U.S. GOVERNMENT PUBLISHING OFFICE

35–838 PDF WASHINGTON : 2019

S. HRG. 116–2 

THE SEMIANNUAL MONETARY POLICY REPORT 

TO THE CONGRESS 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED SIXTEENTH CONGRESS 

FIRST SESSION 

ON 

OVERSIGHT ON THE MONETARY POLICY REPORT TO CONGRESS PURSUANT TO THE FULL EMPLOYMENT AND BALANCED GROWTH ACT OF 1978 

FEBUARY 26, 2019 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: https://www.govinfo.gov/ 
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

MIKE CRAPO, Idaho, Chairman 

RICHARD C. SHELBY, Alabama 

PATRICK J. TOOMEY, Pennsylvania 

TIM SCOTT, South Carolina 

BEN SASSE, Nebraska 

TOM COTTON, Arkansas 

MIKE ROUNDS, South Dakota 

DAVID PERDUE, Georgia 

THOM TILLIS, North Carolina 

JOHN KENNEDY, Louisiana 

MARTHA MCSALLY, Arizona 

JERRY MORAN, Kansas 

KEVIN CRAMER, North Dakota 

SHERROD BROWN, Ohio 

JACK REED, Rhode Island 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

ELIZABETH WARREN, Massachusetts 

BRIAN SCHATZ, Hawaii 

CHRIS VAN HOLLEN, Maryland 

CATHERINE CORTEZ MASTO, Nevada 

DOUG JONES, Alabama 

TINA SMITH, Minnesota 

KYRSTEN SINEMA, Arizona 

GREGG RICHARD, Staff Director 

JOE CARAPIET, Chief Counsel 

BRANDON BEALL, Professional Staff Member 

LAURA SWANSON, Democratic Deputy Staff Director 

ELISHA TUKU, Democratic Chief Counsel 

DAWN RATLIFF, Chief Clerk 

CAMERON RICKER, Deputy Clerk 

SHELVIN SIMMONS, IT Director 

CHARLES J. MOFFAT, Hearing Clerk 

JIM CROWELL, Editor 

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C O N T E N T S 

TUESDAY, FEBRUARY 26, 2019 

Page 

Opening statement of Chairman Crapo ................................................................. 1 

Prepared statement .......................................................................................... 47 

Opening statements, comments, or prepared statements of: 

Senator Brown .................................................................................................. 3 

Prepared statement ................................................................................... 48 

WITNESS 

Jerome H. Powell, Chairman, Board of Governors of the Federal Reserve 

System ................................................................................................................... 5 

Prepared statement .......................................................................................... 49 

Responses to written questions of: 

Senator Brown ........................................................................................... 52 

Senator Rounds ......................................................................................... 58 

Senator Perdue .......................................................................................... 62 

Senator Tillis ............................................................................................. 63 

Senator Moran ........................................................................................... 67 

Senator Warner ......................................................................................... 69 

Senator Schatz ........................................................................................... 74 

Senator Van Hollen ................................................................................... 78 

Senator Cortez Masto ................................................................................ 80 

Senator Smith ............................................................................................ 85 

Senator Sinema ......................................................................................... 93 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Monetary Policy Report to the Congress dated February 22, 2019 ..................... 95 

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(1) 

THE SEMIANNUAL MONETARY POLICY 

REPORT TO THE CONGRESS 

TUESDAY, FEBRUARY 26, 2019 

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The Committee met, at 9:49 a.m., in room SD–106, Dirksen Senate Office Building, Hon. Mike Crapo, Chairman of the Committee, 

presiding. 

OPENING STATEMENT OF CHAIRMAN MIKE CRAPO 

Chairman CRAPO. The hearing will come to order. 

We welcome you, Chairman Powell, to the Committee for the 

Federal Reserve’s Semiannual Monetary Policy Report to Congress. 

This hearing provides the Committee an opportunity to examine 

the current state of the U.S. economy, the Fed’s implementation of 

monetary policy, and its supervisory and regulatory activities. 

In the wake of the 2008 financial crisis, the Fed entered a period 

of unconventional monetary policy to support the U.S. economy, including drastically cutting interest rates and expanding its balance 

sheet. 

I have long been concerned about the Fed’s quantitative easing 

programs and the size of its balance sheet. 

As economic conditions improved, the Fed began trying to normalize monetary policy, including by gradually reducing the size of 

its balance sheet. 

The Fed’s balance sheet grew to approximately $4.5 trillion from around $800 billion between 2007 and 2015 and now stands at 

around $4 trillion still. 

During the press conference following the FOMC’s most recent 

meeting, Chairman Powell provided additional clarity on the Fed’s 

plans to normalize monetary policy, saying, ‘‘the ultimate size of 

our balance sheet will be driven principally by financial institutions’ demand for reserves plus a buffer, so that fluctuations in reserve demand do not require us to make frequent sizable market 

interventions.’’ 

‘‘Estimates of the level of reserve demand are quite uncertain, 

but we know that this demand in the postcrisis environment is far 

larger than before. Higher reserve holdings are an important part 

of the stronger liquidity position that financial institutions must 

now hold.’’ 

‘‘The implication is that the normalization of the size of the portfolio will be completed sooner, and with a larger balance sheet, 

than in previous estimates.’’ 
2 

Banks’ reserve balances grew from $43 billion in January 2008 to a peak of $2.8 trillion in 2014 before falling to $1.6 trillion as 

of January 2019. 

During this hearing, I look forward to understanding more about: 

what factors the Fed may consider in determining what is the appropriate size of the balance sheet; what factors have affected 

banks’ demand for reserves, including the Fed’s postcrisis regulatory framework; and what amount of reserves are estimated to be 

necessary for the Fed to achieve its monetary policy objective. 

The state of the U.S. economy is a key consideration in the Fed’s 

monetary policy decisions. 

The U.S. economy remains strong with robust growth and low 

unemployment. 

Despite everyone telling us prior to tax reform that annual 

growth would be stuck below 2 percent as far as the eye could see, 

the economy expanded, as we predicted, at an annualized rate of 

3.4 percent in the third quarter of last year, following growth of 4.2 

percent and 2.2 percent in the second and first quarters of 2018, 

respectively, according to the Bureau of Economic Analysis. 

This strong growth, which is on track to continue to exceed previous expectations, will now provide our policymakers with much 

greater flexibility to address other fiscal challenges than if we were 

continuing to struggle with insufficient growth. 

And according to the Bureau of Labor Statistics, the unemployment rate has remained low and steady around 4 percent while the 

U.S. economy added 223,000 jobs per month on average in 2018, 

as well as 304,000 jobs in the first month of this year. 

People continue to enter the labor force with the labor participation rate increasing to 63.2 percent from 62.7 percent over the last 

year. 

Reinforcing this strong employment environment, Fed Vice 

Chairman Rich Clarida said in a recent speech that ‘‘the labor market remains healthy, with an unemployment rate near the lowest 

level recorded in 50 years and with average monthly job gains continuing to outpace the increases needed over the longer run to provide employment for new entrants into the labor force.’’ 

Major legislation passed through this Committee and enacted 

last Congress supported economic growth and job creation. 

The Economic Growth, Regulatory Relief, and Consumer Protection Act passed Congress with significant bipartisan support and 

was enacted to right-size regulation and redirect important resources to local communities for homebuyers, individuals, and 

small businesses. 

I appreciate the work that the Fed has done so far to introduce 

proposals and finalize rules required by the law. 

Overseeing the full implementation of that law and the Federal 

banking agencies’ rules to right-size regulations will continue to be 

a top priority of the Committee in this Congress. 

In particular, the Fed and other banking regulators should consider whether the Community Bank Leverage Ratio should be set 

at 8 percent as opposed to the current 9 percent; significantly tailor 

regulations for banks with between $100 billion and $250 billion in 

total assets with a particular emphasis on tailoring the stress testing regime; provide meaningful relief from the Volcker Rule for all 
3 

institutions, including by revising the definition of ‘‘covered funds’’ 

and eliminating the proposed accounting test; and examine whether the regulations that apply to the U.S. operations of foreign 

banks are tailored to the risk profile of the relevant institutions 

and consider the existence of home-country regulations that apply 

on a global basis. 

The Committee will also look for additional opportunities to support policies that foster economic growth, capital formation, and job 

creation. 

Turning for a moment to another issue, Senator Brown and I 

issued a press release on February 13 inviting stakeholders to submit feedback on the collection, use, and protection of sensitive information by financial regulators and private companies, including 

third parties that share information with regulators and other private companies. 

Americans are rightly concerned about how their data is collected 

and used and how it is secured and protected. Americans need this 

kind of attention from this Committee and from the Fed and our 

other financial regulators. 

Given the exponential growth and use of data, and the corresponding data breaches, it is also worth examining how the Fair 

Credit Reporting Act should work in a digital economy and whether certain data brokers and other firms serve a function similar to 

the original consumer reporting agencies. 

The Banking Committee has plans to make this a major focus in 

this Congress, and we encourage our stakeholders to submit their 

feedback by the March 15 deadline. 

Last, I want to take a moment to recognize one of our staff members who is retiring this week. 

Dawn Ratliff is the Committee’s Chief Clerk, and she will be retiring, as I said, at the end of the week. 

She might not want me to say this, but Dawn has been in the 

Senate longer than most Senators. She has dedicated 27 years in 

these hallways and has been with the Senate Banking Committee 

since 2007, starting with then-Chairman Chris Dodd, and then 

working for Chairman Tim Johnson, then Chairman Shelby, and 

now myself. 

Dawn is a Banking Committee institution. She is incredibly 

knowledgeable, helpful, and professional, respected and well liked 

by everyone with whom she works. 

Dawn, your work on the Committee has truly made a lasting impact, and even though you will not be here following this week, you 

will not be forgotten anytime soon. 

We wish you the best of luck in your well-earned retirement. 

Enjoy it. 

[Applause.] 

Chairman CRAPO. Senator Brown. 

OPENING STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. Thank you, Chairman Crapo. And, Ms. Ratliff, 

thank you again for your service to our country—to this Committee 

and to our country and to the Senate. She has been instrumental 

in making this Committee run smoothly for over a decade. We will 

miss her, and congratulations on your retirement. 
4 

Chairman Powell, welcome back to the Committee. It has been 

a great week for Wall Street. The FDIC announced that banks 

made a record-breaking $237.7 billion in profits in 2018, almost a 

quarter trillion dollars in profits. 

Corporations—led by the Nation’s largest banks—bought back a record $1 trillion in stocks last year, conveniently boosting CEO 

compensation. The President’s tax bill put $30 billion in the banks’ 

pockets and continues to fuel even more buybacks and CEO bonuses. 

But that is never enough for Wall Street. It continues to demand 

weaker rules so big banks can take bigger and more dangerous 

risks. And from the proposals the Fed has put out after the passage 

of S. 2155, it looks like the Fed and you are going along. 

The economy looks great from a corner office on Wall Street, but 

it does not look so great from a house on Main Street. 

Corporate profits are up. Executive compensation has exploded— 

all because of the productivity of American workers. But workers’ 

wages have barely budged. Hard work simply does not pay off for 

the people fueling this growth. 

Seven of the ten fastest-growing occupations do not pay enough 

to afford rent on a modest one-bedroom apartment, let alone save 

for a downpayment. 

Household debt continues to rise, taking its toll on families. At 

the end of 2018—think about this for a minute. At the end of 2018, 

7 million Americans with auto loans were at least 90 days past due 

on their payments. Seven million Americans with auto loans were 

at least 90 days past due on their payments, even though the 

President brags about unemployment being at record lows. 

Borrowers of color have not recovered financially from the crisis. 

Too many Americans of all ages are saddled with mountains of student loan debt. 

The Trump shutdown revealed another frightening reality: Too 

many Americans still live paycheck to paycheck, even with stable 

jobs. 

After 35 days of no pay, of uncertainty, of hardship, those workers went back to their jobs and eventually received their pay. But 

more than a million Government contractors were not so lucky. We 

are talking in many cases about custodians and security guards 

and cafeteria workers making $12 to $15 an hour and going 35 

days without pay and getting no compensation later like the 

800,000 Government workers. We have heard a lot of talk about 

whether GDP will recover from the shutdown, not much about how 

workers will recover. 

I give special thanks to Senator Smith for her work on trying to 

remedy this incredible injustice that damn near anybody talks 

about—damn near nobody talks about. 

We have questioned for quite a while whether the economic recovery—now in its tenth year—has been felt by all Americans. 

Stagnating wages and increasing income inequality between Wall 

Street CEOs and working Americans point to an obvious answer. 

Mr. Chairman, Chairman Powell, your comments at the February 6 Fed town hall, for educators confirmed this. A teacher 

asked about your major concerns for the economy, and your answer 

was: ‘‘We have some work to do more to make sure that prosperity 
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that we do achieve is widely spread . . . median and lower levels 

of income have grown, but much more slowly. And growth at the 

top has been very strong.’’ 

‘‘Growth at the top has been very strong.’’ In other words, the 

CEOs, the folks on Wall Street, they are doing just fine in this 

economy. 

Chair Powell, the Fed has spent a decade bending over backwards to help banks, to help big corporations that have hoarded 

profits for themselves rather than investing in the millions of workers who actually make our companies successful. 

We are late in this economic cycle. It is clear that record Wall 

Street profits will not be trickling down to workers before the next 

downturn. 

Before the last crisis, we heard over and over again from Government officials and banks that the economy was doing fine 10 years 

ago. Regulators and Congress continued to weaken rules for Wall 

Street, continued to ignore the warning signs as families struggled 

to make ends meet. 

As the severity of the financial crisis became clear, the Fed 

rushed to the aid of the biggest banks, but it did not devote even 

a fraction of that firepower to helping the rest of America. Ignoring 

working families was a policy failure then; it is a policy failure 

now. 

Mr. Chairman, I hope we do not make the same mistake again. 

I look forward to your testimony and the new ideas for making 

hard work pay off for everyone in our economy. 

Thank you. 

Chairman CRAPO. Thank you, Senator Brown. 

Chairman Powell, we welcome you here again. We appreciate 

your attention. We appreciate the report that you have provided to 

us, and you may make your statement about that report and whatever information you would like to present to us, and then we will 

proceed to some questions. Thank you. 

Chairman Powell. 

STATEMENT OF JEROME H. POWELL, CHAIRMAN, BOARD OF 

GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. POWELL. Thank you and good morning. Chairman Crapo, 

Ranking Member Brown, and other Members of the Committee, I 

am happy to present the Federal Reserve’s semiannual Monetary 

Policy Report to the Congress. 

Let me start by saying that my colleagues and I strongly support 

the goals Congress has set for monetary policy—maximum employment and price stability. We are committed to providing transparency about the Federal Reserve’s policies and programs. Congress has entrusted us with an important degree of independence 

so that we can pursue our mandate without concern for short-term 

political considerations. We appreciate that our independence 

brings with it the need to provide transparency so that Americans 

and their representatives in Congress understand our policy actions and can hold us accountable. We are always grateful for opportunities, such as today’s hearing, to demonstrate the Fed’s deep 

commitment to transparency and accountability. 
6 

Today I will review the current economic situation and outlook 

before turning to monetary policy. I will also describe several recent improvements to our communications practices to enhance our 

transparency. 

The economy grew at a strong pace, on balance, last year, and 

employment and inflation remain close to the Federal Reserve’s 

statutory goals of maximum employment and stable prices—our 

dual mandate. 

Based on available data, we estimate that gross domestic product, or GDP, rose a little less than 3 percent last year following a 

2.5-percent increase in 2017. Last year’s growth was led by strong 

gains in consumer spending and increases in business investment. 

Growth was supported by increases in employment and wages, optimism among households and businesses, and fiscal policy actions. 

In the last couple of months, some data have softened but still 

point to spending gains this quarter. While the partial Government 

shutdown created significant hardship for Government employees 

and many others, the negative effects on the economy are expected 

to be fairly modest and to largely unwind over the next several 

months. 

The job market remains strong. Monthly job gains averaged 

220,000 in 2018, and payrolls increased an additional 304,000 in 

January. The unemployment rate stood at 4 percent in January, a 

very low level by historical standards, and job openings remain 

abundant. Moreover, the ample availability of job opportunities appears to have encouraged some people to join the workforce and 

some who otherwise might have left to remain in it. As a result, 

the labor force participation rate for people in their prime working 

years—which is to say the share of people ages 25 to 54 who are 

either working or actively looking for work—has continued to increase over the past year. In another welcome development, we are 

seeing signs of stronger wage growth. 

The job market gains in recent years have benefited a wide range 

of families and individuals. Indeed, recent wage gains have been 

strongest for lower-skilled workers. That said, disparities persist 

across various groups of workers and different parts of the country. 

For example, unemployment rates for African Americans and Hispanics are still well above the jobless rates for whites and Asians. 

Likewise, the percentage of the population with a job is noticeably 

lower in rural communities than in urban areas, and that gap has 

widened over the past decade. The February Monetary Policy Report provides additional information on employment disparities between rural and urban areas. 

Overall consumer price inflation, as measured by the 12-month 

change in the price index for personal consumption expenditures, 

is estimated to have been 1.7 percent in December, held down by 

recent declines in energy prices. Core PCE inflation, which excludes food and energy prices and tends to be a better indicator of 

future inflation, is estimated at 1.9 percent. At our January meeting, my colleagues and I generally expected economic activity to expand at a solid pace, albeit somewhat slower than in 2018, and the 

job market to remain strong. Recent declines in energy prices will 

likely push headline inflation further below the FOMC’s longer-run 
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goal of 2 percent for a time, but aside from those transitory effects, 

we expect that inflation will run close to 2 percent. 

While we view current economic conditions as healthy and the 

economic outlook as favorable, over the past few months we have 

seen some crosscurrents and conflicting signals. Financial markets 

have become more volatile toward year end, and financial conditions are now less supportive of growth than they were earlier last 

year. Growth has slowed in some major foreign economies, particularly China and Europe. And uncertainty is elevated around some 

unresolved Government policy issues, including Brexit and ongoing 

trade negotiations. We will carefully monitor these issues as they 

evolve. 

In addition, our Nation faces important longer-term challenges. 

For example, productivity growth, which is what drives rising real 

wages and living standards over the longer term, has been low. 

Likewise, in contrast to 25 years ago, labor force participation 

among prime-age men and women is now lower in the United 

States than in most other advanced economies. Other longer-run 

trends, such as relatively stagnant incomes for many families and 

a lack of upward economic mobility among people with lower incomes, also remain important challenges. And it is widely agreed 

that the Federal Government debt is on an unsustainable path. As 

a Nation, addressing these pressing issues could contribute greatly 

to the longer-run health and vitality of the U.S. economy. 

Over the second half of 2018, as the labor market kept strengthening and economic activity continued to expand strongly, the 

FOMC gradually moved interest rates toward levels that are more 

normal for a healthy economy. Specifically, at our September and 

December meetings we decided to raise the target range for the 

Federal funds rate by 1⁄4 percentage point at each, putting the current range at 21⁄4 to 21⁄2 percent. 

At our December meeting, we stressed that the extent and timing of any further rate increases would depend on incoming data 

and the evolving outlook. We also noted that we would be paying 

close attention to global economic and financial developments and 

assessing their implications for the outlook. In January, with inflation pressures muted, the FOMC determined that the cumulative 

effects of these developments, along with ongoing Government policy uncertainty, warranted taking a patient approach with regard 

to future policy changes. Going forward, our policy decisions will 

continue to be data dependent and will take into account new information as economic conditions and the outlook evolve. 

For guideposts on appropriate policy, the FOMC routinely looks 

at monetary policy rules that recommend a level for the Federal 

funds rate based on measures of inflation and the cyclical position 

of the U.S. economy. The February Monetary Policy Report gives an 

update on monetary policy rules, and I continue to find these rules 

to be helpful benchmarks, but, of course, no simple rule can adequately capture the full range of factors the Committee must assess in conducting policy. We do, however, conduct monetary policy 

in a systematic manner to promote our longer-run goals of maximum employment and stable prices. As part of this approach, we 

strive to communicate clearly about our monetary policy decisions. 
8 

We have also continued to gradually shrink the size of our balance sheet by reducing our holdings of Treasury and agency securities. The Federal Reserve’s total assets declined about $310 billion 

since the middle of last year and currently stand at close to $4 trillion. Relative to their peak level in 2014, banks’ reserve balances 

with the Federal Reserve have declined by around $1.2 trillion, a 

drop of more than 40 percent. 

In light of the substantial progress we have made in reducing reserves, and after extensive deliberations, the Committee decided at 

our January meeting to continue over the longer run to implement 

policy with our current operating procedure. That is, we will continue to use our administered rates to control the policy rate, with 

an ample supply of reserves so that active management of reserves 

is not required. Having made this decision, the Committee can now 

evaluate the appropriate timing and approach for the end of balance sheet runoff. I would note that we are prepared to adjust any 

of the details for completing balance sheet normalization in light 

of economic and financial developments. In the longer run, the size 

of the balance sheet will be determined by the demand for Federal 

Reserve liabilities such as currency and bank reserves. The February Monetary Policy Report describes these liabilities and reviews 

the factors that influence their size over the longer run. 

I will conclude by mentioning some further progress we have 

made in improving transparency. Late last year we launched two 

new publications: the first, the Financial Stability Report, shares 

our assessment of the resilience of the U.S. financial system; and 

the second, the Supervision and Regulation Report, provides information about our activities as a bank supervisor and regulator. 

Last month we began conducting press conferences after every 

FOMC meeting instead of every other one. This change will allow 

me to more fully and more frequently explain the Committee’s 

thinking. Last November we announced a plan to conduct a comprehensive review of the strategies, tools, and communications 

practices we use to pursue our congressionally assigned goals. This 

review will include outreach to a broad range of stakeholders 

across the country. The February Monetary Policy Report provides 

further discussion of these initiatives. 

Thank you, and I will be happy to respond to your questions. 

Chairman CRAPO. Thank you very much, Chairman Powell. 

As I mentioned in my opening statement, you said that the balance sheet normalization may end sooner with a larger balance 

than previously anticipated in the—if I understand it correctly, the 

ultimate size of the balance sheet will be principally driven by financial institutions’ demand for reserves plus a buffer, correct? 

Mr. POWELL. That is correct. 

Chairman CRAPO. Reserves have increased from $43 billion in 

early 2008 to about $2.8 trillion in 2014, if I understand correctly, 

before falling now down to about $1.6 trillion currently. Do you 

have an estimate of the amount of reserves that are estimated to 

be necessary to achieve the Fed’s monetary policy objective? And 

how does the Fed’s postcrisis regulatory policy affect this amount? 

Mr. POWELL. The quantity of reserves before the financial crisis, Mr. Chairman, was $20 billion, in that range, plus or minus, so a 

relatively small amount. 
9 

One of the important things we did after the financial crisis was 

require banking institutions, particularly the very largest ones, to 

hold quite large buffers of highly liquid assets. One of those assets 

that the banks like to hold to satisfy this requirement is bank reserves, so the demand for reserves is going to be very substantially 

higher than it was before the crisis and will not go back to those 

lower levels in any case. 

We only have estimates based on market intelligence and discussions with financial institutions, and those estimates have actually 

gone up substantially just over the course of the last year or so. 

We do not have a precise notion, but, you know, we believe that 

the public estimates that are out there of around $1 trillion plus 

a buffer, as you mentioned in your remarks, will be, as a reasonable starting point, an estimate of where we might wind up. 

Chairman CRAPO. All right. Thank you. As you know, I have 

been a strong critic of the quantitative easing the Fed has been engaged in, and I appreciate your explanation of how you intend to 

reach the appropriate balance of what the Fed’s balance sheet 

should be. And I will continue to work with you on understanding 

how we get to the right spot as soon as we can. 

You mentioned in your statement and in your report that the 

labor force participation rate has started to grow. That has been 

one of the reasons we have seen such low economic performance, 

in my opinion, in the past years. Do you expect that the labor force 

participation rate growth that we have seen will stabilize and even 

possibly increase as we continue to move forward? 

Mr. POWELL. So labor force participation, if I can provide just a 

little bit of background, was an area where the U.S. was at least 

comparable to other well-off countries and in some cases at the 

high end as far as labor force participation by women was concerned. 

We are now at the bottom end of the league table for both men 

and women, and it is a very troubling concern. A big part of it, 

though, is driven by something that we cannot really change, and 

that is just demographics. As the country ages, labor force participation should decline at a fairly steady level. Nonetheless, even allowing for that, we are lower than we need to be. 

So the gains we have seen over the past year have been very 

positive and very welcome from our standpoint. We do not know 

how long they can be sustained, but we hope for a long time. I 

would just say that I think we need a broad policy focus on how 

to sustain labor force participation, including not just through Fed 

policy but through legislative policy as well. 

Chairman CRAPO. And I agree. I think that that is a critical part 

of our ability to maintain the growth and strength of our economy. 

I have lots of questions for you, but just one that I will have time 

for in the remaining amount of time I have, and this will get to 

regulatory relief and implementation of Senate bill 2155. As you 

know, Senate bill 2155 provides smaller institutions with relief 

from the Volcker Rule. Regardless, there are still significant issues 

with the rule for institutions of all sizes, and I and six of my Banking Committee colleagues wrote to our financial regulators in October of last year urging further revisions to the rule to address outstanding issues, such as the rule’s ‘‘covered funds’’ definition and 
10 

its broad application to venture capital, other long-term investments, and loan creation. In addition, I am concerned that the proposed accounting test may make the Volcker Rule more complex 

than is necessary. 

Can you commit to using your significant regulatory discretion 

provided by statute to promptly address these outstanding issues? 

Mr. POWELL. Yes, we received comments on those issues and 

more, and we thought some of those comments were very well 

taken, and we are working hard to try to address them. And I assure you we will do our best to do that. 

Chairman CRAPO. I appreciate that. 

Senator Brown. 

Senator BROWN. Thank you. Thank you again for being here, 

Chairman Powell. 

Yesterday your predecessor, Janet Yellen, said she does not think 

President Trump has a grasp of macroeconomic policy. Is she right? 

Mr. POWELL. I will not have any comment on that for you, Senator. 

Senator BROWN. All right. I guess I am not surprised. 

It is troubling that the former Fed Chair, the woman that sat in 

your job and was very good at that job, tells the press point blank 

that she does not think the President of the United States understands the economy. I think the American people continually and 

more and more understand that this President—that many Americans, GM workers in Youngstown and Hamtramck, for example, 

believe he has betrayed workers in this country. That is becoming 

clearer and clearer. 

Let me shift to another question. Last week former Fed Chair 

Paul Volcker raised concerns that the culture of banking only focuses on the profits of the firm and the pay of the CEO. I share 

this concern that we should focus on workers. Since 1979—you 

know these numbers, Mr. Chairman—worker productivity has 

grown 70 percent. Compensation for those workers has grown by 

just 11 percent. Meanwhile, the top one-tenth of 1 percent saw 

their earnings grow by 343 percent. This disparity, as you know, 

is even worse for women and people of color. 

So do you think, Mr. Chairman, the Fed’s employment mandate 

is just to ensure that people are employed? Or do you think full 

employment implies a dignity of work, that is, meaning workers 

earn a salary and benefits that let them fully participate in the 

2019 economy in our country? 

Mr. POWELL. Our mandate, as you well know, is maximum employment, and we try to take that to heart. And, you know, our tool 

for trying to achieve that is monetary policy. And I think we are 

at a 50-year low in unemployment. There are many other issues in 

the country. You have mentioned some of them. But, honestly, to 

achieve some of the things you are talking about, we need other 

tools. It is not—the Fed cannot affect every social problem, as you 

well know. 

Senator BROWN. Is that a social problem, that fewer and fewer 

people, even though they are employed, wages are stagnant, is that 

just a social problem? 

Mr. POWELL. Well, wages, I would say wages do go into our assessment of maximum employment. We do look at wages, and I am 
11 

happy to say that wages, while they were very sluggish in the 

aftermath of the crisis, have now started to move up in a way that 

is more consistent with past history and with inflation and productivity—— 

Senator BROWN. But not even close to productivity, not even 

close to gains in productivity for most workers. 

Mr. POWELL. So today—I know the chart you are talking about. 

You are talking about over the longer run. If you look at what— 

wages are now going up a little better than 3 percent. Inflation is 

right at 2. Productivity has been running—sorry. Inflation has been 

at 2. Productivity has been around 1. So 3 percent is about right 

from that narrow standpoint. 

Wages have moved up. We welcome that. We do not find it troubling from an inflation standpoint at this point. So we do look very 

carefully at wages as we assess maximum employment, as we assess whether we are meeting our maximum employment goal. 

Senator BROWN. Let me put it in a bit of a historical perspective. 

Will Rogers during the Great Depression provided a lesson I think 

we could learn from today. He said that, ‘‘Unlike water, money 

trickles up, not down.’’ Of the Government’s response to that economic crisis of the Great Depression, he said, ‘‘The money was all 

appropriated for the top in the hopes that it would trickle down to 

the needy. . . . Give it to the people at the bottom . . . the top will 

have it before night anyhow. But it will at least have passed 

through the poor fellow’s hands. They saved the big banks but the 

little ones went up the flue.’’ 

This observation is 89 years old. It seems like the Fed still 

thinks, from your answer and from the behavior of the Fed, that 

the best way to help workers is to shore up big bank profits and 

hope the prosperity trickles down. Over the last decade, it has been 

creative in how it accomplishes this. I believe the Fed has the authority and the duty to be creative, to help workers share in the 

prosperity they create. My staff will follow up with your staff on 

ways of doing that. 

One more question. It seems like ‘‘too big to fail’’ is alive and 

well. We are seeing a potential merger—we are seeing growth in 

most of the largest money center banks. Two regional banks, as 

you know, SunTrust and BB&T, each with over $200 billion in assets, decided to merge, saying it was too difficult for them to compete with the money center banks’ investment in technology. 

What message does the Fed send to regional and community 

banks about their future if the Fed eventually approves this merger? 

Mr. POWELL. Well, we have a process that we go through in evaluating any merger. It is set forth in great detail in the law and in 

our guidance. We will go through that process carefully, fairly, and 

thoroughly and with a lot of transparency when we do get an application. We do not actually have an application yet on that matter. 

We expect to get it sometime in the next few weeks. 

So we will do all of that. I would just say we have not prejudged 

anything, and we are going to do our work on that professionally, 

carefully, fairly, and transparently. 

Senator BROWN. OK. 

Chairman CRAPO. Senator Shelby. 
12 

Senator SHELBY. Thank you. 

Chairman Powell, somebody is doing something right. I do not 

know if it is the President or you or a combination of everything. 

I think this is the best economy I have seen in my lifetime at this 

point. 

Now, the question is: How do we keep it going? How do we keep 

it going? That is part of your job—not totally, but you are into the 

money. How do you gauge inflation, for example? You know, there 

are a lot of ways to do it. That is one. You were talking about price 

stability, maximum employment. Price stability, you are talking 

about the stability of the monetary policy, the value of our currency, and everything that goes with it. How do we keep this economy going, in your judgment? 

Mr. POWELL. So I think you said it very well. We want to use 

our tools to sustain this expansion and keep the labor market 

strong and keep inflation near 2 percent. That is exactly what we 

are trying to do. And so we look around and what do we see? We 

see a labor market that is strong and continuing to strengthen. Job 

creation is strong. Wages are moving up. So that is a very healthy 

thing. 

With inflation, we see muted inflation pressures. Even now with 

really historically low unemployment and a great recovery, an ongoing recovery in the labor markets, we still see muted inflation 

pressures, and that gives us the ability to be patient with monetary 

policy, and that is what we are going to do. The Committee has decided that with our policy rate in the range of neutral, with muted 

inflation pressures and with some of the downside risks that we 

have talked about, this is a good time to be patient and watch and 

wait and see how the situation evolves. 

Senator SHELBY. How does the abundance of hydrocarbons that 

we have found in this country in recent years, which prices everything, how does that feed into the economy in a positive way? 

Mr. POWELL. Well, in a couple of ways. One, it’s a big industry. 

We have a very large energy industry now thanks really to shale. 

In addition, if you think about the—so that employs a lot of people, 

and that is a big thing in certain areas of the country. Five or six 

major areas of the country have a lot of employment and economic 

activity. 

Interesting on inflation. If you look back to the 1970s, a lot of 

what set off the bad inflation outcomes in the 1970s was an oil 

shock. What we have in our very large domestic oil industry now 

is, in effect, a shock absorber, because when oil prices go up, American shale producers and other oil producers will produce more oil, 

and so that offsets that shock and will, you know, prevent that 

shock from driving inflation up here. So it has been a real positive 

for our economy from a number of perspectives. 

Senator SHELBY. Mr. Chairman, how important is the certainty 

of good trade agreements to our economy and to the world economy? 

Mr. POWELL. Well, uncertainty is the enemy of business, and 

businesses, they want a set of rules, they want an established, 

transparent set of rules, and they want to play by those rules, be 

able to make longer-term plans, investments, and hiring and that 

kind of thing. 
13 

At the same time, we need the trade—you know, of course, we 

are not responsible for trade. We do not comment on trade policy 

at all. But we have been hearing a lot from our contacts around 

the country really all year, this year and all last year, about uncertainty, and we do sense it has been holding back some decisions, 

probably had some minor effect on confidence and maybe activity. 

But, overall, certainty around trade and other Government policies 

is very important. 

Senator SHELBY. As we look at our current account, the imbalance of trade with most of the world, does that concern you? And 

if it does, why? 

Mr. POWELL. You know, the overall current account is set economically by the difference between savings and investment in our 

country. So it is really an identity that kind of works that way. 

It tends to go up in good times. When Americans are, you know, 

at work and earning well and buying things and the economy is 

strong, we tend to buy things. Some of those things tend to be imported. The trade deficit and the current account balance can go 

down quickly in bad states of affairs. 

Of course, over time we would like to see balance both in savings 

and investment and in the trade balance. 

Senator SHELBY. I do not have much time left, but we have discussed this before, cost-benefit analysis. Last year when you came 

before the Committee, we discussed here the formation and the policy affecting this, an assessment unit to conduct cost-benefit analysis on regulations. Could you provide here an update on the work 

of the entity here? And what have you learned and what is going 

on? 

Mr. POWELL. Yes, so that unit is up and running now, and it is 

a relatively new undertaking. Cost-benefit analysis is something 

we, of course, have done really always, and particularly in the last 

decade or so we have upped our game. Now we have a particular 

unit focused on it. We are very pleased with the progress it is making, and they are involved in the rulemakings and assessment of 

everything we do. So it is a positive development, and, you know, 

we look forward to making it ever stronger. 

Senator SHELBY. My last question to you, in the few seconds I 

have left, is: What is the health of our banking system that you 

regulate at the Federal Reserve, our biggest banks? 

Mr. POWELL. I think our banking system overall is quite strong, 

you know, record profits, no bank failures I think in 2018, much 

higher capital, much higher liquidity, better risk management; 

stress tests have really focused banks on understanding and managing their risks. We have better resolution planning overall. I 

think our banking system is strong and resilient. We never take it 

for granted. We are always looking for problems and cracks, but I 

would say overall our banking system is strong. 

Senator SHELBY. Thank you. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Senator Menendez. 

Senator MENENDEZ. Welcome, Chairman. As the number of legitimate cannabis-related businesses grow across the United 

States, the vast majority of banks and credit unions are not offering services to these enterprises for legitimate fear of legal and reg-
14 

ulatory risk. My home State of New Jersey is moving toward legalization of recreational marijuana, and I have concern that these 

new businesses as well as the existing medical marijuana businesses in the State will continue to find themselves shut out of the 

banking system. And when these businesses are forced to operate 

exclusively in cash, they create serious public safety risks in our 

communities. 

Do you agree that financial institutions need clarity on this 

issue? 

Mr. POWELL. I think it would be great to have clarity. Of course, 

financial institutions and their regulators and supervisors are in a 

very difficult position here with marijuana being illegal under Federal law and legal under a growing number of State laws. It puts 

financial institutions in a very difficult place and puts the supervisors in a difficult place, too. It would be nice to have clarity on 

that supervisory relationship. 

Senator MENENDEZ. And in a corollary question, related to the 

provision of banking services is the ability for such businesses to 

secure insurance products, a necessity for those looking to secure 

financing. Would it be helpful for Congress to also consider the role 

of insurance companies as States move forward to legalization? 

Mr. POWELL. I believe so, yes. 

Senator MENENDEZ. OK. On a different question, on February 

7th BB&T announced that it planned to purchase SunTrust in a 

deal that would result in the combined bank becoming the sixth 

largest commercial bank in the country with $434 billion in total 

assets. As you may know, in 2008 BB&T’s Community Reinvestment Act rating was downgraded due to substantive violations of 

the Equal Credit Opportunity Act and the Fair Housing Act. 

