much of the----
Senator Warren. So just to make sure I am following this,
it is your opinion that in order to ensure that the United
States labor market is reaching its full potential, Congress
needs to deal with the opioid crisis. Is that fair?
Mr. Powell. Yes.
Senator Warren. So I want to ask you about one other
factor--holding back prime-age workers. More than twice as many
prime-age women are out of the labor force as prime-age men,
and according to a recent study by the Hamilton Project, more
than half of women who are on the sidelines in the labor market
cite that they are not working because of caregiving
responsibilities, either for children or for seniors.
Mr. Powell, how can the Fed bring women who are not working
due to caregiving responsibilities back into the labor market?
Mr. Powell. Again, we do not really have those tools.
Senator Warren. Good. And that is really the point I wanted
to make here.
I appreciate your making the point that the opioid epidemic
and the lack of paid family leave are holding back workers, and
that Congress has to do something on both fronts. If you are
confirmed as Chair of the Federal Reserve, I hope you will
promise to come before Congress to advocate for policies, to
make our labor market and our economy stronger for everyone.
Thank you, Mr. Powell.
Mr. Powell. Thank you, Senator.
Senator Warren. I will take that as a yes?
Mr. Powell. Thank you.
Senator Warren. Thank you.
Chairman Crapo. Thank you.
Senator Cortez Masto, do you wish to ask questions?
Senator Cortez Masto. I do. One more.
Chairman Crapo. All right. You will be our final
questioner.
Senator Cortez Masto. Thank you.
Chairman Crapo. Thank you.
Senator Cortez Masto. Governor Powell, large banks have
been fined a combined $160 billion since the crisis, yet
recidivism continues and regulators have been very reluctant to
impose harsher penalties. Take, for example, Wells Fargo, which
has a new scandal that arises, it seems, every week. Do you
view the post-crisis response on the part of regulators toward
the largest banks as being too harsh?
Mr. Powell. Well, I guess I would regard the fact that we
are still seeing things like what you referred to in the paper
as very disturbing. I do not think I would characterize our
reaction to these kinds of problems as too harsh.
I do think it is appropriate that we strike a professional
tone in our supervision and regulation of financial
institutions, and we always strive to do that.
But, no, my main reaction to what you referred to is one of
concern that institutions are still having problems with bad
behavior, bad conduct toward consumers.
Senator Cortez Masto. So can we then address the issue? And
I am looking at this as well, but the conversation that you
just had with Senator Brown regarding stress testing and the
changing of the thresholds, which would then diminish any type
of stress test for Wells Fargo as well as Bank of America and
some of the others, is that true, the way you read the bill?
Mr. Powell. No. No, I do not think it would have any effect
on stress testing for Wells Fargo or the other larger
institutions. It would only affect institutions between $100
and $250 billion in assets.
Senator Cortez Masto. It would not impact them
domestically, their domestic operations here?
Mr. Powell. No. No, it would not, to my--would be my United
States.
Senator Cortez Masto. If it did, would you have concerns?
Mr. Powell. It would depend on what the effect would be,
but I do not see any case for legislation of that nature that
would affect the largest and most complex institutions.
Senator Cortez Masto. Thank you.
Chairman Crapo. And I know I would let Senator Cortez Masto
be last, but I am going to take the Chairman's prerogative and
ask you a couple of other very quick questions.
In fact, I just wanted to go back and clarify my
understanding of an answer that you gave to, I believe, Senator
Heller, but one of the Senators asked you what your
understanding was of the current GDP rate of growth in the
United States today.
Mr. Powell. Well, for the year 2017, about 2.5 percent. I
would say for the last three quarters of this year, it is more
like 3 percent.
Chairman Crapo. All right. And then you did mention what
your expectation was as to what we could expect in the next
year or two, didn't you?
Mr. Powell. I would say in a range--you know, the truth is
that there are big uncertainty bands around these forecasts----
Chairman Crapo. Certainly.
Mr. Powell.----but my starting point for next year would be
in the range of 2.5 percent, 2 to 2.5 percent, something like
that, which is better than what it has been for the last few
years. But that is just where I would start.
Chairman Crapo. And then do you have any--I know I am kind
of pushing you out further and further, but for next year or
the following year, would you expect them to stay in the same
range or not?
Mr. Powell. You know, I would have no confidence on a
forecast 2 and 3 years out.
I mean, ultimately, as we are nearing full employment and
everybody is back to work, it will then--at that point, it will
come down to productivity, and it is hard to see growth quite
as high. You might see a little bit lower growth.
Chairman Crapo. Lower than?
Mr. Powell. Lower than the 2.5 percent. You could see
growth more like 2 percent.
Chairman Crapo. So it could be 2 to 2.5?
Mr. Powell. It could be.
Chairman Crapo. It is hard to say.
Mr. Powell. Very hard to say, yeah.
Chairman Crapo. All right. Thank you very much, and I
appreciate the fact that you have been here and answered all
the questions. We appreciate your willingness also to serve the
country, Governor Powell.
For Senators, all questions for the record need to be
submitted by Friday at noon, and, Governor Powell, we ask for
your responses to those questions by Monday at 10 a.m. So
please respond quickly to questions you may receive from the
Senators.
With that, this hearing is adjourned.
Mr. Powell. Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
[Whereupon, at 12:10 p.m., the hearing was adjourned.]
[Prepared statement, biographical sketch of nominee, and
responses to written questions supplied for the record follow:]
PREPARED STATEMENT OF JEROME H. POWELL
To Be Chairman, Board of Governors of the Federal Reserve System
November 28, 2017
Chairman Crapo, Ranking Member Brown, and other Members of the
Committee, thank you for expeditiously scheduling this hearing and
providing me the opportunity to appear before you today. I would also
like to express my gratitude to President Trump for the confidence he
has shown by nominating me to serve as Chairman of the Board of
Governors of the Federal Reserve System. The Federal Reserve has had a
productive relationship with this Committee over the years, and, if you
and your colleagues see fit to confirm me, I look forward to working
closely with you in the years ahead.
Before I continue, I would like to introduce my wife, Elissa, who
is sitting behind me. I would not be here today without her unstinting
love, support, and wise counsel.
As you know, I have served as a member of the Board of Governors
and the Federal Open Market Committee (FOMC) for more than 5 years,
contributing in a variety of capacities, including most recently as
chairman of the Board's Committee on Supervision and Regulation. My
views on a wide range of monetary policy and regulatory issues are on
the public record in speeches and testimonies during my service at the
Fed. The Congress established the Federal Reserve more than a century
ago to provide a safer and more flexible monetary and financial system.
And, almost exactly 40 years ago, it assigned us monetary policy goals:
maximum employment, meaning people who want to work either have a job
or are likely to find one fairly quickly; and price stability, meaning
inflation is low and stable enough that it need not figure into
households' and businesses' economic decisions.
I have had the great privilege of serving under Chairman Bernanke
and Chair Yellen, and, like them, I will do everything in my power to
achieve those goals while preserving the Federal Reserve's independent
and nonpartisan status that is so vital to their pursuit. In our
democracy, transparency and accountability must accompany that
independence. We are transparent and accountable in many ways. Among
them, we affirm our numerical inflation objective annually and publish
our economic and interest rate projections quarterly. And, since 2011,
the Chairman has conducted regular news conferences to explain the
FOMC's thinking. Additionally, we are accountable to the people's
representatives through twice-a-year reports, testimony, oversight, and
audited financial statements. I am strongly committed to that framework
of transparency and accountability and to continuing to look for ways
to enhance it. In our federated system, members of the Washington-based
Board of Governors participate in FOMC deliberations with the
presidents of the 12 regional Federal Reserve Banks, which are deeply
rooted in their local communities. I am a strong supporter of this
institutional structure, which helps ensure a diversity of perspectives
on monetary policy and helps sustain the public's support for the
Federal Reserve as an institution.
If confirmed, I would strive, along with my colleagues, to support
the economy's continued progress toward full recovery. Our aim is to
sustain a strong jobs market with inflation moving gradually up toward
our target. We expect interest rates to rise somewhat further and the
size of our balance sheet to gradually shrink. However, while we
endeavor to make the path of policy as predictable as possible, the
future cannot be known with certainty. So we must retain the
flexibility to adjust our policies in response to economic
developments. Above all, even as we draw on the lessons of the past, we
must be prepared to respond decisively and with appropriate force to
new and unexpected threats to our Nation's financial stability and
economic prosperity--the original motivation for the Federal Reserve's
founding.
As a regulator and supervisor of banking institutions, in
collaboration with other Federal and State agencies, we must help
ensure that our financial system remains both stable and efficient. Our
financial system is without doubt far stronger and more resilient than
it was a decade ago. Our banks have much higher levels of capital and
liquid assets, are more aware of the risks they run, and are better
able to manage those risks. Even as we have worked to implement
improvements, we also have sought to tailor regulation and supervision
to the size and risk profile of banks, particularly community
institutions. We will continue to consider appropriate ways to ease
regulatory burdens while preserving core reforms--strong levels of
capital and liquidity, stress testing, and resolution planning--so that
banks can provide the credit to families and businesses necessary to
sustain a prosperous economy. In doing so, we must be clear and
transparent about the principles that are driving our decisions and
about the expectations we have for the institutions we regulate.
To conclude, inside the Federal Reserve, we understand that our
decisions in all these areas matter for American families and
communities. I am committed to making decisions objectively and based
on the best available evidence. In doing so, I would be guided solely
by our mandate from the Congress and the long-run interests of the
American public.
Thank you. I would be happy to respond to your questions.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN FROM JEROME H.
POWELL
Q.1. Secretary Mnuchin said that the Trump administration could
accomplish 80 percent of the bank deregulation listed in
Treasury's June report without any help from Congress.\1\
Before this Committee in June, you called the Treasury report
on bank deregulation, a ``mixed bag.''
---------------------------------------------------------------------------
\1\ https://www.reuters.com/article/us-usa-banks-regulation/u-s-
treasury-unveils-financial-reforms-critics-attack-idUSKBN1932KQ.
Q.1.a. If you are confirmed, what will you do to oppose the
recommendations you believe would be harmful to financial
---------------------------------------------------------------------------
stability, consumers, and safety and soundness?
Q.1.b. Randy Quarles is now in the role as Vice Chair for
Supervision at the Federal Reserve. If you are confirmed as
Chair, how do you see your role in relation to the Vice Chair
of Supervision's when it comes to regulatory policy?
A.1.a.-b. The Treasury report acknowledged that regulatory
policies since the financial crisis have improved the safety
and soundness of the financial system, and it noted that the
U.S. banking system is significantly better capitalized as a
result of post-crisis regulatory capital requirements and
stress testing. The report also made a series of
recommendations for the U.S. regulatory agencies to consider in
order to reduce regulatory burden on the banking system.
The Federal Reserve is committed to continuing to evaluate
the effects of regulation on financial stability and on the
broader economy, and to make adjustments as appropriate. As we
do that, however, I would reiterate that we should preserve the
core pillars of regulatory reform that I discussed in my
testimony before the Senate Committee on Banking, Housing, and
Urban Affairs on June 22, 2017--capital, liquidity, stress
testing, and resolvability. Moreover, I believe that we should
continue to tailor our rules to the different risks of
different firms and, in particular, work to reduce
unnecessary burden on community banks.
As for my role as Federal Reserve Board (Board) Chair vis-
a-vis the Vice Chairman for Supervision, if I were to be
confirmed, I expect that the Vice Chairman will be the Board's
primary point person on regulatory and supervisory matters and
will lead the committee that is responsible for formulating
recommendations to the Board on such matters. Decisions about
regulations and material supervisory policies are made by all
of our Board members, however, rather than by any one person.
Q.2. In a 2015 Bloomberg Television interview, Randy Quarles
said the following about Dodd-Frank, ``The macro issue is that
the Government should not be a player in the financial sector.
It should be a referee. And the practice, and the policy, and
the legislation that resulted from the financial crisis tended
to make the Government a player. They put it on the field as
opposed to simply reffing the game.''
Q.2.a. While we can all agree that the Federal Government
should be a referee when it comes to supervision, do you agree
with Governor Quarles' view on the role of the Government in
the financial sector following the crisis?
A.2.a. In response to questions for the record on this topic,
Vice Chairman Quarles stated, ``My approach to policymaking,
and particularly to regulation, has been that the discretion of
policymakers, and particularly of regulators, should be as
constrained as possible. Where discretion remains, regulators
should be as clear as possible about how they will exercise it
in the future so that their actions are predictable and there
is less uncertainty as to what the policy will be.'' I share
that general approach to regulatory and supervisory
policymaking.
Q.2.b. In your confirmation hearing, you noted that you and
Vice Chair Randal Quarles are ``very well aligned on [your]
approach to supervision.'' Are there any areas on bank
supervision policy where you and Vice Chair Quarles disagree?
A.2.b. I am pleased that Vice Chairman Quarles is now leading
our efforts in this area and will not only be building on the
work underway, but will be bringing a fresh perspective to many
issues. I believe that we share the foundational objectives to
post-crisis regulatory reform--preserving the core measures of
capital, stress testing, liquidity, and resolvability. Vice
Chairman Quarles will bring his perspective on how to best
achieve those objectives. We both agree that we need a
resilient, well-capitalized, well-regulated financial system
that is strong enough to withstand even severe shocks and
support economic growth by lending through the economic cycle.
The financial crisis was devastating--the worst economic
downturn since the Great Depression. The work that has been
underway at the Board to calibrate regulation and supervision
aims to achieve and build on the strength and systemic
resilience that we currently enjoy with greater efficiency. If
confirmed for this position, I look forward to working with all
my colleagues on the Board, who bring a diversity of viewpoints
to these very important issues.
Q.3. Vice Chair Quarles in his maiden speech at the Federal
Reserve earlier this month said that, ``changing the tenor of
supervision will probably actually be the biggest part of what
it is that I can do.''\2\ He said this to note that near-term
changes in banking rules would be difficult, but that day-to-
day changes in regulators' tone was more immediately
achievable.\3\
---------------------------------------------------------------------------
\2\ http://www.wsj.com/articles/feds-quarles-changes-to-bank-
stress-tests-on-front-burner-1510080513.
\3\ Ibid.
Q.3.a. Do you agree that Federal Reserve supervisors need to
change their ``tenor?'' If so, please elaborate on what this
---------------------------------------------------------------------------
means.
A.3.a. I feel strongly that, as public servants, we can best
fulfill our mission by being transparent in our processes and
open to a range of perspectives. An open dialogue between
supervisors and supervised firms can foster safety and
soundness because both parties can be more willing to discuss
difficult but important issues that need to be addressed. I
believe that conducting supervision in a mutually respectful
way best furthers our goal of ensuring the resiliency of our
financial system, the availability of credit, economic growth,
and financial market efficiency.
Q.4. At the time Countrywide was teetering and was bought by
Bank of America, it had $211 billion in assets and originated
around one in five mortgages in the country.
In hindsight, would it have been useful for a large lender
like Countrywide to have been subject to enhanced capital or
liquidity standards, stress tests, or to have prepared a living
will?
A.4. Banking organizations of all sizes have benefited from the
stronger regulatory standards that were implemented after the
financial crisis. Prior to the crisis, many large banking firms
operated with excessive leverage, inadequate and low-quality
capital, and insufficient liquidity, and did not have effective
systems to identify and manage their risks. Banks generally
viewed mortgages as a relatively low-risk asset and did not
consider the possibility of a nationwide decline in house
prices. A change in that view would have led to wider
recognition of Countrywide's and the industry's needs for
additional capital and liquidity as well as greater ability to
foresee and manage their risks.
Following the financial crisis, the Federal Reserve
overhauled its regulatory and supervisory regime to focus on
improving the resiliency of large banking organizations, as
well as to reduce the risks to the system in the event that
these firms experienced distress or failure. Under the Federal
Reserve's current regulatory and supervisory regime, large
financial institutions are expected to maintain capital
planning and liquidity risk management processes to determine
the amount of capital and liquidity needed to continue
operations through a range of conditions. Stress tests are an
important element of this regime. Large financial institutions
are also required to conduct recovery and resolution planning.
And as I have said publicly, we also recognize the need to
further tailor regulation to the size and risk profile of
institutions.
Congress principally addressed the Countrywide problem in
the Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act) by eliminating the Office of Thrift
Supervision and reassigning supervisory and regulatory
authority over thrifts to the Office of the Comptroller of the
Currency, and supervisory and regulatory authority over thrift
holding companies to the Federal Reserve.
Q.5. Legislation this Committee will soon consider quintuples
the threshold at which enhanced financial stability rules apply
to banks.
If confirmed, will you commit to not raising it further
using the Federal Reserve's existing authority upon a
recommendation from the FSOC?
A.5. I have supported raising the $50 billion asset threshold
for application of enhanced prudential standards. An increase
in the Dodd-Frank Act statutory thresholds, while also
providing flexibility for the Federal Reserve to apply such
standards to firms
between $100 billion and $250 billion in total assets, along
the lines provided for in the bill under consideration by the
Senate Committee on Banking, Housing, and Urban Affairs, would
help produce a supervisory and regulatory framework that is
better tailored to the size, systemic footprint, and risk
profile of banking firms. Passage of legislation to raise the
threshold would make it less likely that the Financial
Stability Oversight Council (FSOC) would take up such a
recommendation.