BB&T’s most recent CRA exam released last year also included a 

substantive violation of fair lending laws, a violation which likely 

should have resulted in another downgrade to the bank’s CRA rating. 

I want to be sure that the Federal Reserve is not following the 

OCC and deemphasizing its treatment of fair lending violations 

when it comes time to evaluate a proposed merger. What assurance 

can you give us that the Federal Reserve will treat these violations 

with the seriousness they deserve? 

Mr. POWELL. We have not changed our policy on that, and we do 

consider—it comes in the law under convenience and needs of the 

communities served, and that includes consumer compliance and 

fair lending records and the record of performance under CRA. 

Those are all things that we do consider when we get a merger application. 

Senator MENENDEZ. And when you are considering it, can you 

give us a sense of what the Federal Reserve’s review of this bank’s 

or any other bank’s Community Reinvestment Act track record of 

compliance with fair lending laws will look like? 

Mr. POWELL. We will look thoroughly at it. We will look at the 

rating, of course, which I believe is—I think it is satisfactory now. 

Banks that have an unsatisfactory or less than satisfactory rating 

I think have a hard time. But we will look at that, and we will also 

consider public comments and a full range of information. Any information that is presented to us we will consider. 
15 

Senator MENENDEZ. Well, I ask this question because it seems to 

me that, particularly at the OCC, we have—who has released a 

proposal without input from the Fed or FDIC contemplating sweeping changes to the implementation of the Community Reinvestment 

Act. In a speech last year, Governor Brainard said the Community 

Reinvestment Act was ‘‘more important than ever.’’ He stressed 

that branches and deposit-taking ATMs remain an important way 

that banks engage with a community. You also highlighted recently 

the importance of enforcing the CRA and other laws that help ensure people have adequate access to financial services wherever 

they live. 

Can we get your commitment to build consensus among the Fed 

Governors before moving forward with proposals to change implementation of the Community Reinvestment Act? 

Mr. POWELL. Oh, yes. 

Senator MENENDEZ. OK. I think it is important that you do everything in your power to try to achieve a unanimous vote on this 

issue, should the Fed decide to move forward. Many of us find this 

an incredibly important part of our law and an increasingly diminishing reality of financial institutions that somehow think that 

they do not really have to fully engage and implement the law and 

ultimately still get away with it. And so I think there has to be a 

strong message that that is not the case. I hope you will be able 

to deliver that message. 

Mr. POWELL. We are unified in our commitment to, you know, 

the mission of CRA, and to any revisions that we do, we are going 

to want to see that they preserve that mission and enable banks 

to serve it more effectively. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Chairman CRAPO. Senator Toomey. 

Senator TOOMEY. Thank you, Mr. Chairman. 

Chairman Powell, welcome back. Good to see you again. Let me 

just start by once again compliment you and your colleagues on 

taking us a long way toward normalizing monetary policy. In my 

view, this was long overdue, but you have been pursuing what 

strikes me as a prudent, thoughtful, and data-informed process of 

getting back to normal. So I want to thank you for that. 

A quick regulatory question, if I could. I was pleased with the 

interagency proposal that was released by the Fed and the other 

agencies dealing with S. 2155 and specifically the tailoring of capital and liquidity requirements, enhanced prudential standards. 

I think the comment period closed in January on this proposal. 

Can you assure us that it is a high priority to finalize these rules? 

Mr. POWELL. It is a very high priority. S. 2155 implementation 

is probably our highest priority, and we are pushing ahead. 

Senator TOOMEY. Any idea of a timeframe by which we could expect to see finalized rules there? 

Mr. POWELL. I would not want to put a date—I mean, there are 

so many rules. There are a dozen rules that we have comments on 

right now. I can come back to you with—— 

Senator TOOMEY. OK. But I am glad to hear it is a priority. 

Mr. POWELL. It is. 

Senator TOOMEY. We are obviously eager, and we think you 

are—I think you are heading in the right direction. 
16 

Unrelated, as you know, the private sector has set up a real-time 

payment system, and I think a real-time payment system is a terrific innovation that is very, very good for our economy. My understanding is all depository institutions have access to it on an equal 

footing, as they should. To the extent that that is the case, do you 

believe it is necessary for the Fed to develop an alternative or competing real-time payment system? 

Mr. POWELL. That is a judgment that we have not made. We 

sought comment on that question, and we had a range of views, 

and it is something we are thinking about. We are mindful that, 

you know, we do not—under the Monetary Control Act, for example, we have to find that the services we provide are capable of 

being paid for and also not something that the private sector can 

adequately provide. 

Senator TOOMEY. Right. 

Mr. POWELL. So we are looking at that very question. 

Senator TOOMEY. I would be interested in just hearing what your 

thoughts are as you go forward on that. It does seem to me that 

the private sector is providing a perfectly viable and affordable and 

reasonable mechanism here. 

On another topic, as you know, there has been recent discussions 

both, I think, inside and certainly outside the Fed about whether 

the Fed ought to reconsider the way it thinks about inflation, and 

specifically, I guess the way I understand this discussion, whether 

the Fed ought to target a price level rather than a change in the 

price level, and specifically if there were an extended period of time 

when inflation ran below a target, would it make sense for the Fed 

to intentionally attempt to exceed the target modestly or by enough 

so that over a long period of time you would hit the average. 

My first reaction is to be pretty concerned about that. Intentionally running at an inflation rate above the target rate worries 

me given that historically inflation has been much harder to control and high inflation has been a bigger problem than low inflation. But I wonder what your thoughts are about this topic. 

Mr. POWELL. These are questions, as you know, that are going 

to be the subject of careful consideration over the course of this 

year and beyond in our thinking. 

You know, the issue that we face is that rates have come down— 

long and short rates have come down really over the last 40 years 

and are now much—they are just much lower, real rates and, of 

course, inflation—add inflation back in, nominal rates as well, the 

implication of that being that in a typical downturn, the odds are 

much more—much higher that we will wind up back at the zero 

lower bound again. And in that situation, that fact there has the 

potential to drag inflation expectations down over time. 

In our thinking, inflation expectations are now the most important driver of actual inflation. So we are trying to think—and, really, the economics profession has been thinking about it for 20 

years, since the experience of Japan in the late 1990s, thinking of 

ways to make that inflation 2-percent target credible, highly credible, so that inflation kind of averages around 2 percent rather 

than only averaging 2 percent in good times and then averaging 

way less than that in bad times, which would draw expectations 

down. 
17 

No decisions have been made. You raise a—there are plenty of 

questions and concerns to be addressed, but there is also a problem 

that I think we owe it to the public to try think our way through 

the best possible way to address that problem so that we can carry 

out our mandate. 

Senator TOOMEY. Yeah, I understand the logic. I understand the 

problem that you are wrestling with. I would just urge great, great 

caution on this for many, many reasons, not the least of which, for 

whatever period of time the Fed decided it would exceed the goal 

so that it averages the goal—first of all, during that period of time, 

presumably you do not have price stability. Certainly not zero. You 

would be intentionally running above even the goal. 

I have got other questions, but I see I am out of time. I just want 

to urge caution on that one, Mr. Chairman. 

Chairman CRAPO. Senator Tester. 

Senator TESTER. Thank you, Mr. Chairman, Ranking Member 

Brown. Thank you for being here, Chairman Powell. I appreciate 

your service, appreciate the work you are doing. 

I want to talk a little bit about the Government shutdown that 

we just came through that cost the economy $11 billion, and I 

think that is a conservative figure. There is at least one in this 

Government that wants to use Government services and public employees as a pawn when they do not get their way. 

But what I want to ask you about is we are faced with a debt 

ceiling coming up March 1. Could you walk us through quickly, if 

you could, the economic impacts of failing to increase that debt ceiling? 

Mr. POWELL. Well, the failure to increase the debt ceiling creates 

a lot of uncertainty in the first instance, and then when you actually get up to the point where the Government runs out of cash and 

does not pay its bills—we never passed that point yet. That is kind 

of a bright line, and I hope we never do pass it. But there is a lot 

of uncertainty that is generated and a lot of distraction from what 

is otherwise a pretty good economy. 

Senator TESTER. What would happen to our interest rates on $22 

trillion worth of debt if we were not to do what we needed to do 

with the debt ceiling? 

Mr. POWELL. It is beyond even considering. The idea that the 

United States would not honor all of its obligations and pay them 

when due is just something that cannot even be considered. 

Senator TESTER. Would it double? 

Mr. POWELL. It would go up. But I think, you know, we have the 

best credit rating; you know, we borrow at very low rates, and the 

world believes in our full faith and credit. And I think that is not 

something I would—— 

Senator TESTER. It would have draconian effects on our economy 

overall. 

Mr. POWELL. Potentially. Very hard to predict and possibly large 

negative effects. 

Senator TESTER. But there are some in this body, quite frankly, 

that say it would be no big deal. Do you agree with that? 

Mr. POWELL. No, I do not. I think it would be a very big deal 

not to pay all of our bills when and as due. I think that is something the U.S. Government should always do. 
18 

Senator TESTER. I agree. Senator Shelby talked about the certainty of trade agreements. I will not ask you to grade this Administration’s trade policies, but from your perspective, how is this Administration’s trade policy affecting our economy—positively or 

negatively? 

Mr. POWELL. You know, again, we do not play a role in trade negotiations. I think it would be inappropriate for me to comment on 

their trade policy, either directly or indirectly. As I mentioned, you 

know, we have been hearing and everyone has been hearing from 

business about it, and particularly I would think in your State, 

hearing about trade. 

Senator TESTER. Exactly. And in my real job, I farm, and I can 

tell you, as we prepare for planting this spring, I cannot tell you 

any commodity or any livestock that is going to make us much 

money, if any. 

And so I believe the Minneapolis Fed came out and said that bad 

ag loans, we are seeing an uptick—a serious uptick, I might add— 

in farm foreclosures. Are you concerned about that? Do you think 

it is a direct result of trade, or is it something else? 

Mr. POWELL. I actually did see that piece. As you know far better 

than I, the agricultural economy has been under a lot of pressure 

for really 5 years now. It is just low crop prices, sustained low crop 

prices, and that has not changed, and that has driven up, you 

know, bankruptcies under Chapter 12, foreclosures, and all kinds 

of bad things. So, I mean, I think the bigger picture is just crop 

prices have been low. Obviously, the trade issues have not helped 

this year. 

Senator TESTER. OK. And the Fed also suggested that farm 

bankruptcies have not peaked yet, that we have not seen the potential negative impact on rural America that these low commodity 

prices—and might I add, before that 5 years, we had some of the 

best ever when we had some trade going on. 

Do you agree with the assessment that the Federal Reserve 

study suggests that we have not seen the peak of farm bankruptcies yet? 

Mr. POWELL. I did read that, whatever it was, an article or a blog 

post, and it did say that. It sounded plausible to me. 

Senator TESTER. OK. We in agriculture got a bailout. It was pretty serious dollars overall, but it did not amount to much by the 

time it got to the ground, truthfully, as compared to what production ag is losing in products. But we also hear from more than just 

agriculture. We hear from small businesses, and the small businesses are telling me that the big guys can afford to stay in business because of these trade wars, but they are going to be out of 

business. And we are not talking about family farms now, which 

is absolutely affecting—my previous question. But do you believe 

that the trade policies impact smaller businesses greater than the 

big ones? 

Mr. POWELL. I do not know the answer to that. It is a fair question. 

Senator TESTER. OK. Well, I have got some other questions I will 

put in for the record. 

I want to thank you for being here today. I will tell you that the 

economy is booming, but there are a lot of flags that are coming 
19 

up that I am seeing that are canaries in the coal mine, so to speak, 

and I hope—you are a smart guy. Hopefully you are able to pay 

attention to those to avoid any pitfalls. 

Thank you. 

Chairman CRAPO. Senator Rounds. 

Senator ROUNDS. Thank you, Mr. Chairman. Good morning, 

Chairman Powell. 

Mr. POWELL. Good morning. 

Senator ROUNDS. It is good to see you once again, and thank you 

very much for coming in today. 

Before I begin my questions, I wanted to take a moment to underscore the importance of the Insurance Policy Advisory Committee that the Fed is required to establish pursuant to S. 2155. 

As you are aware, South Dakotans have a very strong interest in 

preserving our State-based insurance regulatory system. I look forward to working with you and the new Committee to find ways 

that we can promote the interests of our State-based system. So I 

appreciate that. 

I have got a series of questions that I think I am just going to 

put them in as questions for the record and ask you to respond 

later on. Very seldom do we get an opportunity to have the Chairman of the Fed come in in front of literally the country and to 

share his thoughts about the direction of our country, in many 

cases the financial systems that we have here and so forth. And I 

got to thinking, this is probably an opportunity that we should not 

let go by to talk about the impact of the Federal Government and 

its spending with regard to monetary policy as well. 

In particular, it seems that Congress has a tendency to only 

make changes in the way it does business when there is a crisis 

at hand, and I would like to give you another particular to perhaps 

visit with us and offer if not direction, at least an observation as 

to what happens when Congress fails to take care of some of the 

safety net programs that we have in this country. And I want to 

begin by simply recognizing that we have $22 trillion in debt, and 

clearly that debt is being financed. That means there is competition 

for those dollars. 

The Federal Reserve, on the other hand, it actually manages 

through regular meetings and discussions—and the quantitative 

easing is an example of one where you as an organization have 

very carefully selected how you will work that through, how you 

will refinance and so forth. But you manage it on a regular basis. 

Congress has a tendency with its budget and the money that it 

spends to not even look at a number of the expenditures. Today 

with our budget, we have about 31 percent of the budget that we 

actually vote on. We vote on defense and nondefense discretionary 

spending. We do not vote on nor do we appear to manage Social 

Security, Medicare, Medicaid, or interest on the debt, about 70— 

well, close to 70 percent of all of that which we spent every single 

year. 

Every single year for as far as we can see, we are going to run 

significant deficits. Would you care to comment on the way that 

Congress manages or does not manage the safety nets—Social Security, Medicare, and Medicaid—and what impact that has on our 

economy as a Nation? 
20 

Mr. POWELL. I should start by saying that we try to stay in our 

lane, which is monetary policy, bank regulation, financial stability, 

and we have no supervisory role or really role as a commentator. 

We do not score bills. There is JCT, there is CBO, there is OMB, 

and we do not do those jobs. 

But I will say, as I said in my statement, that the U.S. Federal 

Government is on an unsustainable fiscal path, by which is meant 

that debt as a percentage of GDP is growing and now growing 

sharply, growing quickly, faster, and that is unsustainable by definition. We need to stabilize debt to GDP. 

The timing of doing that, the ways of doing it, through revenue, 

through spending, all of those things are not for the Fed to decide. 

Senator ROUNDS. But as perhaps, for lack of a better term, one 

of the chief economists in the Nation, to be able to give advice to 

the folks that are out there, to the country as a whole about the 

things that we have in our future and about the threats to our future, Social Security will go bankrupt unless we start managing it. 

Is that a fair statement, on the current trajectory? 

Mr. POWELL. I think if I could say it this way: I think what happens over time is that we wind up spending more and more of our 

precious revenues to service the debt, to pay interest to people who 

own the debt, as opposed to investing in the things that we really 

need—education—all the things that we need to be investing in so 

that we can compete in the global economy. 

I think, you know, on the spending side, the thing in my personal 

thinking—again, this is not the Fed’s role—and I think in many 

people’s thinking, the thing that drives our fiscal unsustainability, 

the single biggest thing is just health care delivery. We deliver 

health care outcomes that are pretty average for a well-off country, 

but we spend 17 percent of GDP doing it. Everyone else spends on 

average 10 percent of GDP. That is a trillion-plus, way more than 

a trillion dollars every year that we spend in delivering health 

care. So if I were in your seats—and I am not—I think that is a 

good place to look. It is not that benefits themselves are too generous. It is that we deliver them in highly inefficient ways, particularly health care. 

Senator ROUNDS. If I could—and I know I am out of time, but 

I will just say, in other words, what you are saying is if we actually 

managed—if we actually managed the resources that we had, we 

could probably do a better job than what we do today, where we 

just simply do not even include it in our regular budget that we 

vote on on a year-to-year basis. 

Mr. POWELL. Again, I cannot—I am not here to criticize Congress, but I do think it is a profitable thing to do. 

Senator ROUNDS. Thank you. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you. I will agree with you, Senator 

Rounds. 

Senator Smith. 

Senator SMITH. Thank you, and it is wonderful to see you again. 

I appreciated very much our conversation in my office the other 

day. 

I want to follow up a little bit on what Senator Tester was asking 

about regarding the economic issues in rural areas. And I appre-
21 

ciate your interest in this discussion, and this was featured in the 

Monetary Policy Report that you put out. 

You know, it strikes me that if you look at the overall positive 

numbers in our economy, it is a good thing. But when you 

unbundle those strong numbers, you see inequities and gaps, as 

you have pointed out, around race and gender and then also 

around rural areas. In Minnesota, it is interesting. You know, we 

have some rural counties where the unemployment rate is close to 

2 percent. And then we have other rural counties where the unemployment rate is more like 6 or 7 percent. 

So your Monetary Policy Report highlights the impact of what is 

happening with rural workers without a college degree, in particular, and the impact on labor force participation and how employment-to-population ratios have recovered dramatically for college-educated people but less so for noncollege people. And I am 

really worried about this disparity that it is causing. 

So can you tell us, in your judgment, why is this gap widening 

in rural areas? 

Mr. POWELL. I thought the box is very interesting, and you will 

note that, like so many economic problems, there is no really clear 

or easy answer. But the way I would say it is the gap between 

rural and urban areas in unemployment is not so big. It really 

shows up in labor force participation. 

Senator SMITH. Right. 

Mr. POWELL. That is where it shows up. So when we think about 

low labor force participation, the first thing that comes to mind is 

educational levels, because people in the population, the broader 

population, lower educational levels tend to be associated with 

lower labor force participation. But even accounting for that, that 

does not account for much, really, of the disparity. So, you know, 

it can be that rural areas are more associated with manufacturing 

activities, which have had less recovery than the service sector, 

which is now much larger than the manufacturing sector. 

In addition, it all may be affected by people leaving rural areas, 

in other words, people who leave rural areas to go to an urban area 

where there are better job opportunities. So it is something, you 

know, that we are still working on understanding, but it is a fairly 

stark disparity, and I think we all see it. 

Senator SMITH. Right. 

Mr. POWELL. I was in Mississippi a couple of weeks ago and certainly saw it there in a rural area. 

Senator SMITH. So when people are leaving, does that suggest 

then that the population that is left is older and—— 

Mr. POWELL. Or perhaps less able to find a job, less able to take 

part in the labor force. So some of the people who have job skills 

may have left that area, leaving the remaining population with 

lower labor force participation. That may be part of it. 

Senator SMITH. So would that not suggest that it would be smart 

on our part—this is not a Fed policy, but it is a policy to increase 

our emphasis and our investment in, you know, career and technical education, the kind of training that you need in order to fill 

those manufacturing jobs in rural areas? 

Mr. POWELL. So I do think that we could use a national focus on 

labor force participation, and that would be certainly one piece of 
22 

it. We do not really have the tools. I can identify it as a problem, 

and it is a serious problem, but I think that is a profitable place 

to look. 

Senator SMITH. The other thing I wonder is maybe people are not 

coming back into the workforce because they cannot afford to. In 

rural Minnesota, you cannot afford child care and it is not readily 

available. So I wonder if that is not part of the problem, that the 

jobs that are there are not paying. So how come wages do not go 

up? If there is a demand for labor, people potentially are there, 

why don’t wage go up? 

Mr. POWELL. As I mentioned earlier, wages have moved up from 

their very low levels of increase earlier. I would not say that they 

are going up quickly now, but they are going up at a more healthy 

rate. 

There are some things in the Federal Tax Code where people lose 

their benefits with their first dollar of earnings, which, again, it is 

not our job, but that does not sound like you want people to go 

back to work. 

Senator SMITH. That is counterproductive, right. 

Mr. POWELL. You want them to be rewarded for going back to 

work, and it seems like that is something we could look at—you 

could look at. 

Senator SMITH. Right. Thank you very much, Chairman Powell. 

I know I am out of time. I want to just note that I appreciated the 

question that Senator Tester was asking about farm bankruptcies, 

which is a real concern in Minnesota and across the whole northern swath of States. I am going to follow up with a written question about how you see those farm bankruptcies potentially affecting the overall economic strength of the country, especially in rural 

areas. 

Mr. POWELL. Thank you. 

Senator SMITH. Thank you, Mr. Chair. 

Chairman CRAPO. Senator McSally. 

Senator MCSALLY. Thank you, Mr. Chairman. Chairman Powell, 

good to see you again. 

I want to continue actually on the line of discussion that you 

have been on. In our conversation when we met, we talked about 

this labor force participation issue, and everywhere I go in Arizona, 

in the more metropolitan areas anyway, companies are—the economy is doing great, the optimism is there, but they are lacking for 

workers. They are just screaming for workers. And it is really up 

and down the skill set. It is not just in the trade craft, although 

that often tends to be those areas. And so what we are seeing is 

this labor force participation rate is going up a little bit, ticking up, 

but there is clearly still this gap that is maybe holding back even 

more economic growth because of the mismatch of not having the 

workers for the jobs that are there. 

So can you just give some additional perspective on that? And, 

you know, what within your power and within our power do you 

think that we can do in order to incentivize increasing that number, get more people off the sidelines, get them the skills that they 

need in order to continue to provide more opportunities for people 

we represent? 
23 

Mr. POWELL. Sure. So this strong labor market and strong economy that we have at the aggregate level is, as you mentioned, pulling people back into the labor force or encouraging them to stay in 

the labor force and not leave. So this is very, very positive for us. 

Labor force participation has gone back up above 63 percent, and 

to be in the labor force, by the way, you have either got to have 

a job or have looked for a job in the last 4 weeks. So if you have 

not looked for a job in the last 4 weeks and you are not employed, 

you are not considered unemployed. 

So this is very, very positive, and we hope it is sustained, but, 

you know, that is sort of a strong labor market, pulling people back 

in. Even with that, though, our labor force participation rates are 

lower than other countries that have anything like our level of 

wealth and income and economic activity. And it is not easy to say 

why, but I do think—and I think that the Fed’s ability to—our ability to address this is really just a function of trying to keep us at 

maximum employment. There are plenty of people and it is younger people, particularly younger men, particularly less well educated 

younger men, but also people across the gender spectrum and the 

income spectrum and age spectrum. We just have low labor force 

participation, and I think it is—you know, we want the economy 

to grow, and we want that prosperity to be widely spread. Labor 

force participation gets both of those things almost better than anything, and so I think it is something that ought to be a high focus 

for people who have different tools than ours. 

Senator MCSALLY. I agree with you, and not necessarily within 

your tools, but just based on your perspective. What do you think 

is holding that back? What is your perspective and what else can 

we do in order to remove those barriers for people to, you know, 

get back in the labor force, to be working to support their families, 

themselves, and meet their full potential? 

Mr. POWELL. Part of it would be probably education and skills 

gaps. Part of it would be the opioid crisis. You know, there just 

would be a range of things, and I would think that there are also— 

as we were discussing a minute ago, there also are some disincentives to go to work that are built into benefit programs. I met with 

a group of women in West Virginia last year who were in an apprenticeship program for carpentry, electrical, plumbing, steel 

work, and that kind of thing. And the hardest thing they had to 

do was to go to work in this program, which has 100 percent placement and which paid, you know, 9 or 10 bucks an hour, because 

that was less than the very meager benefits they were already getting. So they had to take a pay cut to go back to work. And they 

did it anyway. They did it anyway, which was pretty inspiring. But 

I think we ought to have policies that reward and support labor 

force participation. 

Again, they are not ours. I should not get into the prescriptive 

business, but I think it is really important for the country. 

Senator MCSALLY. Thank you, and I do want to follow up on the 

rural–urban gap. We have got a lot of rural counties. I visited 

many of them this week in Arizona, and we are seeing the same 

thing where there is that disconnect in wage growth and in labor 

force participation in those rural areas. Do you take that into account in Fed policy? And, again, other perspectives of what else we 
24 

might be able to do on our side or on your side in order to not have 

that gap widening for those in the rural areas? 

Mr. POWELL. We do in the general sense that we are learning 

and we have learned this year that there is more slack in the labor 

market because people are coming back in. If people were not coming back in, then the unemployment rate would be substantially 

lower. But they are, or they are staying in. So labor force participation is rising in either case, and that tells us that there is more 

room to grow, and that certainly has implications for monetary policy. 

In terms of the urban and rural, we look at those disparities. We 

look at all different kinds of disparities. In a general way, they inform our thinking about the state of the economy, and particularly 

maximum employment, which is not—there is no one number that 

you can look at. You have to look at a range of indicators, and that 

would be one of them. 

Senator MCSALLY. OK, great. Thank you. 

Chairman CRAPO. Senator Jones. 

Senator JONES. Thank you, Mr. Chairman. Chairman Powell, 

thank you for being here today. I really appreciate it. 

I want to stay on the urban versus rural divide a little bit. Obviously, we see you have got Senators on this Committee who have 

a lot of urban areas, and it seems like that there is one factor that 

may come into play that is not quite so obvious that we have talked 

about, and that is health care. 

In 2017, the Atlanta Fed set out to study the urban–rural divide 

in the Southeast, and one of the factors they kept noticing was the 

impact on residents’ health on the economic output to simplify 

what is obviously a very complex issue. 

According to that Fed study in Atlanta, while the portion of 

workers who say they are too sick or disabled to work is roughly 

6 percent nationally, that rises to over 12 percent and higher in the 

rural South. 

So from your perspective, what role do you think that health outcomes play in economic growth, particularly in rural America? 

Mr. POWELL. I think poor health outcomes are very much associated with a lot of social issues, including low labor force participation and lots of other economic issues, you know, low lifetime earnings and many, many different things. And those are obviously 

more prevalent now in rural areas, as you pointed out. 

Senator JONES. And I would assume you would agree that if 

health care is not accessible in those areas—for instance, in Alabama we have seen rural hospitals closing left and right, seven or 

eight in the last 7 or 8 years—with the absence of health care, it 

may contribute to the people leaving those rural areas and into 

urban areas. Would you agree with that? 

Mr. POWELL. It is hard to say whether—you know, people have 

been leaving for some time. Some of these counties, as you obviously know, have lost half their population in the last four or five 

decades. 

Senator JONES. Individually, if the States were to develop policies that would expand health care in these communities, give affordable health care, access to health care, what would you expect 

the economic impact to be? 
25 

Mr. POWELL. Well, I think people who—health care is going to— 

you know, in principle would allow people to remain in the labor 

market, would get them back in the labor market and keep them 

from getting sick and being out of the labor market. So that would 

be a positive for the economy. 

Senator JONES. I appreciate that. I promise you we are not going 

to ask you to testify in front of the HELP Committee. 

Senator Tester made a comment as he was finishing up that despite—and there is a lot of good economic news. Everybody agrees 

there is a lot of great economic news out there. But I think a lot 

of folks also, as in Senator Tester’s words, see canaries in the coal 

mine. Do you see any? Other than the obvious of the debt that we 

have, do you see any canaries in the coal mine that we need to be 

looking for in this Congress? 

Mr. POWELL. I would say that the outlook for the U.S. economy 

is a positive one, is a favorable one. There are always risks, and 

right now I would say that the predominant risks to our economy 

are slowing global growth, as I mentioned, particularly China and 

Europe. We have seen a significant slowing in growth really over 

the course of the past year, and it seems to be ongoing. And that 

can create a headwind for the United States economy. I talked 

about Brexit. That is an event risk which could have implications 

for us. 

Here domestically, again, I think the outlook is generally a favorable one. 

Senator JONES. OK. Thank you, Mr. Chairman. And Senator 

Shelby asked you about the state of health of our big banks, which 

you gave a pretty favorable report on. But in December of this 

year, right as the Government was shutting down, the Secretary of 

the Treasury issued a press release, and he had this call with all 

of the big banks to discuss their liquidity and to make sure that 

things were OK. The next day, I think he had a call with you and 

some of the other regulators. And that sent some alarm bells, I 

think, throughout the country and folks up here. 

Can you kind of walk through those 2 days and what was the 

purpose? What did you see was the purpose of the Secretary of the 

Treasury 4 days into the shutdown attempting to reassure folks, I 

guess, that the banking system was OK? 

Mr. POWELL. Let me say, of course, I would not comment on the 

Secretary at all. But, you know, our financial system, as I mentioned earlier, is very strong, record profits, no bank failures last 

year, capital is much higher, liquidity is much higher, risk management is much better. You know, we never take this for granted. We 

keep watching carefully and looking for problems. But I can say 

that what I was thinking in those days was, you know, we had significant volatility in the markets, and I was just, you know, wondering, looking and asking the question, does that have any broader implications for the economy or for the financial system? And 

the answer I felt was no, but it is something that you are—part 

of the job is to ask that question, which I was. 

Senator JONES. All right. Thank you, Mr. Chairman. I appreciate 

you being here. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Senator Kennedy. 
26 

Senator KENNEDY. Mr. Chairman, thank you for coming today. 

My good friend Senator Brown lamented the fact that our financial 

institutions are making profits now. That is a good thing, right? 

Mr. POWELL. We need a profitable financial system to have a 

well-capitalized financial system. 

Senator KENNEDY. Well, is it better if banks are making money 

or losing money from a macroeconomic standpoint? 

Mr. POWELL. I think we want banks to be profitable and strong 

and well capitalized, and they have been. 

Senator KENNEDY. OK. I want to talk about the Government 

shutdown. Tell me if I get this wrong. CBO estimates an $11 billion impact to our economy. We will recover about $8 billion, so the 

net loss to our economy is $3 billion. Does that sound about right? 

Mr. POWELL. All I know about that is that is what I have read. 

Senator KENNEDY. OK. That is what I have read, too. You got 

to trust somebody. I will take CBO at their word. 

We have got about a $21 trillion economy. Is that right? 

Mr. POWELL. That sounds about right. 

Senator KENNEDY. OK. So as a percentage of our economy, that 

$3 billion loss is one-half of 1 percent. Is that about right? 

Mr. POWELL. You did that math very quickly, Senator. I am 

going to trust you on that. 

Senator KENNEDY. Good. OK. That is an infinitesimal impact, is 

it not? 

Mr. POWELL. That is very small. 

Senator KENNEDY. OK. Let us talk about the economy. Some 

economists said that if we passed the Tax Cuts and Jobs Act, our 

economy would overheat. Those economists were wrong, were they 

not? 

Mr. POWELL. The economy did not overheat, has not overheated. 

Senator KENNEDY. We are having growth without inflation. Is 

that correct? 

Mr. POWELL. We have inflation right at our target. 

Senator KENNEDY. About 2.2 percent? 

Mr. POWELL. Right around 2 percent, 1.9 percent. 

Senator KENNEDY. OK. And we have had more business investment. Is that correct? 

Mr. POWELL. We have had solid investment, very solid in the 

first part of last year and reasonably good in the second half of last 

year, and I think the outlook is for continued reasonable levels of 

business investment. 

Senator KENNEDY. And wages are up. Is that correct? 

Mr. POWELL. Yes, they are. As I mentioned, you have wages 

now—all of our wage measures have moved up to 3 percent or a 

little better, which is a very good thing to see. 

Senator KENNEDY. I want to get your opinion on—and I am not 

trying to ask you to make policy, but I am asking you as the Fed 

Chair, what could we have done in hindsight to encourage more 

business investment in plants and machinery and equipment and 

software which would have created more jobs and hopefully increased productivity? Specifically, let me ask you this: There is legislation to prohibit share buybacks. Is that a good thing? I know 

share buybacks have a positive economic impact. But if you had 

legislation that cut business taxes but also said you cannot use 
27 

that money to buy back shares, you have to invest it in your company or pay shareholders dividends, what would you think about 

legislation like that, just from an economic standpoint? 

Mr. POWELL. Well, I think it is—first of all, that kind of a decision is really not in our hands. 

Senator KENNEDY. I know. 

Mr. POWELL. It is really for you to make. 

Senator KENNEDY. I am asking you as an economist. 

Mr. POWELL. So I would say the goal—I guess I would just say 

the goal of having prosperity be widely shared I think is one that 

we all share. I think the thing about share—when you talk about 

companies and what they do with their profits and how they allocate capital, in our system we have always left those decisions to 

the private sector, to private hands. 

Senator KENNEDY. Right. 

Mr. POWELL. And I would want to understand the consequences 

of changing that, and I would want to look at whether there are 

not other ways to achieve the goals that I think we all want, which 

is to have prosperity be widely shared. 

Senator KENNEDY. OK. Are there other ideas you might have to 

make sure prosperity is more widely shared? 

Mr. POWELL. I think it ties to some of the things we have been 

talking about here. You know, labor force participation is just a 

win for the overall economy. The economy will grow faster, and the 

people who are not taking part tend to be the ones with lower education, who are the edges of the labor force. So we are underperforming as a Nation on this compared to our peer group. 

Senator KENNEDY. Why? 

Mr. POWELL. It is a good question. It is a problem that stands 

out here compared to other countries, and—— 

Senator KENNEDY. Is it because we pay people too much not to 

work, or is it because people do not have the skills, or is it because 

they do not have access to the jobs? This is my last one, Mr. Chairman. 

Mr. POWELL. You know, I think there is a range of perspectives 

on this, and there is a range of—there is some wisdom in a lot of 

different ideas, and I think the best thing to do would be to get 

some proposals that would have broad support and work on those. 

I do think quite a bit of it is skills, education, aptitude, and also 

not having disincentives in the Tax Code where people lose their 

benefits, for example, with the first dollar of pay. That seems like 

a disincentive to work that—and none of this, by the way, is in the 

Fed’s hands, but since you ask. 

Senator KENNEDY. You are doing a great job. Thank you. 

Mr. POWELL. Thank you, Senator. 

Chairman CRAPO. Senator Warren. 

Senator WARREN. Child care. Thank you, Mr. Chairman. Thank 

you, Chairman Powell, for being here. 

Earlier this month, two giant banks, SunTrust and BB&T, announced that they intended to merge. This new too-big-to-fail institution would have about $450 billion in assets and become the 

sixth largest bank in the United States. 

Now, as you know, bank acquisitions and mergers do not go 

through on their own. They have to be approved first by the Fed. 
28 

So last spring I wrote you a letter asking for data on the number 

of merger and acquisition applications received by the Fed and the 

number that had been approved over the last 10 years. 

Chairman Powell, when you answered my letter in May of 2018, 

how many merger and acquisition applications from the banks had 

you received since 2006? Do you remember? 

Mr. POWELL. No, I do not have the numbers in front of me. 

Senator WARREN. Would 3,819 sound right? 

Mr. POWELL. Yes. 

Senator WARREN. Good. OK. And do you remember how many of 

those 3,819 applications you denied? 

Mr. POWELL. No, I do not. 

Senator WARREN. Would zero sound right? 

Mr. POWELL. If you say so. 

Senator WARREN. Well, you said so. It is your letter. 

Chairman Powell, has the Board denied any applications since 

you responded to my letter in May? 

Mr. POWELL. I would just—if I can offer a little context—— 

Senator WARREN. Well, let us get this part out, because that is 

what I am trying to do is build some context here. 

Mr. POWELL. I do not believe we have. I think what happens is 

that we—people do not apply or they withdraw their applications. 

Senator WARREN. That is exactly what I am going to talk about. 

So zero percent of the applications for mergers and acquisitions 

since 2006 have been denied. Now, that does not mean that all potential mergers and acquisitions make it through the process. Thirteen percent of applications are withdrawn before they get a decision. According to your letter, Chairman Powell, ‘‘Prospective applicants may discuss a proposed transaction with Federal Reserve 

System staff prior to filing, and applicants will be discouraged from 

filing applications where it is apparent that the applications would 

not meet all of the statutory factors required for approval.’’ 

So if you think that a proposed merger will not be approved, you 

discourage the bank from following through. Is that right? 

Mr. POWELL. In some cases. I think that would be in cases where 

it is clear that there is a statutory problem, you know, for example, 

in some cases—— 

Senator WARREN. OK, but you approve 100 percent of those that 

go ahead and apply, so I assume they are getting some—— 

Mr. POWELL. Unless they are withdrawn. Unless they are withdrawn. 

Senator WARREN. That is what I said. So you encourage them to 

withdraw if they are not going to get an approval. 

Mr. POWELL. But they can file and then withdraw. 

Senator WARREN. But the point is they withdraw if they are not 

going to get it because of a conversation you had that is a nonpublic conversation. 

So this is a formal process required by regulation. In order to do 

an approval, people who object to the merger have an opportunity 

to file a protest. That is how the process is supposed to work. That 

would include, for example, communities that are worried that 

local banks may close following a merger or acquisition; employees 

who are concerned about losing their jobs; State officials that may 

be concerned about decreasing competition and so on. 
29 

So, Chairman Powell, you have explained that consultation with 

a bank starts, can start before the merger is announced publicly. 

When is it that the public can actually file protests, before or after 

the merger is announced? 

Mr. POWELL. So I think the process is that we receive an application for a merger—which we have not received yet. We expect to 

receive it, I am told, sometime next month. And—— 

Senator WARREN. And when will the public have a chance to—— 

Mr. POWELL. Certainly then. 

Senator WARREN. And that is true in all of these, right? The public does not get a chance to comment until after the application is 

already filed. But the application is only filed after the banks have 

had a chance to have this quiet conversation with the Fed. 

I just want to get this straight. You and the banks get together 

in the back room and grease the wheels before the merger is announced. And if you are not going to approve the merger, you tell 

the bank in advance, and then they go figure out something else. 

If the public wants a chance to weigh in, they have to wait until 

you have already made a decision. No wonder you approved 100 

percent of the merger applications. Not a single no. Your approval 

process itself appears to be a rubber stamp, that everything is happening behind closed doors. 

So the question I have is about the SunTrust and BB&T merger. 

Is this one just going to be another rubber stamp? You have already made the decision behind closed doors before the public gets 

a chance to weigh in? 

Mr. POWELL. No, not at all. We are going to conduct a very fair 

and open, transparent process. I think, you know, our obligations 

under the statute are clear and they are quite broad. We will be 

hearing from groups of all kinds and going through our process 

carefully and thoroughly. 

Senator WARREN. So it is just that in the last 3,819 merger applications, which were all approved without a single one for which you 

said no, this time you are going to be listening to comments from 

the public that might cause you to say no? 

You know, I just have to say I will bet that SunTrust and BB&T 

looked at that 100 percent merger success rate and saw what everyone else sees, and that is that the Fed works for big, rich banks 

that want to get bigger and want to get richer, and then everyone 

else pays the price for diminished competition, for worse service, 

for higher prices, for employee layoffs, for the risk that we have yet 

another too-big-to-fail bank on our hands. 

I just think it is time that we put down the rubber stamp and 

that we really let the public and everyone else weigh in before we 

create yet another too-big-to-fail bank. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Senator Cotton. 

Senator COTTON. Thank you, Chairman Powell, for being here. I 

want to start talking about stress tests for midsize banks. 

Reform legislation that the Congress passed to the Dodd–Frank 

Act last Congress increased the threshold for stress tests from $10 

billion banks to $100 billion banks. Can you tell us why so many 

of us still hear from banks in that window, larger than $10 billion 
30 

but smaller than $100 billion, are still hearing from their examiners that they need to undergo such stress tests? 

Mr. POWELL. Well, let me say the law, the new law, is that banks 

between 10 and 100 do not have to—are exempt from the DFAST 

stress tests. That should be crystal clear. I think you are referring 

to the guidance. 

Senator COTTON. Yes. 

Mr. POWELL. Which we are in the process of looking at and revising and, I would think, addressing that issue. 

Senator COTTON. OK. But to be perfectly clear, banks between $10 billion and $100 billion are not required to undergo Dodd– 

Frank stress tests. 

Mr. POWELL. Correct. 

Senator COTTON. When I was in Afghanistan and Iraq, young 

soldiers used to complain about the rules of engagement, and if you 

looked at the rules of engagement that the four-star commanders 

had issued, they are actually pretty flexible. That had been filtered 

down in a different way to the front lines, though. Do you think 

it is possible that your guidance that you just gave gets filtered 

down to examiners on the front line in a slightly different way? 

Mr. POWELL. I think that is something that happens, yes, and, 

again, we are looking at—there is this guidance that is still outstanding. Some of these banks are still going to want to do stress 

testing, and we are not going to discourage that. It is actually a 

good practice. But we are going to be looking at that guidance to 

make sure that there is no question that banks between $10 and 

$100 billion in assets are not required by law to do stress tests. 

Senator COTTON. OK. Thank you. These examiners, they hold a 

lot of power in their hands, obviously, when they are on the front 

lines and they are in one of these smaller community banks. And 

when they say something may be voluntary, you know, that is 

heard by the banker in a different way than they may intend it. 

It reminds me of my old basketball coach who used to have voluntary shoot-arounds before school and on some afternoons. And it 

just so happened that the players that reported to those voluntary 

shoot-arounds tended to be the ones that got playing time on Tuesday and Friday night. 

Mr. POWELL. We try to communicate, and I think our examiners 

do a good job, basically, but, you know, we know we need to work 

hard to make sure that the message gets out clearly, and we find 

that our people do listen. So we are alert to that. 

Senator COTTON. Thank you. 

I want to turn now to a different question. I know there has been 

some talk here about the unemployment rate, which is pretty low, 

and the labor force participation rate, which is increasing. I want 

to talk about wages and wage growth. There was some recent data 

out from the Bureau of Labor Statistics. It was highlighted in a recent Wall Street Journal article that said, despite these factors, income to employees in the form of pay and benefits continues to decrease. It is down to 52.7 percent of our gross domestic income. It 

was as high as 59 percent in the 1970s and 57 percent in 2001. By 

the same token, business income, profits to businesses, whether it 

be the biggest corporations or small businesses, have gone from 12 

percent to up to 20 percent. 
31 

Can you give me your thoughts on why we are seeing more income going into the hands of owners in this country and less into 

the hands of workers? 

Mr. POWELL. Yes, so that is the labor share of income, is what 

you are talking about, and really, if you look back through history, 

it zigs and zags, but it generally zigged and zagged at a higher 

level. And then right around the year 2000, labor’s share went 

down sharply for about 10 years and then, broadly speaking, has 

been about flat since then. You know, it goes up and it goes down, 

but it is basically flat. And the question is, Why? It is a really good 

question, and there are a lot of different answers. Honestly, there 

is no clear, easy answer. 

As a separate matter, wages are actually growing at a level that 

makes sense. The problem is the level. It is not the growth rate. 

Wages and benefits are growing at around 3 percent, a little better. 

That is a healthy growth rate in an economy with 1 percent productivity increase and 2 percent inflation. The problem is there 

were 10 years when that did not happen, from 2000 until 2010. So, 

you know, it can have to do with a lot—globalization is a big answer there. That was right around the time of China joining the 

WTO. Some researchers will connect it to that. So, in any case, you 

know, we welcome these wage increases for this reason. 

Senator COTTON. Well, I do as well, and I hope that we will continue to see them and see a little bit more of that growing economic 

pie going into the hands of our workers. 

Thanks. 

Chairman CRAPO. Senator Cortez Masto. 

Senator CORTEZ MASTO. Thank you. Chairman Powell, thank you 

for being here again. 

I have concerns about discrimination in lending, so I want to ask 

you a follow-up question to the record that I submitted last time 

you were here, and it involves the Federal Reserve’s responsibility 

to enforce the fair lending laws. 

I asked you how the Fed would improve its oversight of fair lending rules. In your response, you mentioned that Fed examiners 

evaluate each financial institution for fair lending compliance. 

So I guess my specific question is: How would examiners evaluate whether a lender might steer consumers to higher-priced loans? 

In your written response, you mentioned credit scores, loan-tovalue ratios, and lending products, but can you expand on what the 

examiners would consider to ensure against consumers being 

steered to high-priced loans? 

Mr. POWELL. So I think examiners who examine for that I believe are trained to look for patterns of that nature. 

Senator CORTEZ MASTO. Specific criteria. Is there anything specific that they look to that you are aware of? 

Mr. POWELL. You know, I have a general understanding of this, 

but I should come back to you with more details. 

Senator CORTEZ MASTO. OK, and thank you. I appreciate that. 

And I would also like to know, as you come back and answer this 

question, would examiners consider incentive pay tied to higherpriced loans as a red flag or a pattern? Would the existence of bonuses for bank staff that provided a loan with higher fees and in-
32 

terest rates be a red flag to these examiners? So if you could expand on that in writing, that would be fantastic. I appreciate that. 

Mr. POWELL. Happy to do that. 

Senator CORTEZ MASTO. Thank you. 

The other issue that is important for me because it is an issue 

in Nevada and across the country is affordable housing. In your response to my submitted questions for the record, I asked you if the 

rapid rise of housing costs was encouraging your consumer price 

models to assume a higher threat of inflation than actually existed. 

Do you think that the Fed’s raising interest rates was a factor 

in rising house costs? 

Mr. POWELL. Well, I think that higher interest rates certainly 

played into higher mortgage rates, and that will have had an effect. 

Senator CORTEZ MASTO. What about the costs of building that 

apartment or house? 

Mr. POWELL. Yeah, I think materials costs and—what you hear 

from builders is labor shortages, particularly skilled labor shortages, and you also hear higher materials costs, some of which are 

affected by tariffs, of course. So you hear them under tremendous 

cost pressure, and I think that was flowing through into higher 

prices, and that was, you know, making the affordability calculus 

a little bit more challenging for buyers at the same time rates were 

going up, and I think all together that picture, you know, slowed 

down housing construction in the last year or so. 

Rates are now down a little bit, about 50 basis points, and so we 

are seeing a little bit—starting to see a little bit of a pickup there. 

Senator CORTEZ MASTO. How would you compare the impact of 

the higher interest rates on construction to that of the higher 

prices for goods that may be caused by tariffs? 

Mr. POWELL. You know, I think that the higher costs—it depends 

on—from the standpoint of the consumer, what matters is what 

does the house cost. I think you will find that the interest rate has 

an important—is a very important thing from the consumer’s 

standpoint. But in setting the price of the house, it is not the interest rates. It is really the cost of materials and labor. 

Senator CORTEZ MASTO. And then you talked about—— 

Mr. POWELL. And land. 

Senator CORTEZ MASTO. ——the higher cost of labor. Could that 

higher cost of labor also be due to curbing immigration and the 

lack of labor because of that? 

Mr. POWELL. It certainly could in construction, particularly in 

some regions. I visited Houston not so long ago, and I think a big 

part of their construction labor force was from immigration. I think 

they were feeling shortages there for that reason. 

Senator CORTEZ MASTO. Thank you. 

Last summer, the Federal Reserve economist noted that high levels of student debt was preventing Millennials from buying a home. 

Other studies have found that Millennials faced housing supply 

constraints, beginning their careers in a poor labor market, and 

high student loan burdens which have made it difficult for them to 

buy a home. 

What was the response to the Federal Reserve’s assertion that 

student debt prevented at least 400,000 Millennials from buying a 

home? 
33 

Mr. POWELL. What was the response? 

Senator CORTEZ MASTO. Yes. 

Mr. POWELL. It is just research, and I think there is a growing 

amount of research that shows that student loans, of course, have 

been growing very, very fast in the last few years, and—— 

Senator CORTEZ MASTO. Was that the right number, the 400,000? 

Mr. POWELL. I do not know that number. 

Senator CORTEZ MASTO. Did you get a sense was it too high, too 

low? Was that—— 

Mr. POWELL. I do not know that number. I will tell you it is a 

trillion and a half dollars in outstanding student loans, and there 

is research that shows that for students who cannot discharge— 

cannot service their loans or discharge them, that those loans can 

weigh on them over a long period of time and have real effects on 

their economic and personal lives over time. 

Senator CORTEZ MASTO. And ability at actually home ownership. 

Is that correct? 

Mr. POWELL. Yes. 

Senator CORTEZ MASTO. Thank you. Thank you, Chairman, for 

being here. 

Mr. POWELL. Thank you. 

Chairman CRAPO. Thank you. 

Senator Moran. 

Senator MORAN. Mr. Chairman, thank you very much. Mr. 

Chairman, thank you very much. 

Let me start with what I think is a straightforward question followed by a much more complicated one. Eighteen of my Senate colleagues joined me in a letter calling on regulators to provide a 

more significant reduction in the reporting burden of our smallest 

banks in the first and third calendar quarters, as required by Section 205 of 2155. We are looking for a greater difference in those 

reporting requirements than what has been proposed. 

According to the current proposal, banks with less—those smallest assets would save only an average of 71 minutes per quarter. 

So not a significant change based upon the proposed rules. Can you 

speak to whether you think our concerns about our smallest banks 

and their call reports have been addressed? 

Mr. POWELL. Senator, as you mentioned, that rule, we put that 

rule out for comment. We got a lot of comments and got your letter, 

and we are carefully reviewing those comments. I think what we 

are trying to balance is—we are trying to find the right balance, 

and we will certainly take into account the comments that we get. 

Senator MORAN. Well, I appreciate that. I would want you to do 

that. But if the end result of 2155 is as modest as this appears to 

be, we have not achieved our goal. That cannot be the congressional intent, at least in this instance on this topic. So let me reiterate that. 

Then let me talk about what I think is at least a difficult topic 

for me to have a conversation with you about just because of its 

complexity. A key goal of this legislation was to provide qualifying 

community banks relief from the complexities and burdens of current risk-based capital rules. But we, of course, want to ensure that 

they maintain a high quality of capital consistent with the current 

rules. 
34 

The recent interagency proposal for community bank leverage ratio allows certain banks with less than $10 billion in total assets 

to elect to use the CBLR instead of the current risk-based capital 

requirements if the CBLR ratio is above 9 percent, the current 

ratio required being 5 percent. So under the new proposed framework, a bank would be considered less than well capitalized if it 

fell below 9 percent and has not opted out of the CBLR, that would 

then trigger certain restrictions and requirements. 

As currently written, the proposal seems to dangle the incentive 

of reduced regulatory burden but with capital requirements 4 percent higher for our small banks to qualify. 

Would it not make sense to leave the existing PCA framework 

unchanged, allowing small banks to maintain well-capitalized status and begin reporting capital ratios under the current risk-based 

capital rules when CBLR falls below the 9 percent? 

Mr. POWELL. That is another rule that we have out for comment, 

obviously, and—Senator, can I ask, is that a comment that you 

have—— 

Senator MORAN. If we have not, we can or will. 

Mr. POWELL. I would encourage you to do so. You know, these 

are—we think these are really important tailoring proposals, and 

they are obviously mandated by S. 2155, and we want to get them 

right. So I understand your question, and, you know, we will look 

carefully at that. 

Senator MORAN. Are all of the financial institution regulators 

working well together in implementation of 2155? 

Mr. POWELL. I believe so, yes. I think we share the goal of, first 

of all, putting a very high priority on implementing S. 2155, but 

also on tailoring. For smaller banks, I think all of us feel that there 

is a lot we can do without undermining safety and soundness, and 

we want to find those things and do them. 

Senator MORAN. I appreciate that approach. I have had many 

conversations with regulators for as long as I have been on this 

Committee and in the Senate, and it is something that has always—and I am not suggesting this at all about you, but it is always something that is highlighted certainly when talking to me 

about its importance. But it is hard to find change that has occurred voluntarily by regulators to make the burdens less on our 

community banks, and that is why 2155 was so appealing to me, 

is that we had failed generally to get regulators to change their behaviors, and 2155 seems to me to be the option, the only option 

that I have seen that actually might force change when it has been 

so reluctantly to arrive. So I care a lot about that. 

In the 15 seconds I have left, I would remind you that agriculture, as you and I visited about last time we talked, is in significant—faces significant challenges. I want to make certain that our 

community banks, our relationship bankers do not lose the ability 

to consider character and history, remind you that we have 

generational bankers along with generational farmers whose 

grandfather bankers have taken care of grandfather farmers and 

down through the generations. That has continued, and our community bankers know who has character, who has ability to pay, 

who has the history to demonstrate that, and we cannot tie their 

strings or the agricultural challenges the economy faces today, ag 
35 

country’s problems will be significantly exacerbated if you take 

away the ability to take into account those factors that are not 

crossing a ‘‘T’’ and dotting an ‘‘I.’’ 

Thank you. 

Mr. POWELL. Thank you. 

Chairman CRAPO. Senator Van Hollen. 

Senator VAN HOLLEN. Thank you, Mr. Chairman. And, Chairman 

Powell, thank you for your service. 

I want to focus for a moment on the impact of the tax bill, the 

tax bill that passed about a year ago, and especially taking a look 

at the banking industry, because I think in no other sector is it 

clearer as to what a huge giveaway this tax cut was to big financial 

interests. I do not know if you saw the Bloomberg analysis that 

was conducted earlier this month. They looked at the 23 U.S. 

banks that the Federal Reserve says are most important to our 

economy and concluded that those 23 banks got a $21 billion tax 

break windfall. Did you see that analysis? 

Mr. POWELL. I do not know that I did. 

Senator VAN HOLLEN. And would you be surprised to learn that 

they used much of that windfall for a major stock buyback? 

Mr. POWELL. I honestly do not know. First of all, I know that the 

tax cut reduced taxes for big companies that were very profitable 

quite substantially. 

Senator VAN HOLLEN. Well, they did, and, again, it was a $21 

billion windfall, and a lot of it used for, you know, stock buybacks 

that helped a lot of the executives. 

What is interesting is that during that same period of time we 

saw a loss of 4,300 jobs among those 23 banks. Does that surprised 

you—big tax break, and yet a loss of jobs among the big banks? 

Mr. POWELL. You know, it must be several million people we are 

talking about, so it is—— 

Senator VAN HOLLEN. But, of course, it was sold on the promise 

that we would see all these new jobs generated. I do want to ask 

you about the increase in wages. Obviously, it is always good to see 

an increase in wages. Of course, nominal wages are only half the 

equation, right? You also have to look at rising costs when you look 

at real wages. And isn’t it the case that when you look at real 

wages and the rise in real wages during the last term of the 

Obama administration, real wages rose faster during that period of 

time than they have since the beginning of the Trump administration, even with the tax cut? Isn’t that the case? 

Mr. POWELL. You know, I just do not look at it in terms of those 

timeframes. I would say that—the way I would say it about wages, 

if you look back to 2012, if you look at the four major wage and 

benefit increases, things that we track, it was around 2 percent. All 

of them were right around 2 percent. Now they are at 3 percent 

or a little better, and part of that is just that the labor market has 

continued to improve since that time. 

Senator VAN HOLLEN. Sure. No, of course. But as you testified, 

you have also seen an uptick in inflation and costs, right? So the 

result for a real American is how much of the increased wages that 

are coming in, what the purchasing power of that will be. Anyway, 

if you could take a look at that and get back and confirm whether 

or not that is true. The figures I have got suggest that you saw a 
36 

more rapid increase in real wages, again, during the last term of 

the Obama administration, which just gets to the point about, you 

know, there is a lot of hype about the tax cuts. 

Let me ask you about student loans. My colleague just asked you about that. You just testified that we have got $1.5 trillion in student loans. I think that the Fed just reported that delinquent U.S. 

student loans reached a record $166 billion in the fourth quarter 

of 2018. You indicated this is putting a lot of stress on students 

who were trying to get out there and buy their apartments or rent 

their apartments. 

Would you be in favor of allowing students to discharge their 

debts in bankruptcy just like banks can? 

Mr. POWELL. So I think it is important that students be in a position to borrow, to invest in their education. It is important that 

they get proper disclosure about what the risks are and what the 

success rates are and that kind of thing. It is not a Fed—someone 

asked me in this Committee a year or so ago that question, and I 

did answer it directly. But I would say it is not really for the 

Fed—— 

Senator VAN HOLLEN. Well, let me ask you, is the impact of student debt in your view impacting the economy in a negative way, 

the fact that these students are, you know, stuck as soon as they 

graduate trying to pay back loans that they apparently cannot 

repay? 

Mr. POWELL. Yes, I think for students who cannot repay their 

loans, there is a growing amount of research that shows that those 

people can have, you know, longer-term negative economic effects. 

Of course, some people invest in their education and borrow money 

to do it, and it works out very well for them as well. But for those 

who do not, it can be quite a negative—— 

Senator VAN HOLLEN. Well, there are a lot of people who cannot 

right now. 

Mr. POWELL. That is right. 

Senator VAN HOLLEN. You just reported a record delinquency 

rate in the last quarter. 

The last thing I would say, Mr. Chairman, while I have the 

Chairman of the Federal Reserve here, is I am going to keep after 

you and your colleagues on this faster payments issue. It makes no 

sense to me that Mexico, South Africa, soon the entire European 

Union will have immediate ability to clear payments while we do 

not. A check cashed on Friday will not clear until the middle of 

next week. And millions of Americans are paying a lot more in 

terms of late fees and, you know, payday loan interest rates at sort 

of loan shark rates because of that. So I hope you will give the 

same attention to that issue as you are giving to some of the other 

issues you discussed this morning. 

Mr. POWELL. Thank you. We will. 

Chairman CRAPO. Senator Perdue. 

Senator PERDUE. Thank you, Mr. Chairman. And thank you, 

Chairman, for being here and for your perseverance. These are big 

committees. You have been here a long time. I have two questions 

for you. 

One, I am always amazed at the economic experts in this Committee and the revisionist views of history, so let me just throw 
37 

some facts out in leading to a question for you. This recovery is 

real. We are growing about 100 basis points more than the last Administration just after 2 years. CBO says if you grow four-tenths 

of 1 percent, you more than pay for this tax bill. So those are two 

facts. 

The second thing is median income is at a historic high. It is the 

highest it has ever been in the United States. Five million new jobs 

have been created, lowest unemployment in 50 years, lowest African American unemployment ever measured, lowest Hispanic unemployment ever measured. 

My concern, though, is with labor issue, with export issues, and 

interest rate issues. We have nine Fed fund increases over the last 

2 years or so, 21⁄2 years, and with our debt—and this is the question I am trying to get to, and you know where I am going here. 

I appreciate the time you gave me recently in a private conversation. The Federal debt really bothers me, and its overhang on the 

economy and our ability to drive the economic wherewithal of every 

American. The national debt is the greatest threat to national security, according to our military experts, and yet today we just turned 

$22 trillion of national debt, if you include all the debt that we 

have as a Government. 

As I understand it, there is about $200 trillion of debt in the 

world; $60 trillion of that is sovereign. We have about a third of 

that. Five percent of the world’s population has about a third of all 

sovereign debt. 

So the question I have—and the projection is in the next—that 

increase is 21⁄4 percent, with our size debt technically is about $450 

billion of new interest that we have loaded in there. And yet of that 

$60 trillion of sovereign debt in the world, about $11 trillion of that 

is laid out at negative interest rates. Much of that is in the euro 

zone. 

My question is: Are there carry-on contagion issues out there 

that could negatively impact this recovery and the continuation of 

this recovery independent of what we do fiscally or monetarily here 

in the U.S. due to these negative interest rates around the world? 

Mr. POWELL. I think the negative interest rates that you are seeing are a reflection of kind of a risk-off mood and slower growth 

in China and Europe in particular. Europe had a good strong year 

in 2017 and then really slowed down over the course of 2018, and 

we are seeing some more of that now. So that is, I think, what you 

are seeing. I think it really is through slower—slower global 

growth for the United States can be a headwind, just as very 

strong—2017 was a year of synchronized strong growth really 

around the world. It was a very good year, and we were feeling a 

tailwind for that. That has now turned into a bit of a headwind for 

us. 

Our economy, though, I think the outlook for our economy is still 

a favorable one, still a positive one. But, nonetheless, this will be 

a headwind. 

Senator PERDUE. There is a growing debate in Congress now 

among some of my colleagues about advocating a change in how 

monetary and fiscal policy work together, and these people are advocating a modern monetary theory. They want a spend-now, 

spend-later, spend-often policy that would use massive annual defi-
38 

cits to fund these tremendously expensive policy proposals such as 

Medicare for All, free college for all, make every structure in the 

U.S. energy efficient in 10 years, and a universal basic income 

whether you are working or not. 

Under this landscape, it is proposed that the Fed would keep interest rates artificially low and that fiscal policy would then be 

driven by Congress and theoretically manage the business cycle. 

What obstacles do you anticipate seeing, and how successful has 

fiscal policy been in terms of managing either inflation or interest 

rates? 

Mr. POWELL. Let me say I have not really seen a carefully 

worked out, you know, description of what it meant by MMT, what 

you are mentioning. It may exist, but I have not seen it. I have 

heard some pretty extreme claims attributed to that framework, 

and I do not know whether that is fair or not. But I will say this: 

The idea that deficits do not matter for countries that can borrow 

in their own currency I think is just wrong. I think U.S. debt is 

fairly high at a level of GDP and, much more importantly than 

that, it is growing faster than GDP, fairly significantly faster. We 

are not even close to primary balance, which means, you know, the 

deficit before interest payments. So we are going to have to either 

spend less or raise more revenue. 

In addition, you know, to the extent people are talking about 

using the Fed as a—our role is not to provide support for particular 

policies. It is to—and that is central banks everywhere. It is to try 

to, you know, achieve maximum employment and stable prices. So 

that is really what it is, and I think decisions about spending and 

controlling spending and paying for it are really for you. 

Senator PERDUE. Thank you. 

Chairman CRAPO. Senator Schatz. 

Senator SCHATZ. Thank you, Mr. Chairman. Chairman Powell, 

thank you for your service. Thank you for your stewardship. 

PG&E, California’s largest utility, filed bankruptcy last month, 

partly as a result of liability costs from climate-related disasters. 

The damage from 2017 and 2018 wildfires exceeded $30 billion, 

more than PG&E’s assets and insurance coverage combined. Climate risks threaten many sectors of our economy: real estate, agriculture, fisheries, industries with extensive supply chains. They are 

all at risk. 

Take coastal real estate as just one example. The U.S. Government currently estimates that storms, floods, erosion, rising sea 

level now threaten approximately $1 trillion in national wealth 

held in coastal real estate. According to Freddie Mac, ‘‘Some of the 

varied impacts of climate change may not be insurable.’’ More than 

300,000 coastal homes are at risk of chronic inundation by 2045, 

a timeframe that falls well within the timeframe of the 30-year 

mortgage. These properties are worth about $117 billion and contribute nearly $1.5 billion toward the property tax base. Banks, insurance companies, and other financial institutions are all exposed 

to these risks, and that is why the Bank of England recently announced that it is planning to include the impact of climate change 

in its bank stress tests next year. 
39 

So here is a simple question. It is not a ‘‘gotcha’’ question. Do you 

agree that climate change creates financial risks for the individual 

financial institutions and for our financial system as a whole? 

Mr. POWELL. So let me say we do not formally or directly include 

climate change in our supervision, but we do, actually, require financial institutions, particularly those who are more exposed to 

natural disasters and that kind of thing, we do require them to understand and manage that particular operating risk. 

So, for example, if you are a bank on the southern coast of Florida and you are subject to hurricanes, we definitely require you to 

have plans and risk management things in place to deal with those 

sorts of things. So you would pick up natural disasters and that 

kind of thing which are associated with climate change. 

Senator SCHATZ. Do you think your processes and your staff and 

your sort of approach to this, which has been built properly over 

many, many years and pursuant to the statute, do you think you 

are moving fast enough to acknowledge the accelerating risks of climate change over the last 2 or 3 years? Do you think there is room 

for you to do a scrub of whether or not you are fulfilling your statutory mandate? Because I get that you are supposed to pick up any 

risks related to natural disasters. The question is whether you 

have really loaded in the latest information from the scientific community to go back to these banks, to go back to REITs, to go back 

to lenders who have either stranded assets or assets in the coastal 

area or whose supply chain is particularly dependent on a certain 

kind of weather pattern which is not materializing anymore. Do 

you think you are doing enough in this space? 

Or let me phrase it another way. Are you confident that you are 

doing enough in this space? 

Mr. POWELL. You know, it is a little bit like cyber risk. You 

know, should you ever be confident that you are doing enough in 

that space? So I think we—you know, I think we are open—we are 

clear-eyed about the nature of coastal risks and natural disaster 

risks and that kind of thing. But it is a fair question, and, you 

know, we will go back and look at it again. 

Senator SCHATZ. Could you please respond in writing as it relates to this specific question? 

Mr. POWELL. Sure. 

Senator SCHATZ. The Bank of England and 29 central banks and 

bank supervisors from around the world are moving toward incorporating climate risk into their supervision of financial institutions. 

You know that another part of the Federal Reserve’s mandate is 

to engage with its counterparts abroad to address systemic risk. Do 

you think the Federal Reserve should be engaging with its international counterparts on this question? 

Mr. POWELL. We are in those meetings. We are involved in those 

bodies. As I mentioned, we do not formally take climate change 

into account in our risks, but I think the consequences are things 

that we do supervise for. 

Senator SCHATZ. I just think that you have been extraordinary 

in terms of your ability to withstand political pressure and look at 

the data and do what is right for the health of the economy. I do 

not want this to be an exception. I understand that talking about 

climate change is fraught with partisan peril and will attract the 
40 

ire of a certain category of people and institutions. But your job is 

to measure risk, and I would submit that you are not measuring 

that risk sufficiently. 

One final question, if you will indulge me, Chairman Crapo, and 

that is, has anybody either directly or indirectly communicated 

with you about rates from the White House? 

Mr. POWELL. That is kind of a broad question. 

Senator SCHATZ. It is a broad question. 

Mr. POWELL. You know, I do not really talk about—it is probably 

not appropriate to discuss our—my private conversations with 

other Government officials, any other Government officials. I would 

say I am completely committed to conducting monetary policy in a 

way that is nonpolitical and in a way that serves all of the American public. You know, and I am very comfortable and confident 

that that is exactly what the Fed is going to do. 

Senator SCHATZ. Thank you. 

Chairman CRAPO. Senator Reed. 

Senator REED. Mr. Chairman, thank you for your distinguished 

service. 

Senator Brown brought up in his comments your February 6 

town hall, where you made it clear that we have to work to make 

prosperity more dispersed throughout society. You also indicated 

that many of the policies are beyond the purview of the Federal Reserve, but most of them are clearly in the purview of Congress. If 

you could, just give us your top three issues that we have to deal 

with or can deal with to make equality much more realized in this 

country. 

Mr. POWELL. Senator, I will go back again to labor force participation, which is just—it is a big win for the overall economy, and 

it is also—the people who are not taking part in the labor force are 

by and large the less well educated and less skilled or people who 

may be in areas where opioids are prevalent and that kind of thing. 

So I think a bipartisan focus, a focus on labor force participation 

would bring in a lot of policies that would help deal with, you 

know, what I see as the problems, which are, you know, sort of relatively stagnant growth in incomes, in median incomes, and also 

relatively low mobility. Education, of course, would be at the top 

of every list, I think, in addressing these issues as well. 

Senator REED. And this could require resources that we would 

have to commit, and I think you are aware we are on the cusp of 

another debate about sequestration and the share of resources to 

defense and nondefense. And, in fact, we are looking at very draconian numbers in terms of the situation with the BCA. But you 

would argue that we do have an obligation to make a significant 

investment in domestic programs in order to provide for this equality? 

Mr. POWELL. I think that it would be great for our country and 

for our economy if we could address these issues. Easy for me to 

say. I do not have to find the resources. 

Senator REED. Thank you. 

Let me just turn to another topic which I am very much involved 

with: the Military Lending Act. As you know, it puts a 36 percent 

cap on interest rates that are charged to men and women in the 
41 

uniform of the United States. The Federal Reserve is one of the 

independent regulators charged with its enforcement. 

Unfortunately, what we have seen from the CFPB particularly is 

a retreat. They are no longer supervising this; they are no longer 

using this in their supervisory activities. They will enforce a complaint, but the complaints are seldom made. Most young soldiers do 

not even realize, or sailors or marines, that they have this ability 

to complain. We are looking at DOD and OMB exempting an insurance product for auto dealers which might result in interest payments far in excess of 36 percent. 

Can you commit your continued, strong, and persistent enforcement to the letter of the Military Lending Act? 

Mr. POWELL. Yes, it will be a priority for us. I commit to that. 

Senator REED. Thank you very much. 

There is another issue, too, that I think you have touched upon, 

and that is cybersecurity. It seems to be the ubiquitous complaint 

of everyone, not just in the financial sector but every sector. And 

it seems to me, too, that typically those who are going to exploit 

cyber look for the back door, not the front door. They look for the 

small institution, not the big Wall Street bank that is spending 

$200 million a year on cyberprotections. 

How are you dealing with that? How are you and your colleagues 

dealing with that, going out and making sure that community 

banks and other smaller institutions that might be more vulnerable 

are taking the appropriate steps? Is that part of your expected procedures? Are you looking closely at cybersecurity? 

Mr. POWELL. Yes, we are, and it is hard because, of course, the 

big banks are attacked, too, but they have the resources to deal 

with it. And so we deal through FFIEC, you know, which is a body 

of the regulators to promulgate guidance. We supervise for that 

guidance, and with the smaller banks, it is very important, and, 

you know, that is a way—we see that as a real vulnerability, for 

example, for the payment system. But we have also got to be mindful of the burden on smaller banks. But it is something we are very 

focused on. 

Senator REED. Are you focused to the extent of conducting, you 

know, red-on-blue exercises, i.e., you know, seeing what is working 

out there, seeing where all the connectivity exists or does not exist? 

Are you doing that or getting any access to organizations that are 

doing that? 

Mr. POWELL. We do tabletop exercises, let us say, and these are 

led by the Treasury Department. This has been a major focus for 

Treasury, and appropriately so, and we take part in them. There 

is always the feeling with cyber that you are just not doing enough. 

Senator REED. Right. Well, in fact, that feeling is justified. 

Mr. POWELL. It probably is. 

Senator REED. Unfortunately. 

Mr. POWELL. Yeah. 

Senator REED. Thank you again for your service, Mr. Chairman. 

I appreciate it very much. 

Mr. POWELL. Thank you, Senator. 

Chairman CRAPO. Thank you, and I am not quite done yet, Mr. 

Chairman. I have a couple more questions. 
42 

I would like to go back to the issue of wages. This has been discussed by a number of the Senators with you. In your testimony 

and in some of your answers, you indicated that wage growth is at 

about 3 percent, and there was some comment by one of the Senators, at least, that the nominal wage growth—or that the current 

rate of wage growth may or may not be keeping up with inflation, 

if I understand the question you were asked correctly. But if I understand your answers, isn’t wage growth today growing at a faster 

rate than inflation? 

Mr. POWELL. Yes. Real wages are going up at—you have to look 

at the average over a year or so, and you have got to look at a 

broad range of indicators. There is no question that wages are 

going up in real terms by roughly the amount of the productivity 

increase, which is appropriate. 

Chairman CRAPO. And in your use of the term ‘‘wages,’’ do you 

include benefits? Or is there a separate calculation on how benefits—— 

Mr. POWELL. There are four different—there are countless measures of wages, of compensation, let us say. One of them that includes wages and benefits is the Employee Compensation Index, 

and that might be our single favorite one. It is one of four major 

ones that we look at. So that one does include benefits, and it, too, 

is showing growth in excess of right around 3 percent, maybe in 

the low 3’s now. 

Chairman CRAPO. All right. Thank you. 

We have also—in fact, I had discussed with you earlier some aspects of the labor force participation rate. Now, I understand that 

just the retirement—or the Baby Boomers retiring is one of the biggest downward pressures in our labor force participation rate, and 

I started to have a discussion with you in my earlier questions 

about now that we have seen that labor force participation rate 

start to increase, whether that would be stable or not. Could you 

just discuss a little more with me your evaluation of what it looks 

like for us in terms of labor force participation in general? And I 

may follow up on that a little bit. 

Mr. POWELL. Yes. So I would say it is very gratifying to see U.S. 

labor force participation actually move up by 0.5 over the course of 

the last year as the labor market has gotten just stronger and 

stronger and stronger. So that has been a great thing to see. 

Given the level of job creation that we have had, if labor force 

participation had not gone up, then the unemployment rate would 

now be much lower than it is. So the unemployment rate has actually gone up to 4 percent from 3.7 percent, but this is only a good 

thing because it means people are coming back into the labor force. 

The real thing, though, is even with these increases, we still lag 

other countries. We still lag other countries who have higher labor 

force participation. You pointed out, correctly, that the aging of the 

population is decreasing labor force participation at a trend rate, 

and that trend rate is about 0.2 or maybe 0.25 percent every year. 

So for us just to hold participation flat is actually a gain against 

a longer-run trend. And really for the last—really since 2013, since 

the latter part of 2013, labor force participation has been flat to 

slightly up, which, again, is really good to see. But, honestly, that 

is just a consequence of having a really good labor market. 
43 

I think if you are going to have that be sustained through good 

times and bad and put us on a more competitive footing with other 

countries, it is going to need more than a good labor market. It is 

going to need policies that reach out and, you know, give people the 

skills and aptitudes to be able to be sustainably in the labor market. 

Chairman CRAPO. All right. Thank you. I cannot remember 

where I read this, but someone commented recently that today, the 

way our labor market is working, if a person wants to work, there 

is a job for them. Do you tend to agree with that observation? 