Q.6. Legislation this Committee will soon consider would
deregulate banks with up to $250 billion in assets from
financial stability rules.
Q.6.a. Would you believe that every bank up to $250 billion in
assets--if it failed--no longer needs a living will?
A.6.a. Resolution planning has been helpful for gaining a
greater understanding of resolution options for large banking
organizations, particularly for banking firms with significant
nonbank operations, critical operations, or cross-border
operations. Resolution planning requirements should also be
tailored to the size and complexity of the firm, with the most
complex firms subject to the highest standards. Smaller and
less complex firms likely do not need the same frequency of,
and detail in, their living wills as larger and more complex
firms, because their plans for resolution are less susceptible
to becoming obsolete due to changes in their businesses and
business models. In addition, as demonstrated in the financial
crisis, complex and crossborder operations may complicate a
firm's resolution, posing risk to the financial system more
broadly.
Q.6.b. Are you confident that each of these banks could be
resolved through bankruptcy, without any taxpayer support?
A.6.b. The bankruptcy of a banking organization with less than
$250 billion in assets would present significantly less
potential risk to U.S. financial stability than the failure of
the largest, most interconnected banking organizations.
Therefore, the Board has tailored its efforts to focus on
improving the resolvability of the largest, most interconnected
banking organizations, which generally have more than $250
billion in consolidated assets. For example, the Board's
resolution-related rules requiring minimum total loss-absorbing
capacity and stays of early termination rights in qualified
financial contracts apply only to global systemically important
banking organizations (GSIBs). Through the resolution planning
process, the Board and the Federal Deposit Insurance
Corporation (FDIC) have also provided substantially more
extensive direction to the U.S. GSIBs and certain non-U.S.
GSIBs to improve their resolvability than to their smaller and
less complex counterparts.
Q.7. At your confirmation hearing when asked if we ``still have
banks that are ``too-big-to-fail,'' you said, ``I would have to
say no to that.'' In addition, when asked if there is any rule
that you believe should be made stronger, you responded, ``I
think they are tough enough.'' While I agree with you that
Dodd-Frank has led
to a substantially stronger banking system, the money center
banks remain very large, complex institutions. As we have seen
time and time again, even their own boards and CEOs do not
fully
understand what is going on within them. I am concerned that
your comments implied that we shouldn't be worried about the
largest banks because efforts to date have been sufficient.
Do you care to elaborate on either of these answers?
A.7. My comments reflect my belief that the statutory framework
established by Congress and the efforts of the U.S. regulators
have made the largest banking firms more resilient and have
significantly improved their resolvability. In particular, for
the largest, most systemically important firms, we have
increased the quantity and quality of capital that they
maintain, have established capital surcharges that are scaled
to each firm's systemic risk footprint, and have required them
to carry long-term debt that can be converted to equity as part
of a resolution.
Through Title I of the Dodd-Frank Act, Congress established
a process for the Federal Reserve and the FDIC to identify
resolution weaknesses at firms, to provide clarity about what
actions need to be taken, and to follow through should
weaknesses remain. The agencies are currently reviewing firms'
resolution plans and I cannot speak for the Federal Reserve
Board or the FDIC Board as to the outcome of that review.
Notwithstanding, firms have clearly made substantial progress
in improving their resolvability since the agencies'
determinations in April 2016, as highlighted in our feedback
letters and explained in their public filings.
It may be useful to clarify what it means to ask whether
any firm remains ``too-big-to-fail.'' By my answer, I intended
to convey my view that we have made enough progress that the
failure of one of our most systemically important financial
institutions, while undoubtedly posing a severe shock to the
economy, could more likely than not be resolved without
critically undermining the financial stability of the United
States. As I also said, we expect our most systemically
important firms to continue to make steady progress toward
assuring the achievement of that goal. Finally, I would add
that higher levels of capital and liquidity and stress testing
substantially reduce the likelihood that one of our most
systemically important financial institutions would fail.
In addition, progress toward becoming more resolvable may
not be permanent. The resolvability of firms will change as
markets evolve and as firms' activities, structures, and risk
profiles change. Firms must remain vigilant in confronting the
resolution consequences of their day-to-day management
decisions. It is therefore important to have a credible,
ongoing process for the agencies to identify and address
resolution weaknesses. The resolvability standard set by
Congress and applied by the agencies accomplishes that, and as
such I believe it is ``tough enough.'' Of course, there may be
areas identified by the agencies where more work by the firms
needs to be done. In my view, that would be consistent with the
statutory framework and standard currently in place.
As for the question of rules that may need improvement or
toughening, I would add that there are a number of post-crisis
regulations that are not yet finalized, and that we continue to
advance. These include, for example, the net stable funding
ratio and single-counterparty credit limits for large banking
firms.
Q.8. Studies of capital other than those funded by industry,
including some by Federal Reserve economists, suggest that
modest increases in capital for the Nation's largest banks are
still warranted.
Do you agree?
A.8. My view is that risk-based capital requirements for our G-
SIBs are neither too low nor too high.
Since the financial crisis, bank capital requirements have
been strengthened considerably to substantially improve both
the quality and quantity of capital. Moreover, a robust stress
testing regime is now the binding capital requirement for many
of the largest and most systemically important banks.
A number of studies have examined the relative costs and
benefits of bank capital requirements. These studies use data
and assumptions on the cost and severity of financial crises
and the costs of increasing capital requirements to estimate
the level of capital requirements that results in the largest
net benefit to the economy. Such studies have been conducted by
economists affiliated with the Basel Committee on Banking
Supervision (2010), The Bank of England (2015), the Federal
Reserve Bank of Minneapolis (2016), as well as economists at
the Federal Reserve Board (2017). Some of these studies produce
results that are consistent with current levels of capital for
the G-SIBs, while others call for more capital. This range in
capital levels among the different studies reflects varying
assumptions and data sources.
A different and perhaps preferable way to assess capital
adequacy is through stress testing. Our G-SIBs should be able
to survive a shock at least as severe as the Global Financial
Crisis while still meeting their capital requirements, and
thereby retain the confidence of the markets. With all of the
G-SIBs now passing the quantitative test in Comprehensive
Capital Analysis and Review, that requirement is arguably met.
Q.9. At your confirmation hearing, you stated that stress
testing is ``a really important post-crisis innovation, maybe
the single most successful, and the banks will say that to you
privately.'' You further explained that your ``strong
preference'' for banks between $100 billion and $250 billion in
total consolidated assets would be to ``have meaningful stress
testing for them.'' For ``systemically important banks,'' you
added, ``we really want the most stringent things to be
happening,'' and ``the most stringent stress tests in
particular.''
Q.9.a. Do you believe that it is important for regulators to
subject banks with over $250 billion in total consolidated
assets to stress tests on at least an annual basis?
A.9.a. Yes, I believe it is important to continue to subject
banks with total consolidated assets greater than $250 billion
to stress tests on an annual basis. Large banks' risks may
evolve rapidly, and conducting stress tests annually helps us
to incorporate those changes in risks and ensure large banks
continue to have sufficient capital to weather a severe stress
and continue to lend.
Stress testing is a critical tool to help us ensure the
safety and soundness of large banks and the financial stability
of our overall economy. Our stress tests have significantly
strengthened these firms by better ensuring that they have
enough capital to survive a severe economic downturn and
continue lending to households and businesses. Our stress tests
also provide public visibility into the risks faced by these
large banks, which was sorely lacking before the financial
crisis and can help enhance market discipline.
The results of the most recent stress tests indicate that
the banking system is strongly capitalized, which is good for
the U.S. economy because it means banks have the ability to
lend and support economic activity, even during a severe
recession.
Q.9.b. How often should stress tests be conducted for banks
with between $100 billion and $250 billion in total
consolidated assets?
A.9.b. Banks' capital positions have improved significantly
since the crisis, in part due to stress tests that have been
conducted annually. Banks with between $100 billion and $250
billion in total consolidated assets are an important source of
credit to consumers and businesses. As a result, it is
important that they continue to maintain sufficient capital to
enable them to lend even in the event of a severe stress.
The dynamic nature of banks and the risks they face could
render the results of stress tests stale within a short
timeframe. Accordingly, we believe there are safety and
soundness and financial stability benefits in conducting
capital stress tests on a periodic basis based on a bank's size
and complexity. If Congress granted us the flexibility to
conduct stress tests at a different frequency than annually, we
would consider the tradeoff between potentially less current
information about banks' risks against the reduced burden of
less frequent stress tests.
Q.10. Title VIII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act established additional oversight of
entities designated as Systemically Important Financial Market
Utilities (SIFMUs), such as clearinghouses, by authorizing the
Federal Reserve Bank to provide SIFMUs with deposit accounts,
as well as discount and borrowing privileges during unusual and
exigent circumstances.
Q.10.a. Do you agree that Title VIII provides important
financial stability tools for regulators in the form of
enhanced oversight, deposit accounts, and discount and
borrowing privileges during unusual and exigent circumstances?
A.10.a. Title VIII creates an enhanced framework for the
supervision of financial market utilities (FMUs), including
central counterparties, that have been designated as
systemically important by the FSOC. This enhanced supervision
framework allows the Securities and Exchange Commission (SEC),
Commodity Futures Trading Commission (CFTC), and the Board
(together, the agencies) to prescribe enhanced risk management
standards for FMUs and provides mechanisms for information-
sharing and coordination among the supervisory agencies. It
provides the Board with the ability to obtain a certain level
of insight across all designated FMUs through examination
participation and notification of material rule changes and
also provides the Board with certain limited enforcement
authority.
Effective risk management of FMUs enhances the stability of
the financial system. It is important that FMUs be overseen
consistently, and in a manner that focuses on the safety of the
system as a whole and not just its individual components. The
role given to the Board under Title VIII allows for such a
systemic view of FM Us and assists the supervisory agencies in
promoting consistency across the various designated FMUs.
The agencies have adopted regulations that have materially
raised the expectations to which systemically compliant FMUs
are held and that have improved FMUs' credit and liquidity risk
management frameworks and enhanced their operational
resilience. Further, the CFTC, SEC, and Board's respective
requirements for FMUs designated under Title VIII require these
firms to manage their risks by relying on private-sector
resources only, without any assumption of reliance on public
funds during times of market stress.
Q.10.b. Would eliminating the Federal Reserve's authority to
provide accounts for customer margin and access to liquidity
facilities during a financial crisis increase the potential for
market instability during a crisis?
A.10.b. Title VIII permits the Board to authorize a Federal
Reserve Bank to establish an account for and provide services
to a designated FMU. Conducting settlements using central bank
money, where available, is consistent with strong risk
management practices. It is likely that the provision of
accounts and services to certain designated FMUs has reduced
risk in the system by minimizing credit and liquidity risk
associated with holding margin payments and contingent
liquidity resources in commercial bank accounts.
Q.11. In June, I asked you about the status of the Board's work
to incorporate the GSIB surcharge into the stress tests. At the
time you said, that it was ``the plan'' to move forward and
were currently ``working on it.''
Q.11.a. Six months later, what progress has been made?
Q.11.b. When do you anticipate completion of the Board's work
on incorporating the surcharge?
A.11.a.-b. We have made significant progress toward the
completion of a package that would simplify the Board's capital
regime by more closely integrating the regulatory capital rule
and stress testing. A key element of the proposal would be the
introduction of a stress capital buffer that would be sized
based on the results of the stress test.
Staff is working to finalize the proposal, including an
analysis of its potential impact, after which the Board would
consider the full proposal. While I cannot predict the timing
or outcome of the Board's consideration, if the Board were to
approve the proposal, it would then be issued for notice and
comment.
Q.12. Several Federal Reserve rulemakings required under the
Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010 remain uncompleted. Additionally, there remain several
other rulemakings initiated by the Federal Reserve that are
likewise not complete. Please indicate if you intend to
complete the rulemakings cited below, and if so, on what
timetable.
Q.12.a. Board of Governors of the Federal Reserve System,
Complementary Activities, Merchant Banking Activities, and
Other
Activities of Financial Holding Companies Related to Physical
Commodities, 79 Fed. Reg. 12,414.
Q.12.b. Board of Governors of the Federal Reserve System,
Capital Requirements for Supervised Institutions Significantly
Engaged in Insurance Activities, 81 Fed. Reg. 38,631.
Q.12.c. Office of the Comptroller of the Currency, Board of
Governors of the Federal Reserve System, Federal Deposit
Insurance Corporation, National Credit Union Administration,
Federal Housing Finance Agency & Securities and Exchange
Commission, Incentive-based Compensation Arrangements, 81 Fed
Reg. 37,670.
Q.12.d. Office of the Comptroller of the Currency, Board of
Governors of the Federal Reserve System & Federal Deposit
Insurance Corporation, Net Stable Funding Ratio: Liquidity Risk
Measurement Standards and Disclosure Requirements, 81 Fed Reg.
35,124.
Q.12.e. Board of Governors of the Federal Reserve System,
Single-Counterparty Credit Limits for Large Banking
Organizations, 81 Fed. Reg. 14,328.
A.12.a.-e. Board staff is actively engaged in reviewing the
public comments received on these proposed rulemakings. With
regard to the interagency rulemakings listed above, we also are
working with staff from the other agencies. While I cannot
provide an exact schedule, I expect that we will work
diligently to address the public comments received on these
rulemakings and finalize the rules as appropriate.
Q.13. As Chair of the Fed's Committee overseeing the Federal
Reserve Banks' operations including the Presidential search
processes, we have seen some improvement in the diversity of
the regional bank presidents, the Boards of Directors, the
Banks' workforces, and better interactions with advocacy groups
in the Banks' communities.
Q.13.a. If confirmed, what more will you do to increase the
diversity of the leadership, workforce and opinions in the
Federal Reserve System?
A.13.a. Diversity is a critical aspect of all successful
organizations, and I am committed to fostering diversity and
inclusion throughout the Federal Reserve System. In my
experience, we make better decisions when we have a wide range
of backgrounds and voices around the table.
The Federal Reserve recognizes the value of a diverse
workforce at all levels of the organization. We are committed
to achieving further progress, and to better understanding the
challenges to improving and promoting diversity of ideas and
backgrounds. This has been an ongoing objective, and, if I am
confirmed, I assure you that diversity will remain a high
priority objective for the Federal Reserve.
As Administrative Governor and Chair of the Committee on
Board Affairs, I have supported and encouraged the Board's
efforts to enhance diversity. In my role as Chair of the
Committee on Federal Reserve Bank Affairs, I have worked with
the Reserve Banks to promote diversity throughout the System.
Recognizing the value of diversity at all levels of the System,
including at the highest levels, I have worked closely with the
Reserve Banks to assure that they have a diverse slate of
qualified candidates for president searches. The Reserve Banks,
working closely with the Board, have also been looking at ways
to further develop a diverse pool of talent in a thoughtful,
strategic fashion, readying them for leadership roles
throughout the Federal Reserve System.
To foster diversity more broadly, a long-term holistic plan
is necessary with a focus on doing the utmost to recruit and
bring people in and provide them paths for success. That means
having an overall culture and organization that is focused on
diversity and demonstrates its ongoing commitment at all
levels, starting at the top. For example, we have an internal
work stream at the Board to coordinate economic inclusion and
diversity efforts that is comprised of the Office of Minority
and Women Inclusion Director, Division Directors, senior staff
and Board Members. It focuses on initiatives not just at the
Board, but also more broadly throughout the System. I am part
of this team, as are other Board members, and we meet regularly
to discuss initiatives and progress.
Q.13.b. Do you believe the dual mandate is a critical part of
monetary policy?
A.13.b. Yes. The Congress established the Federal Reserve more
than a century ago to provide a safer and more flexible
monetary and financial system. And, almost exactly 40 years
ago, it assigned us monetary policy goals: maximum employment,
meaning people who want to work either have a job or are likely
to find one fairly quickly; and price stability, meaning
inflation is low and stable enough that it need not figure into
households' and businesses' economic decisions.
I have had the great privilege of serving under Chairman
Bernanke and Chair Yellen, and, like them, I will do everything
in my power to achieve those goals while preserving the Federal
Reserve's independent and nonpartisan status that is so vital
to their pursuit.
In 2012, the Federal Open Market Committee (FOMC) published
a statement discussing its longer-term goals and the monetary
policy strategy it follows to achieve them; this statement is
reaffirmed each January. At our meetings, FOMC policymakers
evaluate economic conditions and the outlook, and we decide on
the monetary policy that we think will be most likely to
deliver maximum employment and price stability over the medium
term.
Q.14. According to former Chair Bernanke's memoir ``Courage to
Act,'' in 2013, he wanted to continue asset purchases at their
elevated level because of the continued fiscal austerity and
gridlock in Congress. But, in order to achieve unanimity on the
Board of Governors, he slowed asset purchases in order to
respond to concerns raised by you and two other Governors. Some
suggest that this announcement caused the so-called ``taper
tantrum'' in which investors suddenly withdrew their money from
the bond market.
Q.14.a. Did you think the economic recovery was sufficient at
that time to reduce the Fed's support for the economy? What do
you believe caused the ``taper tantrum''?