Mr. POWELL. Generally speaking, although, you know, if you are 

in some regions, for example, there are regions of the country 

which are very poor and do not have job creation. I will tell you 

where that comes from. The level of job openings is now at or above 

the level of unemployed people. So you can say in a sense if you 

are looking for a job, there is at least numerically one job. But 

there are lots of people who—you know, probably millions of people 

who are out of the labor force and in a perfect world, in a better 

world, would be in the labor force. They are in their prime working 

years, and they are not in the labor force because of some kind of 

a problem or issue, and I think those are the people we want to 

get back. 

Chairman CRAPO. All right. Thank you. 

Just to switch topics for a minute, we have seen, I think you indicated, a little bit under 3 percent growth in our GDP in the last 

year. I guess on Thursday we are going to get some economic analysis that will give us some statistics on that. 

One of my colleagues indicated today that, with regard to the tax 

bill that was passed, there was a lot said—I am not going to ask 

you to comment on this. I am just putting some facts out there. 

There was a lot said about how the tax bill would generate a $1.4 

trillion deficit. That projection assumed somewhere in the neighborhood of 1.9 or 2 percent growth in the economy. And it was indicated at the time from all of the analysis we got that, if we just 

had four-tenths of a percentage rate of growth above that, there 

would not be any deficit involved with the tax legislation. And, of 

course, we have seen far more than four-tenths of growth so far in 

terms of the performance of the economy. 

So that leads to my question, and I know that you do not have 

a crystal ball, but you do analyze what it looks like for the economy. And my question relates to given what we have seen, we have 

seen a growth of about almost a percentage point in the GDP over 

the last 12 months, or previous growth rates, if I understand it 

right. Do you have a projection or do you have anything that you 

can share with us about what you see moving forward as to whether the economy will continue to perform? I know you said that it 

may slow down a little bit this year. But do you have a projection 

as to what it would likely look like over the next few years in terms 

of GDP growth? 

Mr. POWELL. I think a good place to start with that question is 

what makes up growth, and it really boils down to more hours 

worked and then more output per hour. That is really all there is. 

And more hours worked is really a function of population growth. 

Population growth has slowed—or let us say it this way: The trend 
44 

growth in the labor force, given aging and given immigration and 

everything we have, is only about five-tenths right now. And, actually, if immigration is going to be even lower, then it is going to 

be below five-tenths. Immigration has made up, you know, half of 

that five-tenths. So that is one piece of it. It is 0.5 percent trend 

labor force growth. The rest is just productivity. No one can forecast productivity growth with any confidence. All we can really do 

is create policies that will, you know, encourage investment, encourage innovation, and all those sorts of things, and let productivity happen as it will. It is something that just happens. 

But if you look at longer-term averages, it has been very difficult 

to predict. But you would have to have sustained high productivity—if you are going to have five-tenths labor force growth, you 

would have to have, you know, very high sustained productivity, 

higher than we have seen, frankly, to get really high levels of 

growth. That is why I think it is so important to focus on both of 

those two things—labor force participation and also productivity. 

That is the closest to anything we can focus on to raise our potential growth rate. 

Chairman CRAPO. Well, thank you. And in terms of increasing 

labor force participation, I know there are a lot of factors. One that 

has been brought up here today already is to perhaps change our 

policy at the policy level so that a person who takes a job, who is 

not currently employed, a person who is willing to go take one of 

those jobs and become productive in the labor force does not actually economically suffer from that decision based on the safety net 

program support that the Government is already providing. 

I am not going to ask you to comment on policy, but is it correct 

that if we were to eliminate or reduce the incentive to stay unemployed because of the disadvantage economically of relying on 

wages rather than benefits, we would increase labor force participation? 

Mr. POWELL. I think incentives do matter, and I think—I mean, 

I would think if you go back to work, your pay should only go up, 

in my perfect-world thinking. Again, easy for me to say, but that 

is how I would say it. 

Chairman CRAPO. All right. Thank you. 

Switching gears one more time, and then I will wrap it up. Housing finance reform. As I am sure you have seen, there is a very significantly increased emphasis on housing finance reform, both on 

this Committee and I think in Congress in general, as well as at 

the level of the Administration. In 2017, you gave a speech in 

which you outlined a few principles that you saw for how we 

should approach housing finance reform, and I am just going to 

quote what you said: ‘‘Do whatever we can to make the possibility 

of future housing bailouts as remote as possible; to change the system to attract large amounts of private capital, and that any guarantee should be explicit and transparent and should apply to securities, not to institutions; and to identify and build upon areas of 

bipartisan agreement.’’ 

Do you still agree with those principles and how to approach it? 

Mr. POWELL. I sure do. 

Chairman CRAPO. Good. I agree with them, too. Strongly. And we 

are going to be very aggressively trying to put together a bipartisan 
45 

solution to this here on this Committee and in Congress in general. 

And I just would like to ask you, first of all, if you will commit to 

work with this Committee in our efforts to build the right solution 

to this issue; and then, second, any other comments you might 

want to make about how our Nation should approach housing finance reform. And I would ask you also to discuss how getting this 

fixed could impact our economy and could impact growth. 

Mr. POWELL. So I do think—and I said this in those remarks. I 

think that this is one of the big unfinished pieces of business in 

kind of the postcrisis reform period. Fannie and Freddie had to be 

taken over by the Government fairly early on in the financial crisis. 

It was a big part of the financial crisis. And I think we have—I 

think the proposals that you have had in the past and I am sure 

the one you will have this year, I think they all have the right elements there. It is just a question of getting something done. And 

I think it would be really good for the economy to get this off the 

Fed’s—sorry, off the Federal Government’s balance sheet and get 

a lot of private capital between the taxpayer and the housing risk, 

if you will. 

So I think it would be a very positive thing for the economy, and, 

of course, we will be delighted to work with you. I think we have 

some very strong, experienced staffers in the housing area, and we 

would be happy to provide whatever expert help we can. 

Chairman CRAPO. All right. Thank you. And I know I said that 

was the last one, but this is really the last one. Again, shifting subjects, you have testified today that there are some pretty positive 

things going on in our economy right now and that we are in a relatively good position on a lot of factors. 

In terms of risks to our economy, could you just tell me what you 

think are some of the bigger risks we should keep in mind? 

Mr. POWELL. I do think that the baseline outlook is a good one, 

favorable one. There are always risks, though, and as I mentioned, 

I do see the foreign risks as particularly relevant right now. So 

global growth has slowed. It has slowed in China. It has slowed 

particularly in the advanced economies and particularly in Europe. 

When growth is booming around the world, we feel that as a tailwind. When growth is slowing, we feel it as a headwind. And I 

think we are feeling some of that now, and we may feel more of 

it. So that is a risk. 

Brexit is an event risk, which should not in the end have much 

of an effect on our economy, but it is something we are monitoring 

very carefully. 

You know, domestically, I think we are in good shape. Unemployment is low. Confidence is still at positive levels. So I feel like, you 

know, we have the makings of a good outlook, and as I said, our 

Committee is really monitoring the crosscurrents, we call them, 

which are really the risks. And for now we are going to be patient 

with our policy and allow things to take time to clarify. 

Chairman CRAPO. All right. Well, thank you. And I know I speak 

on behalf of the Committee. We appreciate the dedication of you 

and the other Governors at the Federal Reserve. We all want to 

have this economy stay strong and grow stronger, and we look forward to making sure that we can achieve the right policies and 

help together to make that happen. 
46 

My last closing comment would be I echo the concerns—or not 

the concerns, really, but the issues raised by some of my colleagues 

about the implementation of S. 2155. I know you are working 

very—you just said it was the highest priority maybe at the Fed 

right now on the oversight level. But I would just encourage you 

to move ahead expeditiously on those issues. A number have been 

raised already. I will reiterate our concern that we move as quickly 

as we can on the implementation of the requirements and the principles of S. 2155 with regard to those financial facilities, banks 

under $100 billion, and getting the stress testing levels for them 

at the right point. 

If you want to comment on that, you are welcome to. If not, I will 

wrap up the hearing. 

Mr. POWELL. I might add one thing to my last comment, if I 

could. 

Chairman CRAPO. Sure. 

Mr. POWELL. I would want to leave you with the thought that 

when I say we are going to be patient, what that really means is 

that we are in no rush to make a judgment about changes in policy. 

We are going to be patient. We are going to allow the situation to 

evolve, and also the balance of risks and allow the data to come 

in. And I think we are in a very good place to do that. 

Chairman CRAPO. All right. Thank you. I appreciate that perspective, and once again, thank you for being here with us today. 

That does conclude the questioning for today’s hearing, and for 

Senators who wish to submit questions for the record, those questions are due on March 5th, Tuesday. 

Chairman Powell, we ask that you respond to those questions as 

promptly as you can. Once again, thank you for being here, and 

this hearing is adjourned. 

Mr. POWELL. Thank you, Senator. 

[Whereupon, at 12:15 p.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 
47 

PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO 

We welcome Chairman Powell to the Committee for the Federal Reserve’s Semiannual Monetary Policy Report to Congress. 

This hearing provides the Committee an opportunity to examine the current state 

of the U.S. economy, the Fed’s implementation of monetary policy, and its supervisory and regulatory activities. 

In the wake of the 2008 financial crisis, the Fed entered a period of unconventional monetary policy to support the U.S. economy, including drastically cutting interest rates and expanding its balance sheet. 

I have long been concerned about the Fed’s quantitative easing programs and the 

size of its balance sheet. 

As economic conditions improved, the Fed began trying to normalize monetary 

policy, including by gradually reducing the size of its balance sheet. 

The Fed’s balance sheet grew to $4.5 trillion from around $800 billion between 

2007 and 2015, and now stands at around $4 trillion. 

During the press conference following the FOMC’s most recent meeting, Chairman 

Powell provided additional clarity on the Fed’s plans to normalize monetary policy, 

saying ‘‘ . . . the ultimate size of our balance sheet will be driven principally by 

financial institutions’ demand for reserves, plus a buffer so that fluctuations in reserve demand do not require us to make frequent sizeable market interventions.’’ 

Estimates of the level of reserve demand are quite uncertain, but we know 

that this demand in the postcrisis environment is far larger than before. 

High reserve holdings are an important part of the stronger liquidity position that financial institutions must now hold . . . 

. . . The implication is that the normalization of the size of the portfolio 

will be completed sooner, and with a larger balance sheet, than in previous 

estimates. 

Banks’ reserve balances grew from $43 billion in January 2008 to a peak of $2.8 

trillion in 2014 before falling to $1.6 trillion as of January 2019. 

During this hearing, I look forward to understanding more about: what factors the 

Fed may consider in determining what is the appropriate size of the balance sheet; 

what factors have affected banks’ demand for reserves, including the Fed’s postcrisis 

regulatory framework; and what amount of reserves are estimated to be necessary 

for the Fed to achieve its monetary policy objective. 

The state of the U.S. economy is a key consideration in the Fed’s monetary policy 

decisions. 

The U.S. economy remains strong with robust growth and low unemployment. 

Despite everyone telling us prior to tax reform that annual growth would be stuck 

below 2 percent as far as the eye could see, the economy expanded at an annualized 

rate of 3.4 percent in the third quarter of last year, following growth of 4.2 percent 

and 2.2 percent in the second and first quarters of 2018, respectively, according to 

the Bureau of Economic Analysis. 

This strong growth, which is on track to continue to exceed previous expectations, 

will now provide our policymakers with much greater flexibility to address other fiscal challenges than if we were continuing to struggle with insufficient growth. 

And, according to the Bureau of Labor Statistics, the unemployment rate has remained low and steady around 4 percent while the U.S. economy added 223,000 jobs 

per month on average in 2018, as well as 304,000 jobs in the first month of this 

year. 

People continue to enter the labor force with the labor participation rate increasing to 63.2 percent from 62.7 percent over the last year. 

Reinforcing this strong employment environment, Fed Vice Chairman Rich 

Clarida said in a recent speech that ‘‘the labor market remains healthy, with an unemployment rate near the lowest level recorded in 50 years and with average 

monthly job gains continuing to outpace the increases needed over the longer run 

to provide employment for new entrants to the labor force.’’ 

Major legislation passed through this Committee and enacted last Congress supported economic growth and job creation. 

The Economic Growth, Regulatory Relief and Consumer Protection Act passed 

Congress with significant bipartisan support and was enacted to right-size regulation and redirect important resources to local communities for homebuyers, individuals, and smaller businesses. 

I appreciate the work the Fed has done so far to introduce proposals and finalize 

rules required by the law. 
48 

Overseeing the full implementation of that law and the Federal banking agencies’ 

rules to right-size regulations will continue to be a top priority of the Committee 

this Congress. 

In particular, the Fed and other banking regulators should consider whether the 

Community Bank Leverage Ratio should be set at 8 percent as opposed to the proposed 9 percent; significantly tailor regulations for banks with between $100 billion 

and $250 billion in total assets with a particular emphasis on tailoring the stress 

testing regime; provide meaningful relief from the Volcker Rule for all institutions, 

including by revising the definition of ‘‘covered funds’’ and eliminating the proposed 

accounting test; and examine whether the regulations that apply to the U.S. operations of foreign banks are tailored to the risk profile of the relevant institutions 

and consider the existence of home country regulations that apply on a global basis. 

The Committee will also look for additional opportunities to support policies that 

foster economic growth, capital formation, and job creation. 

Turning for a moment to another issue, Senator Brown and I issued a press release on February 13 inviting stakeholders to submit feedback on the collection, use, 

and protection of sensitive information by financial regulators and private companies, including third parties that share information with regulators and other private companies. 

Americans are rightly concerned about how their data is collected and used, and 

how it is secured and protected. 

Given the exponential growth and use of data, and corresponding data breaches, 

it is also worth examining how the Fair Credit Reporting Act should work in a digital economy, and whether certain data brokers and other firms serve a function 

similar to the original consumer reporting agencies. 

The Banking Committee plans to make this a major focus this Congress, and we 

encourage stakeholders to submit feedback by our March 15 deadline. 

Lastly, I want to take a moment to recognize one of our staff members who is 

retiring this week. 

Dawn Ratliff is the Committee’s Chief Clerk, and she will be retiring at the end 

of the week. 

She has dedicated 27 years in these hallways, and has been with the Senate 

Banking Committee since 2007, starting with then-Chairman Chris Dodd, and then 

working for Chairman Tim Johnson, Chairman Shelby, and now myself. 

Dawn is a Banking Committee institution—she is incredibly knowledgeable, helpful, and professional, respected and well-liked by everyone with whom she works. 

Dawn, your work on the Committee has truly made a lasting impact, and even 

though you will be gone, you will not be forgotten anytime soon. 

We wish you the best of luck in your well-earned retirement. Enjoy it. 

PREPARED STATEMENT OF SENATOR SHERROD BROWN 

Thank you, Chairman Crapo. 

I also want to thank our Chief Clerk Dawn Ratliff for her service to this Committee and the public. She has been instrumental in making the Committee run 

smoothly for over a decade. Dawn, we will miss you, and congratulations on your 

retirement. 

Chairman Powell, welcome back to the Committee. 

It has been a great week for Wall Street. 

The FDIC announced that banks made a record-breaking $237.7 billion in profits 

in 2018, almost a quarter trillion dollars. 

Corporations—led by the Nation’s largest banks—bought back a record $1 trillion 

in stocks last year, conveniently boosting their CEOs compensation. The President’s 

tax bill put $30 billion in the banks’ pockets, and continues to fuel even more 

buybacks and CEO bonuses. 

But that’s never enough for Wall Street—it continues to demand weaker rules, so 

big banks can take bigger and more dangerous risks. And from the proposals the 

Fed has put out after the passage of S. 2155, it looks like you are going along. 

The economy looks great from a corporate headquarters on Wall Street, but it 

doesn’t look so good from a house on Main Street. 

Corporate profits are up. Executive compensation has soared. And that’s all because of the productivity of American workers. But workers’ wages have barely 

budged. Hard work isn’t paying off for the people fueling all this growth. 

Seven of the 10 fastest growing occupations don’t pay enough to afford rent on 

a modest one-bedroom apartment, let alone save for a downpayment. 
49 

Household debt continues to rise, taking its toll on families. At the end of 2018, 

seven million Americans with auto loans were 90 or more days past due on their 

payments—a record, even though unemployment is at decade lows. 

Borrowers of color have not recovered financially from the crisis. And too many 

Americans of all ages are saddled with a mountain of student loan debt. 

The President’s Government shutdown also revealed another frightening reality— 

too many Americans, still live paycheck to paycheck, even those with stable jobs. 

After 35 days of uncertainty and hardship, those workers went back to their jobs 

and eventually received their pay. But more than a million Government contractors 

weren’t so lucky. We’re talking in many cases about custodians and security guards 

and cafeteria workers making $12 or $15 an hour. We have heard a lot of talk about 

whether GDP will recover from the shutdown, and not enough about how workers 

will recover. 

We have questioned for quite a while whether the economic recovery—now in its 

10th year—has been felt by all Americans. Stagnating wages and increasing income 

inequality between Wall Street CEOs and working Americans point to an obvious 

answer. 

Chair Powell, your comments at the February 6th Fed town hall for educators 

confirmed this. A teacher asked about your major concerns for the U.S. economy, 

and you answered: 

We have some work to do more to make sure that prosperity that we do 

achieve is widely spread. ( . . . ) median and lower levels of income have 

grown, but much more slowly. And growth at the top has been very strong. 

‘‘Growth at the top has been very strong.’’ In other words, the CEOs, the folks 

on Wall Street, they’re all doing just fine. 

Chair Powell, the Fed has spent a decade bending over backwards to help banks 

and big corporations that have hoarded profits for themselves rather than investing 

in the millions of workers who actually make our companies successful. 

We are late in this economic cycle, and it is clear that record Wall Street profits 

won’t be trickling down to workers before the next downturn. 

Before the last crisis, we heard over and over again from Government officials and 

banks that the economy was doing fine. Regulators and Congress continued to weaken rules for Wall Street, and ignored the warning signs as families struggled to 

make ends meet. 

As the severity of the financial crisis became clear, the Fed rushed to the aid of 

the biggest banks, but it did not devote even a fraction of that firepower to helping 

the rest of America. Ignoring working families was a policy failure then, and it is 

a policy failure now. 

Chair Powell, I hope we don’t make the same mistake again. I look forward to 

your testimony and new ideas for making hard work pay off for everyone in our 

economy. 

PREPARED STATEMENT OF JEROME H. POWELL 

CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

FEBRUARY 26, 2019 

Good morning. Chairman Crapo, Ranking Member Brown, and other Members of 

the Committee, I am happy to present the Federal Reserve’s Semiannual Monetary 

Policy Report to the Congress. 

Let me start by saying that my colleagues and I strongly support the goals Congress has set for monetary policy—maximum employment and price stability. We 

are committed to providing transparency about the Federal Reserve’s policies and 

programs. Congress has entrusted us with an important degree of independence so 

that we can pursue our mandate without concern for short-term political considerations. We appreciate that our independence brings with it the need to provide 

transparency so that Americans and their representatives in Congress understand 

our policy actions and can hold us accountable. We are always grateful for opportunities, such as today’s hearing, to demonstrate the Fed’s deep commitment to transparency and accountability. 

Today I will review the current economic situation and outlook before turning to 

monetary policy. I will also describe several recent improvements to our communications practices to enhance our transparency. 
50 

Current Economic Situation and Outlook 

The economy grew at a strong pace, on balance, last year, and employment and 

inflation remain close to the Federal Reserve’s statutory goals of maximum employment and stable prices—our dual mandate. 

Based on the available data, we estimate that gross domestic product (GDP) rose 

a little less than 3 percent last year following a 2.5 percent increase in 2017. Last 

year’s growth was led by strong gains in consumer spending and increases in business investment. Growth was supported by increases in employment and wages, optimism among households and businesses, and fiscal policy actions. In the last couple of months, some data have softened but still point to spending gains this quarter. While the partial Government shutdown created significant hardship for Government workers and many others, the negative effects on the economy are expected 

to be fairly modest and to largely unwind over the next several months. 

The job market remains strong. Monthly job gains averaged 223,000 in 2018, and 

payrolls increased an additional 304,000 in January. The unemployment rate stood 

at 4 percent in January, a very low level by historical standards, and job openings 

remain abundant. Moreover, the ample availability of job opportunities appears to 

have encouraged some people to join the workforce and some who otherwise might 

have left to remain in it. As a result, the labor force participation rate for people 

in their prime working years—the share of people ages 25 to 54 who are either 

working or looking for work—has continued to increase over the past year. In another welcome development, we are seeing signs of stronger wage growth. 

The job market gains in recent years have benefited a wide range of families and 

individuals. Indeed, recent wage gains have been strongest for lower-skilled workers. That said, disparities persist across various groups of workers and different 

parts of the country. For example, unemployment rates for African Americans and 

Hispanics are still well above the jobless rates for whites and Asians. Likewise, the 

percentage of the population with a job is noticeably lower in rural communities 

than in urban areas, and that gap has widened over the past decade. The February 

Monetary Policy Report provides additional information on employment disparities 

between rural and urban areas. 

Overall consumer price inflation, as measured by the 12-month change in the 

price index for personal consumption expenditures (PCE), is estimated to have been 

1.7 percent in December, held down by recent declines in energy prices. Core PCE 

inflation, which excludes food and energy prices and tends to be a better indicator 

of future inflation, is estimated at 1.9 percent. At our January meeting, my colleagues and I generally expected economic activity to expand at a solid pace, albeit 

somewhat slower than in 2018, and the job market to remain strong. Recent declines in energy prices will likely push headline inflation further below the Federal 

Open Market Committee’s (FOMC) longer-run goal of 2 percent for a time, but aside 

from those transitory effects, we expect that inflation will run close to 2 percent. 

While we view current economic conditions as healthy and the economic outlook 

as favorable, over the past few months we have seen some crosscurrents and conflicting signals. Financial markets became more volatile toward year end, and financial conditions are now less supportive of growth than they were earlier last year. 

Growth has slowed in some major foreign economies, particularly China and Europe. And uncertainty is elevated around several unresolved Government policy 

issues, including Brexit and ongoing trade negotiations. We will carefully monitor 

these issues as they evolve. 

In addition, our Nation faces important longer-run challenges. For example, productivity growth, which is what drives rising real wages and living standards over 

the longer term, has been too low. Likewise, in contrast to 25 years ago, labor force 

participation among prime-age men and women is now lower in the United States 

than in most other advanced economies. Other longer-run trends, such as relatively 

stagnant incomes for many families and a lack of upward economic mobility among 

people with lower incomes, also remain important challenges. And it is widely 

agreed that Federal Government debt is on an unsustainable path. As a Nation, addressing these pressing issues could contribute greatly to the longer-run health and 

vitality of the U.S. economy. 

Monetary Policy 

Over the second half of 2018, as the labor market kept strengthening and economic activity continued to expand strongly, the FOMC gradually moved interest 

rates toward levels that are more normal for a healthy economy. Specifically, at our 

September and December meetings we decided to raise the target range for the Federal funds rate by 1⁄4 percentage point at each, putting the current range at 21⁄4 to 

21⁄2 percent. 
51 

At our December meeting, we stressed that the extent and timing of any further 

rate increases would depend on incoming data and the evolving outlook. We also 

noted that we would be paying close attention to global economic and financial developments and assessing their implications for the outlook. In January, with inflation pressures muted, the FOMC determined that the cumulative effects of these developments, along with ongoing Government policy uncertainty, warranted taking a 

patient approach with regard to future policy changes. Going forward, our policy decisions will continue to be data dependent and will take into account new information as economic conditions and the outlook evolve. 

For guideposts on appropriate policy, the FOMC routinely looks at monetary policy rules that recommend a level for the Federal funds rate based on measures of 

inflation and the cyclical position of the U.S. economy. The February Monetary Policy Report gives an update on monetary policy rules. I continue to find these rules 

to be helpful benchmarks, but, of course, no simple rule can adequately capture the 

full range of factors the Committee must assess in conducting policy. We do, however, conduct monetary policy in a systematic manner to promote our long-run goals 

of maximum employment and stable prices. As part of this approach, we strive to 

communicate clearly about our monetary policy decisions. 

We have also continued to gradually shrink the size of our balance sheet by reducing our holdings of Treasury and agency securities. The Federal Reserve’s total assets declined about $310 billion since the middle of last year and currently stand 

at close to $4.0 trillion. Relative to their peak level in 2014, banks’ reserve balances 

with the Federal Reserve have declined by around $1.2 trillion, a drop of more than 

40 percent. 

In light of the substantial progress we have made in reducing reserves, and after 

extensive deliberations, the Committee decided at our January meeting to continue 

over the longer run to implement policy with our current operating procedure. That 

is, we will continue to use our administered rates to control the policy rate, with 

an ample supply of reserves so that active management of reserves is not required. 

Having made this decision, the Committee can now evaluate the appropriate timing 

and approach for the end of balance sheet runoff. I would note that we are prepared 

to adjust any of the details for completing balance sheet normalization in light of 

economic and financial developments. In the longer run, the size of the balance 

sheet will be determined by the demand for Federal Reserve liabilities such as currency and bank reserves. The February Monetary Policy Report describes these liabilities and reviews the factors that influence their size over the longer run. 

I will conclude by mentioning some further progress we have made in improving 

transparency. Late last year we launched two new publications: The first, Financial 

Stability Report, shares our assessment of the resilience of the U.S. financial system, and the second, Supervision and Regulation Report, provides information about 

our activities as a bank supervisor and regulator. Last month we began conducting 

press conferences after every FOMC meeting instead of every other one. The change 

will allow me to more fully and more frequently explain the Committee’s thinking. 

Last November we announced a plan to conduct a comprehensive review of the 

strategies, tools, and communications practices we use to pursue our congressionally 

assigned goals for monetary policy. This review will include outreach to a broad 

range of stakeholders across the country. The February Monetary Policy Report provides further discussion of these initiatives. 

Thank you. I am happy to respond to questions. 
52 

1 Regulatory Capital Rules; The Federal Reserve Board’s Framework for Implementing the 

U.S. Basel III Countercyclical Capital Buffer, 12 CFR Part 217, Appendix A. 2Minutes of the Federal Open Market Committee, November 7–8, 2018, p.8. For additional 

detail on the Federal Reserve’s framework for assessing vulnerabilities in the U.S. financial system, see Board (2018), Financial Stability Report, November 28, https:// 

www.federalreserve.gov/publications/files/financial-stability-repmt-201811.pdf. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM JEROME H. POWELL 

Q.1. Last month I sent the Board of Governors a letter asking it 

to reevaluate the countercyclical capital buffer, currently set at 

zero. Banks are doing well, but there are certainly growing risks 

in the economy. Now is the time to ensure that the banks have 

enough capital for those eventual bad times, and many of your colleagues on the Board and at the Reserve Banks agree. I have not 

received a response. 

When will the Fed raise the buffer? 

A.1. As stated in the Federal Reserve Board’s (Board) policy statement, we will raise the countercyclical capital buffer when systemic 

vulnerabilities are meaningfully above normal. 1 At this time, the 

Board assesses the resilience of the financial system overall to be 

strong. Our forward-looking stress tests indicate that the institutions at the core of the financial system—the Nation’s largest 

banks—will be able to continue to support lending and economic 

activity during severe macroeconomic and stressed market scenarios. The Board recently voted to maintain the level of the countercyclical capital buffer at zero. 2

Q.2. Earlier this month the Board suspended stress testing for 

bank holding companies between $100 billion and $250 billion in 

total assets. Meanwhile you have not finalized rules for how this 

same group of banks will be regulated after passage of S. 2155. 

Will you commit to me that these institutions will be required to 

participate in the 2020 stress testing cycle? 

A.2. As noted in the October 31, 2018, Notice of Proposed Rulemaking, domestic bank holding companies subject to Category IV 

standards (those with total assets between $100–$250 billion and 

less than $75 billion in cross-jurisdictional activity, nonbank assets, 

weighted short-term wholesale funding, and off-balance sheet exposure) would be subject to supervisory stress testing on a 2-year 

cycle. The exemption from the 2019 stress test cycle for domestic 

bank holding companies with assets of between $100 and $250 billion with a limited risk profile was intended to provide these banks 

with immediate burden relief, consistent with the requirement in 

S. 2155 that they be subject to periodic rather than annual stress 

tests. Under the Board’s current rules, these banks will be subject 

to stress tests in 2020. 

Q.3. Related, in the form letters to each of the firms exempted from 

the stress tests, the Board indicated that in assessing the company’s risk profile, the Board takes into consideration the company’s size, scope of operations, activities, and systemic importance. Yet, these factors vary greatly between all of the exempted 

firms—for example: nonbank assets range from $0.2 billion to $65.6 

billion; off balance sheet exposures range from $4.7 billion to $45.8 

billion, and cross-jurisdictional activity range from $0.1 billion to 
53 

$48.1 billion. It looks like the Board categorically exempted companies within a certain asset threshold without considering each 

firm’s particular risk profile. 

How does the Board explain why all of these firms, which range 

in complexity, have received the same treatment when it comes to 

2019 stress testing? 

A.3. On February 5, 2019, the Board provided certain domestic 

bank holding companies with assets of between $100 billion and 

$250 billion and certain U.S. intermediate holding company subsidiaries of foreign banking organizations with assets of less than 

$250 billion relief from all regulatory requirements related to annual supervisory and company-run stress testing for the 2019 

stress test cycle and from the requirement to submit a capital plan 

to the Board on April 5, 2019. In providing this relief, the Board 

considered each firm’s asset size, cross-jurisdictional activity, reliance on short-term wholesale funding, nonbank assets, and off-balance sheet exposure. These factors may, individually or in combination, reflect greater complexity and risk to a banking organization 

and can, depending on the firm, result in greater risk to the financial system. The Board also considered reports of examination and 

other supervisory information, including a 2018 review of each 

film’s Comprehensive Capital Analysis and Review (CCAR) capital 

plan and capital planning processes, and the results of the Board’s 

2018 Dodd–Frank Annual Stress Testing (DFAST) supervisory 

stress test, as well as other publicly reported information. Each of 

these firms received notice in 2018 that the Federal Reserve did 

not object to its capital plan or planned capital actions. Our analysis suggested that the 2018 DFAST stress tests remained an adequate assessment of the risks of each of these firms and that no 

firm had risks that would warrant an additional DFAST stress test 

in 2019. 

Q.4. The Fed has recently finalized proposals to make stress testing more transparent, providing more information to the financial 

institutions in advance. 

Why is the Fed making it easier for the largest, most complex 

banks to pass their stress tests, which are one of the most important tools enacted after the crisis to ensure that institutions have 

enough capital to withstand a severe economic shock? 

A.4. The model disclosure enhancements increase the transparency 

of the stress test, but do not make the stress test exercise easier 

for firms. The stress test is one of our most important and effective 

tools. The high level of credibility of the stress test has been built 

over the years, in part, through careful and regular efforts to improve the transparency of the test. 

We believe that our new disclosures would further enhance the 

public’s understanding of the DFAST and CCAR supervisory stress 

test models without undermining the effectiveness of the tool. The 

new model disclosures include more detail about these supervisory 

models and methodologies, which may help the public understand 

and interpret the results of the stress test and thereby improve 

public and market confidence in the financial system. 

These disclosures may facilitate public comments on the models, 

including those from academic experts, which could lead to data 
54 

improvements and a better understanding of the risks of particular 

loan types. They also may help financial institutions better understand the capital implications of changes to their business activities 

by providing general information about how the Federal Reserve’s 

models treat broad classes of assets. 

We carefully designed the new model disclosures to avoid allowing firms to see the full models. In particular, the amount of detail 

we provide in the model disclosures would not facilitate a firm 

making incremental modifications to its business practices that 

have little effect on its risk profile, but could materially change its 

DFAST and CCAR supervisory stress test results. 

The information in the model disclosures also is not detailed 

enough to enable a firm to minimize stress test losses by optimizing credit allocations across geographies or industries, as that 

type of regulatory arbitrage could have unintended consequences 

for credit availability. 

We will continue to seek feedback on our DFAST and CCAR 

stress test from a wide range of stakeholders. The Board recently 

announced that it will host a stress testing conference in July that 

will be open to the public. During the conference, we expect that 

a number of stakeholders, including academics, public interest representatives, and financial sector representatives, will share their 

thoughts on certain aspects of the stress test program, including 

our current level of transparency. 

Q.5. In response to my question related to maximum employment, 

you replied that wages are considered as part of the maximum employment mandate. 

Does the Fed consider the level of wages and benefits and whether those levels allow the employee to fully participate in the economy? 

A.5. The Federal Open Market Committee considers a wide variety 

of economic indicators in assessing the level of maximum employment, including information on wages and benefits. The appropriate level of wages and benefits for any given type of work is best 

left to the interactions between firms demanding and workers supplying that type of work under the regulations and institutions 

that govern behavior in the labor market. Average increases in 

wages and benefits in the economy provide, in conjunction with 

many other macroeconomic indicators, information about the balance between the overall demand and supply of labor and the presence, or absence, of inflationary pressures. The increase in the pace 

of wage gains over the past few years has been a welcome development that has signaled a strengthening in the labor market and 

helped move inflation toward our 2 percent objective. 

Q.6. In your testimony, you describe that real wages are slightly 

rising, but indicate that some of the longer-term challenges to our 

economy are stagnant incomes and lack of upward economic mobility. 

Do you expect wages to continue to rise in ways that are meaningful to address concerns about stagnant incomes and lack of economic mobility? How much will wages need to rise to reverse this 

trend? 
55 

1https://www.frbsf.org/economic-research/files/el2018-26.pdf 

A.6. In the aggregate, the pace of wage gains has been gradually 

improving. With wages now rising at a rate of roughly 3 percent 

per year, and with inflation near 2 percent, we should see real 

wage gains of about 1 percent per year. That is slightly better than 

the pace we saw through most of the current expansion, and cumulated over time, such gains are meaningful. One important reason 

we have not seen larger real wage increases is that productivity 

growth has been relatively weak during this economic recovery. 

I would emphasize that those are aggregate wage figures, which 

apply to Americans as a whole, but do not speak to issues of income distribution or of economic mobility. As you know, I believe 

those issues are of central importance to the well-being of American families; together with productivity, they determine living 

standards for the bulk of our population. I encourage policymakers 

to devote attention to policies to help strengthen productivity 

growth as well as improve mobility and income distribution. Such 

policies are largely beyond the scope of monetary policy, but the 

Federal Reserve is committed to fulfilling the maximum employment element of our congressional mandate. 

Q.7. As inflation hovers near the Fed’s target, a recent San Francisco Fed report noted that one component of that, ‘‘acyclical’’ inflation, had large effects. The report indicated cellular telephone services and financial services charges and fees including ‘‘charges for 

deposit accounts, credit card services, and ATMs . . . ’’ made up 

about half of the increase in that component. 1 Financial services 

fees rose by 10 percent in the year prior to this report, and likely 

disproportionately affected lower income workers and their families. 

Are you concerned that financial services fees make up a significant portion of inflation? If financial services fees are a significant 

contributor to inflation, and the Fed is responsible both for monetary policy and regulation of financial services, how is the Fed coordinating its efforts to ensure that inflation is not disproportionately borne by workers whose incomes have been stagnant for 

years? 

A.7. The measure of financial service charges and fees that was 

noted in the Federal Reserve Bank of San Francisco report encompasses charges and fees associated with deposit accounts and credit 

cards (e.g., overdraft and ATM fees, membership fees), as well as 

some other items such as postal money orders. The price index for 

this expenditure category posted large increases in late 2017 and 

early 2018, contributing noticeably to inflation over the 12-month 

period noted in the report. Notably, that increase followed a period 

of smaller price increases. Considering the 5-year period ending 

December 2018, increases in this category of prices averaged 3.1 

percent per year, which is above overall inflation, but not enormously so. 

We recognize that bank fees can be a burden on low-income 

Americans. In 2017, according to an FDIC survey, about one-quarter of unbanked households indicated that high bank account fees 

were among the reasons they did not have an account. Other more 

commonly cited reasons were not having enough money to keep in 
56 

3See Regulation DD (Truth in Savings Act) at https://www.ecfr.gov/cgi-bin/textidx?c=ecfr&tpl=/ecfrbrowse/Titlel2/12cfr1030lmainl02.tpl. See Regulation Z (Truth in Lending Act) at https://www.ecfr.gov/cgi-bin/text-idx?c=ecfr&tpl=/ecfrbrowse/Titlel2/ 

l2cfr1026lmainl02.tpl. 

an account and a lack of trust in banks. Federal financial regulations require specific disclosure of fees and terms for bank deposits, 

as well as for other financial products like credit cards and prepaid 

cards, but these regulations generally do not limit the size of those 

fees. 3

Q.8. Following up on the numerous questions related to the BB&T 

and SunTrust merger, the Bank Holding Company Act requires 

that the Fed evaluate the competitive effects of mergers, acquisitions, and other transactions when determining whether to approve 

these applications. The factors for consideration include the effect 

of the acquisition or merger to lessen competition in any section of 

the country. 

How has the Fed considered this factor in the past, and what criteria does the Fed use to evaluate the effect of a merger on the 

competition in any section of the country? 

A.8. The Bank Holding Company Act requires the Board to analyze 

any application by a company seeking to control a bank or bank 

holding company, including through merger or acquisition, to determine whether the proposal would substantially lessen competition 

in any section of the country. A similar analysis is required under 

the Home Owners’ Loan Act regarding applications by companies 

to control savings and loan holding companies or thrifts. Courts 

have held that the antitrust standards embodied in the banking 

laws were intended to incorporate the antitrust standards of the 

Clayton Act. 

The Board analyzes the competitive effects of the proposal in the 

context of local geographic banking markets where the applicant 

and the target compete. In order to perform the required competitive analysis, the Board performs an initial screen similar to the 

screen used by the U.S. Department of Justice (DOJ), in which deposits of the institutions are used to calculate market shares and 

market concentration. In applications in which consummation of 

the proposal would result in market shares or concentration levels 

below certain specified thresholds, a Reserve Bank may approve 

the transaction under authority delegated by the Board. However, 

if the structural effects exceed the initial screening thresholds, the 

Board further analyzes the proposal and determines whether the 

transaction can be approved. 

In its analysis of market concentration under the Bank Holding 

Company Act, the Board’s review includes a close examination of 

the behavior of commercial banks, thrift institutions, and credit 

unions in the local banking market to determine the extent to 

which they compete with each other. The review also includes factors that might mitigate the structural effects of a proposed merger 

or acquisition, including the number of institutions remaining in 

the market, the likelihood of entry into the market, the financial 

viability of the target institution, any proposed branch divestiture 

that the applicant offers to reduce the potential anticompetitive ef-
57 

4See https://www.federalreserve.gov/newsevents/pressreleases/bcreg20141009a.htm. 

fect of the merger or acquisition in affected markets, and other factors. 

In order to advance transparency concerning competitive analysis 

of banking mergers and acquisitions, the Board and DOJ, in 2014, 

jointly released a set of Frequently Asked Questions and responses, 4 which are posted on the Board’s public website. 

Q.9. At the hearing you stated that, ‘‘S. 2155 implementation is 

probably our highest priority, and we are pushing ahead.’’ The Fed 

appears to have ceased work completely on several rule proposals 

that would have increased regulation of large Wall Street banks. 

These include proposed rules on bonus payments for top executives 

and on capital for merchant banking and commodities activities. 

Why did the Board shift away from finalizing rules that would 

strengthen regulation, even apparently abandoning proposed rules, 

and instead prioritize activity on rules that would weaken regulation? Is the Fed currently considering any rulemakings that would 

strengthen regulation? 

A.9. The Board, along with the other Federal banking agencies, has 

spent almost a decade building the postcrisis regulatory regime. 

The regulatory policies implemented since the financial crisis have 

improved the safety and soundness of the financial system. The 

U.S. banking system is significantly better capitalized as a result 

of postcrisis regulatory capital requirements and stress testing. At 

this point, the agencies have completed the bulk of the work of 

postcrisis regulation; however, the agencies are still in the process 

of implementing a small number of important measures to 

strengthen the regulatory framework. 

Recently, the Board has examined the regulations put into place 

in light of our supervisory experience. We, at the Federal Reserve, 

intend to maintain the core elements of the postcrisis framework 

to protect the financial system’s strength and resiliency, while also 

seeking ways to enhance effectiveness of our regulations. The Federal Reserve is committed to continuing to evaluate the effects of 

regulation on financial stability and on the broader economy and 

to making appropriate adjustments. The Board also is committed 

to enhancing the transparency and efficiency with which the Federal Reserve supervises and regulates firms under our jurisdiction. 

In order to enhance the strength and resiliency of the U.S. financial system, the Board has requested comment on the following proposed rulemakings: the Reduction of Interconnectedness and Contagion Risks of G–SIBs and the Net Stable Funding Ratio. When 

the comment periods on these proposals close, staff will consider 

the comments received and work towards the final proposed rules, 

as appropriate. 

Other actions the Board has recently taken to strengthen the 

regulatory framework for financial organizations it regulates include finalizing a number of rulemakings such as SingleCounterparty Credit Limits and the Large Financial Institution 

Rating system. 
58 

1See 84 FR 3062 (February 8, 2019). 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS 

FROM JEROME H. POWELL 

Q.1. I’m concerned that the community bank leverage ratio created 

pursuant to S. 2155, as drafted, does little to provide actual relief 

for community banks. 

The Fed, OCC, and FDIC established the leverage ratio at the 

very upper end of the threshold allowed under S. 2155. The 9 percent capital level that the regulators settled on is well above the 

status quo for well-capitalized banks and would do little to help 

any institution with assets under $10 billion. It’s hard for me to 

understand why any bank would jump through the new hoops established by the regulators when the trade-off is a much higher 

threshold for Prompt Corrective Action. 

I’m concerned that the regulators did not do a sufficient job of 

consulting with our State banking supervisors as required under 

2155. You are likely aware that the Conference of State Banking 

Supervisors sent you a letter on February 14th laying out its concerns in great detail. 

How are you working with State regulators on the implementation of the community bank leverage ratio? 

A.1. Section 201 of the Economic Growth, Regulatory Relief, and 

Consumer Protection Act (EGRRCPA) directs the Federal banking 

agencies (agencies) to establish a community bank leverage ratio 

(CBLR) of not less than 8 percent and no more than 10 percent for 

community banking organizations with less than $10 billion in 

total consolidated assets that also meet certain qualifying criteria. 

Under the CBLR proposed rule, 1 a firm with a CBLR above 9 percent would be considered to have met the capital ratio requirements for purposes of the agencies’ capital rule and for purposes 

of being well capitalized under the agencies’ prompt corrective action (PCA) rules of section 38 of the Federal Deposit Insurance Act. 

The proposed 9 percent calibration of the CBLR, in conjunction 

with the qualifying criteria and simplified definitions, seeks to 

strike a balance among the following objectives: maintaining strong 

capital levels in the banking system, ensuring safety and soundness, and providing appropriate regulatory burden relief to as 

many banking organizations as possible. For example, an 8 percent 

CBLR would allow more banking organizations to opt into the 

CBLR framework but could allow a large number of banking organizations to hold less regulatory capital than they do today. 

The proposal is not expected to require a material change to the 

amount of capital held by qualifying firms that opt into the community bank leverage ratio framework because these firms generally 

hold capital well in excess of the minimum requirements. The 

agencies are currently reviewing all public comments on the proposal, including those related to the proposed calibration, and will 

consider them before finalizing the CBLR. 

Before issuing the proposal, the agencies consulted on several occasions with State bank regulators, as well as the Conference of 

State Bank Supervisors, to ensure their views were considered. The 

agencies very much appreciate the perspectives provided by the 
59 

State bank regulators and plan to continue consulting with them 

before finalizing the CBLR. 

Q.2. Why are the agencies applying a new prompt-corrective-action 

framework to banks that fall below the 9 percent community bank 

leverage ratio threshold instead of simply requiring them to report 

risk-based capital? 

A.2. The CBLR proposal seeks to provide material burden relief, in 

the form of significantly simpler capital requirements and shorter 

reporting schedules, while maintaining safety and soundness in the 

banking system. The agencies believe that one way of achieving 

this outcome is by giving a community banking organization the 

flexibility to opt-in to and opt-out of the CBLR when the firm 

deems it appropriate. Consistent with section 201 of EORRCPA, 

the proposal establishes procedures for a CBLR firm that falls 

below 9 percent to be assigned a ‘‘proxy’’ PCA category based on 

the level of its CBLR. If we were to require a firm that has optedin to the CBLR framework but that falls below the 9 percent CBLR 

to immediately revert to the current capital rule’s requirements (including the substantially longer and more complex reporting requirements), we would be reducing the firm’s flexibility by not allowing it to remain in the simpler regime. 

Under the proposal, a firm can opt-out of the CBLR framework 

and revert to the current capital rule at any time and for any reason. The agencies provided this optionality because they believed a 

CBLR firm would appreciate the flexibility to either revert to the 

current capital rule or remain subject to the CBLR as opposed to 

immediately being required to revert to the capital rule and associated regulatory reporting if the firm’s CBLR drops below 9 percent. 

Without this flexibility, firms may feel compelled to maintain their 

current regulatory capital and reporting apparatus in case their 

CBLR drops below 9 percent. 

The comment period for the CBLR proposal ended on April 9, 

2019. The agencies are currently reviewing comments from the 

public on all aspects of the proposed rule, including the optionality 

embedded in the proposal, and will consider them before finalizing 

the rule. 

Q.3. Why is the Federal Reserve Board lowering capital standards 

for the largest U.S. banking organizations while at the same time 

increasing leverage capital requirements for community banking 

organizations? 

A.3. The agencies have proposed changes to prudential requirements that would better align regulations with a firm’s size, risk 

profile, and systemic footprint, consistent with EGRRCPA. Under 

the proposals, the largest firms, such as U.S. OSIBs, would continue to be subject to the most stringent requirements. 

The CBLR proposal is an optional framework designed to reduce 

compliance burden for qualifying community banking organizations. The CBLR proposal is not intended to materially change the 

amount of capital currently required to be held under the riskbased and leverage-based capital requirements. 

Q.4. You may recall that I’ve had a longstanding dialogue with the 

Fed regarding the rule on the standardized approach for measuring 
60 

counterparty credit risk, or SA–CCR. I first raised this issue at 

Vice Chairman Quarles’ confirmation hearing in July 2017, going 

on 2 years ago, and have written to you about it as well as asked 

about it in open hearings since that time. 

Because I believe it’s easier to establish rules making our financial system safer outside of a crisis, I was glad to see that a draft 

SA–CCR rule was published last October. The draft, however, falls 

short. It failed to include initial margin exposure, a point that Vice 

Chairman Quarles ignored when responding to my previous questions for the record. The draft rule was also overbearing in several 

key areas, such as how it treats hedging risk for commodities. 

Can you please share your thoughts on where the SA–CCR rule 

currently stands and tell us whether or not the rule is ever going 

to be finalized? 

A.4. With respect to initial margin in the supplementary leverage 

ratio (SLR), the Standardized Approach to Counterparty Credit 

Risk (SA–CCR) proposal requests comment on an alternative approach that would permit greater recognition of initial margin for 

cleared transactions under the SLR. The comment period on the 

SA–CCR proposal ended on March 18, and the Board of Governors 

(Board), the Office of the Comptroller of the Currency (OCC) and 

the Federal Deposit Insurance Corporation (FDIC) are now reviewing the comments, including with respect to the treatment of commodities and the treatment of initial margin under the SLR. 

Q.5. Last August, a number of my colleagues and I sent you a letter about the G–SIB surcharge. Our letter said in part that we 

hoped you would examine excessive capital requirements in the 

U.S. given the successful implementation of postcrisis reforms. 

In response, you wrote back saying, ‘‘The Board is conducting a 

comprehensive review of the regulations in the core areas of 

postcrisis reform, including capital, stress testing, liquidity, and 

resolution. The objective of this review is to consider the effect of 

those regulatory frameworks on the resiliency of the financial system, including improvements in the resolvability of banking organizations, and on credit availability and economic growth.’’ 

In addition, when responding to a question from Senator Shelby 

during our recent hearing, you said that our banking system overall is quite strong, there have been no banking failures in 2018, 

and that the system has much higher capital, liquidity, and risk 

management than in years past. 

Can you please provide an update on the comprehensive review 

from your earlier letter? 

Will there be an output—such as a report—as the result of this 

review? 

When will it conclude, and will the public have the opportunity 

to comment? 

A.5. In connection with postcrisis reforms and recent statutory developments, the Board has been evaluating its regulations for simplicity, efficiency, and transparency. Board staff are in the process 

of reviewing core elements of the Board’s regulatory framework. 

The Board will consider this analysis when developing future regulatory proposals. In addition, on October 31, 2018, the Board issued 

the proposals to tailor requirements for certain banking organiza-
61 

2See 83 FR 61408 (Nov. 29, 2018); 83 FR 66024 (Dec. 21, 2018); 84 FR 4002 (Feb. 14, 2019). 

tions while also ensuring the continued safety and soundness of 

their operations. 2 These proposed rulemakings seek public comment on separate proposals for tailoring enhanced prudential 

standards, tailoring of capital and liquidity requirements, and 

modifying stress testing requirements for certain banking organizations. In developing these proposals, the Board considered the expected impact of the rulemakings and sought comment from the 

public on this question and all other aspects of the proposals. 

Q.6. We all recognize that the Federal Reserve plays a critical role 

in ensuring the safety and soundness of the U.S. financial system 

and that you are constantly evolving your thinking on potential 

risks. Last year, I asked how you are considering evaluating bank 

practices in areas that are beyond the scope of the traditional supervision process. You responded that there a variety of ways the 

Federal Reserve ensures it understands what best practices should 

look like at the firms you supervise. 

That said, it remains unclear how decisions concerning technology, HR management, and general corporate strategy present 

clear safety and soundness issues. At some level, it seems the Federal Reserve’s view is that anything could create risk and therefore 

you are able to dictate practices to firms. 

Consider, for instance, use of new cloud technologies to store customer data. Such a decision by bank management is no different 

than those made by other private companies—retailers, credit card 

companies, or even a local utility. These are private companies, 

with very engaged boards and investors, and well-informed senior 

management teams. 

As you develop expectations for firms in these types of areas, will 

you make certain that there is sufficient stakeholder engagement 

and that you are appropriately deferring to the judgments of private entities and not dictating what such entities must do on matters outside your traditional areas of expertise? 

A.6. As emerging and evolving risks become more relevant to safety and soundness supervision, the Federal Reserve incorporates a 

broad range of views into shaping potential policy. This engagement happens during the research and development phase, where 

outreach and information gathering is conducted, and also through 

public comment periods when proposed rules are published. 

Q.7. I was pleased to see that S. 2155 included Section 402, which 

would exempt cash that custody banks store at the Fed from their 

leverage ratio calculation. Shortly before S. 2155 was signed into 

law, however, the Fed released a new rule changing that same calculation. 

In response to a question from the record from last November, 

Vice Chairman Quarles said, ‘‘staff is evaluating the April 2018 

proposal in light of the statutory change.’’ 

Can you elaborate on Vice Chairman Quarles’ response? 

A.7. The Board, along with the OCC and FDIC, plan to issue a 

joint proposal in April 2019, to implement Section 402(b) of the 

EGRRCPA. The comment period on the proposal would end 60 days 

after publication in the Federal Register. 
62 

3The Board voted 4–1 to maintain the level of the CCyB at zero. See https:// 

www.federalreserve.gov/newsevents/pressreleases/bcreg20190306c. 

The April 2018 proposal to recalibrate the enhanced supplementary leverage ratio (eSLR) standards was calibrated based on 

the definition of the existing denominator of that ratio. At that 

time, the denominator included central bank deposits for all firms. 

The April 2018 proposal noted that any subsequent and significant 

changes to the SLR would likely necessitate the Board to reconsider the proposal recalibration, as it was not intended to materially change the aggregate amount of capital in the banking system. 

As you note, section 402(b) directs the agencies to allow custodial 

banking organizations to exclude qualifying central bank deposits 

from the SLR, and therefore, would meaningfully modify the SLR 

as applied to these firms. Accordingly, as the Board weighs any recalibration of the eSLR, the Board will consider the potential 

changes to capital levels at custodial banking organizations resulting from the implementation of section 402, as well as the expected 

impact on the aggregate level of capital in the banking system. 

Q.8. Are instructions for the latest Comprehensive Capital Analysis 

and Review tests forthcoming? When will they be released and why 

have they been held up this year? 

A.8. The instructions for the 2019 Comprehensive Capital Analysis 

and Review (CCAR) were released on March 6, 2019. While the 

CCAR instructions have been released in prior years on or around 

the beginning of February, the release of this year’s instructions 

was postponed to incorporate into them the Board’s final rule limiting the use of CCAR’s qualitative objection. 

Q.9. In a recent press conference, you mentioned that the Fed 

would make an announcement on changes to the countercyclical 

capital buffer ‘‘in early 2019’’. The Fed has yet to take further action. 

When will you make your announcement on the countercyclical 

capital buffer? 

A.9. The Board recently voted to maintain the level of the countercyclical capital buffer (CCyB) at zero. 3

RESPONSES TO WRITTEN QUESTIONS OF SENATOR PURDUE 

FROM JEROME H. POWELL 

Q.1. In April 2017, at the Global Financial Forum, you commented 

that capital rules should not disincentivize derivatives clearing or 

serve as an impediment to end users hedging risk. These products 

are critical risk management tools for farmers, ranchers, and other 

businesses in Georgia and across the country. 

Unfortunately, the supplementary leverage ratio (SLR) is limiting access to derivatives risk management opportunities for the 

agricultural community in my State and discouraging the central 

clearing of standardized swap products by futures commission merchants (FCMs) registered with the CFTC. Since 2008, according to 

the CFTC, the number of firms providing clearing services has declined from 88 to 55 in 2018. 
63 

In December 2018, I introduced legislation to correct this unintended consequence, and to ensure regulators properly recognize 

the risk-reducing nature of client initial margin for a cleared derivative transaction. Ultimately, this will provide much-needed relief 

to farmers and other consumers and free up capital for our main 

street economy. As you also know, the Fed, along with the FDIC 

and OCC are currently soliciting comments as they seek to implement a new approach for calculating the exposure amount of derivatives contracts under the agencies’ regulatory capital rules. The 

CFTC Commissioners recently submitted a joint comment that 

raises my very concerns. 

Do you share my concerns about SLR and what steps can you 

take to address the concerns above into consideration as you move 

through the joint-comment process? 

Will you commit to taking the concerns above into consideration 

as you move through the joint-comment process? 

A.1. The Federal Reserve Board (Board) is reviewing a number of 

its rules and regulations to address any unintended consequences 

and undue regulatory burden, including for the provision of central 

clearing services. In this regard, on October 30, 2018, the Board, 

along with the Office of the Comptroller of the Currency and the 

Federal Deposit Insurance Corporation (the agencies), issued a 

joint notice of proposed rulemaking to implement the standardized 

approach for counterparty credit risk (SA–CCR), to determine the 

exposure amount of a derivative contract. SA–CCR introduces a 

new methodology for calculating exposure amount in both the riskbased capital rules and the supplementary leverage ratio (SLR) 

rule. The proposal specifically requests comment on whether the 

agencies should permit greater recognition of margin for purposes 

of the SLR. The comment period closed March 18. We will take 

your concerns into account as we review comments on the rule. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS 

FROM JEROME H. POWELL 

Q.1. In October of last year, the Federal Reserve (Fed) issued a request for public comment on ‘‘actions the Federal Reserve could 

take to support faster payments in the United States.’’ We understand the Fed has been working collaboratively with the banks and 

other private-sector stakeholders for years on how best to facilitate 

faster payments. As you noted at a recent press conference, the Fed 

has thus far been ‘‘more of a convener, bringing industry and the 

public and public interest groups . . . around the table and . . . 

playing a constructive role’’ in encouraging the private sector in 

this area. In October, however, the Fed issued a request for public 

comment indicating that it could instead decide to enter the market 

for faster payments as a direct competitor of the private sector solutions with its own Real-Time Gross Settlement’’ (RTGS) system. 

Is it possible the Fed’s proposal could hamper and delay, rather 

than facilitate, the arrival of real-time payments? 

A.1. In its October 2018 Federal Register Notice requesting public 

comment (2018 FRN), the Board of Governors of the Federal Reserve System (Board) specifically sought feedback on whether potential Federal Reserve action(s) in faster payments settlement 
64 

1See https://www.federalreserve.gov/paymentsystems/pfslstandards.htm. 

would hasten or inhibit financial services industry adoption of faster payment services. The potential actions, which would facilitate 

real-time interbank settlement of faster payments, build on collaborative work with the payment industry through the Federal Reserve System’s Strategies for Improving the U.S. Payment System 

initiative. Real-time settlement avoids interbank credit risk by 

aligning the speed of interbank settlement with the speed of underlying payments. As a result, broad use of real-time settlement for 

faster payments could enhance the overall safety of the faster payments market in the United States. Development of a nationwide 

real-time interbank settlement infrastructure by the Federal Reserve could encourage more banks to develop faster payment services, creating more choice for consumers, households, and businesses. 

The 2018 FRN sought feedback on what operational and technical adjustments the private sector would need to make in order 

to operate in a 24x7x365 settlement environment and potential 

challenges and related costs the industry could face in the process 

of transitioning to such an environment. 

As part of its central mission, the Federal Reserve has a fundamental responsibility to ensure that there is a flexible and robust 

infrastructure supporting the U.S. payment system on which the 

private sector can develop innovative payment services that serve 

the broadest public interests. 

The Federal Reserve is committed to working together with the 

private sector to achieve nationwide access to faster payments and 

will continue to explore collaborative efforts to promote the safety 

and efficiency of faster payments and to support the modernization 

of the financial services sector’s provision of payment services. 

Q.2. Please explain why the Fed is proposing the creation of a Government-run real-time payments system when the private sector 

has already created one that is up and running? 

A.2. The potential actions outlined in the 2018 FRN are intended 

to promote the safety and efficiency of faster payments in the 

United States and to support the modernization of the financial 

services sector’s provision of payment services. The Federal Reserve has long supported these objectives in its existing services, 

which provide nationwide access to check, Automated Clearing 

House (ACH), and wire services to banks of all sizes. The Federal 

Reserve has provided services (check, ACH, wire) alongside privatesector service providers since its inception, and the Board has established policies and processes to avoid conflicts of interest across 

the various roles played by the Federal Reserve. 1

Q.3. The Fed’s own policy statement on ‘‘The Federal Reserve in 

the Payments System’’ requires that the Fed satisfy three conditions before proposing a new service. Among those is a finding that 

the private sector ‘‘cannot be expected to provide such service with 

reasonable effectiveness, scope, and equity.’’ Has the Fed made this 

finding, and, if so, on what grounds was it made? 

A.3. In response to the 2018 FRN, the Board received over 400 

comment letters from a broad range of market participants and in-
65 

terest groups, including consumer groups. The Board is carefully 

considering all of the comments received before determining whether any potential action is appropriate, as well as the timing of such 

potential action. Any resulting action would be pursued in alignment with the provisions of the Federal Reserve Act, the Monetary 

Control Act, and longstanding Federal Reserve principles and criteria for the provision of payment services. The criteria specify that 

the Federal Reserve must expect to (1) achieve full cost recovery 

over the long run, (2) provide services that yield a public benefit, 

and (3) provide services that other providers alone cannot be expected to provide with reasonable effectiveness, scope, and equity. 

Q.4. How long would it take for the Fed to create its real-time system? 

A.4. The Federal Reserve is not committing to any specific actions 

at this time, and there are several potential approaches that could 

help achieve the objective of safe, efficient, and ubiquitous faster 

payments. Any implementation period will depend on what actions, 

if any, the Board decides to take. 

Q.5. Would the Fed’s proposed RTGS and the existing private sector real-time payments network be interoperable and, if so, why— 

specifically—do you believe that will be the case? 

A.5. The 2018 FRN asked for feedback on specific areas, including 

interoperability with existing or potentially new Real-Time Gross 

Settlement (RTGS) service providers. The Board received responses 

to such questions and is assessing the comments. The Federal Reserve recognizes that a decision to undertake a 24x7x365 RTGS 

settlement service will require close partnership and collaboration 

with a wide range of industry stakeholders. 

Q.6. If you believe the systems would interoperate, would such 

interoperability require the private sector system to significantly 

alter its current design? 

A.6. As noted, the Board recognizes that a decision to undertake 

the proposed actions, in particular the development of a 24x7x365 

RTGS settlement service, will require close partnership and collaboration with industry stakeholders. Based on the comments received, the Board is assessing the implications for various industry 

stakeholders including banks, service providers, merchants, and financial technology providers. One important consideration relates 

to interoperability, which can involve different layers of a payment 

message (e.g., rules, standards, processing). The Board is assessing 

the options for interoperability between a Federal Reserve RTGS 

settlement service and existing or potentially new RTGS service 

providers across these layers for achieving nationwide access to 

faster payments in the United States. 

Q.7. As currently structured, CECL presents major capital volatility risk, affecting pricing and availability of lending for 30-year 

mortgages and to borrowers of lower credit quality, especially during downturns. It is highly procyclical. There have been proposals 

made that before implementing this major accounting change, 

there should be a quantitative impact study (QIS) conducted to 

look into these concerns. The 3-year phase in that the Fed recently 

finalized does not address this underlying procyclicality issue. 
66 

Do you see any harm in conducting such a QIS? 

A.7. We recognize the importance of evaluating the quantitative 

impact of a policy change. Prior to finalizing the current expected 

credit loss (CECL) accounting standard, the Financial Accounting 

Standards Board followed its established process, which included 

cost-benefit analysis and extensive outreach with all stakeholders, 

including users, preparers, auditors, and regulators. Furthermore, 

various economists, institutions, and independent organizations 

have produced impact analyses of CECL with varying conclusions. 

We have reviewed these analyses and performed additional internal studies to support the 3-year phase-in referenced in your question as well as the Board’s announcement that it will maintain the 

current modeling framework for loan allowances in its supervisory 

stress test through 2021. Institutions subject to the Board’s Comprehensive Capital Analysis and Review (CCAR) will be required to 

incorporate CECL into their own stress tests starting in the 2020 

cycle. However, the Board will not issue supervisory findings on 

those institutions’ allowance estimations in the CCAR exercise 

through 2021. 

Given the importance of the CECL accounting standard to the institutions we supervise and the banking industry as a whole, we 

are committed to closely monitoring implementation and studying 

the effect of the accounting standard on the banking system to determine if further changes to the regulatory framework are appropriate. 

Q.8. The Fed has not undertaken any effort to update its rules to 

provide a pathway to margin eligibility for companies traded overthe-counter (OTC) since NASDAQ became an exchange in 2006. 

Margin eligibility of OTC-traded stocks can be an important part 

of the growth of small and emerging companies, as it helps to improve the market quality of those securities, impacts an investor’s 

willingness to purchase those securities, and as a result, has a direct impact on capital formation. U.S. investors in the ADRs for 

Roche and other large, international OTC traded firms are also 

negatively impacted by the Fed’s inaction on this issue. 

Will you commit to following up with me on the actions the Fed 

will take to revive the margin list for certain OTC securities—those 

that have similar characteristics to those traded on NASDAQ before it became an exchange? 

A.8. As you note, the List of Over-the-Counter Margin Stocks (OTC 

List) is no longer published by the Federal Reserve Board (Board), 

and, in fact, the OTC List’s publication ceased in 1998. Board staff 

have continued to monitor OTC market developments in the years 

since. Any expansion of the types of securities that are margin-eligible would require the Board’s careful consideration of the benefits 

of such an approach, weighed against the potential increase in burdens on banks and other lenders. 

We will be sure to take your concerns into account as we look 

into potential approaches that may be considered, while ensuring 

any changes would not pose additional regulatory burden. 
67 

1Our survey is aimed at areas of the country with high concentrations of agricultural lending 

by community banks, located primarily in Chicago, St. Louis, Minneapolis, Kansas City, and 

Dallas. 2See, https://communitybankingconnections.org/fedlinks. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR MORAN 

FROM JEROME H. POWELL 

Q.1. With cash flow dwindling in the farm sector amid ongoing 

trade disputes, the volume of non–real estate farm debt continues 

to increase at a rapid pace, driven by the growth in operating loans 

which have reached a historically large average size. Bankruptcies 

across the Farm Belt are rising past the highest level in at least 

10 years. 

Lower farm incomes, the uncertainties about ag trade, and the 

growth of lending volumes has interest rates on ag loans trending 

ever higher. The rapidly increasing combination of higher leverage 

and rising rates continue to put pressure on operations across the 

Farm Belt. 

With financial performance at agricultural banks remaining relatively strong and the value of farm real estate continuing to provide ongoing support, what actions are you and regulators considering to help alleviate mounting pressure on the farm sector experiencing difficulties beyond their control? 

A.1. The agricultural industry is experiencing uncertainty, as commodity prices were suppressed in 2018 and trade issues continue 

to put pressure on economic growth. Some producers may be wellpositioned to withstand the prolonged challenges facing today’s agricultural sector, but others are more susceptible to financial stress. 

As regulators, it is essential to ensure that banks have appropriate 

processes to effectively measure and mitigate risks while maintaining safe and sound operations and serving the needs of the agricultural communities in which they operate. 

In 2011, the Federal Reserve issued guidance to the industry on 

‘‘Supervisory Expectations for Risk Management of Agriculture 

Credit Risk’’. This guidance applies in all economic environments, 

but is especially helpful to banks during periods of economic stress. 

It reminds bankers that ‘‘the identification of a troubled borrower 

does not [prohibit] a banker from working with the borrower,’’ and 

it provides a road map for lenders to work prudently with troubled 

borrowers in a way that serves the long-term interests of all stakeholders. With respect to the Community Reinvestment Act (CRA), 

the current regulations consider bank activities in their assessment 

areas, including bank activities in the assessment areas that are 

responsive to the needs of those that have been affected by disasters. 

In acknowledgement of the concerns and uncertainties surrounding the outlook of agricultural conditions, the Federal Reserve has taken measures to maintain an ongoing dialogue between 

regulators, bankers, and agricultural communities. On a quarterly 

basis, we conduct Agricultural Credit Conditions Surveys that 

gather comments from bankers located in various Reserve Bank 

Districts 1 with significant agricultural exposure. Our FedLinks and 

Community Banking Connections website 2 and publications, which 

could be useful to all banks, aim to improve the understanding of 

supervisory expectations and provide tools to help community 
68 

3See, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181010a.htm. 4See, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20190325a.htm, and 

https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181115b.htm. 

banks across the United States. Additionally, we invite bankers 

and agriculture industry professionals to the annual National Agricultural Credit Conference, hosted by the Federal Reserve Bank of 

Kansas City, which provides a forum for those in the industry to 

discuss current developments. The most recent conference was held 

at the Board of Governors of the Federal Reserve System on March 

25, 2019. All of these outreach efforts allow the Federal Reserve to 

hear diverse perspectives and receive feedback from both the industry and public. They also enable the Federal Reserve to have a better understanding of credit conditions and challenges in agricultural markets so that supervisory reviews can be tailored, as appropriate. 

In addition to the supervisory process, the Federal Reserve System strives to incorporate perspectives from all regions of the country and from a broad range of industries, including agriculture, into 

its regular monetary policy deliberations and its assessments of the 

U.S. economy. We receive input on agricultural conditions from 

business contacts across the country through our boards of directors at regional Reserve Banks, various advisory councils, and surveys, in addition to reports from staff who track developments in 

U.S. agriculture. 

Q.2. One parallel I suggest you and regulators explore and consider 

for lenders is the regulatory relief granted to financial institutions 

in areas affected by natural disasters, such as favorable Community Reinvestment Act consideration, extension of repayment 

terms, restructuring existing loans, and easing terms for new 

loans. 

Would you and your staff be willing to work with my staff and 

I to develop the legislation necessary to provide regulators with 

this authority? 

A.2. As always, we are available to provide technical assistance to 

Members of Congress and their staffs. For this particular issue, our 

staff can inform you and your staff about past initiatives that the 

Board and the other Federal banking agencies (agencies) have 

taken to provide regulatory assistance to our supervised institutions affected by a major natural disaster. On an interagency basis, 

the agencies issue statements to encourage institutions operating 

in a disaster area to meet the financial services needs of their communities. For example, on October 10, 2018, the agencies and the 

Conference of State Bank Supervisors issued a statement that provides an overview of supervisory practices for institutions affected 

by Hurricane Michael. 3 More recently, the agencies and relevant 

State regulators issued interagency statements on supervisory 

practices regarding financial institutions and their customers related to the flooding in the Midwest and wildfires in California. 4
69 

1The Agencies have been aware of the impact of technology on the delivery of banking services for many years now. In 2016, the Agencies provided guidance on how examiners will evaluate the availability and effectiveness of alternative (nonbranch) product and service deliver 

mechanisms. That guidance can be found at in the Interagency and Answer Guidance on Community Reinvestment (Q&A §l.24(d)(3), https://www.govinfo.gov/content/pkg/FR-2016-07-25/ 

pdf/2016-16693.pdf. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER 

FROM JEROME H. POWELL 

Q.1. Community Reinvestment Act—As you noted in a speech a couple weeks ago at the HBCU Mississippi Valley State University, 

the loss of a branch often means ‘‘more than the loss of access to 

financial services; it also meant the loss of financial advice, local 

civic leadership, and an institution that brought needed customers 

to nearby businesses.’’ I couldn’t agree more. You rightly mention 

the Community Reinvestment Act as an important tool to encourage banking services in underserved areas. 

As regulators consider updates to the regulations implementing 

the Community Reinvestment Act, how can we make sure we that 

we protect the folks most likely to be significantly affected by 

branch closures—low income families, families of color, rural families? 

A.1. Public comment and the Federal Reserve’s outreach to banks 

and community stakeholders have clearly conveyed that bank 

branches are an important venue for banks to engage with their 

communities. Commenters have emphasized the high value that 

bank branches have for retail customers, small business owners, 

local leaders, and community developers, especially in underserved 

communities. 

One opportunity in modernizing the Community Reinvestment 

Act (CRA) regulations is to better define the area in which the 

agencies evaluate a bank’s CRA activities, while retaining a focus 

on the credit needs of local communities. There is a complex balance between the profitability of branches and the needs of local 

communities to interact with bank personnel needs to be kept in 

mind as revisions to the regulations are considered. Additionally, 

it would be useful to find ways to recognize how technology offers 

meaningful and cost-efficient opportunities to serve consumers and 

communities. 1

As the Federal Reserve works with the Office of the Comptroller 

of the Currency and the Federal Deposit Insurance Corporation 

(the Agencies) to develop a notice of proposed rulemaking, it is important to ensure that any modernization of assessment areas 

keeps in focus the goal of encouraging banks to seek out opportunities to create incentives for CRA capital to effectively meet the 

credit and banking needs of underserved communities and consumers. 

Q.2. Beyond the Community Reinvestment Act, what other tools do 

you as a regulator have to promote access to bank branches? 

A.2. The Federal Reserve has dedicated staff in each Reserve Bank 

throughout the country who work collaboratively to engage relevant stakeholders; to understand issues and challenges in lowand moderate-income (LMI) communities; and to provide research, 

insights, and technical assistance to support community and economic development programs. 
70 

2The FBIIC consists of 18 Federal and State member organizations that collectively engage 

in supervisory activities for the banking, investment, and insurance sectors. 

For example, staff facilitate roundtable discussions between 

banks, nonprofit organizations, and Government officials to support 

awareness of community needs and CRA-eligible activities, and to 

provide information on possible policy options and practices that 

may help serve the banking needs in LMI communities. In addition, staff work to advance Federal Reserve policymakers’ understanding of labor markets, housing markets, and other economic 

and financial conditions across populations and geographies. By engaging a broad range of stakeholders, staff obtain diverse views on 

issues affecting the economy and financial markets. This information helps banks identify opportunities to serve the credit and financial services needs of their communities. 

Q.3. Cybersecurity Harmonization—Many financial institutions are 

subject to cybersecurity supervision from a number of State and 

Federal regulators. Not only are these institutions subject to, at 

times, differing requirements from these regulators, there is often 

not even a shared lexicon among regulators, so that when one regulator says ‘‘effective data security,’’ they actually mean something 

different from what another regulator means by the same phrase. 

Are there efforts underway to harmonize the cybersecurity lexicon used by State and Federal regulators? How is that effort progressing? 

A.3. The Federal Reserve, in collaboration with other regulatory 

agencies, continues to identify opportunities to harmonize the cybersecurity lexicon used by State and Federal regulators. Specifically, the Federal Reserve chairs a working group of the Financial 

and Banking Information Infrastructure Committee (FBIIC) 2 that 

is working to harmonize the cybersecurity lexicon by using the National Institute of Standards and Technology (NIST) as the primary 

source of cyberterms and definitions going forward. 

Q.4. What about an effort to harmonize standards? 

A.4. The FBIIC provides a forum for member agencies to discuss 

regulatory and supervisory practices, including opportunities for 

harmonization and to leverage existing standards, such as the 

NIST Cybersecurity Framework. As discussed above, the Federal 

Reserve chairs a FBIIC working group that is engaged in identifying opportunities to further harmonize cyber-related standards 

and supervisory activities for firms subject to the authority of multiple regulators. 