A.14.a. When the FOMC agreed to undertake a new asset purchase
program in September 2012, we indicated that the purchases
would continue until there was a substantial improvement in the
outlook for the labor market, but that we would also take
account of the efficacy and costs of the purchases. At the
FOMC's May 2013 meeting, shortly before the taper tantrum, I
voted along with other policymakers to continue purchases of
Treasury and mortgage-backed securities--the unemployment rate
was at that time around 7 \1/2\ percent and other indicators of
the labor market suggested that considerable slack remained.
The market reaction began in late May 2013 after Chairman
Bernanke mentioned the possible tapering of our asset purchase
program for the first time during congressional testimony;
longer-term yields rose further following the June press
conference when he mentioned tapering again. These remarks seem
to have been interpreted as a message not only about the course
of our asset purchases, but also about how soon we might raise
our target range for the Federal funds rate from its effective
lower bound. The rise in yields of around 100 basis points was
too large to have been plausibly explained by balance sheet
effects alone, and is more consistent with the perception that
our monetary policy stance had become less accommodative. One
of the lessons we learned was the need to clearly distinguish
in our communications between the Federal funds rate and asset
purchases.
Q.14.b. What communication practices from the Fed might prevent
incidents like the taper tantrum from occurring again?
A.14.b. Monetary policy is complicated, particularly when the
FOMC is using both the policy rate and the balance sheet as
tools. Communicating about one of the tools can have unintended
consequences for the other--as we experienced during the taper
tantrum. One of the lessons we learned is that it is important
to clearly distinguish between the two tools. This year, we
have increased the target range for the Federal funds rate on
two occasions and initiated a program to gradually reduce the
Federal Reserve's balance sheet. We began discussing options
for tapering the reinvestments of maturing Treasury and agency
securities last spring and informed the public about these
discussions through the FOMC meeting minutes. In June, we
updated our normalization principles and plans to outline how
our redemption program would work. At our September meeting, we
agreed that the time had come to begin to implement this
program. We used a sequence of communications about the change
to our reinvestment policy because we wanted to separate our
actions on the Federal funds rate from the winding down of our
securities holdings. In addition, we wanted to give financial
market participants time to understand and plan for the effects
of our redemptions. Our communications were well received in
financial markets and the commencement of our redemption
program has progressed very smoothly.
Q.15. At your confirmation hearing, you mentioned several times
the impact of the opioid crisis on the labor force
participation rate especially for prime age men. In September,
Senator Donnelly and I sent a letter to Chair Yellen asking her
to devote resources to Fed research into this issue and to
encourage the Federal Reserve Banks to work with their
community leaders to find ways to address this crisis. She
committed that the Fed would continue to
explore this issue.
Do you think there is more the Fed can do to try to
understand the impact of the opioid crisis on the economy? If
so, what?
A.15. The opioid epidemic is a crisis that goes well beyond its
effects on the economy. It has resulted in a sharp increase in
the rate of drug deaths in the United States since 2000, and it
has had devastating effects on too many individuals and their
families, as well as on many communities. As Anne Case and
Angus Deaton have documented, this crisis has spread
extensively over the past 20 years and is now evident in
virtually all parts of the United States.
In terms of its economic effects, the opioid epidemic has
likely contributed to the downward trends in the labor force
participation rates of prime-age men and women and reduced
worker productivity, while adding to healthcare expenditures
and the costs of the criminal justice system. With employers
now finding it more difficult to fill their open positions with
qualified and productive workers, the effects of the opioid
crisis are likely constraining the potential growth rate of the
U.S. economy, although it is difficult to quantify how large
those effects might be.
We will continue to engage with researchers on this
important issue, as well as look for ways in which we can
contribute to a better understanding of its effects on local
communities.
Q.16. The Fed's long-term growth projection from September was
1.8 percent. Earlier this week several prominent economists
suggested that tax changes could increase growth by 0.1 percent
or less. The Joint Committee on Taxation's recent estimate
shows an annual increase of less than 0.08 percent. You
indicated at your confirmation hearing that they Fed has not
done modeling that tries to anticipate the impact on the
economic growth rate of Federal fiscal policy, including
possible tax changes, because it is too speculative.
Q.16.a. Does this mean that the Fed's economists only look at
existing law when modeling potential GDP growth?
Q.16.b. If not, could you describe their approach?
A.16.a.-b. In preparing their individual forecasts that feed
into the Summary of Economic Projections (issued quarterly in
conjunction with the Chair's press conferences), FOMC
participants are free to make their own judgments about the
likely future evolution of fiscal policy. And indeed, views
among FOMC participants have differed this year about what
fiscal effects should be built into their forecasts; I am among
those who have assessed the situation as too uncertain to
warrant building in the effects of fiscal-policy changes;
others have assessed the odds on passage of some fiscal action
as sufficiently high as to warrant making some allowance in
their projections. Participants are not constrained to consider
only current law with regard to fiscal policy.
While it is not possible for me to speak for any other FOMC
participant in this regard aside from myself, in general the
issue you are raising is a judgment call. Some of the factors
that affect my thinking are:
LLikelihood of enactment: How likely is the given
change to be enacted, and in exactly what form?
LWhat are the likely effects of a given change in
fiscal policy on the future evolution of the economy? I
would take into account what the economics literature
has to say about particular changes for aspects of the
economy that are most relevant for the Federal Reserve.
This assessment can be highly uncertain, and the
uncertainty around these estimates may have increased
the reluctance of some FOMC participants to factor a
change in fiscal policy into their outlook.
LTiming: Will the contemplated change in fiscal
policy affect the performance of the macroeconomy
within the next 2-3 years, which is the timeframe most
relevant for operational near-term decisions about
monetary policy?
I should emphasize that FOMC participants strive to take a
comprehensive approach in their assessment of the outlook, and
fiscal policy is only one of the many factors that bear on the
outlook. l should also emphasize that our congressional mandate
is very clear about what we should focus on--maximum employment
and price stability. We assess various factors for their
implications for those variables. Other agencies, of course,
are responsible for assessing other implications of various
fiscal actions.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR TOOMEY FROM JEROME H.
POWELL
Q.1. The Dodd-Frank Act instructed the Fed to develop enhanced
prudential standards for bank holding companies (BHCs) with
more than $50B in total consolidated assets. That number was
far too low and the hard cutoff was very problematic. There is
no reason to consider a bank that grows from $49B to $50B as
suddenly a threat to financial stability. I applaud Chairman
Crapo and the bipartisan group of Banking Committee Members who
have agreed to increase the threshold. However, I remain
concerned that a $250B threshold suffers from the same weakness
as the $50B threshold. That is, a bank's systemic risk profile
does not suddenly change when it grows from $249B to $250B in
assets.
In fact the Dodd-Frank Act makes very clear that enhanced
prudential standards should still be tailored in their
application. It states that the Board may ``differentiate among
companies . . . taking into consideration their capital
structure, riskiness, complexity, financial activities, size,
and any other risk-related factors . . . ''
Will you use your authority under Dodd-Frank to right size
regulation for all regulated institutions--from community banks
to midsize, regional, and even the largest banks?
A.1. The Federal Reserve has been working for many years to
make sure that our regulation and supervision is tailored to
the size, systemic footprint, and risk profile of individual
institutions. I believe that it is not only appropriate to
recognize the different levels of risk and types of risk that
different institutions in the system pose, but that it also
makes for better and more efficient regulation. Efficient
regulation allows the financial system to more efficiently
support the real economy. If I were to be confirmed, I would be
committed to the Federal Reserve continuing to tailor its
supervisory and regulatory framework to the size, systemic
footprint, and risk profile of the different classes of banking
firms in our economy.
The failure or distress of a large bank can harm the U.S.
economy. The recent financial crisis demonstrated that
excessive risk-taking at large banks makes the U.S. economy
vulnerable. The crisis led to a deep recession and the loss of
nearly nine million jobs. Our regulatory framework must reduce
the risk that bank failures or distress will have such a
harmful impact on economic growth in the future. As we do so,
effective and efficient regulation should take into account the
risk of the institution.
While the Federal Reserve Board (Board) currently has some
authority to tailor the enhanced prudential standards included
in section 165 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act), the Board generally
cannot eliminate the application of these standards to covered
firms. In particular, Congress required that certain enhanced
prudential standards must apply to firms with $10 billion or
more in total assets, with other standards beginning to apply
at $50 billion in total assets. I am aware that Congress is
currently considering whether and how to raise existing
statutory thresholds in the Dodd-Frank Act, and I have
expressed support for increasing these thresholds. I also
understand that Congress is considering an alternative to
simply raising the thresholds that would entail the use of a
more complex, multi-factor approach to decide which firms are
subject to enhanced prudential standards. If I were to be
confirmed, I would stand ready to continue working with Members
on this issue.
It is important to note that the Federal Reserve already
tailors its regulation and supervision of firms above $250
billion. For example, firms with more than $250 billion in
total assets that are not considered to be global systemically
important banks (GSIBs) are not subject to risk-based capital
surcharges, the enhanced supplementary leverage ratio, or total
loss-absorbing capacity and long-term debt requirements to
facilitate orderly resolution. I fully expect that we would
continue to tailor the application of regulations for such
firms if Congress were to raise the threshold. We are looking
at ways we might better tailor liquidity regulations, for
example, to maintain resilience with greater efficiency.
Q.2. Interest on excess reserves has become a key tool of
monetary policy for the Fed. In Chairwoman Yellen's words,
``Paying interest on reserve balances enables the Fed to break
the strong link between the quantity of reserves and the level
of the Federal funds rate and, in turn, allows the Federal
Reserve to control short-term interest rates when reserves are
plentiful.''
Q.2.a. Do you expect interest on excess reserves to remain a
key tool in implementing monetary policy, or would you like to
return the pre-crisis monetary policy toolkit?
A.2.a. The payment of interest on excess reserves contributes
to effective implementation of monetary policy by helping to
manage the level of the Federal funds rate and other short-term
interest rates. Most major central banks have the authority to
pay interest on excess reserves and have used this authority to
help manage the level of short-term interest rates. In the
current circumstances,
interest on excess reserves is essential to the Board's ability
to
manage the level of short-term interest rates even with a very
elevated level of reserve balances in the system.
The Federal Reserve's authority to pay interest on reserves
is an important tool to reduce the burdens on banks associated
with reserve requirements and to manage the level of short-term
interest rates, both in normal times and during periods of
financial stress. Even if the Federal Reserve ultimately
returned to an operating system very similar to that in place
prior to the crisis, the ability to pay interest on reserves
would enhance the effectiveness of monetary policy
implementation.
Q.2.b. Do you see any risks associated with breaking the strong
link between the quantity of reserves and the level of the
Federal funds rate?
A.2.b. The payment of interest on reserves provides flexibility
for the Federal Reserve to implement monetary policy in a
variety of settings. In the current circumstances, the level of
reserves in the banking system is very large as a result of the
large scale asset purchase programs conducted by the Federal
Reserve to support economic recovery and stem disinflationary
pressures in the aftermath of the crisis. In this environment,
even sizable changes in the quantity of reserves do not affect
the level of interest rates, and the ability to pay interest on
reserves is the essential tool that allows the Federal Reserve
to implement monetary policy effectively.
The Federal Open Market Committee (FOMC) has initiated its
program for normalizing the size of the Federal Reserve's
balance sheet and has noted that it expects the long-run level
of reserves in the banking system will be significantly smaller
than at present. In the longer-run, the FOMC could choose to
continue to operate in a so-called ``floor system'' in which
policy implementation is implemented primarily through changes
in the interest rate on reserves. Alternatively, the FOMC could
return to a ``corridor system'' with a much smaller quantity of
reserves in the banking system than at present. In that type of
system, the Federal Reserve would again manage the level of
short-term interest rates through frequent open market
operations aimed at fine tuning the quantity of reserves in the
banking system. Even in this framework, interest on reserves
would be a useful tool to help keep the Federal funds rate
close to the target established by the FOMC. Either type of
operating system would allow the FOMC to conduct monetary
policy effectively to promote its long run goals of maximum
employment and stable prices.
Q.3. In 2008, Chairwoman Yellen, then the President of the
Federal Reserve Bank of San Francisco, stated: ``As Japan found
during its quantitative easing program, increasing the size of
the
monetary base above levels needed to provide ample liquidity to
the banking system has no discernible economic effects aside
from those associated with communicating the Bank of Japan's
commitment to the zero interest rate policy.''
Q.3.a. Do you agree with Chairwoman Yellen's 2008 assessment
that increasing the size of the monetary base above levels
needed to provide ample liquidity has no discernible economic
effects?
A.3.a. In my view, it is not the increase in the monetary base,
or alternatively in banks' reserves at the central bank, per se
that has beneficial effects for the economy. Those effects are
mostly determined by what types of assets the central bank
acquires with the reserves it creates. In the case of our asset
purchases, these were long-maturity Treasury securities and
agency mortgage-backed securities. These purchases put downward
pressure on longer-term interest rates and helped to make
overall financial conditions more accommodative. These changes
in financial conditions, in turn, helped to foster economic
recovery and stem disinflationary pressures in the aftermath of
the crisis.
Q.3.b. Even with multiple rounds of quantitative easing,
inflation has consistently been below the Fed's target. Why do
you think that is the case?
A.3.b. While it is true that inflation has generally fallen
short of the Committee's 2 percent objective over the past
several years, that shortfall has for the most part been
explicable by economic conditions, with good reason to view it
as temporary. During the early years of the recovery from the
Great Recession, inflation was held down by slack in resource
utilization. Later on, in 2015 and into 2016, inflation was
held down by a sharp rise in the dollar, falling import prices,
and falling energy prices. More recently, the softness in
inflation seems to have been exaggerated by what look like one-
off reductions in some categories of prices, including, for
example, a large decline in quality-adjusted prices for
wireless telephone services. These factors appear to be largely
behind us.
Given the ongoing strengthening in labor markets, and with
measures of longer-term inflation expectations broadly stable,
I expect inflation to move higher next year. Most of my
colleagues on the FOMC agree with this assessment. In the
September Summary of Economic Projections, the median forecast
anticipated personal consumption expenditure price inflation
moving back to 2 percent by 2019. However, monetary policy will
adjust in response to incoming news, and we will be closely
monitoring inflation developments to see whether this outlook
is validated in the time ahead.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SASSE FROM JEROME H.
POWELL
Q.1. Is free trade always a net-gain for the U.S. economy? How
would this view impact your tenure as Federal Reserve Chairman?
A.1. The Federal Reserve is entrusted to achieve its
congressionally mandated objectives of price stability and
maximum sustainable employment. Matters of trade policy are the
responsibility of the Congress and the Administration.
In general, trade and access to global markets provide many
benefits for businesses and firms, including larger and deeper
markets for their products and a wider selection of inputs for
production. Consumers also benefit in terms of greater variety
of goods and more competitive prices. Because of these and
other benefits, more open and globalized economies generally
have been faster growing, more productive, and more dynamic.
However, the economic shifts brought on by trade have costs,
and the loss of jobs in some industries or professions has been
very painful for those affected. Policymakers and economists
alike are increasingly cognizant of the need to design policies
to support workers and families so that the benefits of
globalization and trade can be more widely and evenly shared.
Q.2. Is the measure of the United States's trade deficit with
another country a useful metric to consult to evaluate whether
trade with that country hurts or helps our economy? If not,
what are some useful metrics?
A.2. The overall U.S. trade balance is the most useful measure
for evaluating the impact of trade on the U.S. economy. That
balance is affected by many factors, including savings and
investment in the United States, economic conditions abroad,
and movements in exchange rates. Bilateral trade deficits are
less informative. For example, U.S. workers and businesses
could benefit when the United States runs a deficit with one
country by importing goods that we use as inputs to produce
goods to sell to another country. In this example, a focus on
the bilateral deficit would obscure the net effect on the U.S.
trade balance and the overall benefit to the economy.
Q.3. Is there any instance where the United States would
benefit from a trade war with a large country like China? How
should the Federal Reserve respond to such a trade war?
A.3. As noted in the answer to question 1, openness to trade
has many benefits for the U.S. economy. A trade war with
another large country could be quite disruptive and reduce the
benefits we experience from trade.
China is an important U.S. trading partner. The Chinese
economy is also an important source of demand for commodities
and other products from the United States and other countries.
What happens to China matters for the U.S. and global
economies. At the same time, it is important for trade and
financial relations to be arranged so that countries operate on
a level playing field.
How the Federal Reserve would respond to these
circumstances would depend on how it affected the U.S. economy
and, in particular, progress toward the Federal Reserve's
congressionally mandated objectives of price stability and
maximum sustainable
employment. It is difficult to predict those impacts and the
appropriate monetary response.
Q.4. How would you evaluate the economic impact of NAFTA's
dissolution, all things being equal? How should the Federal
Reserve respond to the dissolution of NAFTA?
A.4. If the United States were to withdraw from North American
Free Trade Agreement (NAFTA), an earlier free-trade agreement
with Canada would still be in force, while trade barriers
between the United States and Mexico would revert to the
moderate, Most Favored Nation (MFN), levels consistent with
current international trade rules. Academic studies estimate
that the effect of implementing NAFTA on U.S. output was
positive, but small in magnitude, mostly because only a few
sectors, like textiles, were highly protected in Mexico prior
to the agreement. These studies could be interpreted to imply
only a small, negative effect in the long run from leaving
NAFTA and increasing tariffs to MFN levels.
Nonetheless, the near-term effects of a NAFTA withdrawal
could be significant. In particular, North American automotive
supply chains have been built on tariff-free cross-border trade
in automotive parts and could be disrupted. Additionally, U.S.
agricultural exports to Mexico would likely face higher MFN
import tariffs.
Q.5. How would you evaluate the economic impact of the U.S.-
South Korean Free Trade Agreement, all things being equal? How
should the Federal Reserve respond to the dissolution of the
U.S.-Korean Free Trade Agreement?
A.5. As noted in question 4, most of the academic literature
studying the effects of trade agreements (such as NAFTA) has
found modest positive effects for the United States, and the
same would likely be true for the U.S. trade agreement with
South Korea. In addition, South Korea accounts for a much
smaller share of U.S. trade (about 3 percent) than does Canada
and Mexico, so the direct effects of that agreement are likely
even more limited.
As noted in question 3, monetary policy decisions should be
based on an assessment of realized and expected progress toward
the Federal Reserve's employment and price stability
objectives. International trade is an important part of the
U.S. economy, so trade developments should be one aspect of
that assessment. However, trade policy is only one among
several factors that could affect the outlook for trade, with
other factors including movements in currency and commodity
markets as well as prospects for economic growth abroad.
Q.6. What were the economic impacts of the U.S.'s failure to
ratify TPP?
A.6. Specific trade decisions are the province of Congress and
the Administration. As a general rule, most research finds that
open trade and capital flows provide benefits for U.S.
businesses, including larger markets for U.S. products and a
wider selection of inputs for production. Consumers also
benefit from a greater variety of goods and more competitive
prices. However, increased trade can cause dislocations,
including the loss of jobs in some industries. Policymakers and
economists alike are increasingly cognizant of the need to
design policies to support workers and families so that the
benefits of globalization can be more widely and evenly shared.
Q.7. How would you evaluate the economic impact of a 25 percent
tariff on Mexican or Chinese goods, all things being equal? How
should the Federal Reserve respond to such a tariff?
A.7. A higher tariff on either Chinese goods or Mexican goods
would tend to shift demand both toward U.S.-produced goods and
also to imports originating elsewhere. Although some U.S.
businesses may benefit from increased domestic demand, U.S.
firms would also likely have to pay more for imported
intermediate inputs, increasing production costs. An additional
effect would be to raise prices for goods consumed by U.S.
households.
The benefits that U.S. business receive from increased
domestic demand would also be reduced by lower demand from the
targeted country. The targeted country's demand for U.S.
exports would
decline not only because a U.S. tariff would reduce the
targeted country's own income, but also because the targeted
country might
retaliate by increasing its tariffs on U.S. goods.
In particular with regards to Mexico, the negative effects
of higher tariffs on the Mexican economy could result in
additional indirect spillovers to the U.S. economy, given the
interconnected supply chains that currently tie together U.S.
and Mexican production.
Q.8. Has the United States's threats to withdraw from NAFTA and
failure to otherwise robustly defend free trade already damaged
the economy? What about Mexico's efforts to find other trading
partners for goods like corn, in likely response to the United
States's threats to withdraw from NAFTA?
A.8. Market expectations about trade policy developments have,
at times, affected some financial market variables, such as the
exchange value of the dollar against the Mexican peso, but I am
not aware of broader effects on the U.S. economy.
Mexico is the third-largest market for U.S. agricultural
exports and the largest market for U.S. exports of corn, with
U.S. corn exports to Mexico valued at $2.6 billion in 2016.
Each year, the United States exports about 14 percent of its
corn crop.
Although there have been reports of efforts by Mexico to
diversify the sourcing of its imports of corn and other goods,
actual Government policy actions have not yet been implemented.
In addition, U.S. corn exports to Mexico, after being weak
earlier this year, have stepped up in recent months. Through
September, the value of corn exports to Mexico is now slightly
higher than over the same time period in 2016.
A sizable reduction in Mexican demand for U.S. corn would
force U.S. farmers to find other markets for their corn
exports. Doing so could be difficult, especially in the short
run, as other trading relationships would have to be developed
or expanded. In addition, corn exports may become less
profitable, after accounting for the increased shipping costs
to reach farther away destinations. However, those same
considerations raise questions over the ease with which Mexico
could reduce its U.S. corn imports. That said, Brazil and
Argentina are major corn exporters, who compete worldwide with
U.S. exporters for market share, and are potential alternative
sources for Mexican corn imports if the Mexican government were
to enact to discourage demand for U.S. corn.
Q.9. What economic sectors benefit the most from free trade and
what--if any--sectors are hurt by free trade? For example, does
free trade help the United States's agricultural sector?
A.9. Sectors where the United States is particularly productive
relative to its trading partners, such as agriculture, are ones
that likely benefit most from openness to trade. For example,
the value of U.S. agricultural exports has nearly tripled
(increasing 182 percent) since 2002 as U.S. agricultural
producers have exported a larger quantity of goods at higher
prices.
Sectors that are likely to be hurt are those where our
trading partners are particularly productive or low-cost, such
that domestic production is displaced by growing imports from
overseas. For example, there is a growing consensus among
economists that the rise of China as an exporter contributed to
job losses, higher unemployment, and lower wages for U.S.
manufacturing workers in manufacturing industries that compete
with imports from China, including apparel, furniture, and
electronics. However, cheaper Chinese imports may have helped
lower costs and boost employment in other industries, as well
as providing cheaper goods to
consumers.
Q.10. It has been said that trade has destroyed large segments
of the manufacturing-based economy. Is that true? How much of
the damage to that sector has actually resulted from other
factors such as automation?
A.10. Research suggests that, overall, increased trade has
benefited the United States, both by expanding supply chains
and access to new markets for U.S. exporters, and by providing
U.S. households with a greater choice of goods at lower costs.
That said, the U.S. manufacturing sector has been facing a
number of long-term structural challenges, including the
relative costs of labor and investment in producing
domestically versus abroad. As a result, some industries within
the U.S. manufacturing sector have experienced long-term
declines stemming from globalization. It is very difficult to
parse out with any precision responsibility for the decline of
the manufacturing sector to the various possible underlying
causes.
Q.11. What--if anything--should be done to help those sectors
that may be left behind by free trade and automation?
A.11. These are important issues that the Congress should
consider. Technological change is inevitable, and in my view it
would be a damaging mistake to stand in its way. And as I
indicated earlier, the bulk of economic research suggests that,
overall, increased trade has benefited the United States.
However, research also indicates that automation and trade have
tended to reduce the demand for lower-skilled workers,
especially those in jobs that involve routine tasks, either
physical or cognitive. This, in turn, has contributed to the
increased inequality of incomes that has been in train for
several decades, and it can help explain the ongoing decline in
labor force participation of men 25-54 years old, which has
been most concentrated among those with a high-school degree or
less. Some communities have also suffered disproportionately
because of the geographically concentrated nature of some of
the job losses that have resulted from trade and automation. I
have no prescription about exactly what an effective policy
approach should be, but would broadly point to education and
job training as among the things that the Congress could
reasonably consider in trying to address these issues.
Q.12. What risk does cybersecurity pose to the economy and
what--if anything--should the Federal Reserve do about it?
A.12. As I stated during my confirmation hearing, cybersecurity
risk is one of the most important risks faced by U.S. financial
and Government institutions. The U.S. economy has a heightened
level of exposure to cyber risk due to the high degree of
information technology (IT)-intensive activities and the ever-
increasing interconnection between entities operating in its
various sectors. In
particular, firms in the financial services sector are highly
interconnected and have considerable dependency on critical
service
providers. The presence of active, determined, and sometimes
sophisticated adversaries means that malicious cyber attacks
are often difficult to identify or fully eradicate, and may
propagate rapidly through the financial sector, with
potentially systemic
consequences.
To reduce the threat to U.S. financial stability, the
Federal Reserve has been taking steps to promote effective
cybersecurity risk management at the institutions we supervise
and strengthen their resilience to prepare for, withstand, and
rapidly recover from a cyber-related disruption. The Federal
Reserve evaluates the cyber and IT risk management practices of
these institutions and provides critical feedback and guidance
to better enable them to prepare for and rapidly recover from
cyber-attacks. However, to combat the dynamic cyber threat and
strengthen the resiliency of the financial sector, the Federal
Reserve believes the public sector and private entities need to
work closely together.
To this end, the Federal Reserve engages in interagency and
industry collaboration with the Federal Financial Institutions
Examination Council, Financial and Banking Information
Infrastructure Committee (FBIIC), Financial Services Sector
Coordinating Council (FSSCC), Financial Services Roundtable,
and various other groups to improve the cyber and IT resiliency
of the financial sector. In addition, the Federal Reserve
established the Secure Payments Task Force, comprised of a
diverse group of 170 industry participants, to collaborate on
the industry's most pressing payments system security issues,
including identity management, data protection, fraud, and risk
information-sharing payment security.
We appreciate the perspective of these groups, which is
complementary to achieving our safety and soundness and
financial stability goals. We strongly believe that the
continuation of these partnerships and their expansion into
other areas is necessary to effectively combat the cyber
threat.
Q.13. What is the cause of the increasing geographic
concentration of economic growth in larger cities? What--if
anything--should the Federal Reserve do about it?
A.13. Since the end of the Great Recession, labor markets in
larger cities have recovered substantially more than those in
smaller cities and nonmetropolitan (or rural) areas, and this
divergence has become even more pronounced in the past few
years. Several factors may help explain why larger cities have
been growing more quickly in recent years. For example, larger
cities tend to have more diversified economies, which
contributes to greater resiliency in the face of adverse
economic shocks. In contrast, rural areas tend to be more
dependent on a single industry or employer, and have been hit
harder by the loss of manufacturing jobs, perhaps prompted by
technical change or greater exposure to international trade. As
well, some highly educated people and fast-growing high-
technology and medical-science firms seem to be attracted to
larger cities because of the greater opportunities and
amenities they provide. Although the Federal Reserve is not
well positioned to target particular industries or regions,
pursuing our dual mandate of maximum employment and price
stability can help foster broad-based economic growth, thereby
improving prospects in all areas.
Q.14. What is the cause of the increasing consolidation of the
financial services sector? What are the downsides of this
consolidation? What--if anything--should the Federal Reserve do
about it?
A.14. The banking industry has been consolidating at a
relatively steady pace for more than 30 years, resulting in a
steady decline in the number of banks. The causes cited for
this trend include changes in legislation that permitted
interstate branching,
demographic shifts in population from rural to urban centers,
and rapid improvements in technology that have made it possible
for banks to serve a broader geographic range of customers.
Bankers also have increasingly cited an increase in regulatory
burden as contributing to the decline in the number of small
banks.
Research conducted over many years has concluded that
community banks provide distinct advantages to their customers
compared to larger banks. Because of their smaller size and
less complex organizational structure, community banks are
often able to respond with greater agility to lending requests
than their large national competitors. In addition, community
banks often have close ties to the communities they serve and
detailed knowledge of their customers, which enables them to
meet the needs of their local communities and small business
and small farm customers in a more customized and flexible way
than larger banks. Consequently, a decline in the number of
community banks can adversely affect local and regional
economic conditions.
The Federal Reserve believes it is important to maintain a
diversified and competitive banking industry that comprises
banking organizations of many sizes and specializations,
including a healthy community banking segment. To help support
this diversity, the Federal Reserve has taken a number of steps
in recent years to reduce regulatory burden on community banks.
These have included reducing the time devoted to the
examination of lower-risk activities at supervised community
banks, tailoring regulatory expectations depending on the size
and complexity of banks, and completing more examination work
offsite to reduce the disruption to day-to-day business that
can be caused by the examination process. The Federal Reserve
has also worked with the other banking regulators to streamline
regulatory reporting requirements for small banks, increase the
dollar threshold for commercial real estate loans requiring
appraisals, and simplify certain aspects of the regulatory
capital rules that community banks have found problematic. We
will continue to work to identify further opportunities to
adjust regulatory requirements to ensure that unnecessary
regulatory burden is minimized for these banks.
Q.15. I'd like to ask about the Federal Reserve's
implementation of Section 165 of Dodd-Frank, which provides for
enhanced prudential standards for banks with $50 billion in
assets or higher. As you know, Congress is considering raising
this threshold to $250 billion.
Q.15.a. Should a bank's asset size be dispositive in assessing
a bank's risk profile for the purposes of imposing prudential
regulations? For example, does a bank with less than $500
billion
regional banks pose the same systemic risk and have the same
complexity as large banks with around three times the asset
size? According to Basel Systemic Risk Indicators from 2015,
the systemic risk score of most banks with less than $500
billion in assets is 4 times less than banks with more than
$500 billion in assets.
Q.15.b. Are there costs to relying upon arbitrary asset
thresholds to impose prudential regulations, instead of
independently analyzing the risk profile of financial
institutions?
Q.15.c. If Congress raised the Section 165 threshold to $250
billion, should the Federal Reserve still tailor these
prudential standards for banks above that threshold? If so,
how?
A.15.a.-c. You ask whether the Federal Reserve would continue
to tailor enhanced prudential standards if the Dodd-Frank Wall
Street Reform and Consumer Protection Act section 165 threshold
is raised to $250 billion by Congress. It is important to note
that the Federal Reserve already tailors its regulation and
supervision of firms above this threshold. For example, firms
with more than $250 billion in total assets, that are not
considered to be global systemically important banks, are not
subject to risk-based capital surcharges, the enhanced
supplementary leverage ratio, or total loss-absorbing capacity
and long-term debt requirements to facilitate orderly
resolution. I fully expect that we would continue to tailor the
application of regulations for such firms if Congress were to
raise the threshold.
In all of our efforts, our goal is to establish a
regulatory framework that helps ensure the resiliency of our
financial system, the availability of credit, economic growth,
and financial market efficiency. The Federal Reserve has been
working for many years to make sure that our regulation and
supervision is tailored to the size and risk posed by
individual institutions. I believe that it is not only
appropriate to recognize the different levels of risk and types
of risk that different institutions in the system pose, but
that it also makes for better and more efficient regulation.
Efficient regulation allows the financial system to more
efficiently support the real economy.
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RESPONSE TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM JEROME
H. POWELL
Q.1. With rising levels of household debt, widening inequality,
and the neutral interest rate at historically low levels, it's
critical that the Federal Reserve have the ability to respond
in the event of another economic decline.
Q.1.a. What signs do you see of inflation coming close to the
Fed's 2 percent target, let alone exceeding it by dangerous
amounts?
A.1.a. While inflation has generally fallen short of the
Federal Open Market Committee's (FOMC) 2 percent objective over
the past several years, that shortfall has for the most part
been explicable by economic conditions, with good reason to
view it as temporary. During the early years of the recovery
from the Great Recession, inflation was held down by slack in
resource utilization. Later, in 2015 and into 2016, inflation
was held down by a sharp rise in the dollar, falling import
prices, and falling energy prices. More recently, the softness
in inflation seems to have been exaggerated by what look like
one-off reductions in some categories of prices, including, for
example, a large decline in quality-adjusted prices for
wireless telephone services. These factors appear to be largely
behind us.
Given the ongoing strengthening in labor markets, and with
measures of longer-term inflation expectations broadly stable,
I expect inflation to move higher next year. Most of my
colleagues on the FOMC agree with this assessment. In the
September Summary of Economic Projections, the median forecast
anticipated personal consumption expenditures (PCE) price
inflation moving back to 2 percent by 2019. However, monetary
policy will adjust in response to incoming news, and we will be
closely monitoring inflation developments to see whether this
outlook is validated by incoming data.
Q.1.b. What would be the cost to the economy of slightly
overshooting inflation versus the cost to the economy of
choking off growth if the Fed were to continue tightening
without a clear indication that inflation is reaching or
exceeding its target?
A.1.b. The FOMC has said that the 2 percent PCE inflation
objective is symmetrical, in the sense that the Committee would
be concerned about inflation running persistently above or
below 2
percent. For a number of years after the end of the Global
Financial Crisis, the economy was far from reaching either 2
percent inflation or full employment, which called for
accommodative monetary policy. With unemployment at 4.1 percent
and some other indicators suggesting that we are near full
employment, the Committee has been gradually returning monetary
policy settings to more normal levels. Since monetary policy
works with a lag, the Committee acts based on forecasts of the
path of inflation and employment. As shown in the September
2017 Summary of Economic Projections, most members of the
Committee forecast that inflation will return to the 2 percent
objective over the next 2 years. Although a temporary, slight
overshooting of the inflation target might not be a serious
problem, it would be possible for this process to run too far,
and for the FOMC to get behind the curve in preventing a
serious overheating of the economy. In particular, waiting too
long to tighten monetary policy could require the FOMC to
eventually raise interest rates rapidly, which could risk
disrupting financial markets and pushing the economy into a
recession. That is why we have been on a path of gradually
adjusting the stance of policy to promote the longevity of the
expansion. Of course, monetary policy is not on a preset
course: We will continue to respond to incoming information
about the tightness of the labor market and the pace of
inflation, and will adjust our policy accordingly.