In addition, the agencies, with supervisory responsibility for the 

banking sector, collectively engage in efforts to promote uniformity 

in the supervision of those financial institutions through the Federal Financial Institutions Examination Council (FFIEC). The 

FFIEC, established in 1979, includes the Board of Governors of the 

Federal Reserve System (Board), Office of the Comptroller of the 

Currency (OCC), Federal Deposit Insurance Corporation (FDIC), 

National Credit Union Administration, Consumer Financial Protection Bureau and the State Liaison Committee. The FFIEC promotes uniformity in the supervision of financial institutions 
71 

through the development of joint examination procedures, principles, standards, and report forms. 

Q.5. Real Time Payments—I fully support the adoption in the 

United States of a real time payments (RTP) system. Such a system brings with it terrific promise for innovation in financial services that meet customer demands to make payments cheaply and 

instantly. 

In its 2013 Strategies for Improving the U.S. Payment System, 

the Federal Reserve said that it ‘‘would not consider expanding its 

service provider role unless it determines that doing so is necessary 

to bring about significant improvements to the payment system 

and that actions of the private sector alone will likely not achieve 

the desired outcomes for speed, efficiency, and safety in a timely 

manner’’ and unless ‘‘other providers alone could not be expected 

to provide this capability with reasonable effectiveness, scope, and 

equity’’—phrases that the Federal Reserve has repeated elsewhere. 

I can understand how the provision by the Federal Reserve of a 

24/7/365 real time liquidity management tool that would support a 

private sector RTP solution—as contemplated in the Federal Reserve’s recent proposal—would meet the test that the Federal Reserve has consistently outlined for its operational involvement. A 

24/7/365 liquidity management tool would help alleviate otherwise 

potentially destabilizing liquidity demands that overnight RTPs 

could generate. 

The development of a real time gross settlement (RTGS) system, 

however, seems to be a different matter in terms of meeting the requirements the Fed set forth in its 2013 Strategies for Improving 

the U.S. Payment System and the requirements of the Monetary 

Control Act. 

With regard to the possible development of an RTGS system, has 

the Federal Reserve made a determination that Federal Reserve 

provision of RTGS services meets this test? If so, on what basis? 

A.5. The potential actions outlined in the Board’s October 2018 

Federal Register Notice request for comment (2018 FRN) are intended to promote the safety and efficiency of faster payments in 

the United States and to support the modernization of the financial 

services sector’s provision of payment services. The Federal Reserve has provided services alongside the private-sector service providers since its inception that have supported both objectives while 

providing nationwide access to check, Automated Clearing House 

(ACH), and wire services to banks of all sizes. 

The Board has received over 400 comment letters from a broad 

range of market participants and interest groups, including consumer groups in response to the 2018 FRN seeking public input on 

potential actions the Federal Reserve might take in regard to supporting faster payments in the United States. The Board is carefully considering all of the comments received before determining 

whether any action is appropriate or the timing of such potential 

action. Any resulting action the Board decides to take would be 

pursued in alignment with the provisions of the Federal Reserve 

Act, the Monetary Control Act, and longstanding Federal Reserve 

policies and processes created to avoid conflicts of interest across 

the various roles of the Federal Reserve. 
72 

3See ‘‘The Federal Reserve in the Payments System’’ (issued 1984; revised 1990), Federal Reserve Regulatory Service 9-1558. 

In particular, the Congress, in part motivated to encourage and 

ensure fair competition between the Federal Reserve and the private sector, passed in 1980, the MCA, requiring that the Federal 

Reserve fully recover costs in providing payment services over the 

long run and adopt pricing principles to avoid unfair competition 

with the private sector. The Board also has established additional 

criteria for the provision of new or enhanced payment services that 

specify the Federal Reserve must expect to (1) achieve full cost recovery over the long run, (2) provide services that yield public benefit, and (3) provide services that other providers alone cannot be 

expected to provide with reasonable effectiveness, scope, and equity. In addition to these criteria, for new services or service enhancements, the Board also conducts a competitive impact analysis 

to determine whether there will be a direct and material adverse 

effect on the ability of other service providers to compete effectively 

in providing similar services. 3

Q.6. The Federal Reserve has also consistently supported the implementation of RTP system by 2020. I understand there is a fully 

operational private sector clearing and settlement solution that has 

significant adoption by depository institutions. Would a Federal Reserve-provided RTGS infrastructure be implemented by 2020? If 

not, how long would such an infrastructure take to become fully 

operational? 

A.6. The Federal Reserve is not committing to any specific actions 

at this time, and there are several potential approaches that could 

help achieve the objective of safe, efficient, and ubiquitous faster 

payments. Any implementation period will depend on what actions, 

if any, the Board decides to take. Analysis of the input received in 

response to the Board’s 2018 FRN is currently underway. The 

Board is in the process of carefully considering all of the comments 

received before the determining whether any action is appropriate 

or the timing of such potential action(s). 

Q.7. Given the Fed’s long-held goal of getting to real-time payments by 2020, is there a risk that the Fed’s suggestion that it 

might, at some time in the future, enter the real-time payments 

market—as a direct competitor of existing private-sector alternatives—delay, rather than facilitate, adoption of real-time payments? 

A.7. In its 2018 FRN request for public comment on actions the 

Board specifically sought feedback on whether potential Federal 

Reserve action(s) in faster payments settlement would hasten or inhibit financial services industry adoption of faster payment services. The potential actions, which would facilitate real-time interbank settlement of faster payments, build on collaborative work 

with the payment industry through the Federal Reserve System’s 

Strategies for Improving the U.S. Payment System (SIPS) initiative. Real-time settlement avoids interbank credit risk by aligning 

the speed of interbank settlement with the speed of underlying 

payments. As a result, broad use of real-time settlement for faster 

payments could enhance the overall safety of the faster payments 
73 

market in the United States. Development of a nationwide, realtime interbank settlement infrastructure by the Federal Reserve 

could encourage more banks to develop faster payment services, 

creating more choice for consumers, households, and businesses. 

The 2018 FRN sought feedback on what operational and technical adjustments the private sector would be required to make to 

operate a 24x7x365 settlement environment and potential challenges and related costs the industry could face in the process of 

transitioning to such an environment. 

As part of its central mission, the Federal Reserve has a fundamental responsibility to ensure that there is a flexible and robust 

infrastructure supporting the U.S. payment system on which the 

private sector can develop innovative payment services that serve 

the broadest public interests. 

The Federal Reserve is committed to working together with the 

private sector to achieve nationwide access to faster payments and 

will continue to explore collaborative efforts to promote the safety 

and efficiency of faster payments and to support the modernization 

of the financial services sector’s provision of payment services. 

Q.8. Brexit: Financial Stability Monitoring—I’m glad to see the 

news that the Federal Reserve is now publishing semiannual financial stability reports. I think it’s critical that the Federal Reserve, 

and the other financial regulators and FSOC, continue to monitor 

for new and emerging threats to financial stability. One of the 

items the Fed has highlighted in its financial stability report is 

Brexit. 

What are the key economic and financial risks associated with 

the possibility that Britain crashes out of the EU? 

A.8. European Union (EU) leaders agreed at their April 10 summit 

to grant the United Kingdom (U.K.) a Brexit extension until October 31, 2019. Although this extension reduced uncertainty in the 

near term, it is unclear how Brexit will play out. The EU and the 

U.K. Governments reached a deal last November that would set 

the terms of U.K. withdrawal from the EU, and introduce a basis 

for new relations, but the U.K. Parliament has not ratified this 

agreement. The possibility remains that the U.K. could leave the 

EU without a ratified agreement. U.K. authorities have warned 

that, under such a no-deal scenario, there likely would be logistical 

issues as the two economies jump from a seamless trading environment to one involving tariffs, rules of origin of products, and border 

inspections. Planned measures to address such issues likely would 

not eliminate all such disruptions, which might have a significant 

near-term effect on the U.K. economy and on some of the EU 

economies that trade most heavily with the U.K. 

The direct trade impacts on the United States likely would be 

minimal. A no-deal scenario could generate some European financial stresses that could spill over to global financial markets, including in the United States. However, U.S. financial institutions 

have had a long time to prepare, with oversight from U.S., U.K., 

and EU regulators, for potential spillovers resulting from Brexit. 

More generally, U.S. banks currently are well capitalized, and their 

exposures to Europe are fairly small relative to their capital levels. 

Q.9. What is the Fed doing to prepare for such an event? 
74 

A.9. Board staff has monitored and analyzed the U.K. expected 

withdrawal from the EU, including the possibility of a no-deal scenario. As part of these efforts, staff has discussed preparedness for 

a variety of scenarios with financial institutions and closely monitored political, economic, and financial sector developments. Staff 

has also coordinated with other domestic financial regulatory agencies and the U.S. Department of the Treasury as well as engaged 

with relevant authorities in the U.K. and EU, as appropriate. In 

particular, Board staff has consulted regularly with the Bank of 

England and its Prudential Regulation Authority. 

Q.10. With which Federal agencies is the Fed working in preparation? 

A.10. As mentioned in response above, Board staff has coordinated 

and consulted with colleagues at several Federal agencies, including the U.S. Department of the Treasury, Commodity Futures 

Trading Commission, Securities and Exchange Commission, OCC, 

and FDIC. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCHATZ 

FROM JEROME H. POWELL 

Q.1. The U.S. Government’s Fourth National Climate Assessment 

says climate change will ‘‘cause substantial net damage to the U.S. 

economy throughout this century,’’ with annual losses in some sectors projected to exceed the current GDP of many U.S. States. Climate-related extreme weather will ‘‘increasingly affect our trade 

and economy, including import and export prices.’’ It will also disrupt operations and supply chains, and ‘‘lead to large-scale shifts 

in the availability and prices of many agricultural products across 

the world.’’ 

Has the Federal Reserve specifically examined data in the National Climate Assessment on the economic impact of different climate change scenarios? 

A.1. The longer-term predicted impacts of climate change are generally beyond the scope of monetary policy. Although it is important for us to understand how weather is affecting the economy in 

real time and respond accordingly, monetary policy is not well suited to address longer-term economic disruptions associated with severe weather events. Longer-term predictions such as those in the 

Fourth National Climate Change Assessment report are an issue 

for Congress and the Administration to consider. 

Q.2. Has the Federal Reserve examined any data, produced by the 

U.S. Government or by others, on the economic impact of increasingly severe weather and climate events, such as flooding, sea level 

rise, drought, wildfires, and deadly storms? 

A.2. The Federal Reserve takes into account the severity of weather events in assessing current economic conditions as part of our 

deliberations about the appropriate stance of monetary policy. For 

example, our staff has relied on data from the Federal Emergency 

Management Agency and the Department of Energy to gauge the 

disruptions to oil and gas extraction, petroleum refining, and petrochemical and plastic resin production in the wake of hurricanes 

that affected the Gulf region. Our staff regularly uses daily meas-
75 

ures of temperatures and snowfall from National Oceanic and Atmospheric Administration (NOAA) weather stations to understand 

better, how severe weather may be affecting economic activity in 

specific areas. In addition, our staff recently has begun to use credit and debit card transaction data to gauge how specific types of severe weather events might affect consumer spending in areas affected by those events. 

Q.3. Have you considered how different climate change scenarios 

would impact the Federal Reserve’s statutory mandate to stabilize 

prices, maximize employment, and moderate long-term interest 

rates? 

A.3. As I have noted previously, while Congress has entrusted the 

matter of addressing climate change to other agencies, the Federal 

Reserve uses its authorities and tools to prepare financial institutions for vulnerabilities, including severe weather events. Over the 

short-term, severe weather events have the potential to inflict serious damage to the lives of individuals and families, to devastate 

local economies and even temporarily affect national economic output and employment. The Federal Reserve, in its conduct of monetary policy and related decision making, is concerned with shortand medium-term developments that may change materially over 

quarters and a relatively small number of years, rather than the 

decades associated with longer-term changes. 

Q.4. Have you considered how different climate change scenarios 

would impact the Federal Reserve’s statutory mandate to promote 

the safety and soundness of supervised institutions and the stability of the overall financial system? 

A.4. The Federal Reserve Board (Board) has supervisory and regulatory authority over a variety of financial institutions and activities, with the goal of promoting a safe, sound, efficient, and accessible financial system that supports the growth and stability of the 

U.S. economy. In carrying out the responsibility to promote the 

safety and soundness of individual financial institutions that we 

supervise, we assess, among other things, supervised firms’ ability 

to identify, measure, monitor, and control risks, including those related to severe weather events. The Federal Reserve has particular 

tools and mechanisms for monitoring the financial system. 

One of the most critical elements of safety and soundness is a financial institution’s ability to absorb substantial unexpected losses 

and continue to lend to households and businesses. Severe weather 

events are one potential source of such losses, especially for firms 

with exposures concentrated in regions that are likely to experience 

those events. We routinely examine banks’ management of concentration risk and recommend or, if necessary, enforce, enhancements, including additional capital, where warranted. For example, 

our supervisors consider any evidence of a rising incidence of severe weather events, including coastal flooding, in those areas 

where it is a factor. 

To that end, the Board issued supervisory guidance in 1996, to 

ensure that bank management takes into account all relevant risks 

in their underwriting and review practices. Our guidance with respect to credit underwriting and asset quality provides supervisors 

the flexibility necessary to address risks from severe weather 
76 

1See, e.g., 12 CFR Part 208, App. D-1 to Part 208 (‘‘Interagency Guidelines Establishing 

Standards for Safety and Soundness’’); Board of Governors of the Federal Reserve System, ‘‘SR 

96-36: Guidance on Evaluating Activities Under the Responsibility of U.S. Branches, Agencies, 

and Nonbank Subsidiaries of Foreign Banking Organizations (FBOs)’’ (Dec. 19, 1996), https:// 

www.federalreserve.gov/boarddocs/srletters/l996/sr9636.htm; Federal Deposit Insurance Corporation, ‘‘Uniform Financial Institutions Rating System’’, 62 FR 752 (Jan. 6, 1997). 2See, e.g., Board of Governors of the Federal Reserve System, ‘‘Commercial Bank Examination Manual’’, §§2142.1 (‘‘Agricultural Credit Risk Management’’), 2150.1 (‘‘Energy Lending—Reserve-Based Loans’’) (rev. Oct. 2018), https://www.federalreserve.gov/publications/files/ 

cbem.pdf. 

events. 1 In addition, our guidance also specifically addresses lending to sectors where assessments of these risks are critical for due 

diligence and underwriting. 2

The Board also ensures that financial institutions that are core 

clearing and settlement organizations, or play significant roles in 

critical financial markets maintain sound practices to ensure that 

they can recover and resume their activities supporting these markets following a severe weather event. In addition, the Board has 

provided guidance to banking institutions directly affected by an 

event that results in a Presidential declaration of a major disaster. 

The supervisory approach described in the guidance provides examiners flexibility to conduct supervisory activities and formulate supervisory responses that take into account the issues confronting 

institutions impacted by such events. 

Q.5. Does the Federal Reserve coordinate with other central banks 

and bank supervisors around the world to discuss best practices for 

managing emerging risks? If no, why not? If yes, have climate risks 

to financial institutions been discussed? 

A.5. In its role promoting financial stability, the Federal Reserve 

cooperates and coordinates with many other central banks and 

bank supervisors and regulators, both bilaterally and through 

international standard setting bodies, such as the Basel Committee 

on Banking Supervision and the Financial Stability Board (FSB). 

We discuss climate risks frequently with our international central 

bank colleagues. Our engagement is intended to help identify and 

address vulnerabilities in the global financial system and to develop stronger regulatory and supervisory policies in order to help 

ensure a more stable and resilient global financial system. 

Additionally, the Federal Reserve Board is an active participant 

in the proceedings of the FSB, which was established after the financial crisis to strengthen financial systems and increase the stability of international financial markets, and has undertaken relevant work in this area. Of particular interest are efforts to promote enhanced risk management disclosure by financial institutions. In this regard, the FSB established in 2015 the Task Force 

on Climate-related Financial Disclosures (TCFD), a global, industry-led effort to develop recommendations for consistent climate-related financial disclosures, for use by companies in providing information to investors, lenders, insurers, and others. The TCFD considers the physical, liability, and transition risks associated with 

climate change and what constitutes effective financial disclosures 

across industries. 

Q.6. Your counterpart in the United Kingdom, Mark Carney, recently announced that the Bank of England is planning to include 

the impact of climate change in its bank stress tests as early as 
77 

3First Street Foundation, ‘‘Rising Seas Erode $15.8 billion in Home Value From Maine to 

Mississippi’’, February 27, 2019, available at: https://assets.floodiq.com/2019/02/ 

9ddfda5c3f7295fd97d60332bb14c042-firststreet-floodiq-mid-atlantc-release.pdf. 

next year. The Bank of England is taking this step because it believes that responding to climate-related financial risks ‘‘helps ensure the Bank can fulfil its mission to maintain monetary and financial stability.’’ 

Are you aware of the Bank of England’s plans to incorporate climate risk into bank stress testing? 

A.6. The Board is aware of the Bank of England’s (BOE) plans to 

incorporate severe weather risk into bank stress testing. The BOE 

has said it will conduct this analysis as part of its exploratory scenario either next year or 3 years hence. As we understand, banks 

cannot pass or fail these exploratory scenarios; instead, the scenarios are designed to increase transparency and to focus on specific issues. 

Q.7. Do you think it would be productive for the Federal Reserve 

to learn more about the Bank of England’s efforts to incorporate 

climate risks into bank stress testing? 

If not, please explain why the Federal Reserve does not think it 

is worth learning more about how climate risks could impact the 

safety and soundness of financial institutions or the stability of the 

financial system. 

A.7. Federal Reserve staff meet regularly to exchange views with 

our counterparts at the BOE and other global regulators. We look 

forward to seeing the structure of and results of the exercise, 

should the BOE ultimately decide to conduct these tests. 

Q.8. In his September 2010 testimony before the Financial Crisis 

Inquiry Commission, former Federal Reserve Chairman Ben 

Bernanke said the most prominent trigger of the 2007–08 global financial crisis ‘‘was the prospect of significant losses on residential 

mortgage loans.’’ Chairman Bernanke explained, ‘‘When house 

prices declined, the equity of those homeowners was quickly wiped 

out; in turn, ‘underwater’ borrowers who owed more than their 

houses were worth were much more likely to default on their mortgage payments.’’ 

The National Climate Assessment found it is likely that ‘‘between $66 billion and $106 billion worth of real estate will be 

below sea level by 2050; and $238 billion to $507 billion, by 2100.’’ 

It is reasonable to expect that frequent and intense coastal property damage under such scenarios will drastically reduce property 

values. 

We do not need to wait to 2050 to see the impact of climate 

change on property values. Coastal flooding from sea level rise is 

already eroding property values. A recent analysis by First Street 

Foundation estimated that property value losses from coastal flooding in 17 States totaled almost $16 billion from 2005 to 2017. 3

Has the Federal Reserve assessed the risks that extreme weather 

events pose to the U.S. housing market? 

A.8. The Board conducts an active research program on a broad 

array of topics in economics and finance. As part of this broader research mission, research staff write working papers and publish ar-
78 

4See Board of Governors of the Federal Reserve System, ‘‘Financial Stability Report’’ (May 

2019), https://www.federalreserve.gov/publications/files/financial-stability-report-201905.pdf. 

ticles in peer-reviewed journals. This research includes studies on 

a number of topics that pertain to modeling the economic effects of 

severe weather events, modeling uncertainty and risks from such 

events in financial markets, and estimating the effects of these 

events on consumer and business activity, as well as on local and 

aggregate real estate markets. In recent years, Board economists 

have authored more than 30 papers on the impact of climate 

change on the financial sector and undertaken research on the economics of weather, natural disasters, climate policy, and related 

risks. 

Q.9. How does the Federal Reserve assess the risk of natural disasters that are increasing in frequency and severity on the loan portfolios of supervised financial institutions and the financial system 

as a whole? 

A.9. The Board’s framework for monitoring the stability of the U.S. 

financial system distinguishes between shocks to and 

vulnerabilities of the financial system. 4 Shocks are typically surprises and are inherently difficult to predict. Vulnerabilities tend 

to build up over time and are the aspects of the financial system 

that are most expected to cause widespread problems in times of 

stress. Thus, in our framework, severe weather events are treated 

as shocks to the system. For example, the possibility of large losses 

to property and casualty insurers from historically atypical timing, 

intensity, or frequency of hurricane damages represents one such 

potential shock. If that shock led to significant strains on capital 

positions of affected firms, those losses could expose or exacerbate 

other vulnerabilities, such as funding risks, through the firms’ connections to the broader financial system. 

While the Board’s framework provides a systematic way to assess 

financial stability, some potential risks do not fit neatly into that 

framework. Some potential risks are difficult to quantify, especially 

if they materialize over such a long horizon that methods beyond 

near-term analysis and monitoring are appropriate. Accordingly, 

we rely on ongoing research by academics, our staff, and other experts to improve our understanding and measurement of such 

longer-run or difficult-to-quantify risks. 

RESPONSES TO WRITTEN QUESTIONS OF 

SENATOR VAN HOLLEN FROM JEROME H. POWELL 

Q.1. One of the fundamental economic challenges of our times is 

to make sure that America families actually benefit from economic 

growth. There is a growing gap between skyrocketing corporate 

profits and CEO salaries on one side, and stagnant pay for typical 

workers on the other side. At the same time, President Trump is 

implementing policies that make the situation even worse, such as 

huge tax cuts for millionaires and big corporations, while taking 

credit for economic trends that predate his Administration. 

During the hearing, I asked you about data showing that for the 

typical American worker, weekly earnings are growing slower 

under President Trump than they were during President Obama’s 
79 

second term, after adjusting for inflation. According to the Bureau 

of Labor Statistics, the median usual weekly earnings for full-time 

wage and salary workers was $333 in the 4th quarter of 2012, just 

before President Obama’s second term began. At the end of President Obama’s second-term, in the 4th quarter of 2016, this figure 

was $349. Two years into President Trump’s term, in the 4th quarter of 2018, it is $355. All of these figures are 1982–1984 constant 

dollars. 

Is it correct that median usual weekly earnings for workers were 

increasing at an average rate of 1.18 percent per year during President Obama’s second term, compared to 0.86 percent since President Trump took office? 

A.1. It is correct that, according to both of the measures you report, 

inflation-adjusted labor compensation, in the aggregate, increased 

a little more rapidly from 2012:Q4 to 2016:Q4 than from 2016:Q4 

to 2018:Q4. 

I would emphasize that the result you describe—faster real wage 

gains during the 2012–2016 period—depends importantly on the 

fact that oil prices fell between 2014 and 2016 and partially rebounded after that. That 2014–2016 drop in oil prices fed through 

to prices of gasoline and other energy products, and so boosted 

households’ purchasing power at that time. Because energy prices 

can be so variable, it is useful to look at real wage gains over somewhat longer periods, to help avoid having transitory energy price 

movements dominate the calculations. 

Q.2. During the hearing, you identified the Employment Cost Index 

(ECI) as your single favorite source for compensation data that includes both wages and benefits. The Employment Cost Index for 

total compensation of all civilian workers was 117.8 in the 4th 

quarter of 2012, 128.0 in the 4th quarter of 2016, and 135.2 in the 

4th quarter of 2018, when indexed to a base of 100 for December 

of 2005. 

At the same time, inflation measured by the Consumer Price 

Index for All Urban Consumers (CPI–U), was 231.369 in the 4th 

quarter of 2012, 242.164 in the 4th quarter of 2016, and 252.759 

in the 4th quarter of 2018, when indexed to a base of 100 for 1982– 

1984 dollars. 

Is it correct that ECI was increasing at an average annual rate 

of 2.10 percent during President Obama’s second term, with CPI– 

U increasing at an average annual rate of 1.15 percent during this 

period, meaning that 0.94 percent of the average annual increase 

in ECI could be attributed to real compensation growth? 

A.2. See response to Question 1. 

Q.3. Is it also correct that ECI has increased at an average annual 

rate of 2.77 percent since President Trump took office, with CPI– 

U increasing at an average annual rate of 2.16 percent during this 

period, meaning that 0.60 percent of the increase in ECI can be attributed to real compensation growth? 

A.3. See response to Question 1. 
80 

RESPONSES TO WRITTEN QUESTIONS OF 

SENATOR CORTEZ MASTO FROM JEROME H. POWELL 

Q.1. Inequality—A few weeks ago, you told a group of teachers you 

were concerned that income growth for middle- and working-class 

Americans ‘‘has really decreased,’’ while ‘‘growth at the top has 

been very strong. We want prosperity to be widely shared. We need 

policies to make that happen.’’ 

If Congress were able to pass policies that would increase the 

paychecks and bank accounts of working families—raise the minimum wage, invest in infrastructure, subsidize housing and child 

care for low-wage workers, support for unions, and make health 

care and college more affordable—what would the impact on the 

economy be? Would you see higher economic growth? Greater workforce participation? Changes to unemployment? Inflation increases? 

Are there Nations that have better fiscal policies that lead to 

higher wages you would recommend we consider? Which countries 

and which policies lead to higher wages do you think? 

A.1. Specific fiscal policy or labor market policy proposals that are 

most appropriate for the United States are best decided by Congress. Generally speaking, however, policies aimed at increasing 

workforce participation and raising productivity have the best 

chance at boosting economic growth and raising living standards 

for Americans across the economic spectrum. 

We at the Federal Reserve can play a role by conducting monetary policy so as to fulfill our dual mandate of maximum employment and stable prices. In this way, we can ensure that the conditions are in place to keep labor demand high and stable for as 

many workers as possible, which in turn allows workers to find 

jobs that best match their abilities and that provide them with the 

greatest opportunity to increase their skills, productivity, and earnings more easily. 

Q.2. Economic Mobility—Earlier this month in your speech to 

teachers, you pointed out that the United States used to be a global 

leader in mobility—the ability of people born into poverty to move 

up to the middle class or even the wealthiest echelons of society. 

You said that is no longer true. You said ‘‘The U.S. lags now in mobility. And that’s not our self-image as a country, nor is it where 

we want to be.’’ 

Are there Nations that have better fiscal policies that lead to 

more economic mobility you would recommend we consider? Which 

countries and which policies lead to greater economic mobility? 

A.2. Research by a number of economists suggests that intergenerational economic mobility in the United States lags that of many 

other advanced economies. The reasons behind this are complex 

and not well understood. The Federal Reserve can do its part by 

working to achieve its dual mandate of maximum employment and 

price stability, as full employment improves the resources available 

to lower income households. 

Q.3. During the hearing, you mentioned a carpentry program for 

women that paid more in benefits than they would receive from the 

job for which they were training. Please provide details on this program: where it was located, for which jobs and which types of pro-
81 

1On March 28, 2019, the BEA reported the profits for the fourth quarter of $372 billion at 

an annual rate of 1.8 percent of GDP. 

grams through which the recipients received benefits that provided 

and income of more than ‘‘$9 or $10 an hour.’’ 

A.3. Last year, I visited West Virginia Women Work, a nonprofit 

in Morgantown, West Virginia, founded in 2000 to help women explore, train, and secure employment in nontraditional occupations, 

especially the skilled trades. The organization developed the Step 

Up for Women Construction Pre-Apprenticeship, a program designed to prepare women for entry-level construction jobs and apprenticeships. Additional information on this program is available 

on the West Virginia Women Work’s website at: http:// 

wvwomenwork.org/stepup. 

Q.4. Bank Profits—Banks and other financial firms made more 

than $500 billion in profits in the first three quarters of 2018. 

Banks made a record $237 billion in the fourth quarter of 2018. 

These are record profits. 

It seems that finance (banks, insurance, and real estate) earned 

more than 26 percent of all domestic corporate profits during those 

first three quarters of last year. Only about 6 percent of the private 

sector workforce is employed in finance but their share of corporate 

profits is about $1 in every $4 dollars. 

Are those figures correct? How much profits did the finance sector earn in 2018? What did finance earn compared to other private 

sectors such as manufacturing and real estate? What percent of 

corporate profits did finance earn? What share of people are employed in finance compared to other sectors? 

What is the impact on the economy when financial firms earn 

such an outsized percentage of corporate profits? 

The Federal Reserve tracks a number of indicators of our Nation’s economic prosperity. If you were to prioritize the top five indicators of economic prosperity, would bank profitability be in the 

top five? 

A.4. Data from the Bureau of Economic Analysis (BEA) indicates 

that, in the first three quarters of 2018, the corporate financial sector (including finance, insurance, bank, and other holding companies, but excluding Federal Reserve Banks) reported profits of $387 

billion at an annual rate of 1.9 percent of U.S. gross domestic product (GDP), on average. 1 Data from the Federal Deposit Insurance 

Corporation (FDIC) indicates that FDIC-insured commercial banks 

and savings institutions earned profits of $237 billion in all of 

2018. 

During the first three quarters of 2018, the corporate financial 

sector accounted on average for 24.8 percent of profits generated by 

the domestic corporate sector, according to data from the BEA. 

During the postrecession period, there has been no discernible increasing or decreasing trend in the fraction of corporate domestic 

profits generated by the financial sector or in other domestic sectors. For example, the manufacturing sector has been responsible, 

on average, for 22 percent of the domestic corporate sector’s profits. 

The manufacturing sector’s share was 14.9 percent in the first 

quarter after the last recession (2009 Q3). Its share then reached 
82 

2See Thomas Philippon, ‘‘Has the U.S. Finance Industry Become Less Efficient?’’ American 

Economic Review, 105(4), 2015. 

a peak value of 28.l percent in the last quarter of 2013, and in the 

third quarter of 2018, its share was 18.4 percent. 

Data from the Bureau of Labor Statistics (BLS) indicate that the 

financial corporate sector’s share of total private employment has 

declined slightly since the financial crisis, from 5.4 percent in 2009 

to 4.9 percent in 2018. Over the same period, the share of manufacturing sector employment also has declined a bit, from 10.8 percent 

to 10 percent. By contrast, the professional, scientific, and technical 

services sector’s share of total private employment has increased 

from 15.3 percent to 16.6 percent. 

Total profits relative to the number of total employees in the cor- porate financial sector was $62,250 per employee in the third quarter of 2018. This relatively high profitability per worker is typical 

of sectors that rely on intangible assets to create value. Intangible 

assets include, but are not limited to, reputational and institutional 

capital, brand value, and patents. As an example, in the third 

quarter of 2018, the profit-to-employees ratio for information technology and chemicals (dominated by pharmaceuticals)—two intangible-intensive sectors—were $57,619 per employee and $56,915 

per employee, respectively. 

It is difficult to assess the range of economic consequences derived from the degree of profitability of the financial sector, particularly because the size and profitability of the corporate sector 

are themselves the result of other economic forces. For example, 

the corporate financial sector has increased in importance in the 

U.S. economy during the postwar period. Academic research suggests that this rise is itself a consequence of the increase in the volume of intermediation to support economic activity, especially business credit, equity, and household credit. 2

In general, profits in the banking sector are important to the extent that they contribute to building and maintaining the capital 

adequacy of the financial system. We view the resilience of bank 

capital as a fundamental element of financial stability and the 

health of the credit markets that support the U.S. economy. More 

generally, in the Federal Open Market Committee’s (FOMC) conduct of monetary policy, to best achieve its maximum employment 

objective and its symmetric 2-percent inflation objective, the Committee takes into account a wide range of information, including 

measures of labor market conditions, indicators of inflation pressures and inflation expectations, and financial and international 

developments. Bank profitability is only one of numerous factors 

that influence the FOMC’s assessment of overall economic conditions. 

Q.5. Buybacks—We need investments that help families prosper. 

Instead, the majority of the Trump and GOP tax bill has gone to 

share buybacks—$171 billion worth have been announced so far in 

2018—more than double 2017’s total. This keeps stock markets 

high. Financial Times’ columnist, Rana Foroohar, refers to the 

buybacks as a ‘‘financial shell game of issuing their own [corporate] 

debt at very cheap rates and handing the money back to their investors as buybacks and dividends, while also buying up the high-
83 

er-yielding bonds of riskier companies at a favorable spread and 

holding those assets offshore.’’ 

What happens when the buybacks stop? 

A.5. While it is too early to conclude the overall effects of the 2017 

tax legislation on firm investment and share repurchase decisions, 

it is likely that companies allocated at least some portion of earnings repatriated from abroad to share buybacks following changes 

in the tax treatment of foreign earnings. In dollar volume, share 

buybacks in 2018 were up substantially from 2017 and are at their 

highest annual level on record since 1983. However, when measured relative to operating earnings, share buybacks appear somewhat closer to their historical range. For the first three quarters 

of 2018, buybacks for nonfinancial companies averaged about 22 

percent of companies’ operating income, and we estimate, based on 

partial data available to date, that buybacks were 26 percent of operating income in the fourth quarter. By comparison, share 

buybacks also averaged 22 percent of operating income from 2014 

to 2016, but buybacks fell to 16 percent of operating income in 

2017. 

Companies generally repurchase shares when they deem these 

repurchases to be the highest value use of those particular funds 

for the company. U.S. companies have been quite profitable in recent decades and those profits have allowed companies to accumulate cash, pay dividends, and repurchase shares, in addition to investing and hiring. 

A reduction in share repurchases would not, however, necessarily 

translate into an increase in investment. For example, in lieu of 

share buybacks, a given company may choose to distribute funds 

to shareholders by other means (e.g., regular or special dividends) 

or retain a larger share of the funds by accumulating cash or other 

liquid assets. 

Q.6. Discrimination in Lending—These questions follow up on our 

discussion during the hearing about how Fed examiners evaluate 

financial institution for fair lending compliance. 

Please expand on the type of indicators or red flags examiners 

look for in determining compliance with the Equal Credit Opportunity Act or the Fair Lending Act? It’s not just credit scores and 

loan-to-value ratios. What types of lending products? Would examiners consider incentive pay tied to higher-priced loans? Would the 

existence of bonuses for bank staff that provided a loan with higher 

fees and interest rates be a red flag? Please be specific and comprehensive in your response. 

A.6. The Federal Reserve’s fair lending supervisory program reflects our commitment to promoting financial inclusion and ensuring that the financial institutions under our supervision fully comply with applicable Federal consumer protection laws and regulations. For all State member banks, we enforce the Fair Housing Act 

which provides us authority to review all Federal Reserve regulated institutions for potential discrimination with respect to mortgages, including potential redlining, pricing, and underwriting discrimination. For State member banks of $10 billion dollars or less 

in assets, we also enforce the Equal Credit Opportunity Act 

(ECOA), which provides us authority to review these State member 
84 

3See https://www.ffiec.gov/pdf/fairlend.pdf. 4See www.federalreserve.gov/publications/2018-july-consumer-compliance-supervision-bulletin.htm. 5 Chari, V.V., ‘‘The Role of Uncertainty and Risk in Climate Change Economics’’. The Federal 

Reserve Bank of Minneapolis: Research Division. December 2018. Available at: https:// 

www.minneapolisfed.org/research/sr/sr576.pdf. 

banks for potential discrimination concerning any credit product. 

Together, these laws prohibit discrimination on the basis of race, 

color, national origin, sex, religion, marital status, familial status, 

age, handicap/disability, receipt of public assistance, and the good 

faith exercise of rights under the Consumer Credit Protection Act 

(collectively, the ‘‘prohibited basis’’). 

We evaluate fair lending risk at every consumer compliance 

exam based on the risk factors set forth in the Federal Financial 

Institutions Examination Council’s interagency fair lending examination procedures. 3 These procedures include risk factors related 

to potential discrimination in pricing, underwriting, redlining, and 

steering. Our examiners commonly review mortgage products and 

consumer products reportable under the Home Mortgage Disclosure 

Act for fair lending risk, although a State member bank’s lending 

record will determine the loan products that are reviewed in a particular exam. 

The presence of any financial incentives, including incentive pay 

tied to higher-price loans or bonuses for staff originating such 

loans, is a risk factor that the Federal Reserve considers, consistent 

with the interagency fair lending procedures. Since April 2011, 

Regulation Z’s mortgage loan originator compensation rule has prohibited banks from providing financial incentives based on the 

terms or conditions of a loan, including the price. Although this 

rule has decreased the risk of financial incentives influencing mortgage pricing, it has not eliminated such risk. In our outreach efforts to State member banks and the public, including in our publication, Consumer Compliance Supervision Bulletin, 4 we have been 

clear in explaining how fair lending risk may be increased by financial incentives. During our consumer compliance exams, we continue to evaluate any financial incentives in place at a State member bank for compliance with both Regulation Z and the fair lending laws by reviewing the bank’s compensation structure along 

with any other existing fair lending risk factors. 