Q.2. Compensation practices at large financial firms prior to
the crisis incentivized excessive risk-taking and created a
business environment with no guard rails where banks played
fast and loose with the savings and investments of hard-working
families. Ultimately those same families paid the cost when the
crisis hit and they lost their homes to foreclosure and saw
their savings wiped away in the blink of an eye. In response,
we passed a law requiring the financial regulators to prohibit
payment practices that encourage inappropriate risk taking at
the largest banks. In a January 2015 speech you gave at the
Brookings Institution, you noted that the Federal Reserve Board
strongly encouraged reforms to compensation practices at large
banks and financial institutions--reforms which you said would
be ``codified and strengthened'' by pending rulemakings.
Q.2.a. Understanding that it is a joint rulemaking requiring
input from other agencies, will you commit to doing everything
in your power to finalize the Section 956 incentive-based
compensation rulemaking?
A.2.a. Incentive compensation is an important tool to attract
qualified employees and executives to financial institutions.
It also is important that compensation programs at banking
firms provide incentives for employees to act in the long-term
interest of the firm. The supervision of incentive compensation
can play a role in helping safeguard financial institutions
against practices that threaten safety and soundness or could
lead to material financial loss. In particular, supervision can
help address incentive compensation practices that encourage
inappropriate risktaking at an institution, which may also have
effects on other institutions or the broader economy.
The Federal banking agencies, Federal Housing Finance
Agency, the Securities and Exchange Commission, and National
Credit Union Administration published a proposed incentive
compensation rule in response to the requirements of section
956 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) in June 2016. The agencies
received over 150 comment letters on the proposal. If
confirmed, I will support Vice Chairman Quarles' work with
Federal Reserve staff and the other five Federal agencies to
consider the comments received on the 2016 proposed rule. In
addition, I support efforts to continue to evaluate incentive
compensation practices at banking firms as a part of ongoing
supervision.
Q.3. Governor Powell, expanding diversity at the Federal
Reserve, at other financial regulatory agencies, and in the
financial services industry is essential--the quest for
diversity is an issue of fairness, opportunity, and it is a
realization by all that our economic strength is tied to our
inclusivity. I worked to include a provision in the Wall Street
Reform Act to establish Offices of Minority and Women Inclusion
at the Federal financial regulators, including at the Fed. Both
in the financial industry and the Federal Government, I firmly
believe institutions are stronger when they are built on a
foundation of more diverse backgrounds and viewpoints. In order
to be successful, diversity efforts absolutely require
commitment and attention from top leadership, and full
integration into human resources, contracting, and other
relevant processes.
How do you plan to enhance diversity and inclusion, and can
I have your commitment to make it a priority to improve
diversity both at the Fed and among regulated institutions?
A.3. Diversity is a critical aspect of all successful
organizations, and I am committed to fostering diversity and
inclusion throughout the Federal Reserve System. In my
experience, we make better decisions when we have a wide range
of backgrounds and voices around the table.
The Federal Reserve recognizes the value of a diverse
workforce at all levels of the organization. We are committed
to achieving further progress, and to better understanding the
challenges to improving and promoting diversity of ideas and
backgrounds. This has been an ongoing objective, and, if
confirmed, I assure you that diversity will remain a high
priority objective for the Federal Reserve.
As Administrative Governor and Chair of the Committee on
Board Affairs, I have supported and encouraged the Federal
Reserve Board's (Board) efforts to enhance diversity. In my
role as Chair of the Board Committee on Federal Reserve Bank
Affairs, I have worked with the Reserve Banks to promote
diversity throughout the System. Recognizing the value of
diversity at all levels of the System, including at the highest
levels, I have worked closely with the Reserve Banks to assure
that they have a diverse slate of qualified candidates for
president searches. The Reserve Banks, working closely with the
Board, have also been looking at ways to further develop a
diverse pool of talent in a thoughtful, strategic fashion,
readying them for leadership roles throughout the Federal
Reserve System.
To foster diversity more broadly, a long-term holistic plan
is necessary with a focus on doing the utmost to recruit and
bring people in and provide them paths for success. That means
having an overall culture and organization that is focused on
diversity and demonstrates its ongoing commitment at all
levels, starting at the top. For example, we have an internal
work stream at the Board to coordinate economic inclusion and
diversity efforts that is comprised of the Office of Minority
and Women Inclusion Director, Division Directors, senior staff
and Board Members. It focuses on initiatives not just at the
Board but also more broadly throughout the System. I am part of
this team, as are other Board members, and we meet regularly to
discuss initiatives and progress.
As you know, section 342 of the Dodd-Frank Act charged the
Board with developing standards for equal employment
opportunity and the racial, ethnic, and gender diversity in our
workforce and senior management, as well as for increased
participation of minority-owned and women-owned businesses in
programs and contracts. With regard to contracting, the Federal
Reserve has utilized national and local organizations
advocating for minority companies as a method to connect
directly with qualified companies and we participate in
numerous outreach events that provide a platform for Federal
Reserve staff to discuss the procurement process with potential
vendors while also providing information on future procurement
opportunities.
I believe it is important to continue to build on these
efforts. Continued collaboration with advocacy groups will help
the Federal Reserve better understand the challenges minority
businesses face as well as help the firms better navigate the
Federal Reserve's acquisition process.
The Federal Reserve also was required to develop standards
for assessing the diversity policies and practices of the
entities we regulate. The standards provide a framework for
regulated institutions to assess and establish or strengthen
their diversity policies and practices, and are intended to
promote transparency and awareness of diversity policies and
practices within the institutions. The Federal Reserve has
encouraged and continues to strongly encourage the institutions
we regulate to provide their policies, practices, and self-
assessment information and to maximize transparency, to
disclose on their websites their diversity policies and
practices, and to share information related to their self-
assessments.
Q.4. As you may know, the National Oceanic and Atmospheric
Administration's National Centers for Environmental Information
tracks U.S. weather and climate events that have significant
economic impacts, specifically those disasters or events where
the overall damage costs reach or exceed $1 billion dollars.
From 1980-2016, the annual average number of billion-dollar
plus events was 5.5, but for the most recent 5 years (2012-
2016), the annual average nearly doubled to 10.6 events
exceeding $1 billion in damages, including Superstorm Sandy
which caused $65 billion in damages. In 2017, we've already
seen 15 weather and climate events exceeding $1 billion.
Obviously, local economies impacted by these storms see both
short- and longer-term impacts including destruction of
capital, labor market shifts, and reconstruction efforts. As we
see the number of these storms increase I think it is critical
that we understand the economic impacts and potential risks.
Q.4.a. In your view, does the increasing frequency of
economically significant natural disasters and climate-related
events pose a potential risk to the long-term economic outlook
and to the Nation's financial stability?
Q.4.b. Do you believe that it is in the economic interest of
the United States to take steps to mitigate the worst impacts
of climate change?
A.4.a.-b. The potential implication of climate change for the
U.S. economy is an important issue that warrants further study.
However, this issue is well outside of the remit of the Federal
Reserve System, and I will leave it to others to decide how
best to address that issue. That said, the implications of
climate change and its effects on the economy are likely to be
more relevant for various
aspects of fiscal policy and the longer-run growth trend of the
economy than they are for the short-term evolution of the
business cycle.
Q.5. In January, the Minneapolis Federal Reserve published a
report estimating that if the Federal Open Market Committee had
been required to follow the Taylor Rule for the last 5 years,
2.5 million more Americans would be out of work today.
Do you accept the analysis that suggests strictly following
the Taylor Rule would undermine the Federal Reserve's ability
to achieve its full employment mandate?
A.5. John Taylor's well-known 1993 rule, and the many variants
on that rule sparked by his research, represent an important
contribution to the vast literature concerning the conduct of
monetary policy. That said, the 1993 rule called for raising
the Federal funds rate above its effective lower bound in
2012--a year when the unemployment rate averaged more than 8
percent. The rule calls for a funds rate about 100 basis points
higher than today's rate. A range of models of the economy
suggest that these significantly higher rates would have led to
slower progress in reducing unemployment.
Q.6. In a recent speech, FDIC Chair Gruenberg said that
improved cushions of capital and liquidity at large U.S.
banking organizations are not a source of competitive weakness
relative to banks in other jurisdictions, rather they are a
competitive strength.
A.6. Do you agree with the view that because of post-crisis
capital, stress testing, liquidity, and resolvability reforms,
our financial
institutions are better positioned to play a stabilizing role
in the next downturn rather than contributing to deeper
economic contraction?
Our financial system is stronger and more resilient than it
was a decade ago, in large part as a result of stronger levels
of high quality capital and liquidity in the system. Stronger
risk-based capital and liquidity regulations, together with our
stress testing program, help ensure that large U.S. banks are
better positioned to continue lending through periods of
economic stress and market turbulence.
Although U.S. banks are subject to high regulatory capital
and liquidity standards, U.S. banks have been successful
competitors in the global financial markets in recent years.
Internationally active U.S. banks are meaningfully more
profitable than their largest foreign bank peers and have much
higher price-to-book ratios and returns on equity. U.S. banking
organizations have also been able to expand lending while
maintaining high capital and liquidity buffers required by the
Federal Reserve.
U.S. banking organizations have also taken important steps
in recent years to improve their resolvability, including
meaningful adjustments to their structure, operations and
internal allocation of loss absorbing capacity and liquidity
resources. These changes help reduce the potential impact of a
large banking organization's failure on U.S. financial
stability.
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RESPONSE TO WRITTEN QUESTIONS OF SENATOR WARNER FROM JEROME H.
POWELL
Q.1. Growth in productivity is the ultimate driver of a higher
standard of living for Americans. There has been considerable
discussion in recent years about why productivity rates have
been below historical trend levels. Some believe that we are
not accurately measuring productivity, and that productivity is
actually growing more than the rates we've seen over the last
decade would suggest. Others believe that productivity has been
weak because of a lack of business investment. We've seen an
uptick in business investment recently, which is promising.
Q.1.a. Are we accurately measuring productivity?
A.1.a. Productivity is notoriously difficult to measure.
However, it has always been so, and research has not uncovered
evidence that would support dismissing the substantial
productivity slowdown as merely an artifact of mismeasurement.
There have been astounding innovations in many fields in recent
years, from energy to medicine, often underpinned by ongoing
advances in information
technology. These emerging technologies do augur well for
productivity growth going forward. But as has happened in the
past, such productivity gains may appear only slowly--perhaps
over a very long timeframe--as new firms emerge to exploit new
technologies and as incumbent firms invest in new vintages of
capital and restructure their businesses.
Q.1.b. Do you think that businesses until recently had little
incentive to invest because of loose labor markets? In other
words, because wage inflation has been weak, have businesses
been able to increase output by bringing more workers into the
workforce and not by increasing capital investment? Do you
believe this trend has been shifting recently as the labor
market tightens, attributing for the uptick in investment?
A.1.b. When businesses are making decisions about hiring new
workers or purchasing new capital equipment, the relative cost
of those two factors is an important consideration. However,
even with the sluggish pace of wage gains in recent years, the
ratio of wages to the marginal cost of investing in new capital
has continued to rise at a fairly steady pace since the
recession. In other words, firms continue to face incentives to
substitute capital investment for hiring where they can. The
pace of investment can vary considerably from quarter to
quarter and even from year to year. One factor that probably
has contributed to the relatively sluggish growth of investment
during the current economic expansion is the slowdown in the
growth of the labor force, which itself has importantly been
driven by the aging of the population.
Q.1.c. Projections show that U.S. Government debt will continue
to rise significantly over the coming years, even assuming a
current policy baseline. Are you concerned that the resulting
rise in Government borrowing rates will crowd out private
investment?
A.1.c. A large and growing Federal Government debt, relative to
the size of the economy, over the coming decades would have
negative effects on the economy. In particular, a rising
Federal debt burden would reduce national saving and put upward
pressure on longer-term interest rates. Those effects would
restrain private investment, which, in turn, would tend to
reduce productivity and overall economic growth.
Q.1.d. Would incentives for companies to invest in improving
their human capital, much like we incentivize businesses to
improve their physical capital, could help encourage
productivity gains?
A.1.d. As is the case for physical capital, improvements in the
quality of the workforce tend to increase productivity. Thus,
incentives for businesses to invest in the quality of their
workforces would encourage productivity gains. Of course, it
would be important for the Congress to weigh the costs and
benefits of policy steps in this direction.
Q.1.e. Does pressure on companies to meet short-term financial
targets detracts from their ability to implement a long-term
vision that may result in innovations that increase
productivity?
A.1.e. Although the question of whether American business is
overly focused on short-term financial targets has been a focus
of concern for a very long time, the question still hasn't been
clearly
settled. One reason for this is that different measures give
different answers. For instance, the share of capital spending
in GDP is currently well below the level reached at similar
points in the previous two business cycles. However, the share
of R&D spending, perhaps a better measure of firms' willingness
to focus on the future, is at an all-time high. Some research
indicates that executives do feel pressure to meet key short-
term metrics, such as earnings per share. On the other hand,
shareholders play an important role in providing the market
discipline that is necessary in a capitalist economy. Overall,
the economics literature doesn't provide a clear answer, but
given the importance of capital investment and good corporate
stewardship to productivity, the recent wave of new research on
this topic is a welcome development.
Q.2. In Chair Yellen's testimony before the Banking Committee,
she said that the ``neutral rate'' is low by historical
standards, but that it should rise slowly over the next several
years.
What is behind the current lower neutral Federal funds rate
target, and do you think these forces will abate, and if so,
why?
A.2. It's important to be humble and admit that our
understanding of the factors determining the neutral Federal
funds rate is limited. There are a few factors that we can
point to. One is the aging of the population, which increases
the supply of savings and reduces the demand for investment
because the labor force is growing more slowly. This factor
will almost certainly be with us for many years to come.
Another is the slow pace of productivity growth in the
aftermath of the recent recession. I am hopeful that in coming
years we will see a pickup in the pace of productivity growth
to historically more normal levels, but we need to watch the
incoming data. Another factor that restrained the neutral rate
for several years was weak economic performance in many foreign
economies. This factor seems to be lifting, with solid
synchronized growth across the major economies.
Q.3. The FOMC has begun to normalize the Fed balance sheet. At
the same time, the European Central Bank has signaled that its
support of the European government bond market will decrease,
and the Bank of Japan has also indicated it may begin to slow
its asset purchases. And U.S. Government deficit projections
increase significantly over the coming years.
Q.3.a. Will the resulting material drop in Fed demand for
longer-dated Treasuries and agency debt, when combined with the
increased U.S. Government debt supply, significantly push up
U.S. bond rates?
A.3.a. All else equal, reductions in demand for longer-term
securities from major central banks and the potential for
increases in debt supply stemming from wider fiscal deficits
would be expected to put some upward pressure on longer-term
yields. For example, some studies have suggested that the
Federal Reserve's asset purchases may be depressing longer-term
Treasury yields now by something on the order of 1 percentage
point. This effect would be expected to gradually fade over
time as the Federal Reserve normalizes the size of its balance
sheet. Of course, longer-term yields may be affected by many
other factors including the evolution of the outlook for
economic activity and inflation, perceptions of
economic and financial risks, and longer-term forces such as
aging populations and slowing productivity growth. On balance,
most forecasts have longer-term Treasury yields rising
gradually over time but to a long-run level that is fairly low
by historical standards. For example, in the economic
projections prepared by the Congressional Budget Office earlier
this year, the 10-year Treasury yield was projected to rise
gradually over time to a long-run level of about 3 \3/4\
percent.
Q.3.b. Have you been able to quantify how much you think long-
end U.S. rates could move up as a result of these U.S. and
global forces?
A.3.b. As noted above, the normalization of the stance of
monetary policy and the size of the Federal Reserve's balance
sheet would be expected to put some upward pressure on the
level of long-term interest rates over time. Many other factors
could affect longer-term yields as well. Most economic
forecasts have longer-term Treasury yields rising gradually
over time but to a long-run level that is relatively low by
historical standards. For example, in the economic projections
prepared by the Congressional Budget Office earlier this year,
the 10-year Treasury yield was projected to rise gradually over
time to a long-run level of about 3 \3/4\ percent.
Q.3.c. As a result, do you think there could be a significant
negative effect on U.S. mortgage rates and the housing recovery
at a time when the housing sector still has room to grow
compared to historic norms?
A.3.c. Mortgage rates are still low in historical terms, and
are likely to remain low for some time, which will provide
support for the housing market. In addition, higher household
formation is creating a need for more housing than we are
currently building, whether for rental or for ownership by
occupants, and with job creation continuing at a solid pace,
conditions are favorable for some further recovery in this
sector.
Q.4. Dodd-Frank Act supervisory stress testing is a forward-
looking quantitative evaluation of the impact of stressful
economic and financial market conditions on BHCs' capital.
Under current law, banks with over $50 billion are subject to
enhanced prudential standards.
Do you view stress tests as an essential part of the
enhanced prudential standards?
A.4. Yes, stress tests are one of the core post-crisis
regulatory reforms. They allow us to assess whether firms hold
enough capital to withstand a severe stress while still being
able to function and support lending to households and
businesses. Unlike traditional capital requirements, stress
tests provide a forward-looking assessment of losses banks may
incur under adverse economic scenarios. In doing so, the stress
tests help determine firms' capital needs when they will be
needed most--in a serious economic downturn.
To maintain the efficacy of our stress testing regime, we
have made regular improvements to them in response to feedback
from banks and the public. These improvements--which have
included tailoring our stress testing regime to be less
burdensome for smaller institutions and most stringent for the
largest, most systemically important firms--have helped our
regulatory and supervisory program for the largest firms remain
relevant and effective. Our guiding principle in modifying our
stress testing regime is that any changes should enhance the
resilience of the most systemically important U.S. firms in the
most efficient and effective manner possible. We will continue
to consider whether additional tailoring of our stress testing
regime is merited in order to achieve that objective.
Q.5. On October 21, 2016--over 1 year ago--the Federal Reserve
Board announced plans to enter negotiations with FINRA to
potentially act as the collection agent of U.S. Treasury
securities secondary market transactions data for trades done
by banks. You stated at the time that, ``(t)he collection of
data would allow the U.S. official sector a more complete view
of Treasury securities trading in the secondary market.''
When will the Fed come out with a proposed rule to collect
data on bank transactions in Treasuries?
A.5. The collection of data on secondary market transactions in
Treasury securities was a major recommendation of the
Interagency Working Group's Joint Staff Report on the market
events of October 15, 2014, and is a key policy goal. The
Financial Institution Regulatory Authority's (FINRA) collection
of data from broker-dealer reporting of Treasury secondary
market transactions on its Trade Reporting and Compliance
Engine (TRACE), begun in July, is already providing valuable
insights into the market, although the data collection is still
in an early phase. As shown by the events of October 14, 2014,
the overall objective of collecting Treasury market
transactions data on a regular basis is a sound one; until
recently, U.S. authorities have had far more information on
equities and corporate bond trading than we do on trading in
Government bonds.
While depository institution trading activity currently
appears to be a small proportion of overall activity in this
market, collecting this information from depository
institutions would allow a more complete analysis of the
Treasury trading data and could help identify and address
potential anomalies in the secondary market for Treasury
securities. Allowing depository institutions to report through
the FINRA TRACE system will save significant costs and
resources. In addition, to properly monitor markets, the data
collected under the Federal Reserve Board's (Board) authority
would need to be combined with the broker-dealer data to be
collected by FINRA, so direct reporting by the banks to FINRA
seems to be the most efficient method.
Accordingly, over the past year, Federal Reserve Board
staff have entered in negotiations with FINRA to act as the
Board's collection agent for depository institution
transactions data in secondary market transactions in Treasury
securities. Under such an agreement, the collection of
depository institution data by FINRA on the Board's behalf
would mirror FINRA's data collection from broker-dealers to the
closest extent possible. Certain details of a potential
agreement are still being worked out, including issues such as
information technology security, cost, access to the data, and
agency confidentiality and use. Once the feasibility of a FINRA
collection on behalf of the Board has been conclusively
established, the Board would plan to request comment on a
requirement for the reporting by banks. Among the issues that
the Board would seek comment on is the specification of cutoff
rules for a reporting requirement in order to avoid placing a
burden on smaller banks that are unlikely to have significant
transactions in this market. The Board is hopeful that
negotiations with FINRA can be concluded soon and that a
request for comment can be published in the near future.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR WARREN FROM JEROME H.
POWELL
Q.1. In June of this year, The Treasury Department released a
report entitled ``A Financial System that Creates Economic
Opportunities: Banks and Credit Unions.''\1\ The report
contained dozens of recommendations for rolling back financial
regulations. These recommendations closely resembled the wish
lists created by big bank lobbying groups.\2\ The attached
summary lists all of the recommendations that fall into the
Federal Reserve's jurisdiction.
---------------------------------------------------------------------------
\1\ https://www.treasury.gov/press-center/press-releases/Documents/
A%20Financial%20
System.pdf.
\2\ http://ourfinancialsecurity.org/wp-content/uploads/2017/06/The-
Trump-Treasury-And-The-Big-Bank-Agenda.pdf.
---------------------------------------------------------------------------
For each listed recommendation in the Fed's jurisdiction,
please state briefly whether you agree or disagree with the
recommendation, and explain why.
A.1. We must not forget the severity of the financial crisis
and its material adverse impact on families, businesses, and
the broader economy. The core reform--capital, liquidity,
stress testing, and resolvability--put in place since the
crisis are necessary if we are to have a more resilient
financial system. But, at the same time, we are looking at ways
to better tailor some of the new financial regulations to
achieve similar levels of systemic resilience with greater
efficiency.
It is seldom true that complex systems are constructed
perfectly on the first try. For example, there are areas where
it might be appropriate to make adjustments to more narrowly
focus financial stability reforms on larger, more systemically
important banking firms.
The Federal Reserve Board (Board) has not taken a position
on many of the recommendations in the report. There are a
number of recommendations in the report that I would support
and that, in fact, the Board had already begun to implement
before the report was published. For example, I believe that we
should continue to further tailor statutory and regulatory
requirements based on the risks presented by firms. I also
believe that we should continue to streamline regulation of
community banks, including simplifying capital requirements.
However, I also believe that we must maintain strong
capital and liquidity requirements for large, complex financial
institutions. Having strong capital and liquidity requirements
for the global systemically important banks that constrains
their leverage and risk-taking, for example is an intended
consequence of the post-crisis reforms and should be
maintained. Any changes to the regulatory
regime for these firms should be narrowly targeted at specific
aspects of regulations that are having an unintended effect.
In all our efforts, the Federal Reserve's goal is to
establish a regulatory framework that helps ensure the
resiliency of our financial system, the availability of credit,
economic growth, and financial market efficiency. As we
consider the recommendations in the Treasury report, that is
the lens through which the Board would view any future
regulatory changes. If I were to be confirmed, I would look
forward to continuing to work with our fellow regulatory
agencies and with Congress to achieve these important goals.
Q.2. In 2013, then-Fed Chairman Bernanke reportedly responded
to concerns expressed by you and two other Governors that it
was time to slow the Fed's rate of asset purchases.\3\ Chair
Bernanke wanted to continue asset purchases at their elevated
level because of the continued fiscal austerity and gridlock
being imposed by Congress at the time, but in order to achieve
unanimity on the Board of Governors, he announced intentions to
slow asset purchases. It has been speculated that this
announcement caused the so-called ``taper tantrum'' in which
investors suddenly withdrew their money from the bond market.
---------------------------------------------------------------------------
\3\ https://sites.google.com/site/kocherlakota009/home/policy/
thoughts-on-policy/2-6-16.
---------------------------------------------------------------------------
Q.2.a. Can you explain your role in the taper tantrum?
A.2.a. A novel feature of the asset purchase program started in
late 2012 was its open-ended nature. We said at the time that
we would continue this program until we saw a substantial
improvement in the outlook for the labor market. I supported
this open-ended approach, but was concerned that we needed to
have a plan for exiting the program even if such an improvement
did not occur because our asset purchases were found to be
ineffective. As reflected in the meeting minutes, the Federal
Open Market Committee (FOMC) discussed the efficacy of our
asset purchases in depth during that period. By the spring of
2013, we began to see signs that the outlook for the labor
market was improving, as we had hoped. The taper tantrum had,
in my view, less to do with changes in market expectations for
our asset purchases as it had with changes in expectations for
the path of the Federal funds rate. The rise in yields of
around 100 basis points was too large to have been plausibly
explained by balance sheet effects alone and is more consistent
with the perception that our policy stance had become less
accommodative. These changes were not intended by Chairman
Bernanke's communications. Subsequent FOMC communications were
successful in clarifying that the prospective reduction in the
pace of our asset purchases did not imply a change to our
intentions for the path of the Federal funds rate.
Q.2.b. Did you think the economic recovery was sufficient at
that time to reduce the Fed's support for the economy?
A.2.b. The tapering of our asset purchases began only in
December 2013. At that time I thought it was appropriate to
reduce the pace at which the FOMC was adding accommodation. It
is important to note that tapering did not imply tightening
monetary policy, as Chairman Bernanke emphasized throughout the
summer and fall of 2013. To use a car analogy, tapering did not
mean tapping the brakes, but merely easing off a little bit of
the accelerator. The challenge during the taper tantrum episode
was that our intention to slow the pace of asset purchases
later in 2013 was initially misunderstood as an intention to
raise interest rates sooner. Subsequent communications were
successful at aligning the public's expectations for the
Federal funds rate better with the FOMC's intentions.
Q.2.c. What communication practices from the Fed might prevent
incidents like the taper tantrum from occurring again?
A.2.c. Communicating about the course of monetary policy when
operating with multiple tools is inherently challenging. The
communications earlier this year in the run-up to our
announcement of our plan to reduce the size of our balance
sheet illustrate some lessons learned from the taper tantrum
episode. In particular, the FOMC informed the public through
the minutes of its meetings well before any decisions were
made. Moreover, in the addendum to our Normalization Principles
and Plans that the FOMC issued in June, we emphasized that, in
current circumstances, the Federal funds rate would be the
primary means for adjusting the stance of monetary policy. This
statement was intended to clarify that our actions regarding
the balance sheet at this time should not be interpreted as a
decision to alter the stance of monetary policy. The very muted
financial market response to our announcements and actions
suggests that the public understood our intentions.
Q.3. At your confirmation hearing, you stated that you believed
that there no U.S. banks that were too big to fail. When Lehman
Brothers failed in 2008, sparking the financial crisis, it had
$639 billion in assets. As of now, JPMorgan Chase has roughly
four times that amount of assets.
Do you honestly believe that if JPMorgan Chase failed
tomorrow, taxpayers would not need to bail the bank out to stop
another financial crisis?
A.3. It may be useful to clarify what it means to ask whether
any firm remains ``too-big-to-fail.'' By my answer, I intended
to convey my view that we have made enough progress that the
failure of one of our most systemically important financial
institutions, while undoubtedly posing a severe shock to the
economy, could more likely than not be resolved without
critically undermining the financial stability of the United
States. As I also said, we expect our most systemically
important firms to continue to make steady progress toward
assuring the achievement of that goal. Finally, I would add
that higher levels of capital and liquidity and stress testing
substantially reduce the likelihood that one of our most
systemically important financial institutions would fail.
During the financial crisis, large financial institutions were
unprepared to be resolved. As demonstrated by Lehman Brothers,
firms had not been required, nor seen the need, to take
specific actions to prepare themselves for resolution. This
lack of preparedness contributed to the disruption that the
failure of Lehman ultimately generated.
Since the financial crisis, the statutory framework
established by Congress and the efforts of the U.S. regulators
have made the largest banking firms more resilient and have
significantly improved their resolvability. In particular, for
the largest, most systemically important firms, we have
increased the quantity and quality of capital that they
maintain, have established capital surcharges that are scaled
to each firm's systemic footprint, and have required them to
issue long-term debt that can be converted to equity as part of
a resolution.
Through Title I of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Congress established a process for the
Federal Reserve and the Federal Deposit Insurance Corporation
to identify resolution weaknesses at firms, to provide clarity
about what actions need to be taken, and to follow through on
penalties should weaknesses remain. This process is designed to
foster resolution planning and enables the agencies to assess
whether a firm could be resolved under bankruptcy without
severe adverse consequences for the financial system or the
U.S. economy.
Specifically, the resolution planning process requires
firms to demonstrate that they have adequately assessed the
challenges that their structure and business activities pose to
resolution and that they have taken action to address those
issues. They must also confront the resolution consequences of
their day-to-day management decisions on a continual basis,
particularly those related to structure, business activities,
capital and liquidity allocation, and governance.
For all these reasons, the financial system today is
substantially more able to absorb the shocks that would result
from the material financial distress of failure of a large,
complex financial firm.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR PERDUE FROM JEROME H.
POWELL
Q.1. As you know, Federal law allows for banking regulators to
impose temporary consent orders on financial institutions to
address deficiencies at these organizations. I understand that
there are several inter-agency consent orders in place for
companies that,
despite having met the obligations of their consent orders for
some time, have not had the consent orders lifted due to
inaction on the part of the Federal Reserve Board. As the
Treasury Department's June Report (A Financial System That
Creates Economic Opportunities: Banks and Credit Unions)
outlined, the regulatory agencies need to improve this.
Specifically, the reports states ``A greater degree of inter-
agency cooperation and coordination pertaining to regulatory
actions and consent orders should be encouraged, in order to
improve the transparency and timely resolution of such
actions.'' This is an achievable task and should be adopted
swiftly, particularly as it pertains to the remaining inter-
agency consent orders that appear to be unnecessarily left in
place.
Could you please provide me with an update on existing
consent order statuses and what the Federal Reserve is doing to
give these the appropriate level of attention so companies can
avoid being left in limbo for an indeterminate timeframe?
A.1. In some limited cases the Federal Reserve Board (Board)
enters into formal enforcement actions against regulated
institutions where other banking regulators are parties to the
same action. In these cases, we coordinate closely with the
other regulators that are parties to the action. In deciding
whether any enforcement action should be terminated, the
Board's consistent practice is to require that the institution
subject to the action show that all corrective measures
required by the action have been properly implemented, and
these corrections have been sustained for an appropriate period
and are expected to be sustainable in the future. The Board is
committed to lifting enforcement actions on a timely basis when
these conditions are met, and Board staff is reviewing our
policies and practices in this area and assessing ways to
increase interagency coordination for actions shared by
multiple banking regulators.
Q.2. Governor Powell, the global financial crisis of 2007-2012
created the term SIFI systematically important financial
institution. Globally, the Basel Committee created a
methodology to identify Globally Systemically Important Banks
(G-SIB). Beyond the G-SIBs, Dodd-Frank gave the Federal Reserve
the power to impose enhanced supervision on bank holding
companies over $50 billion. Meanwhile in Europe, the European
Banking Authority uses an activity based test to identify their
Other Systemically Important Institutions (O-SIIs).
Is the size of a financial institution a sufficient
assessment of its risk to the financial system or is there
merit in the European model (O-SII) that takes into account a
more comprehensive list of factors including size,
substitutability, complexity, interconnectedness, and global
cross-jurisdictional activity?
A.2. The Federal Reserve has been working for many years to
make sure that our regulation and supervision is tailored to
the size, risk profile, and systemic footprint of individual
institutions. I believe that it is not only appropriate to
recognize the different levels of risk and types of risk that
different institutions in the system pose, but that it also
makes for better and more efficient regulation. Efficient
regulation allows the financial system to more efficiently
support the real economy.
While the Board currently has some authority to tailor the
enhanced prudential standards included in section 165 of the
Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act), the Board generally cannot eliminate the
application of these standards to covered firms. In particular,
Congress required that certain enhanced prudential standards
must apply to firms with $10 billion or more in total assets,
with other standards beginning to apply at $50 billion in total
assets.
I am aware that Congress is currently considering whether
and how to raise existing statutory thresholds in the Dodd-
Frank Act, and I have expressed support for increasing these
thresholds. I also understand that Congress is considering an
alternative to simply raising the thresholds that would entail
the use of a more complex, multi-factor approach to decide
which firms are subject to enhanced prudential standards. As I
have indicated previously, I am comfortable with both of these
approaches for further tailoring of section 165 of the Dodd-
Frank Act. More specifically, I think that an increase in the
Dodd-Frank Act statutory thresholds, combined with authority to
apply enhanced prudential standards below the new threshold,
along the lines provided for in the bill under
consideration by the Senate Committee on Banking, Housing, and
Urban Affairs, would help produce a supervisory and regulatory
framework that is better tailored to the size, systemic
footprint, and risk profile of banking firms. If I were to be
confirmed, I would stand ready to continue working with Members
on this issue.
Q.3. Governor Powell, we've had 3 rate hikes in the past year
yet we haven't seen an exact replication on yield rates. In
fact, as seen below, the rates on U.S. notes and bonds (2-10
years and 30 years) have not moved at all or seen a dip.
Q.3.a. Do you believe this is a reflection of general global
instability and the growth of risk within the pricing of bonds?
A.3.a. The yields on Treasury securities with maturities out to
2 years have responded to the policy firming of the Federal
Reserve over the past year largely as one would expect. For
example, 1- and 2-year Treasury yields have moved up about 75
basis points and 60 basis points, respectively, since the end
of last year. Longer term Treasury yields have not increased by
as much as one might expect based on historical relationships.
For example, 10- and 30-year yields have declined by about 10
and 30 basis points, respectively, since the end of last year.
Market participants have pointed to a number of factors as
contributing to the decline in longer-term Treasury yields over
the last year including some scaling back in the expectations
for fiscal stimulus, reduced concerns that inflation could move
sharply higher, an increase in demand for longer-term assets by
institutional investors, and asset purchase programs by central
banks. Longer-term yields in many advanced countries have edged
lower over the last year, suggesting that global forces may be
contributing to the low level of long-term yields.
Q.3.b. Do you believe this is a temporary situation or a new
global norm?
A.3.b. The level of longer-term interest rates around the world
can be expected to rise gradually over time as the global
economy recovers further and central banks normalize the stance
of monetary policy. However, many analysts have suggested that
the so-called ``equilibrium'' level of interest rates may be
lower now than in the past. Indeed, the median long-run level
of the Federal funds rate in projections prepared by Federal
Open Market Committee participants in September stood at 2.8
percent--almost a percentage point lower than comparable
projections prepared 2 years ago. Analysts have pointed to a
number of factors that could be contributing to a lower
equilibrium level of interest rates including aging populations
and slower productivity growth in many advanced economies,
changes in regulation, and increased caution on the part of
businesses in their investment spending.