Q.7. Climate Change—Chapter 3 of the Monetary Report includes 

a section on Uncertainty and Risks. It includes uncertainty about 

the funds rate and the impact of trade and tariffs but nothing 

about climate change. A recent paper by V.V. Chari of the Federal 

Reserve of Minneapolis 5 urged social scientists to take the findings 

of climate scientists about the effects of global warming on the atmosphere, climate, land, and oceans and understand and communicate the consequences of these physical changes on the economic, 

social, and political well-being of humanity. 

Central Banks and economists have a role to play to guide policy 

recommendations to respond to climate change. Last year, William 

Nordhaus and Paul Romer received the Nobel Memorial Prize in 

Economic Sciences for pioneering the analysis of the economic effects of climate change. 
85 

6 Jackson, Hugh, ‘‘Did AOC Nudge Economists (Including 12 From Nevada) To Back a Carbon 

Tax?’’ Nevada Current. February 20, 2019. Available at: https://www.nevadacurrent.com/2019/ 

02/20/did-aoc-nudge-economists-including-12-from-nevada-to-back-a-carbon-tax. 

Do you agree with Janet Yellen who, along with 3,300 economists, signed a statement supporting a carbon tax to prevent devastating droughts, fires, and hurricanes? 6

A.7. I think that it is appropriate for the details of fiscal policy decisions to be left to Congress and the Administration. 

Q.8. What role will the Federal Reserve play in communicating the 

effects of alternative policies aimed at addressing climate change? 

Will the Fed include economic models to respond? 

A.8. Addressing climate change is a responsibility that Congress 

has entrusted to other agencies. That said, the Federal Reserve 

uses its authorities and tools to prepare financial institutions for 

severe weather events. Over the short term, these events have the 

potential to inflict serious damage on the lives of individuals and 

families, devastate local economies (including financial institutions), and even temporarily affect national economic output and 

employment. As such, these events may affect economic conditions, 

which we take into account in our assessment of the outlook for the 

economy. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SMITH 

FROM JEROME H. POWELL 

Q.1. In November, the Minneapolis Fed reported that the number 

of farms filing for Chapter 12 bankruptcy has doubled in Ninth 

District States over the past 4 years. We have watched this problem evolve for years. The overproduction of certain commodities 

like grains and dairy has led to low prices which, combined with 

recent trade disputes, has made it nearly impossible for family 

farms to turn a profit. In the years following the Great Recession, 

low interest rates made it easier for farmers to take on debt, upgrade equipment and facilities, and buy new land. Steadily rising 

interest rates in the last 3 years have made it more difficult for 

farmers with already small margins to pay off their debts. The 

Beige Book put out by the Minneapolis Fed in the fourth quarter 

of 2018 says that approximately three in five lenders reported seeing a decrease in farm incomes and in capital spending. It is clear 

that downturns in the farm economy can have big impacts on consumer spending and regional economic prosperity. 

How do you expect the rise in farm bankruptcies to impact the 

state of our economy, both regionally and nationally? 

A.1. The U.S. farm economy has remained in a prolonged downturn 

for the past several years, alongside persistently low agricultural 

commodity prices. Nationally, farm income is expected to rise in 

2019 due, in part, to Government support programs announced in 

recent months. Some agricultural prices have also increased significantly due to widespread weather disruptions that affected planting in May and June. Looking ahead, however, agricultural commodity prices and farm incomes are generally expected to remain 

low beyond 2019. 
86 

Amid reduced incomes, financial stress in the agricultural sector 

has continued to build at a gradual pace. At commercial banks, delinquencies on farm loans have increased slightly in recent years, 

but remain less than in 2010, and well below those of the 1980s, 

a period often referred to as the U.S. farm crisis, which included 

a number of bank failures and other significant challenges in rural 

communities. 

Similar to the uptick in delinquencies on farm loans, farm bankruptcies also have edged higher since 2014. Nationally, Chapter 12 

bankruptcy filings have increased from 360 in 2014 to 498 in 2018. 

The increase in bankruptcies appears to be most pronounced in 

States with a high concentration of dairies, as well as States focused on corn and soybean production. In Minnesota, for example, 

there were an average of thirteen Chapter 12 filings per year from 

2014 to 2017, increasing to twenty-six in 2018. 

Despite the ongoing challenges of low farm incomes and an uptick in farm bankruptcies, measures of solvency have generally remained strong, and the increase in bankruptcies appears to be having a limited effect on broader economic conditions. The debt-toasset ratio for the U.S. farm sector is expected to rise only slightly 

in 2019 to 13.9 percent, as farm real estate values remain relatively stable. Although the severe planting delays this spring may 

affect financial conditions for some producers, Government payments will provide some support and, thus far, there appears to be 

limited impacts on broader regional economies. Moreover, unemployment has remained historically low, even in rural areas focused 

on agriculture, where job growth has been weaker in recent years. 

As these conditions evolve, the Board of Governors of the Federal 

Reserve System (Board) will continue to monitor developments in 

agriculture and the potential for implications in other segments of 

the national or regional economy. 

Q.2. Can you speak to how future changes in the Federal funds 

rate may impact the agricultural economy? 

A.2. While it cannot be said with certainty what actions will be 

taken in response to the future state of the economy, the Federal 

Reserve System strives to incorporate perspectives from all regions 

of the country and from a broad range of industries, including agriculture, into its regular monetary policy deliberations and its assessments of the U.S. economy. We receive input on agricultural 

conditions from business contacts across the country through our 

boards of directors at the Federal Reserve Banks, various advisory 

councils, and surveys, in addition to reports from staff who track 

developments in U.S. agriculture. 

Although interest rates on farm loans are typically not indexed 

or explicitly tied to the Federal funds rate, the rates on these loans 

have increased in recent years. The increases have been relatively 

modest, and some financial stress has been mitigated by the relative strength of farm real estate values. Since the end of 2015, the 

average interest rate on farm operating loans at commercial banks 

has increased about 1.9 percent, but still remains less than prevailing interest rates on these farm loans as recently as 2012. 

Interest expenses on farm debt also account for a relatively small 

share of overall expenses in the U.S. farm sector. Moreover, despite 
87 

the modest increase in interest rates, farm real estate values have 

remained relatively strong and have supported farm borrower balance sheets. 

Q.3. Wage growth has been stagnant for many Americans over the 

last decade or longer. One of the causes of this concerning slowdown has been a decline in worker productivity growth—only about 

1 percent annually over the last decade. This figure is well below 

historic norms and is not, in my estimation, sustainable if we want 

strong, long-term wage growth. 

Why is there slower growth in productivity? 

A.3. The reasons for the slowing in productivity growth over the 

last decade or so are not clear. Some explanations assign a large 

role to the Great Recession and its aftermath, which dramatically 

reduced the level of investment in equipment, software, and research and development, and which also likely reduced credit available for business startups. Other research suggests, instead, that 

the slowing occurred prior to the Great Recession and may be due 

to a relative scarcity of new, general-purpose, high-impact technologies. If the slowdown has been due largely to factors associated 

with the Great Recession, then as the expansion continues, productivity growth should pick up. Last year, productivity did rise at a 

relatively robust rate of nearly 2 percent, but we would need to see 

this higher rate of growth persist before concluding that the period 

of low growth was behind us. 

Q.4. To what extent, if any, is this slowdown affected—either now 

or potentially in the future—by high levels of stock buybacks 

crowding out investment in workforce, technology and capital improvements? 

A.4. Companies generally repurchase shares when they deem these 

repurchases to be the highest value use of those particular funds 

for the company. U.S. companies have been quite profitable in recent decades, and those profits have allowed companies to accumulate cash, pay dividends, and repurchase shares, in addition to investing and hiring. Businesses without profitable investment opportunities are more likely to return income to shareholders than 

invest. Shareholders are then free to invest the funds in businesses 

that have profitable investment opportunities. 

Q.5. Around the world, countries have begun shifting to nearly instantaneous, 24/7 payment systems. But while consumers can send 

money in pseudo–real time using apps like Venmo, those transactions are only instantaneous for the consumer—they’re usually 

not fully settled for the bank or retailer until days later. Two years 

ago, the Fed’s Faster Payments Task Force embraced a goal of having a true, ubiquitous, 24/7 real-time payment system in the 

United States by 2020—which is necessary to keep pace with foreign countries that are developing or already implementing similar 

systems. Last year, the Fed sought comments on how to implement 

a faster payments system, and asked what role, if any, the Fed 

should play in developing it. 

Do you think the United States is on track to meet the Task 

Force’s goal of having a ubiquitous real-time payment system in 

place by 2020? 
88 

A.5. The Faster Payments Task Force (FPTF), an industry work 

group established by the Federal Reserve in 2015, called on all 

stakeholders in its 2017 final report to facilitate a vision of ‘‘a payment system in the United States that is faster, ubiquitous, broadly inclusive, safe, highly secure, and efficient by 2020.’’ The Federal 

Reserve continues to applaud the FPTF’s aspirational goal and the 

industry’s progress to date. Also as part of that final report, the 

FPTF requested that ‘‘the Federal Reserve develop a 24x7x365 settlement service’’ and to assess other operational roles ‘‘to support 

ubiquity, competition, and equitable access to faster payments.’’ 

The Federal Reserve agreed to consider both requests of the FPTF, 

and the Board sought, in an October 2018 Federal Register Notice, 

public input on potential actions the Federal Reserve might take in 

regard to supporting faster payments in the United States. 

While those requests focused on infrastructure needs in the 

United States to support faster payments, the FPTF also identified 

a need for ongoing industry collaboration to build the foundation 

for a highly functioning faster payments ecosystem and asked the 

Federal Reserve to facilitate an industry group to establish a governance framework. Late last year, the industry announced the formation of the U.S. Faster Payments Council to develop collaborative approaches to accelerate U.S. adoption of faster payments. 

All of these efforts by the Federal Reserve and industry are intended to create a strong foundation for collective efforts to promote the safety and efficiency of faster payments in the United 

States and to support the modernization of the financial services 

sector’s provision of payment services. 

Q.6. With the 2020 deadline quickly approaching, when do you expect the Fed to take next steps on this issue? 

A.6. The Board has received over 400 comment letters from a broad 

range of market participants and interest groups, including consumer groups, in response to the October 2018 Federal Register Notice. The Board is carefully considering all of the comments received before determining whether any action is appropriate or the 

timing of such potential action. Any resulting action the Board decides to take would be pursued in alignment with existing, longstanding Federal Reserve principles and criteria for the provision 

of payment services. 

Q.7. Are you monitoring actions of foreign countries to develop 

real-time payment systems, and if so, how are those developments 

informing your decision making? 

A.7. Globally, the Federal Reserve is not unique in considering settlement infrastructure to support faster payments—several jurisdictions around the world have undertaken similar processes and 

implemented settlement infrastructures to support real-time payments in their jurisdictions. The Federal Reserve has been actively 

monitoring these efforts and considering the models for faster payment settlement in other countries, including real-time gross settlement (RTGS) and deferred net settlement (DNS), as part of its 

analysis. 

Q.8. You remarked recently that income inequality is our country’s 

biggest economic challenge in the next decade—and said that: ‘‘We 
89 

want prosperity to be widely shared,’’ and, ‘‘We need policies to 

make that happen.’’ I agree with this assessment. Many have 

pointed to the recent strength in both the U.S. stock market and 

overall GDP growth as evidence that Americans are doing better. 

But I’m not sure these are the right indicators to be looking at to 

assess how the average American family is faring these days. The 

recent stock market highs and tax cut legislation do not benefit the 

average American household to nearly the same extent as it benefits the very wealthiest households. In 2016, the top 10 percent of 

American households owned 84 percent of all stocks, and the top 

20 percent received about 70 percent the benefits of the 2017 tax 

bill. Banks have done well in this economy too—with last years’ 

profits up 44 percent from 2017, including $29 billion in profits attributable to the Trump tax cuts alone. But instead of steering 

these profits and tax windfalls toward new investment in jobs and 

technology, banks and corporations have instead rewarded wealthy 

investors with record stock buybacks—over $1 trillion worth in 

2018. 

Would you say that the 2017 tax bill, on balance, has increased 

or decreased income and wealth inequality in the U.S., and would 

you consider it an example of a policy that creates the ‘‘widely 

shared prosperity’’ that you called for recently? 

A.8. For a number of reasons, estimates of the distributional effects 

of the Tax Cuts and Jobs Act of 2017 are subject to considerable 

uncertainty. For example, the changes in the personal income tax 

laws were very complicated and have affected different families in 

various ways, in part reflecting the new limits on deductibility of 

State and local income taxes and the end of personal exemptions. 

Similarly, the distributional effects of corporate income taxes are 

very complex. A corporate income tax cut may benefit working people if the tax cut induces more investment that results in higher 

productivity and real wages. But estimating the magnitude of these 

effects from tax cuts is highly uncertain. More generally, policies 

to reduce economic inequality, including tax policies, are appropriate for Congress to decide. 

Q.9. How committed is the Fed to studying the macroeconomic effects of our record-high levels of inequality, and how are the findings being incorporating into the Fed’s policymaking and its assessment of the economic outlook? 

A.9. The Federal Reserve tries to understand the root causes and 

economy-wide implications of the uneven distribution of income 

and wealth. For example, we support two household surveys, the 

annual Survey of Household Economics and Decision Making 

(SHED) and the triennial Survey of Consumer Finances (SCF), to 

study household finances. In addition, we recently released the Distributional Financial Accounts, which we also hope will add to our 

understanding of changes in the income and wealth distributions. 

And, we have included analyses of various forms of economic disparities in several recent issues of the Federal Reserve’s Monetary 

Policy Report. With regard to monetary policy, the Federal Reserve 

is limited in the extent to which its tools can specifically address 

inequality. However, our dual mandate includes maximum employment, which has a direct impact on the most vulnerable families 
90 

1 Cajner, Tomaz, Tyler Radler, David Ratner, and Ivan Vidangos (2017), ‘‘Racial Gaps in 

Labor Market Outcomes in the Last Four Decades and Over the Business Cycle’’, Finance and 

Economics Discussion Series 2017-071. Washington: Board of Governors of the Federal Reserve 

System, https://www.federalreserve.gov/econres/feds/files/2017071pap.pdf. 

who depend on their labor income. More generally, and regardless 

of its effects on growth, inequality is an important and complicated 

issue that is appropriately addressed by Congress. 

Q.10. Recent Bureau of Labor Statistics data has shown unemployment rates to be approaching record lows—hovering around 4 percent. But the headline picture obscures key compositional effects. 

When these numbers are broken down by race, we see significant 

disparities, with notably higher unemployment rates for African 

Americans and other traditionally marginalized communities. Compared to white unemployment, which remains below 4 percent, 

black and hispanic workers face 6.8 percent and 4.9 percent unemployment rates, respectively. These disparities reflect structural 

barriers but also demonstrate that there is some slack in the labor 

market with the potential to reintegrate traditionally marginalized 

individuals into the labor force. The Fed has suggested previously 

that as a whole, the economy is at or near full employment. 

Are communities of color at full employment as well? 

A.10. The unemployment rate has fallen sharply in recent years for 

all major racial and ethnic groups. In particular, the unemployment rate of African Americans recently reached its lowest level on 

record (data began being collected in the early 1970s). Despite 

these encouraging developments, as you note, the unemployment 

rate of black workers remains well above that of whites. This troubling differential in unemployment rates is not new; it has persisted for several decades, regardless of the state of the business 

cycle. Indeed, one relevant study 1 prepared by Federal Reserve 

staff made two important findings. First, the black–white unemployment rate gap is highly cyclical, widening in recessions and 

narrowing in expansions. That said, beyond the cyclical variation, 

there has been very little secular improvement in this gap in the 

past four decades. Second, the black–white unemployment rate 

gap—as well as its cyclicality—is primarily driven by large and 

persistent differences in the rate of job loss (rather than in the rate 

of job finding) between black and white workers. In particular, in 

economic downturns, black workers lose their jobs at a much higher rate than white workers, perpetuating large gaps in unemployment rates. 

One important implication is that the Federal Reserve can be 

most helpful by focusing on our dual mandate of fostering full employment and price stability. Setting monetary policy that is not 

consistent with the dual mandate could lead to high price inflation 

or financial imbalances, and thereby set the stage for an economic 

downturn, which would appear to be especially harmful to African 

American workers. Meanwhile, progress to further narrow the differentials in unemployment rates by race and ethnicity is more 

likely to be found in structural policies aimed at addressing longerrun disparities. This is an important issue that is appropriately addressed by Congress. 
91 

Q.11. How does the Federal Reserve and the FOMC consider disparities in the headline unemployment data when it comes to fulfilling its maximum employment mandate? 

A.11. In setting monetary policy to be consistent with the dual 

mandate of maximum employment and price stability for the economy as a whole, the Federal Open Market Committee (FOMC) considers a range of experiences and economic outcomes across the 

country. For example, at every FOMC meeting, Reserve Bank 

presidents describe economic conditions in their Districts, and the 

Committee reviews a wide range of information on the strength of 

the labor market, including data on the labor market conditions experienced by different demographic groups. Similarly, in advance of 

every FOMC meeting, Federal Reserve staff provide to the Committee their review of labor market developments, including analyses of labor market conditions across groups defined by age, gender, race, and ethnicity. Finally, Federal Reserve staff regularly 

conduct research aimed at better understanding differences in economic outcomes across demographic groups; the study cited previously is one example. 

Q.12. One of most important powers given to FSOC in Dodd–Frank 

was the ability to subject nonbank financial institutions to the 

same enhanced regulatory scrutiny as the largest banks. This 

power is crucial for keeping our financial system safe. Large 

nonbank firms like AIG played a major role in crashing our economy in 2008 through their risky bets and excessive leverage, and 

they were able to do so largely beyond the reach of the existing regulatory regime. Despite the importance of this regulatory power, as 

of October 2018, all four nonbank SIFIs have been dedesignated— 

leaving no nonbank institution, no matter how large or how risky, 

under higher scrutiny from regulators to protect our Nation’s financial stability. Most recently, both MetLife and Prudential have successfully fought to shed their enhanced SIFI oversight—but not by 

significantly deleveraging and radically changing their business 

models like GE Capital and AIG did. The Treasury Department 

under Secretary Mnuchin proposed in a 2017 report that FSOC’s 

systemic risk oversight of nonbanks should shift to an activitiesbased approach rather than an entity-based approach, which would 

make it more difficult and time-consuming to place SIFI status on 

a nonbank entity. Former Chair Yellen, however, argued in a 

Brookings interview last month that individual nonbank entities do 

pose systemic risks, and when they do so it is important to supervise and regulate them. 

Do you today believe that no nonbank financial institution currently warrants SIFI-level enhanced supervision, and do you agree 

with the 2017 Treasury report proposing to make it more difficult 

for FSOC to impose SIFI designations on nonbank entities? 

A.12. Maintaining stability of the U.S. financial system remains a 

top priority for the Federal Reserve. The Federal Reserve actively 

monitors potential risks to U.S. financial stability in a variety of 

ways, including reviewing the resilience of key financial intermediaries. As noted in the Federal Reserve’s Financial Stability 

Report, the largest U.S. banks remain strongly capitalized; the leverage of broker-dealers is substantially below precrisis levels; in-
92 

2See ‘‘Federal Reserve Board Financial Stability Report’’ (April 2019), https:// 

www.federalreserve.gov/publications/files/financial-stability-report-201905.pdf. 

surance companies appear to be in relatively strong financial positions; and hedge fund leverage appears to have declined. 2

In terms of nonbank designations, the Financial Stability Oversight Council’s (FSOC’s) October 2018 decision to rescind the designation of Prudential Financial, Inc. (Prudential) was based upon 

its reevaluation of the risks posed by the firm. This reevaluation 

determined that the original designation likely overstated the negative consequences of potential asset liquidation should Prudential 

experience material financial distress. For MetLife, Inc., in March 

2016, the U.S. District Court overturned FSOC’s determination 

that MetLife poses a threat to U.S. financial stability. It should be 

noted that, in the summer of 2017, MetLife shrank substantially 

by spinning off a portion of its U.S. retail life insurance and annuity segment into Brighthouse Financial. 

The FSOC published proposed amendments to its guidance on 

nonbank financial company determinations for public comment on 

March 6, 2019. The proposed guidance, which was drafted following 

the 2017 Treasury report, promotes an activities-based approach 

for identifying and mitigating risks to financial stability. However, 

FSOC also maintains the important tool of designating individual 

entities as systemically important in cases where the activitiesbased approach cannot address the potential risks or threats. The 

proposed guidance represents a disciplined framework that can 

more effectively identify and address underlying sources of risk to 

financial stability. 

Still, individual nonbank entities can pose systemic risks, and 

therefore it is critical that FSOC maintains the option to designate 

these firms when appropriate. The activities-based approach described in the proposed guidance is intended to enhance the 

FSOC’s process for evaluating individual nonbank financial companies for designation by increasing transparency, analytical rigor, 

and public engagement. It is viewed as a valuable complement to 

entity designations, rather than a substitute for the current entitybased approach of managing systemic risk. 

Q.13. In the same Brookings interview, former Chair Yellen stated 

that the Trump administration’s support for the SIFI designation 

standards from the MetLife court would, ‘‘all but eliminate the 

chances of future designations’’—do you agree with this assessment, and is it a concern for you? 

A.13. As I noted in my response above, we continue to believe that 

individual nonbank entities can pose systemic risks. The proposed 

activities-based is viewed as a valuable complement to entity designations, rather than as a replacement for the current entitybased approach of managing systemic risk. 

Q.14. In your testimony, you said ‘‘there are some things in the 

Federal tax code where people lose their benefits with their first 

dollar of earnings,’’ and you noted this effect could cause individuals to avoid entering the labor market. 

Specifically, which tax credits were you referring to? 
93 

A.14. In general, safety-net programs are typically designed so that 

benefits fall as incomes rise. As a consequence, for low- and moderate-income households, any improvement to household finances 

from increased work is partially offset by the loss of benefits that 

occurs as household income rises. Researchers have found that programs with a rapid phase-out of benefits and the interaction among 

various safety-net programs sometimes leads to relatively high effective marginal tax rates. This, in turn, may discourage work, particularly for potential second earners. Researchers have found that 

programs where the phase-out range is relatively long reduce potential disincentive effects. 

It is up to Congress to determine how best to ensure safety-net 

programs provide the lowest work disincentives as possible while 

still achieving the social goals of the programs. For our part, the 

Federal Reserve is focused on pursuing our congressionally mandated goals of maximum employment and price stability, and making the best decisions we can in the interest of the public. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA 

FROM JEROME H. POWELL 

Q.1. Arizonans continue to be concerned about the Administration’s 

trade policy. This unnecessary trade war hurts Arizona farmers 

and businesses, stifling job creation. On February 17th, the Commerce Department submitted its national security report to the 

President under Section 232 of the Trade Expansion Act. 

While the details of this report aren’t public and the President 

is not necessarily bound by the report’s recommendations, it is possible that this report recommends additional tariffs on automobiles 

and automobile parts, levied as high as 25 percent. 

What is your assessment on the effect these additional tariffs 

would have on investment, the labor market, and the economy 

overall—both in Arizona and nationally? 

Modeling all but certain retaliatory tariffs from impacted Nations, which have historically targeted American farmers and agriculture. 

What is your assessment on the collective effect this decision to 

escalate the trade war would have on investment, the labor market, and the economy overall—both in Arizona and nationally? 

A.1. In response to both of your questions, it is important to note 

that the Federal Reserve Board is responsible for formulating monetary policy to achieve price stability and maximum sustainable 

employment. Matters of trade policy are the responsibility of Congress and the Administration. 

In pursuit of our mandated objectives, we monitor the effects of 

various developments, including trade policy, on the economy. Tariff increases, by both the United States and other countries, already have affected individual businesses and industries. As indicated in the Federal Open Market Committee minutes and the 

Beige Book, our business contacts report that trade policy developments are increasing input costs and creating policy uncertainty, 

causing some firms to delay investments. 

Similarly, potential tariffs on the auto industry could raise input 

costs and could cause some firms to delay plans for investment or 
94 

hiring. Such tariffs also may disrupt the extensive supply chains 

that link the auto industries in the United States, Canada, and 

Mexico. Consumers could face higher prices for new automobiles. 

However, the particular effects would depend on the precise implementation of tariffs and may be mitigated by certain types of 

agreements with Canada and Mexico. 

Retaliatory tariffs by other countries have impacted certain U.S. 

industries, most notably agriculture, with farmers facing lower demand and prices for their crops, such as soybeans. Additional retaliatory tariffs could put further strain on farmers and other affected 

businesses. 

The overall process of trade negotiations is ongoing, and it is unclear how it will play out. If the end result is a world with higher 

tariffs in many countries, then experience suggests there will be 

negative effects for the U.S. economy as we miss out on some of 

the benefits of trade. However, if the end result is a world with 

lower trade barriers and a more level playing field, then the U.S. 

economy should benefit. 
95 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

MoNETARY Poucv REPORT 

February 22, 2019 

Board of Governors of the Federal Reserve System 

For use at 11 :00 a.m., EST 

ftbnwy 22, 2019 
96 

LETIER OF T RANSMITIAL 

BOARD Of GOVER~ORS Of TilE 

FEDERAL R ESI:RVE Sl'STEM 

Washington, O.C, February 22, 2019 

THE REStO£~• Of TilE SeN,m 

THE SPEAKER OF THE HollSE OF REPRESENTATIVES 

The Board of Governors is pleased to submit its Monet(lr)' Policy Repqtt pursuant to 

section 28 of the Federal Resen·e Act. 

Sincerely, 

Jerome H. Powell, Chairman 
97 

STATEMENT ON n.oNGER·RUN GOALS AND MONETARY POLICY STRATEGY 

Adopted ~ffectiv~ January 24, 2012; as amended effeclile /anuary 29,2019 

The Federal Open Market Committee (FOMC) is firmly committed to fulfilling its statutory 

mandate from the Congress of promoting maximum employment, stable prices, and moderate 

long-term interest rates The Committee seeks !O explain its monetary policy decisions to the public 

as clearly as possible. Such clarity facilitates well-informed decisionmaking by households and 

businesses, r.'duces economic and financialuncertaint)', ncre~ses the elfectil'eness of monetary 

policy, and enhances transparency and accountability, which are essential in a democratic society. 

Inflation. employment, and long-term interest rate$ fluctuate o1·er time in response to economic and 

financial disturbances Moreover, monetary policy actions tend to influence economic activity and 

prices with a Jag. Therefore. the Committee's policy decisions reflect its longer-run goals, its mediumterm outlook, and its assessments of the balance of risks. including risks to the financial system that 

could impede the attainment of the Committee's goals 

The inflation rate 01·er the longer run is primarily determined by monetary policy, and hence the 

Committee has the ability to specify a longer-run goal for inflation. The Committeereaftirms its 

judgment that inflation at the rate of 2 percent, as measured by the annual change in the price 

index for personal consumption expenditures is most consistent o1·er the longer run 11~th the 

Federal Reserve's Statutory mandate. The Committee would be concerned if inflation were nmning 

persistently above or below this objective. Communicating this symmetric inflation goal clearly to the 

public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability 

and moderate long-term interest rates and enhancing the Committee's ability to promote maximum 

employment in the face of significant economic disturbances Tile maximum level of employment 

is largely determined by nonmonetary factors that aft'ectthc structure and dynamics of the labor 

market. These factors may change OI'Cr time and may not be dir<>ctly measurable. Consequently, 

it would not be appropriate to specify a fixed goal for employment: rather. the Committee's policy 

decisions must be informed by assessments of the maximum lerel of employment. recognizing that 

such assessments are necessarily uncertain and subject to revision. The Committee considers a 

wide range of indicators in making these assessments. Information about Committee participants' 

estimates of the longer-run normal rates of output growth and unemployment is published four 

times per year in the FOMC's Summary of Economic Projections. For example, in the most 

rmnt projections, the median of FOMC participants' estimates of the longer-run normal rate of 

unemployment was 4.4 percent. 

In setting monetary policy. the Committee ~ks to mitigate deviations of inflation from its 

longer-run goal and deviations of employment from the Committees assessments of its maximum 

level. TI!ese objectives are generally complementary. However, under circumstances in which the 

Committee judges that the objeetiloes are not complementary. it follo11~ a balanced approach in 

promoting them. taking into account the magnitude of the deviations and the potentially dift'erent 

time horizons over which employment and inflation are projected to return to levels judged 

consistent with its mandate. 

The Committee intends to reaftirm these principles and to make adjustments as appropriate at its 

annual organizational meeting each January. 
98 

CONTENTS 

Summary ...•.••.•.....•...........•..•........•.......•..•• 1 

Economic and Financial Developments .. .. .. ... .. .. .. .. ... .. .. .. . .. .. ..... .. .. . 1 

Monetary Policy . .. .. ...... ........... 2 

Special Topics.. .. . . .. . . .. ..... .. ... ... 3 

Part 1: Recent Economic and Financial Developments ................. 5 

Domestic Developments. . . . . . . . . . . . . . . 5 

Financial Developments.... .. . .... .. .. .. . .. . . .... ..... ... ... .. ... .. ... 22 

International Developments .. ...... .. ... ....... ......... .. ..... .... ..... .. .. 29 

Part 2: Monetary Policy . .. .. .......•..•.... .. ......... .......• 33 

Part 3: Summary of Economic Projections ......................... 47 

The Outlook for Economic Activity.. . .. • . .. .. .. .. . • . .. . • .. . .. . . . . 48 

The Outlook for Inflation . .. . ........ ....... .. ..... ..... .. .... ..... ...... . .. 50 

Appropriate Monetary Policy . .. .. ... .... ....... ...... ... .. ..... .... ..... .. .. 51 

Uncertainty and Risk~. . . . ........... .............. ...... ......... .. 51 

Abbreviations .............. .. . .. . .. . ..... . .... .. . .... .. .. . . 65 

List of Boxes 

EmpiO)'ment Disparities between Rural and Urban Areas .....•.... . .. ...•....... . .. 10 

Developments Related to Financial Slability . ..... .. .. . .... .. .. .. ... .. .. ..... .. .. 26 

Monetary Policy Rules and Systematic Monetary Policy . . . .. .... .. ..... .. ....... .. 36 

The Role of liabilities in Determining the Size of the Federal Reserve's Balance Sheet ..... 41 

Federal Reserve Transparency: Rationale and New Initiatives .... .. ..... .. .. ..... .. .. 45 

Forecast Uncertainty. .. .. .. .. . . .. . .. .. ... .... ... 62 

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99 

SuMMARY 

Economic activity in the United Stales 

appears to have increased at a solid pace, on 

balance, over the S<'COnd half of 2018, and the 

labor market strength~ncd further. Inflation 

has been near the Federnl Open Market 

Commillee"s (FOMC) longer· run objective 

of 2 percent aside from the transitory eft"ccts 

of n.>tenl energy price movement& In this 

environment the FOMC judged that on 

balance, current and prospective economic 

conditions called for a further gradual removal 

of policy accommodation. In particular. the 

FOMC rnised the target range for the federal 

funds rnte twice in the second half of 2018, 

pulling its level at 2Y. to 2'h percent following 

the December meeting.ln light of softer 

global economic and financial conditions late 

in the year and muted inflation pressures, the 

FOMC indicated at its January meeting that 

it will be patient as it determines what future 

adjustments to the federnl funds rnte may 

be appropriate to support the Commi11ee's 

congre$Sionally mandated objectives of 

maximum employment and price stability. 

Economic and Financial 

Developments 

The labor market. The labor market has 

cominued to strengthen since the middle of 

last year. Payroll employment growth has 

remained strong, averaging 224,000 per month 

since June 2018. The unemployment rate 

has been about unchanged over this period. 

avernging a lillie under 4 percent- a low le1-el 

by historical standards.-while the labor force 

participation rnte has moved up despite 1he 

ongoing downward influence from an aging 

population. Wage grol\1h has also picked 

up recently. 

Inflation. Consumer price inflation, as 

measured by lhe 12·month change in the price 

index for perwnal consumption expenditure& 

moved down from a little abo1-e the FOMC"s 

objectil•e of 2 percent un the middle of las1 

year to an eslimated 1.1 percelll in December. 

restrnined by recent dedines in consumer 

energy prices Tile 12·month measure of 

inflation I hat excludes food and energy items 

(so-<:alled core inflation), which historically 

has been a bcuer indicator of where overall 

infla1ion will be in the future than the headline 

measure thai includes those items, is estimaled 

10 have been 1.9 percem in December- up 

\1, percentage point from a year ago. Survey· 

based measures of longer·run inflation 

expectations haw genernlly been stable, 

though market·based measures of inflation 

compensalion have moved down some since 

the first half of 2018. 

Economic gro11th. A1-ailable indicators suggest 

1ha1 real gross domestic product (GDP) 

increased al a solid rnle. on balance, in 1he 

second half of last year and rose a lillie under 

3 percent for the year as a whole- a no1iceable 

pickup from the pace in recent years. 

Consumer spending expanded at a strong 

rntc for mosl of the second half. supported by 

robust job gains, past increases in household 

wealth, and higher disposable income due in 

partlo the Tax Cuts and Jobs Act, though 

spending appears to ha1>e weakened toward 

yeaHnd. Business investment grew as well. 

though growth seems 10 have slowed somewhat 

from a sizable gain in I he first half. However, 

housing market actil•ity declined last year 

amid rising mortgage interest rntes and higher 

material and labor cosls. Indicators of both 

consumer and business senliment remain 

at fa1'0rable levels, but some measui\.'S have 

sofiened since the fall, likely a reflection of 

financial market volatilily and increased 

concems about the global oUllook. 

Financial condilions. Domestic financial 

conditions for businesses and households have 

become less supponive of economic growth 

since July. Financial market panicipants' 

appelite for risk deteriorated markedly in the 

laner part of last year amid investor concems 
100 

2 SUMI\1\RY 

about do1171side risks tot he growth outlook 

and rising trade tensions between the United 

States and China. As a result. Treasury );elds 

and risl.)' asset prices declined substantially 

between early October and late December in 

the midst of heightened volatility, although 

those moves partially retraced early this year. 

On balance since July, the expected path of the 

federal funds rate over the next several years 

shitied do11n, long-term Treasury yields and 

mortgage rates mo1·ed lower, broad measures 

of U.S. equity prices increased somewhat, 

and spreads of yields on corporate bonds 

over those on comparable-maturity Treasury 

securities widened modestly. Credit to large 

nonfinancial firms remained solid in the second 

half of 2018; corporate bond issuance slowed 

considerably toward the end of the year but 

has rebounded since then. Despite increases 

in interest rates for consumer loans, consumer 

credit expanded at a solid pace, and financing 

conditions for consumers largely remain 

supportive of growth in ilousehold spending. 

The foreign exchange value of the U.S dollar 

strengthened slightly against the currencies of 

the U.S. economy's trading partners. 

Financial stabilit)'· The U.S. financial system 

remains substantially more resilient than 

in the decade preceding the financial crisis. 

Pressures associated with asset valuations 

eased compared with July 2018. particularly 

in the equit)', corporate bond, and leveraged 

loan market& Regulatory capital and liquidity 

ratios of key financial inS1itution& including 

large bank~ are at historically high level& 

Funding risks in the financial system are 

low relative to the period leading up to the 

isi~ Borrowing by households has risen 

roughly in line with household incomes and 

is concentrated among prime borrowers. 

While debt owed by businesses is high and 

credit standard~pecially within segments 

of the loan market focused on lower-rated or 

unrated firms- deteriorated in the second half 

of 2018, issuance of these loans has slowed 

more recently. 

International Derelopments. Foreign economic 

growth stepped down significantly last year 

from the brisk pace in 2017. Aggregate growth 

in the advanced foreign economies slowed 

marked!)', especially in the euro area, and 

several Latin American economies continued 

to underperform. The pace of eccnomic 

activity in China slowed noticeably in the 

second half of 2018. lnHation pressures in 

major advanced foreign economies remain 

subdued, prompting central banks to maintain 

accommodative monetary policies. 

Financial conditions abroad tightened in the 

second half of 2018, in pan reHecting political 

uncertainty in Europe and Latin America, 

trade policy developments in the United States 

and its trading partners. as well as concerns 

about moderating global growth. Although 

financial conditions abroad impro1·ed in recent 

weeks, alongside those in the United States. on 

balance since July 2018, global equity prices 

were lower, sovereign yields in many economies 

declined, and sovereign credit spreads in the 

European periphery and the most vulnerable 

emerging market economies increased 

somewhat. Market-implied paths of policy 

rates in ad1-anced foreigu economies generally 

edged down. 