Q.4. Governor Powell, as a continuation of our conversation on
bitcoin during the hearing.
Q.4.a. Do you have concerns that bitcoin is a significant asset
bubble and if asset prices were to correct, would this create a
regional, super-regional, or national economic crisis?
Q.4.b. What would the contagion effect be?
Q.4.c. Are there any weaknesses in our global financial
structure that would be susceptible to operation risks?
A.4.a.-c. The use of digital currencies has expanded. But from
the standpoint of analysis, the ``currency'' or asset at the
center of some of these systems is not backed by other secure
assets, has no intrinsic value, is not the liability of a
regulated banking institution, and in leading cases, is not the
liability of any institution at all.
Asset prices can be volatile, and it is quite difficult to
make reliable assessments about the right level for any given
asset class. The problem is even more difficult with digital
currencies, because they are so new and there are so many
questions about the factors that drive their value and their
status as a new asset class. As a result, it is difficult to
say whether there is currently an asset bubble in the price of
bitcoin. However, the price of bitcoin has been quite volatile
throughout its existence, and recently bitcoin has experienced
losses of more than 20 percent of its value in just a few
hours. Those experiences give us some confidence that even if
there were a more significant correction in the price of
bitcoin in the near term, there would be limited spillover to
regional, super-regional, or nation economies. Recent
experience also suggests that contagion has been limited to
prices of other digital currencies.
While these digital currencies may not pose major concerns
at their current levels of use, more serious financial
stability issues may result if they achieve wide-scale usage.
Risk management can act as a mitigant, but if the central asset
in a payment system cannot be predictably redeemed for the U.S.
dollar at a stable exchange rate in times of adversity, the
resulting price risk and potential liquidity and credit risk
pose a large challenge for the system. A related issue is
operational risk, if there are large surges in the number of
transactions as holders of an asset try to settle purchases and
sales of transactions in a concentrated window of time.
During times of crisis, the demand for liquidity can
increase significantly, including the demand for the central
asset used in settling payments. Even private-sector banks and
certainly nonbanks can have a hard time meeting large-scale
demands for extra liquidity at the very time when their balance
sheets may be in question. Moreover, this inability to meet the
demand for extra liquidity can have spillover effects to other
areas of the financial system.
Nonetheless, at this time, I do not see bitcoin as having
sufficient scale in volume or value to make the overall global
financial structure susceptible to operational or other
disruptions.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR HEITKAMP FROM JEROME
H. POWELL
Q.1. Before I dive into some of my larger economic policy
questions, I do want to get you on the record regarding the
bipartisan regulatory reform proposal which my colleagues and I
introduced last week.
Q.1.a. A simple yes or no will do: Would anything in this bill
hamper the Fed's ability to adequately monitor and regulate
systemic risk of financial institutions?
Q.1.b. Would anything in this bill increase the risk to the
safety and soundness of the U.S. financial system?
A.1.a.-b. I am still familiarizing myself with the bill, and I
understand that it is scheduled to be marked up this week and
is still subject to change. Based on my review thus far, I
believe that the bill preserves the Federal Reserve's ability
to adequately monitor and regulate systemic risk of financial
institutions as well as our ability to regulate firms for
safety and soundness objectives. I certainly share the goal of
tailoring regulation and supervision according to the size,
complexity, and risk to the financial system posed by banks. An
increase in the Dodd-Frank Wall Street Reform and Consumer
Protection Act statutory thresholds combined with provisions
that allow the Federal Reserve to apply enhanced prudential
standards to firms below the new threshold, along the lines
provided for in the bill under consideration, would help
produce a supervisory and regulatory framework that is better
tailored to the size, systemic footprint, and risk profile of
banking firms.
Q.2. One of the things that I think is critical for the Fed
Chair to engage on is how policy choices will impact the larger
economic picture. And one of the biggest policy choices
confronting us today is what to do about trade. The answer to
how we handle our trade relationships will have a huge impact
on our economy and specifically will greatly impact North
Dakota's economy, which is driven by commodity exports.
The Fed historically has been willing to engage on large
macroeconomic policy issues such as trade. For example, in
2007, then Fed Chair Bernanke gave a speech entitled:
``Embracing the Challenge of Free Trade: Competing and
Prospering in a Global Economy.''
Q.2.a. Do you agree with then former Fed Chair Bernanke's
statement that ``restricting trade by imposing tariffs, quotas,
or other barriers is exactly the wrong thing to do''?
A.2.a. The Federal Reserve is entrusted to achieve its
congressionally mandated objectives of price stability and
maximum sustainable employment. Matters of trade policy are the
responsibility of the Congress and the Administration.
In general, trade and access to global markets provide many
benefits for businesses and firms, including larger and deeper
markets for their products and a wider selection of inputs for
production. Consumers also benefit in terms of greater variety
of goods and more competitive prices. Because of these and
other benefits, more open and globalized economies generally
have been faster growing, more productive, and more dynamic.
However, the economic shifts brought on by trade have costs,
and the loss of jobs in some industries or professions have
been very painful for those affected. Policymakers and
economists alike are increasingly cognizant of the need to
design policies to support workers and families so that the
benefits of globalization and trade can be more widely and
evenly shared.
Q.2.b. Do you share Mr. Bernanke's view that a response to the
dislocations that may result from trade--such as a retreat into
protectionism and isolationism--would be ``self-defeating and,
in the long run, probably not even feasible''?
A.2.b. U.S. exporters have benefited from access to foreign
markets. To the extent that we raise our barriers to foreign
goods, we should expect to face increased barriers overseas.
Such developments would harm U.S. firms through a number of
channels. Not only would U.S. exporters face increased costs in
selling their goods in foreign markets, but U.S. producers
could have higher input costs and U.S. consumers would likely
pay higher costs for some products as well. Overall, a decrease
in the openness of trade is likely to reduce the
competitiveness of U.S. producers.
Q.2.c. Do you believe that the United States can achieve its
targeted economic growth rate of 3-4 percent by adopting
protectionist and isolationist trade policies?
A.2.c. I will not comment or speculate on individual policies.
Overall effects would depend on the specifics of trade
policies. In general, increased trade barriers should induce
some U.S. firms and consumers to switch expenditures away from
foreign goods and toward U.S. produced goods. However, this
benefit may be offset by U.S. producers having to adapt to
higher costs for intermediate inputs, and by households having
to pay more for their purchases. In addition, there may be
reduced demand for U.S. exports if other countries retaliate by
imposing increased restrictions or tariffs on U.S. goods.
Another consideration is that reduced trade and competition
could lead to slower productivity growth in the U.S. economy.
Q.3. As you're well aware, the Senate is preparing to vote on a
massive tax package that the Joint Committee on Taxation and
other independent experts expect to add at least $1.5 trillion
to the national debt. By the time you respond to these
questions, that tax bill could have already been voted on.
Q.3.a. Would you recommend raising interest rates more quickly
under a scenario where tax cuts marginally boost short-term
growth while increasing long-term deficits?
A.3.a. The Federal Open Market Committee (FOMC) makes decisions
about the stance of monetary policy so as to achieve the
congressional mandate of maximum employment and price
stability. Because monetary policy affects the economy only
with some lag, the FOMC is focused on the outlook for the labor
market and inflation. Fiscal policy affects this outlook, but
is only one among many factors. Moreover, the effects of fiscal
policy depend on the size and composition of a given fiscal
package, and on its effects on aggregate demand versus supply.
Q.3.b. How would an increase in deficits potentially impact the
U.S. trade deficit? Could that foreseeably lead to off-shoring?
A.3.b. Generally speaking, stimulative fiscal policies tend to
boost the exchange value of the dollar, which in turn would
lead to higher imports into the United States and raise the
cost of our exports to foreigners, thereby increasing the trade
deficit. The net effect on manufacturing would depend on the
magnitude of this effect relative to the boost to production
from the stimulus to domestic demand associated with the tax
cut. As of this writing, the final shape of what will be
enacted is still uncertain. Even once that is known, it would
likely be difficult or impossible to cleanly separate the
effect of the tax package from other factors affecting the
trade deficit.
Q.3.c. Today we have the strongest labor market in a decade, a
4.4 percent unemployment rate, yet wages are rising barely
faster than inflation--Do you believe corporate tax cuts can
lead to higher wage growth? What evidence is there to support a
direct relations hip between corporate rate reductions and
higher wages?
A.3.c. While there is a consensus among economists that
corporate tax reform can potentially induce greater business
investment and boost economic output, productivity, and the
demand for labor, there is no consensus on the magnitude of
those effects nor the distribution of those benefits. In
addition, a complete analysis would have to take into account
other provisions in the tax package, as well as the method of
financing the tax package. Assessing the net effects of all
these changes is very challenging and subject to considerable
uncertainty.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCHATZ FROM JEROME H.
POWELL
Q.1. What are your views on whether climate change will have a
material impact on our economy?
A.1. The potential impact of climate change on the U.S. economy
is an important issue that warrants further study. However,
this issue is well outside of the remit of the Federal Reserve
System. Moreover, as important as climate change may ultimately
prove to be, it will play out over a much longer timeframe than
the one that is most relevant for monetary policy
decisionmaking; in our conduct of monetary policy, we are more
concerned with short- and medium-term developments that may
change materially over quarters and a relatively small numbers
of years rather than the decades associated with the pace of
climate change.
Q.2. When the Federal Reserve Board formulates monetary policy,
it takes a broad look at the economy and identifies short- and
medium-run risks and trends. In the minutes from the FOMC's
most recent meeting, there is a brief discussion of the
economic impact of hurricane-related disruptions as well as
dislocation from wildfires in California. But the minutes note
that these sorts of severe weather events have only had a
temporary impact in the past.
Our own Government's data show that the intensity and
frequency of major weather events are increasing. Hurricanes,
flooding, droughts, wildfires--they are happening more often
and they are causing more damage than ever.
Q.2.a. How many events do you think it would take to have a
material impact on the economy?
Q.2.b. Has the Federal Reserve considered what that number
would be, in terms of number of events or the total cost of the
damage?
A.2.a.-b. Each and every disaster of the kind that you describe
represents a catastrophe for the individuals and communities
that are directly affected. The most severe of these events can
seriously damage the lives and livelihoods of many individuals
and families, devastate local economies, and even temporarily
affect national economic statistics such as GDP and employment.
However, the historical regularity has been that events of this
kind have not materially affected the business-cycle trajectory
of the national economy, both because the disruptions to
production have tended to be relatively short-lived and because
such events tend to affect specific geographic areas rather
than the United States as a whole. That said, the most severe
of these events have imposed a significant drain on public
resources. If such events become much more frequent or more
severe, the fiscal cost would likely mount, and that would be
an important issue for the Congress to consider.
Q.2.c. Have you or the Federal Reserve's staff been in
communication with NOAA about the likelihood of the number of
severe weather events increasing?
Q.2.d. At what point should the Federal Reserve begin to factor
into its analyses the downside risks of not having policies in
place to combat climate change?
A.2.c.-d. As I indicated above, the pace of climate change--and
the change in frequency of major weather events that might
result--is commonly denominated in terms of decades or even
longer, and thus is much slower-moving than is monetary policy
decisionmaking. The issues of climate change and its associated
effects on the economy are likely to be more relevant for
various aspects of fiscal policy and the longer-run growth
trend of the economy than they are for the short-term evolution
of the business cycle.
Q.3. The Treasury Department has put out a number of reports
that detail its proposals for deregulating the financial
industry. You have stated that Treasury's recommendations are a
``mixed bag'' and that there are ``some ideas [you] would not
support.''
Q.3.a. What are the regulations you would not want to see
undermined? Please be as specific as possible.
A.3.a. The June 2017 Treasury report on financial regulation
acknowledged that regulatory policies since the financial
crisis have improved the safety and soundness of the financial
system, and noted that the U.S. banking system is significantly
better capitalized as a result of post-crisis regulatory
capital requirements and stress testing. The report also made a
series of recommendations for the U.S. regulatory agencies to
consider in order to reduce regulatory burden on the banking
system.
The Federal Reserve Board (Board) has not taken a position
on many of the recommendations in the report. There are a
number of recommendations in the report that I would support
and that, in fact, the Board had already begun to implement
before the report was published. For example, I believe that we
should continue to further tailor statutory and regulatory
requirements based on the risks presented by firms. I also
believe that we should continue to streamline regulation of
community banks, including simplifying capital requirements.
However, I also believe that we must maintain strong
capital and liquidity requirements for large, complex financial
institutions. Having strong capital and liquidity requirements
for the global systemically important banks that constrain
their leverage and risk-taking, for example, is an intended
consequence of the post-crisis reforms and should be
maintained. Any changes to the regulatory regime for these
firms should be narrowly targeted at specific aspects of
regulations that are having an unintended effect.
The Federal Reserve is committed to continuing to evaluate
the effects of regulation on financial stability and on the
broader economy, and to make adjustments as appropriate. As we
do that, however, I would reiterate that we should preserve the
core tenets of regulatory reform that were designed to
significantly reduce the likelihood and severity of future
financial crises. As I discussed in my testimony before the
Senate Committee on Banking, Housing, and Urban Affairs on June
22, 2017, there are four key elements of the post-crisis
regulatory reforms that I believe should remain substantially
in place to achieve this aim: regulatory capital, stress
testing, liquidity, and resolution planning. Moreover, I
believe that we should continue to tailor our rules to the
different risks of different firms and, in particular, work to
reduce unnecessary burden on community banks.
In all our efforts, the Federal Reserve's goal is to
establish a regulatory framework that helps ensure the
resiliency of our financial system, the availability of credit,
economic growth, and financial market efficiency. As we
consider the recommendations in the Treasury report, that is
the lens through which the Board would view any future
regulatory changes. If I were to be confirmed, I look forward
to continuing to work with our fellow regulatory agencies and
with Congress to achieve these important goals.
Q.3.b. As the Federal Reserve Chairman, how would you assess
whether rolling back a particular regulation would introduce
risks into the financial system?
A.3.b. The activities of financial firms can pose risks to the
financial system. For example, an excessive reliance on short-
term wholesale funding, excessive leverage, and deficiencies in
risk management at large financial firms, as well as at many
firms outside the regulated banking sector, led to a
devastating financial crisis. The reforms to regulation and
supervision that have been put in place are intended to help
prevent another crisis. As we consider possible changes to the
post-crisis structure of regulation and supervision, we should
look at ways we might better tailor supervision and regulation
to be more efficient while maintaining the resilience of the
financial system. Changes to regulation should take into
account a range of factors. When adopting regulations, we
should consider our own analyses, as well as public comments,
and aim to maximize the long-term net economic benefits, while
taking account of regulatory burden.
Q.4. At a hearing with the current CEO of Wells Fargo, I asked
why the OCC should not review and possibly revoke the bank's
charter because of its egregious violations of consumer
protection laws. Mr. Sloan answered that Wells Fargo provides
banking services to 1-in-3 households in America, which sounds
to me like he thinks Wells Fargo is too big to be held
accountable.
Q.4.a. Do you think there are institutions that are too big to
be held accountable?
Q.4.b. Do you think there is a point at which a bank,
regardless of how plain-vanilla it is, can be so big that its
officers and board members are unable to manage risk and truly
oversee all operations?
Q.4.c. What should the Federal Reserve do in those cases?
A.4.a.-c. I also have been very distressed to see large banking
organizations with problems complying with consumer laws and
preventing fraud. All banking organizations--regardless of
their size--are expected to comply with applicable laws and
regulations and operate in a safe and sound manner. All banking
organizations need to have effective, firm-wide compliance risk
management programs that enable firms to identify, assess, and
control their compliance risks. Banking organizations--
especially the largest, most complex institutions--must
appropriately design these programs for the activities in which
they engage and ensure that they have sufficient systems and
resources to effectively operate the programs on an ongoing
basis.
The Federal Reserve's program for supervising large banking
organizations is focused on whether the firms maintain
sufficient capital to absorb stress and continue to operate,
maintain sufficient liquidity to withstand an acute funding
shock, conduct effective recovery and resolution planning, and
maintain sufficient governance and controls to ensure all
aspects of their business are well managed and operate in a
safe and sound manner. Banking organizations that do not meet
these standards or fail to comply with laws and regulations are
subject to supervisory actions, including ratings downgrades
and enforcement actions. The severity of an
enforcement action is calibrated to the materiality of the
legal violation or supervisory issue. Banking organizations
that fail to
address weaknesses over a prolonged period of time may be
subject to restrictions or limitations on their business.
We expect to see robust policies and procedures in place to
help ensure that employees are acting in a legal and ethical
manner, and that the incentives that are put in place in these
organizations are appropriate and do not foster behaviors that
could harm consumers. This has been and will be a focus of our
supervision for all banking organizations.
Q.5. According to a letter that FDIC Vice Chairman Thomas
Hoenig sent to this Committee, ``10 bank holding companies in
the United States will distribute, in aggregate, 99 percent of
their net income . . . [in the form of dividends and stock
buybacks].'' For 2017, these institutions will pay out over
$116 billion. He goes on to note that ``if the 10 largest U.S.
bank holding companies were to retain a greater share of their
earnings earmarked for dividends and share buybacks in 2017
they would be able to increase loans by more than $1 trillion,
which is greater than 5 percent of annual U.S. GDP.'' In his
view, ``such massive distributions of capital provide no base
for their future growth that would benefit our national
economy.''
Q.5.a. Do you think it is good or bad for the economy that
banks are putting so much capital toward shareholder payouts?
Q.5.b. This trend of aggressive shareholder payouts can be seen
across major industries in our economy. Do you think the share
of net income going to shareholder payouts, as opposed to other
investments--such as R&D, wages, workforce development, and
capital investments--plays any role in the disappointing
productivity that the Federal Reserve has observed in the U.S.
economy?
A.5.a.-b. As a percentage of corporate earnings, payouts from
U.S. corporations to shareholders in the form of share buybacks
and dividends have been unusually high over the past couple of
years. But establishing a direct connection between the strong
shareholder payout activity and the lackluster capital
investment and productivity growth of the economy is difficult.
Indeed, prior to 2016, payouts to shareholders as a share of
earnings had been running close to their average pace of the
past three decades, including times with faster productivity
growth. Moreover, economists tend to view the high payouts more
as a consequence, rather than a cause, of the relatively modest
pace of investment amidst high profitability.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR VAN HOLLEN FROM JEROME
H. POWELL
Q.1. While your predecessors were careful not to wade into the
specifics of the fiscal decisions made by Congress, they did
express concerns about rising debts.
Q.1.a. Are you concerned about rising debt?
A.1.a. Yes, I am concerned. If current budget policies do not
change, the Congressional Budget Office projects that the
further aging of the population, rising healthcare costs, and
growing interest payments on the debt will all contribute
importantly to rising budget deficits and an unsustainable
trend in the ratio of the
Federal debt to GDP. A large and growing Federal Government
debt, relative to the size of the economy, over the coming
decades would have negative effects on the economy. In
particular, a rising Federal debt burden would reduce national
saving, all else equal, and put upward pressure on longer-term
interest rates. Those effects would be likely to restrain
private investment, which, in turn, would tend to reduce
productivity and overall economic growth.
Q.1.b. How do you believe adding $1.5 trillion to the national
debt will impact the Federal Reserve's monetary policy
decisions and the economy overall?
A.1.b. Fiscal policy in general, and the size of the national
debt in particular, are only some of the many factors affecting
the overall economic environment in which we will be conducting
monetary policy. In my answer immediately above, I outlined
some of the longer-term effects that a larger national debt
might have on the national economy. While those effects may
ultimately prove to be important, they will mostly play out
only slowly, over long periods of time. In general, in the day-
to-day and month-to-month conduct of monetary policy, we can be
more tactical, in that we can respond quickly to unfolding
developments. Indeed, we will respond to many changing factors
over coming years.
Q.1.c. Do you know of any credible analysis that indicates that
this tax cut would ``pay for itself?''
A.1.c. Because the Federal Reserve is not assigned a role in
estimating the budgetary effects of changes in fiscal policy,
it would not be appropriate for me to comment on any specific
tax proposal. But generally speaking, changes in tax policy
would have to generate sizable and persistent increases in
economic growth in order for the revenues lost from tax cuts to
be offset by the revenues gained because taxable incomes and
profits are higher.
Q.2. This past March, you spoke at West Virginia University
College of Business and Economics about the History and
Structure of the Federal Reserve. In that speech you discussed
how the Federal Reserve needs ``to have diversity in gender and
race both at the Board and at the Reserve Banks.'' Please
discuss how you will prioritize diversity at the Federal
Reserve should you become Chair. You have previously
recommended in your annual letter to Reserve Banks that they
look beyond the corporate and financial sector to labor and
community organizations for Reserve Bank directors.
Q.2.a. Do you think the Reserve Banks have been receptive to
your recommendations?
Q.2.b. How will you continue to prioritize diversity of
industry and sector representation throughout the Federal
Reserve System?
Q.2.c. Please provide an assessment of the Federal Reserve's
progress on diversity.
A.2.a.-c. Diversity is a critical aspect of all successful
organizations, and I am committed to fostering diversity and
inclusion throughout the Federal Reserve System. In my
experience, we make better decisions when we have a range of
backgrounds and voices around the table.
The Federal Reserve recognizes the value of a diverse
workforce at all levels of the organization. We are committed
to achieving further progress, and to better understanding the
challenges to improving and promoting diversity of ideas and
backgrounds. This has been an ongoing objective, and, if
confirmed, I assure you that diversity will remain a high
priority objective for the Federal Reserve.
As Administrative Governor and Chair of the Committee on
Board Affairs, I have supported and encouraged the Federal
Reserve Board's (Board) efforts to enhance diversity. In my
role as Chair of the Board Committee on Federal Reserve Bank
Affairs, I have worked with the Reserve Banks to promote
diversity throughout the System. Recognizing the value of
diversity at all levels of the System, including at the highest
levels, I have worked closely with the Reserve Banks to assure
that they have a diverse slate of qualified candidates for
president searches. The Reserve Banks, working closely with the
Board, have also been looking at ways to further develop a
diverse pool of talent in a thoughtful, strategic fashion,
readying them for leadership roles throughout the Federal
Reserve System.
To foster diversity more broadly, a long-term holistic plan
is necessary with a focus on doing the utmost to recruit and
bring people in and provide them paths for success. That means
having an overall culture and organization that is focused on
diversity and demonstrates its ongoing commitment at all
levels, starting at the top. For example, we have an internal
work stream at the Board to coordinate economic inclusion and
diversity efforts that is comprised of the Office of Minority
and Women Inclusion Director, Division Directors, senior staff
and Board Members. It focuses on initiatives not just at the
Board but also more broadly throughout the System. I am part of
this team, as are other Board members, and we meet regularly to
discuss initiatives and progress.
The Board focuses considerable attention on increasing
gender, racial, and sector diversity among directors because we
believe that Reserve Bank boards function most effectively when
they are constituted in a manner that encourages a variety of
perspectives and viewpoints. Monetary policymaking also
benefits from having directors who effectively represent the
communities they serve because we rely on directors to provide
meaningful grassroots economic intelligence. Because all
directors serve in this role, we believe it is important to
consider the characteristics of both Reserve Bank and Branch
boards.
Each year, the Board carefully reviews the demographic
characteristics of Reserve Bank and Branch boards. This
information is shared with Reserve Bank leadership, including
the current Chair and Deputy Chair of each board, and areas for
improvement are highlighted. The Board's Bank Affairs Committee
regularly discusses this topic with Reserve Bank leadership
during the annual Bank evaluation meetings.
Although there is surely room for further improvement, the
Federal Reserve has made significant progress in recent years
in
recruiting highly qualified women and minorities for director
positions. For example, we anticipate that in 2018:
Lsix of the 12 Reserve Banks boards of directors
will be chaired by a woman, and three of those Banks
will have a woman serving as both Chair and Deputy
Chair;
Lfive Reserve Banks will have a racially diverse
Chair or Deputy Chair, and one additional Bank will
have a racially diverse director in both roles; and
L50 percent of Reserve Bank Chairs and 67 percent of
Deputy Chairs will be diverse in terms of gender and/or
race (with a racially diverse woman counted only one
time).
The System's directors represent a wide variety of industries
and sectors, and we have seen significant improvement in
increasing representation from historically underrepresented
groups, including consumer/community and labor leaders. For
example, in 2017 every Reserve Bank except one has a consumer/
community or labor representative serving on its board. In
addition, consumer/community and labor directors serve on
numerous Branch boards throughout the System. In addition,
other Board-appointed directors are affiliated with
organizations that allow them to provide unique and invaluable
insights into their communities and regional economies.
As you know, section 342 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act charged the Board with
developing standards for equal employment opportunity and the
racial, ethnic, and gender diversity in our workforce and
senior management, as well as for increased participation of
minority-owned and women-owned businesses in programs and
contracts. With regard to contracting, the Board has utilized
national and local organizations advocating for minority
companies as a method to connect directly with qualified
companies and we participate in numerous outreach events that
provide a platform for the Board's staff to discuss the
procurement process with potential vendors while also providing
information on future procurement opportunities.
I believe it is important to continue to build on these
efforts. Continued collaboration with advocacy groups will help
the Fed better understand the challenges minority businesses
face as well as help the firms better navigate the Fed's
acquisition process.
Q.3. In response to the financial crisis, the Federal Reserve
instituted the Comprehensive Capital Analysis and Review
(CCAR). This annual exercise has helped ensure that
institutions have well-defined and forward-looking capital
planning processes that
account for unique risks of the institution and sufficient
capital to continue operations through times of economic and
financial stress.
Q.3.a. Please describe how you believe the CCAR has benefited
our financial system.
A.3.a. The Comprehensive Capital Analysis and Review (CCAR) was
designed to address critical weaknesses at the largest banks
that threatened their viability and, in turn, the stability of
the U.S. financial system during the recent financial crisis.
At that time, these banks were:
LUnable to understand the adverse effects they could
suffer under extreme stress or the impact of such
effects upon their financial condition;
LUnable to gather basic data necessary to accurately
determine their own exposures, including determining
their total exposure to particular counterparties
across their firm and the location and value of the
collateral they held;
LReluctant to cut their distributions--particularly
dividends--even as stress was growing, lest they signal
weakness to the markets; and
LSignificantly undercapitalized as a result of being
unable to understand the material risks to which they
were exposed.
CCAR and stress testing have prompted improvement in capital
adequacy and capital planning at the largest U.S. banks in the
years since the crisis. U.S. firms have substantially increased
their capital since the first round of stress tests led by the
Federal Reserve in 2009. The common equity capital ratio--which
compares high-quality capital to risk-weighted assets--of the
34 bank holding companies in the 2017 CCAR has more than
doubled from 5.5 percent in the first quarter of 2009 to 12.5
percent in the first quarter of 2017. This reflects an increase
of more than $750 billion in common equity capital to a total
of $1.25 trillion during the same period.
CCAR has also required firms to steadily improve their risk
management and capital planning practices. As a result, some of
the firms are now close to meeting our supervisory expectations
for capital planning. It will continue to be important to
assess the capital planning practices of these firms, given the
dynamic nature of banks and the risks that they face.
Q.3.b. Do you believe the Economic Growth, Regulatory Relief
and Consumer Protection Act, as it is written provides the
Federal Reserve with any implicit or explicit signals to alter
the way and frequency with which it administers the CCAR?
A.3.b. I am still familiarizing myself with the bill. I
understand that it is scheduled to be marked up this week and
is still subject to change, but in general I support the
overall framework of the legislation. One provision of the bill
under consideration would increase the $50 billion asset
threshold for supervisory stress testing to $100 billion. If
the threshold for supervisory stress testing were raised, and a
supervisory stress test were no longer done for some firms, an
adjustment to the CCAR quantitative assessment would be
appropriate for these firms as well.
Another provision of the bill would change the required
frequency of supervisory stress testing from ``annual'' to
``periodic'' for firms with between $100 billion and $250
billion of total assets. Banks with between $100 billion and
$250 billion in total consolidated assets are an important
source of credit to consumers and businesses. As a result, it
is important that they continue to maintain sufficient capital.
We believe there are safety and soundness and financial
stability benefits in conducting capital stress tests on a
periodic basis based on a bank's size and complexity. If
Congress granted us the flexibility to conduct stress tests at
a different frequency than annually, we would consider the
tradeoff between potentially less current information about
banks' risks against the reduced burden of less frequent stress
tests.
Q.3.c. Does the Federal Reserve plan on altering the frequency
by which it administers the CCAR within the next 2 years?
A.3.c. Under current law, we have no plan to reduce the
frequency of CCAR within the next 2 years.
Q.4. One of the hallmarks of the Federal Reserve is its
independence as an agency that is ultimately accountable to the
public and the Congress.
Q.4.a. How would you respond to efforts by members of the
executive branch to exert influence over the Federal Reserve's
monetary and regulatory policy?
A.4.a. The independence that Congress granted the Federal
Reserve is a hallmark of our institution and allows us to
pursue policies--both monetary and regulatory--that are
appropriate for the health and safety of the U.S. economy and
its banking system, but which could be politically unpopular or
difficult. Our highly trained staff conducts objective analysis
that allows Board members and Federal Open Market Committee
participants to make decisions so as to achieve maximum
employment, price stability, and a stable financial system. I
intend to preserve the Federal Reserve's independence, which I
see as essential for us to achieve our congressionally mandated
goals.
Q.4.b. What will you do as Chair to maintain the Federal
Reserve's independence?
A.4.b. Historical studies and economic research have shown the
importance of independence in enabling the Federal Reserve to
achieve its mandated goals. If confirmed, I plan to continue
our tradition of independence and nonpartisanship by fostering
an environment that supports objective analysis and research,
and promoting a culture in which policymakers express their
viewpoints and achieve consensus. I will also continue my
predecessors' commitment to transparent communications with the
Congress and the public, so that the Federal Reserve can be
held accountable for its performance.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM
JEROME H. POWELL
Q.1. The Fed recently released a proposal seeking to minimize
bank Boards of Directors' engagement with bank examiners on
supervisory issues, instead relying more on bank managers to
flag items for the Board that require attention. This moves in
precisely the wrong direction after the Wells Fargo scandal.
Why should the Fed's proposal on bank boards apply to
recidivist firms like Wells Fargo?
A.1. The Proposed Guidance on Supervisory Expectation for
Boards of Directors \1\ seeks to focus the directors and our
supervisory staff on key attributes of effective boards and
their role in overseeing institutions. The proposed guidance
clarifies that expectations for boards of directors are
distinct from expectations for management. Rather than
minimizing examiner engagement with directors, that distinction
allows our examiners to spotlight the core responsibilities of
effective boards, one of which is to ensure the independence
and stature of the risk management and internal audit
functions. The proposed guidance would make boards accountable
for supporting a risk management function that is valued for
identifying risks and escalating concerns about controls. As I
have said publicly, the failure to ensure the independence of
these functions from the revenue generators and risk takers has
been shown to be dangerous, and this is something for which the
board is accountable.\2\ The proposal also states that an
effective board will hold senior management accountable for a
variety of key actions, including the development and
implementation of performance management and compensation
programs that encourage prudent risk-taking behaviors and
business practices, which emphasizes the importance of
compliance with laws and regulation, including consumer
protection.
---------------------------------------------------------------------------
\1\ See ``Proposed Guidance on Supervisory Expectation for Boards
of Directors,'' 82 FR 37219 (August 9, 2017).
\2\ See ``The Role of Boards at Large Financial Firms,'' remarks by
Governor Jerome H. Powell at the Large Bank Directors Conference,
August 30, 2017. https://www.federalreserve.gov/newsevents/speech/
powell20170830a.htm.
Q.2. Both you and Vice Chair Quarles have stated a desire to
provide more ``granular'' information to banks about stress
tests.
If you make more information about the tests public, how do
you anticipate preventing big banks from gaming the system by
rigging their portfolios to match the models you reveal?
A.2. As I have stated previously, the Federal Reserve is
committed to increasing the transparency of the stress testing
process, but I also believe the benefits of increased
transparency must be carefully weighed against the potential
downsides of providing the firms subject to the stress test
with full details about the models.
For example, complete knowledge of the models could lead to
a ``model monoculture'' in which all firms have similar
internal stress testing models, which could increase the
correlation of risk in the system, and miss key idiosyncratic
risks faced by the firms.
Federal Reserve staff has developed and will be seeking
public comment on a proposal that aims to enhance the
understanding of the Federal Reserve's models through
disclosure of information about the range of loss rates
produced by our models for given asset types. That proposal
will be published in the Federal Register soon. These proposed
enhanced model disclosures would provide more insight into how
the Federal Reserve's supervisory models treat different types
of loans than has previously been provided.
The enhanced model disclosures strive to strike an
appropriate balance between transparency and the continued
effectiveness of our models, and we will seek comments on the
proposal from the public.
Q.3. In your testimony, you said that stress testing is ``maybe
the single most successful'' post-crisis innovation.
Can you guarantee that less frequent or rigorous stress
testing would be as successful as under current law?
A.3. Capital stress tests, which played a critical role in
bolstering confidence in the capital positions of U.S. firms in
the wake of the 2007 to 2009 financial crisis, have become one
of the most important features of our supervisory program.
Stress tests play a
critical role in ensuring that firms have sufficient capital to
continue lending through periods of economic stress and market
turbulence, and that their capital is adequate in light of
their risk profiles. If we do make changes to the stress
testing program, we would seek to do so in a way that does not
undermine the program's aim of keeping firms well capitalized
and, in turn, safe and sound.
The dynamic nature of banks and the risks they face could
render the results of stress tests stale within a short
timeframe. Accordingly, we believe there are safety and
soundness and financial stability benefits in conducting the
tests annually for large and complex U.S. banking
organizations. If Congress granted us the flexibility to
conduct stress tests at a different frequency than annually for
smaller and less complex firms, we would consider the tradeoff
between potentially less current information about banks' risks
against the reduced burden of less frequent stress tests.