Monetary Policy 

Interest rate policy. i\s the labor market 

continued to strengthen and economic 

acti1•ity expanded at a strong rate, the FOMC 

increased the target range for the federal 

funds rate gradually over the second half of 

2018. Specifically, the FOMC decided to raise 

the federal funds rate in September and in 

December. bringing it to the current range of 

2V. to 2\1, percent. 

In December, against the backdrop of 

increased concerns about global growth, 

trade tensions, and volatility in financial 

markets, the Committee indicated it would 

monitor global economic and financial 

de1•elopments and assess their implications for 
101 

the economic outlook. In Jan~ I'). the FOMC 

stated that it continued to ,;ew sustained 

expansion of economic acti\ it)'. strong labor 

market conditions. and in"ation near the 

Committee's 2 percxnt objeeti,·e as the most 

likely outcomes. Nonelheless in light of 

global economic and financial dc\'elopments 

and muted inflation pressures. the Committe~: 

noted that it "ill be palient as it determines 

"hat future adjustments to the target range 

for the federal funds rate may be appropriate 

to support these outcomes. FOMC 

communications continued to emphasize 

that the Committee's approach to setting the 

stance of policy should be importantly guided 

by the implications of incoming data for the 

economic outlook. In particular. the timing 

and sile of future adjustments to the target 

ran~ for the federal funds rate-. ill depend 

on the Committee's assessment of rtalized 

and expected economic conditions relatire to 

its maximum-employment objectht and its 

symmetric 2 percent inflation objecti,·e. 

Balance sheet policy. The FOM C continued 

to implement the balanct sheet normalization 

program that has been under wa) since 

October 2017. Specifically. tbe FO~IC 

reduced its holdings ofT rtaSUI') and agency 

securities in a gradual and predictable manner 

by rtin\'esting only principal pa) ments it 

recci\'ed from these securities that exceeded 

grndually rising caps. Consequently, the 

Federal Reserve's total assets declined by about 

S260 billion sinct the middle of last year, 

ending the period close to~ trillion. 

T~ther \\ith the January postmeeting 

statement. the Commiuee released an 

updated Statement Regarding Moneta I')' 

l'olicy lmplementatio111 and Balanct Sheet 

Normali1.ation to pro~ de additional 

information about its plans to implement 

monetary policy orer the longer run. In 

particular, the FO~ C stated that it intends 

to continue to implement monetal') policy 

in a regime "ith an ample suppl) of resents 

so thatacti'~ management of resentS is not 

M(N.lAR\ POtlCY ll(I'ORT: fE6RUAAY 2019 3 

required. In addition. the Committee noted 

that it is prepared to adjust any of the details 

for completing balance sheet normalization in 

light of economic and financial derelopment~ 

Special Topics 

labor markets in urban 1mus rur.ll areas. 

The f<'OO\'tl') in the U.S. labor marltet since 

the end of the I'CC'CS>ion has been une>-en 

across the countl')·. \\ith rural areas shO\\ing 

markedly less impro,-ement than cities and 

their surrounding metropolitan area& In 

particular. the employment-to-population 

ratio and labor force participation rnte in rural 

areas remain wdl below their pre-recession 

le>-els. \\hile the n:tO\CI')' in urban areas has 

been more complete. Differences in the mi.' of 

industries in ruraJ and urban artaS-alargnsbare of manufacturing in rural areas and a 

grtater concentration of fast-gro\\ing serrices 

industries in urban areas- ha\'e contributed to 

the stronger rebound in urban area& (See the 

box "Employment OiSI>arities between Rural 

and Urban Areas" in Part 1.) 

)lonttal} polk) rules. In Mluating the 

stance of mon<tal') policy. polic)makers 

consider a \\ide range of information on the 

current economic conditions and the outlook. 

Policymakers also consult prescriptions for the 

policy interest rate deri'td from a rariety of 

policy rules for guidance, without mechanically 

follo"ing the prescriptions of any specific 

rule. The FO~IC's approach for conducting 

S)>tematic moneta I')' policy pfO\ides sufficient 

tle.libilit)to address the intrinsic complexities 

and uncertainties in the economy \\nile 

keeping monetary policy predictable and 

transparent. (See the box "Monetal')' Polic)' 

Rules and S)stematic Monetary Policy" in 

Part2.) 

Balance sheet normali1ation and monetar)· 

policy implrmeotalion. Since the financial 

crisis. the sQ( of the Federal Reserw·s balance 

sheet has been determined in large part 

by its decisions about aSStt purchases for 
102 

4 SU.I\1\o\RY 

economic stimulus, with gro111h in total assets 

primarily matched by hig)ler reserve balances 

of depository institutions. However, liabilities 

other than reserves have grown significantly 

owr the past decade. In t~e longer run, the 

size of the balance sheet will be importantly 

determined by the variottS factors affecting the 

demand for Federal Reserve liabilities (See the 

box '"The Role of Liabilities in Determining 

the Size of the Federal Reserve's Balance 

Sheet"" in Part 2.) 

Federal Resme transpare;ncy and 

acoountability. For central bank~ transparency 

provides an essential basis for accountability. 

Transparency also enhances the effectiveness 

of monetary policy and a central bank ·s 

eftorts to promote financial stability. For 

these reason~ 1 he Federal Reserve uses a 

wide variety of communications to explain 

its policymaking approach and decisions 

as clearly as possible. Through se1<eral new 

initiatives including a review of its monetary 

policy framework that 11ill include outreach 

to a broad range of stakeholders, the Federal 

Reserve seeks to enhance transparency and 

accountability regarding how it pursues 

its statutory responsibilities (See the box 

'·Federal Reserre Transparency: Rationale 

and New Initiatives·· in Part 2.) 
103 

PART 1 

RECENT ECONOMIC AND fiNANCIAL DEVELOPMENTS 

Domestic Developments 

The labor market strengthened further 

during the second half of 2018 and early 

this )ear ... 

Pa) roll empiO)ment gains h;nc remaiool 

strong. amagjng 224.000 per month sinct 

June 2018 (figure 1). This pact is similar to the 

pace in the first half of last year. and it is faster 

than thca1-erage pace of job gains in 2016 

and 201 7. 

The strong pace of job gains 0\tr this ptriod 

has primarily been manifest in a rising labor 

forte participation rate (lFPR}-the share 

of the population that is either working 

or acthely looking for work rather than 

a da:lining unemplo)ment rate' Since 

June 2018. the lFPR has mol'ed up about 

Y. percentage point and was 63.2 percent in 

Januar)'- a bit higher than the narrow range it 

has maintained in recent )'ears (figure 2). The 

impro1ement is especial~· notable because the 

aging of the population-and. in particular. 

the m01ement of members of the bab)· 

boom cohort into their retirement )ears--has 

othel'l,ise imparted a downward in8uence on 

the LFPR. Indeed. the LFPR for individuals 

be!II'CCn 25 and 54 year.; old 11 hich is much 

less sensitive to population aging has 

I. Th< obstmd pact of poyroY job pm> •ould 1111' 

b<to IU.'Iici<nl 10 pu.b lllt uii<Oipio)..., 121< loot1 bod 

IW LfPR"'" rbn.IDdMI. 1110111111) l'l)rollpmin 

111< fliJ1itoC I!S.OOOioi~5.1XXl•J>Il'2r<'08>bl<ftl •ilh 

In un.chang.'d~W~Dploymt~t Ill It aroulld a j)lll'<lll 

and on unchang<d LFPR around 61.9 P,'l\'<lll l•hid> 

'"' I he Jun< 20ih!.lu<S of'""' r.JI<S). If in!l•'ad 

1he LFPR ,..,. d«:lining0.2 pe~"""I!C poinc per 

ym rouiJ>l)' th< inftu<n« of popul3liona~n& 1he 

"IIi< of job gains needed tolll3intain an und!ang<d 

u~~tmplo)lntnl rat< •~uld be ahoul .W.IXXI per month 

looer 1bt1t ~-ui!Ctflaml) arouod 111<1t 

tiiii!YI<\ 1> abed~"""'"' -•hi) P'Yroll pins 

aod..,plo)m<DI<il>o!l<'frocalll<Cormu 1\lpolatioo 

Sun<) (Ill<""'"" oC 11>< untmplo)lll<lll r.Jit 10d LFPRI 

an b:quilc \obtik 0\'(1' ~on p:riod~ 

-..... 

\cYrl: ..... ,... ... :a,~ 

bn lkmlotl.lboc~\.al:t.,ttAU)'b.":t. 

2. Lobo< fOR'C p311kipotion rates 311<1 

tmpi0)111<11H01"'PUIJiioo raa;. 

-~ ... 

-'!00 

- .101) 

_.., 

_.,. 

- -

so- --~ ~ 

, tfl·ll"ll If I ~l ),IJ& X ~tt ))I} =:t:6 )J(t 

~: nc.,.__.., nt,....~Mw,........• 

··~ollk~ ... !liOlllbotoll<rlm- '**"=eq&>)~~lll»l/l't~cfllc~ 

!Jfdl6d0fltr 

~tn: I!Wtalolt...bor$&111\o!J('Ioi!IKl'oftANI)'I.Ics.. 
104 

6 PART 1: R£aNTECOKO.\liCA-'OflNAKCW.0MlOf'MENTS 

3. Mcasuf'I.'S of labor undmrlil izatioo 

_,, 

- 16 

- ·~ 

- u 

-10 

-. 

- ' 

I, I I I I 

ll)ll ZOIJ ro1s wn !(119 

:«11£: L'~~o.~m.:tllllk~ lo)U]-.:n~"Ntia~otlbe~~ IJ..4~Wuo..-q4.1)~pm~"d•'Od:m.asa 

~oflho:bOOrfi:Jttt~~·od"ttS..V!stol.r.l~~octtn:wcaSlbdofm:.tpflll.l) lllllr.."h..~•llrl:ftS•tlo~t r..'tcmmllyb:ting.bv.«<l ~~·lle!IC\tr.oj..~arc,'libb«korth.-m.U-.S~esi<GII:D.'ftl9~\'d~allupar~~t31h:bbof~.asap.T~of~bbcf 

fotttP:usp.'I'«<Srwpal':tWt."MliOdltbb«f«~. !I~·~ .. 'Orl.'tt$wno~iftth.:-tlborkm.•-at~~:•t•hua\'li~b•'M:.ai'Jdh.twb*C'd 

ror,jobin~~l211*llbs.U.Cnx-~k'al~mcq~ytdplustll~~ a~tt.-bc-oJ•'OI't...~pl\b~~-coJ~af«~r.:-"-ICiCJ.)!;~ 

p.'f~oflb:bbortom-~all~ll)lllldt.'oi"''(lltco.TbcWcS.'IJI>M~'S*P."fK'dOI'busirbH~as~ofuxd~ IM~!8ur.;a~;(J( 

[(oo)mic Rccsc-JI'd\. 

Sc..Wf: ~otutuSIII!SbC5,Utbw•Aaai)m. 

improved considerably more !han !he overall 

LFPR, including a '1: percenlage PQinl rise 

since June 2018.' 

AI the same lime, 1he uncmploymem r.lle has 

remained linle changed and has gene rail)' 

~~~ running a linle under 4 percent.' 

Nevenheless.lhe unemployment rate remains 

al a hislorically low level and is \1, percemage 

PQinl below I he median of the Federal Open 

Markel Comminee (FOMC) participants' 

estimates of ils longer·run normal level 

(figure 3).' Combining the mo,•ements in both 

unemploymem and labor force panicipation. 

1. Since 1015. 111< incr<asc in 111< prime•a!JC LFPR for 

women ~ nearly l peR:tntagc points. while the iocre.as.e 

forTilfn was only about I peKtntagc point.ln January. 

!lie LFPR for primo-3!1< ·-• '"" slighrly abo\~ \\heft it Stood in 2007. 1\'herea~ ror own it \l'lSStill about 

2 pertentage points betow. 

3. The uotmploymtl'lt rate in 3nua~' was 4.0 pcm.'tlt. 

boosted somewhat by the P'utial g\)\l:rnrntnl shutdown. 

"somc furloug)l«< f«<ml•wk<rs and rtmpornrily laid· 

oft' feckrnl contrnctors are treated as-unemployed in llle 

houSI:'hold employment sun 'e): 

4. Set tile Summary of Economic Projections in Part 3 

of 1his r<pon. 
105 

the emplo)~ncnHo-population ratio for 

ind 1~duals 16 and Oltr- the share of that 

segment of the population 11110 are workingwas 60.7 perrent in January and has bren 

gradually increasing since 2011 . 

Other indicators are also consistent 11ith 

a strong labor market. As reported in the 

Job Openings and Labor Turnover Survey 

(JOLTS), the job openings rate has moved 

higher since the first half of 2018. and in 

December, it was at its highest Jerel since 

the data began in 2000. The quits rate in the 

JOLTS is also near the top of its historical 

range, an indication that workers have become 

more confident that they can successfully 

switch jobs when they wish tO. In addition, 

the JOLTS layoff rate has remained low. and 

the number of people filing initial claims for 

unemplo)'ment insurance benefits has also 

remained low. Sun·e)' evidence indicates that 

households perceive jobs as plentiful and that 

businesses sre vacancies as hard to fill . 

. . . and unemployment rates have fallen 

for all major demographic groups over 

the past several years 

The flauening in unemployment since mid2018 has bren evident across racial and ethnic 

groups (figure 4). E1~11 so, 01-er the past 

several years. the decline in the unemployment 

rates for blacks or African Americans and 

for Hispanics has bren particularly notable, 

and the unemplo)~nent rates for these groups 

are near their lowest readings since these 

series began in the earl)' 1970s. Dillerences in 

unemplo)'ment rates across ethnic and racial 

groups have narrowed in m-cm y~ars, as they 

typically do during economic expansions. after 

having widened during the recession; on net, 

unemployment rates for African Americans 

and Hispanics remain substantially above 

those for whites and Asians. 11~th differentials 

generally a bit below pre-recession levels. 

The rise in LFPRs for prime-age indi1iduals 

over the past few years has also bren apparent 

in each of these racial and ethnic groups. 

Nonetheless. the LFPR for whites remains 

,\\ON !TAR\' POliCY REI'ORT: HBRUARI' 2019 7 
106 

8 PART 1: R£aNTECOKO.\liCA-'OflNAKCW.0MlOf'MENTS 

4. Unanplo)'mrnl ra!c by r.lCC' and cthnidty 

- 18 

-16 

- 1.: 

- 12 

- 10 

- 6 

I I 

2019 

Noll:: l:~Do.-nii)I(D.~.:'$r.obluntmpbj\'dtilJ'tl\"CW~olthtblx"'b~.~"'""'*~""Yasi&atifi(!Jas ~«~IN)·b.:o( 

~D.'C'.lhtM:dN'iN..'».':S;apMOOc,fbusiixs:sla.~as&~b)·lk ~Ba~o(Erunomk tstat\.il 

&l.ltt: Burtalo(Llbx~\l.atb\'l't'Miat)'tics. 

S. Prim<->s< bbor foo:< p311~ip31ion <11< by r.lCt 3lld 

etllntcity 

- &I 

- 81 

_., 

-II 

_,. 

- 19 

-11 

" - j6 

Sorelb:~bb«f<oc«p!i."'ipxi)nr.;:cis~r-~orw 

~apil:S10~ P~•b-~·isidttll 6..~as ~« 

lxmiDI)' N cllll)·rJOt.1b:dmct )('~~Nb)'BNrdw.ff 

DJ~ J..cDootb .... lllg 1\~"S.lk ~N' ~' pc00Jo( ~"-ita.~as&I'D.\!b) th.:-NaticU Bwtaao1E«<.''IIIii:~il.. 

S.:..ut=Bo:<1l!iloft.abor~ 

higher lhan lhal forolher groups(figure 5). 

lmportanl differences in oconomic ou1comes 

persisl across olher charac1eris1ics as well 

(see, for example.lhe box "Employmenl 

Disparilies bel ween Rural and Urban Areas," 

which highlighls 1ha11here has been less 

improvemenl since 2010 in1he LFPR and 

cmploymeni·IO·populalion ra1io for prime-age 

individuals in rural areas compared 'vilh 

urban areas). 

Increases in labor compensation have picked up recently but remain moderate 

by historical standards ... 

Mosl available indicalors sugges11ha1 gro111h 

of hourly compensa1ion has s1epped up fun her 

since June 2018 afler having firmed somewhal 

over 1he pasl few years: however. gro\\1h ra1es 

remain moderale compan.>d 11~1h I hose I hal 

prevailed in I he docade before I he recession. 

Compensalion per hour in I he business 

seclor-a broad-based measure of wages and 

benefi1~ btll one 1ha1 is qui1e ''olalile-rose 

2'4 perren1 over I he four quar1crs ending 

in 2018:Q3, abou11he same as I he average 

annual increase O\'tr I he pasl seven years or so 

(figure 6). The employmenl cos1 index. a less 

,·olalile measure of both "'ages and 1he cos1 
107 

to emplo)ers of p101iding bendits. inerwcd 

3 perrent 01er the same period, 11hile a1-erage 

hourlyearnings- whkh do not take account 

of benefits- increased 3.2 perrent over the 

12 momhs ending in January of this year. the 

annual increases in both of these measures 

\\CCC the suongest in nearly 10 )tal'S. The 

measure of wage gro11'!b computed b) the 

Federal Resme Bank of Allanta that tracks 

median 12-rnomb wage p1h of indhiduals 

reponing to the Curren! Population Sui'\ e) 

sho\\ed an increase of 3.7 perrem in January. 

near the upper end of its readings in the past 

three years and well aboo1•e the average increase 

in the preceding few years.l 

... and have likely been restrained by 

slow growth of labor producti1 ity 01er much of the expansion 

Th<Se moderate rates of compensation 

gains likely reflect the offsetting inHuencn 

of a strong labor market and productivity 

growth that has been weak through much 

of the expansion. From 2008to 2017. 1abor 

productility increased a little more than 

I perrent per year, on average. well beiOII' 

the 111era~e putt fR)!Il 1996to 2007 of nearly 

3 perrent and also below the 111mge gain 

in the 1974-95 period (figure 7). Although 

considerable debate remains about the 

reasons for the slowdown over this period, the 

weakness in productivity growth may be partly 

attributable to the sharp pullback in capital 

investment during the most recent recession 

and the relatively slow rcco1ery that follo11'td. 

More rttent~' h0111!1"er.labor producti1ity is 

1$1imated to h111-e increased almost 2 perrent 

at an annual rate in the first three quaners of 

2018 still moderate relatire to earlier period~ 

but its fastest three-quarter gain since 2010. 

While it is uncenain whether this faster rate 

of growth 11ill persist, a sustained pickup in 

producti1ity gto\\1h, as well as additional labor 

market strengthening. would likely support 

stronger gains in labor compensation. 

5. Tilt AlbDia r .. r. 111<:15111tdJJfm (1\1111 othm on 

1h:11 11 mc.J u~<>lhc: •>g<gro.th on~ of•orl.m•bo 

""" <mpiO)<d bolh in oh< cumn1 SUM) monoh and 

12 nlh a~i<r. 

IIO,!lA!tY POliCY R£1'0RT: fEBRUARY 1019 9 

~t:~~~tf.OCI ~~~ 

Nstsand t\~-.!O S~-' l«lkpmi~Ma.UtatbJWIIIroll 

lldrt.rhlllt•ll'crdtl!_.a*c•lbrll!tlb."ldiofr~o.ioq~~Wr. 

*pci\'ISMt\1011\ttlf'lloltt)~ .. -~u.-..pma~ 

~ .t tt..-p. • ''-\il ~~. ftf lire~ rots u·• c:a..• Tta.i.cr,6t61a11t .... ,,....._. .. "CfVcllkl!--' """" Soltet: ..... llrcafi'*~'·Hn:t.~fo&r11~ 

Bd:fiU....'&·C...·T'*-"..7 

-· 

- I 

_ , 

"-= ~--.thaO't16t~"Ca'~~ 

.. ,.,., ... O'ol""'-',_ .... ,.,....,..,,. .. :'0, • ..,... pa .... !tt~~ ...... :O!\C)l•• .... .._ 

51);11(1; ... tii,.N-.,, • .,..11'~ 
108 

Employment Disparities between Rural and Urban Areas 

The U.S. labo< mark('( has tOCOI'efed subslanlially 

since 2010. For people in their prime llllding rears 

(ages 2> 10 541, the unemployment rare has ,.,..o down Slea<fily ro le~~ls below the previous business 

cycle peak in 2007, the labor force participation rate 

(lFPR) has r('(r.IC<d much oi i~ decline, and the share 

of the population who are empiO)td-known as the 

emplorment.ro.popularion rAtio, or EPOI' rati<>-

has rtlurned to a boot its 1.,..~1 bdore the recession. 

Howe>'«, the labo< mar~ teCO\~ has been une~w 

aaoss the counlly, 1\ith •rvral" (or nonme';o) areas 

mowing mar~edly less imptO\-ement than cities llnd 

their surroundings (metro arm}.' 

The extent of the in t~l decline and subsequent 

imprO\oement in the EPOP ratio \'<lried by metropolitan 

S!Jtus. The gap bolween the El'OP ratios in rural and 

larger urban area~ is now noticeably \\ider than it was 

before the recessioo, and the q~lical rec""')' st.lrted 

later in rural areas. Specifoc•ll)\ as shown in figure A. 

the pri...,.;ge EPOP is 1101• slightly above its prerecession fevel in larget urban areas, \\~eas it is just 

below its pre-recessioo .,..,.~ in Stn.1ller urb>n areas 

and much below its pre-recession !4:\-el in rural arcas.

1 

The El'OP ratio can u~ully be viei1.C ;s 

summarizing both the LFPR---1hat is, the share of 

the populatioo that either has a job or is aoti1~ly 

looking for 111ld-ond the unetllplormenr rate. 11llich 

m .. sutt<s the shate of the labo< force without a job and 

adivel}• se.uching.

1 The di\'f'fgenct" in rural and urbdn 

EPOP r,uios during the ecooomic expansion. afmost. 

entirely refleas di\'<fgences in LFPRs rather than in 

unempiO)'mer>t rates (figures 8 and Q. In p;rti<ular, the 

rural and urban unemp\O)'Metlt rates hal-e tracked ea<h 

(coounuedi 

1. Folcom"enieocf, we relet lomtttopolitancoun=iEs with 

$trOrl8 CUim"~t.llillg t*s lo ,m Ufbilnilt'd c~ as "urb.lrt" .'lnd not'M'I'Ie««;lpp/ iln counties th.lt bdSIJCh tie> !lS 'f'Uroll. .. 

2. Follllfi&urt'Sinthisdiscwioo.lber;r..,•d.Jta.uefrom 

tho U5. (....., 8omo, C..r.,..il>pu!Jl;on Sun<r,- th.lt the Burt.!u oi l.tbcx' SUtisfiCS is in\d\td in the StU\ty 

p<e>C<'SS for ill< C..r.,.ll>pu!at;on Som"). Cakubt;on, ol 

tht~!J><I,, nart ld!l«i1Jo!dinAii!onW~<d!n 

UOI n 'l>bo< Marfo< O...:omes iii.W.<ropolitan and 

Noo-I'J'l(l(f(lp()~n Are<Js: Signs d Crowing Oi~rities: 

HD> Nc<<S 1\Vo\SIIing;ooo Bo.lrd ol Goi'O!t«S ol the f..,.,. I 

Restf\1!' System, Sepctmber 2St w\\\1 .ftdef;alt'I.OSM't. p·t'(()IW~notes.1«h-~1,abor.f!U;flet-<JUI~inft'lt'tt0pollt.\n-.lnd-1'101"1-ll'-'t'ltcl!)Cilir..an~~Hig:ns--oi ~I'(J'.vlng· 

cr:~puiltts·2017~2Htm. 'The f~tes ~ 12 monthn)()'lo~ng 

3\'0!Ig<lolillemon:hl)'t-;,_ 3. Spe<if>eali)', ill< EI'OPratio"!"lkltfi'I(J x(l- ~ment r-ite), where LFf'R isdelined.ts ' Llbcw fotcd 

A. EmploymcnHo-popul::nion rntios 

_., 

- $0 

- 1'! 

- ~ 

- 74 

I 11. 1 •'11'1 11~ ,,,,,,-, ?l am :.'001 zros 2«1t zoto rou I» ~ ~'' 

~~: D&t.~ttforpmcGS.-dlS s.&.~~lbll~ 

X".::~S MS.\s fWJ.OOO~"'\l'k«~Dl SINII« MSAi~!t 

ofiOOifh~q!(O.((OPNPk 'l'br:~Nl:)~p.orh.'\b oS ~ 

tl\.~;l5&frtM!\Ibrr!w: Naoo.wa &imu f~rt~'tb. 

S«tn: ~tnt."l:$li:I6N.Ixa.DCCtl. 

..... 

- 10 

- . 

- . 

_ , 

·""" Dlo<cf«-op.~!) )l ""''~'"'""'" re.K MS.\s)~ot'SOO,O»~orm..'IK.JO!~MS..U~ 

oCICO.O:O'-'XO.O:O"'"\'fPk. Thts\adNNrs p.'t'it'ds of ~ 

1\'\.'t."a.WW &fllltdbyt!l.: NDmiBu:c-au ot ~~ 

S«m: lk~tl'lrri<"'lrilo.! ~~!. 

""""~""'- '"" tht ,nomp~q,_, ''";,del'...," . .,..,.,. unemp/o)rolabot fot(t: n... """""''" roohipl;ed by 100 for pr~tloo putposes in the ftg'lres. 
109 

othe< Llirly closely in this e'J)<lnsion, thoogh they hal'e 

<f•~ a linle in the pa~ few )~•IS. in conua11, the 

diffe<ence be~ ~" rural and utban Lff>Rs has wioo..d 

signifoc,.tly """ rhe past <i«.lde. 

On average, people in rural areas tend to ha'•e 

iewe< years of ~hooling !han people in utban are.11, 

and because ihe EPOP «tio tends to be lower for 

indi,·iduals with leis edUCJtion, this demographic 

diffe<ence has CO!ltributed to ihe pe<>i~<fll rurai-<Jtban 

dil'ide. Howe'"'· these educatiO!lal differences do not 

appear responsible for ihe fact that ihe g•p between 

ruroland utban EPOP ratios ha'~ wid<>ned. Fogore 0 

shows 1h..:t~ in recent )'eil~, rur.al.and u!ban EPOP 

ratios divefged subs.tanli.a11)1 e'\'en within educaliooal 

categories, similar to lhe di\-etgence in EPOPs I'AOfe 

generally. The left panel of frgur< 0 s""-" that ihe 

EPOP ratio of non-coll~ucated adul~ age< 25 to 

54 ~ been muc;h 'ower in rurJI areolS than in urban 

ones beginning in 2012. The right p.1nel of figure 0 

s""-'' that ihe EPOP ratio of collegt-educated adults 

used to be highef in rur,11 areas than in urban ones, 

but that is no longer so.lhus, tbe receot wid<>ning oi 

tbe ruraklrb.ln disparity in EPOP ratios ha. not beeo 

plimarily dri,·en br differences in )ear< of education. 

Newrtheless, because ihe rec"'~' in the EPOP 

ratio i01 non-coii~UCJted adults in rural areas 

(CO<ltinued on ne.<t page) 

D. Employm..,Ho-popul>tion "tios 

Nooroli<ge adult$ 

MONETARY POLICY REPORT: fi8RUARYIOt9 11 

C. labor ron.-e p.micipation r.l!CS 

SO'n: 0.wtbpmt'C11>~2-SDS.l.lqr~IIM~ 

IIC&S(}I$..\.s)c..~ol$00.0:0pt~.'<pk«m«t.-.Ji0111lcr.\IS}.~~ 

ott(l).<>OO~m<>OO~.n."""'~""'"'""'~""">.r""""' 

r~•«f6:'db)Qic~'ftlt.181RluofEotoxtUcRNaldl. 

Soi.VI; Rtf«tco.~INN•bo.tDOCtl 

scm: [)Jt.aafct~~~l5toS4.MSA is.mt<ropoliua~Ra.. Thrsludtdtws~pcm.korhNxs:5r~as&liMdb)'tb: 

--.r-.... ..t. Soi,'JlCt:Rtf~&<dii:l'bo.tfiQC.:l 
110 

Employment Disparities (coorinuedl 

h.ls been particulorly w .. k. it islikelr lh.lr brooder 

macroeconomic trends-including the oogoing shift in 

!abo< dem.nd lh.lt has ii!\<>red individuals with more 

education-ha\e h.ld mo<e ad\erse <OO<eGuen<e< 

ior the popuLttioos in rural are.1s than in urban areas. 

fo< example, manufa<turing. \\l>e<e empfO)~lent has 

ltilgnate<l, accounts for a la.ger sh.lre oi employm<nt 

in tut.al ar~Ms than in urban areas, wbile fast-gtzy.\·ing 

sen•ices industries. such as hea!th-<:are and professional 

services th.lt tend to employ """'"' with mo<e 

educ.ation, are more concentrated in urban areCJs. 

Indeed, empto,ment in manufacturing has not l'tt 

fully "'«•~red from the recession. And, despite 

the ~rength in the past ~'" years, the share of tOial 

employmenl in m.muic1e1uring h.ls remained near irs 

pos.t·recession lew. 

The fact lh.lt most of the EPOP do'tlgence is seen 

in \abo< force participation rathe< than unen1ployment 

rates "'ggests lh.lt """l' "'"' """'"' "ilo e>perienced a permanent job loss, perhaps due to a factory closing. 

decided to eventuallr exit (he labor f01ce rather lh.ln 

cootinue their job search. Some individuals "ilo h.ld 

been \\O<king. despite ongoing health problen~, may 

"''" responded to job loss ""od poor renmployment oppoounities by applying for Social Stcurity Dis.lbility 

!""'ranee ISSDIJ beneti~. and, in fac~ t.1k .. up 

increased a little more in rur.J;I ar~ than il did in urban 

ones 0\'tl the pa~ deade.' 

When ~tgions are faced \\ith ad\-erse ch.lnges 

in labor dem.nd. some residen11 mar respond by 

migrJting to more prosperous ar .. s. The more out· 

migration that occurs from areas with rel3th-elr fe\\tf 

labor matlret oppo<tunities, the smaller should be the 

obsened decline in loc•l·area EPOPs.' Hal,~..,. son>e 

research suggescs that the a'l'erage migration response 

to adl'elst dem.nd shocks h'l decreased in recent 

dec•des. ~ich could ampliiy the \abo< marl:et elfec~ 

of loc.JI shod< and le.d to pe<si<tent disparities in 

EPOP ~tios across areas.• 

4. This incre;se cou\d ret lea growing publk ~alth 

problems (\>~i<h "'J"nds the pool cl indiv;ru,k "ilo qwl;!y 

lot SSOI) and ~ugg;.h bbot dooland in rural arm (\\~idl 

incrt.lS<StheP<CJ900Si<yclind,~lsooapplyic<SSOI 

bettefits\ 

S. Although a high«"" cl "'"I oot-migration """ld help close the I POl' w. depopobOOII mighl t.\aCe<batt rxooom~ 

d"d't'iculties fOt those \,ho ttmain in rurAl olteds, 

6. See, i"' "'~ Mai Oao, \RI;de F.-i, and Prala.h l.oongani aoi7J, ·Reg;o.al ubot •lalket Adjustment in the 

United St.lte" Trend and C)<f<; II.Mewol£cooomicsand 

Sllliflicos. '"'· 99 \tay . pp. W -57. 
111 

Price inflation is close to 2 percent 

Consumer price inflation has ftucwated 

around the FOMC's objectire of2 percent, 

largely reflecting movements in energy prices 

As measun;d by the 12-momh change in 

the price index for personal consumption 

expenditures (PCE). inflation is estimated 

to hare been 1.7 percent in December after 

being above 2 percent for much of 2018 

(figure8).' Core PCE inflation- that is, 

inflation excluding c01~sumer food and energy 

prices- is estimated to have been 1.9 percent 

in December. Because food and energy prices 

are often quite I'Oiatile, core inflation typically 

provides a bener indication than the total 

measure of 1111ere Ol-er.all inflation will be 

in the future. Total inflation was below core 

inflation for the year as a whole not only 

because of softness in energy prices. but also 

because food price inflation has remained 

relatirely low. 

Core inflation has moi'Cd up since 2017. when 

inflation was held dow11 by some unusually 

large price declines in a few relatirely small 

categories of spending, such as mobile phone 

services. The trimmed mean PCE price index, 

produced by the Federal Rese11-e Bank of 

Dallas, pro1~des an altern at ire way to purge 

inflation of transitory influences. and it 

may be less sensitire than the core index 

to idiosyncratic price movements such as 

those noted earlier. The 12-month change 

in this measure did not decline as much 

as core PCE inflation in 2017, and it was 

2.0 percent in Nowmber.' lnftation likely has 

been increasingly supported by the strong 

labor market in an em~ronment of stable 

inflation expectations: inflation last ymwas 

6. The panial gO\·tmlll<ol shuldO\m has delarro 

publicalion of 1he 8umu o( Economic Anai)>iss 

t$1imate for PCE prict inRa1ion in IA'X'«nbe:r. and 

111< numbers "'pon<d """' ""'"'ima1es baS«! on 1he 

Ot.\.<tmber consumer and producw ~ indt.'<I.'S. 

7. The trimmed mean indt'\: exdudl.'$ whiche\'er poo.-s 

showtd 111< larges1 in<~.,ses de<~.,ses in a gh•n 

month. Note that on~r the past 20 }t.ars. changes: in lhe 

uimrnOO m~n index haw ao.-e-rng4.'d about % ~1\"'!'nlil&¢ 

point abowoore PCE inRation and 0.1 ptl'l"tnlagt poin1 

abo\'C total PCE in"ation. 

MONETARY POLICY REPORT: fi8RUAAYI019 13 

8. Cb>nge in Ill< price index for pe,..,..l roliSUmplion 

expendittm.':S 

- J..O 

x.n ~jjo,C«wool""-'io;rood o>d=rt<>J<OI"""'P 

l).•((c:;..\:t ):11$: (ll'li1J ·.ab.'$ltl:suf'f~imalc$. Tk~'\l dal:l C\~ 

tlltouPNvt~ lS. 

Sot.to: f«~e.'*l,Ft\i.'ftl Rr<tf\e B.cl oi Dalbl;:b' ~ 

Elur'Nuof ~~ Hal.tt .w!)~ 
112 

9. Spound fulun'S prim for <1\Jdo oil 

- IJO 

- IN 

- 110 

- ,,. 

!I) 

- "' 10 

.. 

"' .&0 

JO 

N 

10. Nonfucl impoo prim >J1<I ind•orialm<13~ indc<<S 

,. 

,

11,.0-_ \;2: 

w10-

\<c:fid~ .. - 10 - ~ 

10 -

_,., 

- ,,. 

- 9S 

- 96 

- .. 

r&lb:d:laforo.-c.~"'llllpat FO>~al'l: TbC' ~b 

~l!lr((J;ba: ~~ ~ofd»l)·daulmi~~ 

f~lUlll. 

Sol.tu:F«Q)IlflXt~pO.xt.~o(LitiOr~t« 

~ mcs4. S..U GSCI ~ ~~~ %« bh ,u lh·ott Aflll:,, l($. 

also boosted slightly by the tariffs that were 

imposed throughout 2018. 

Oil prices have dropped markedly in 

recent months . .. 

As noted. the slower pace of total inflation 

in late 2018 relative to core inflation largely 

reflected softening in consumer energy prices 

toward the end of the year. After peaking 

at about $86 per barrel in early October, the 

price of crude oil subsequentlr fell sharply 

and has al'eraged around S60 per barrel this 

year (figure 9). The retent decline in oil prices 

has led to moderate reductions in the cost 

of gasoline and heating oil. Supply factors. 

including surging oil production in Saudi 

Arabia. Russia. and the United States. appear 

to be most responsible for the recent price 

decline~ but concerns about weaker global 

growth likely also played a role. 

... while prices of imports other than 

energy have also declined 

After climbing steadily since their early 

20161ows, nonfuel import prices peaked in 

May 2018 and declined for much of the rest 

of 2018 in response to dollar appreciation, 

lower foreig11 inflation, and declines in 

commodity prices. In particular, metal prioes 

fell markedly in the second half of 2018. partly 

reflecting concems about prospects for the 

global economy (figure 10). Nonfuel import 

prices, before accounting lor the effects of 

tariffs on the price of imported goods, had 

roughly a neutral influence on U.S. price 

inflation in 2018. 

Survey-based measures of inflation 

expectations have been stable ... 

Expectations of inflation likely influence 

actual inflation by affecting wage· and pricesetting ec ion~ Survey-based measures of 

inflation expectations at medium· and longer· 

term horizons ha'-e remained generally stable 

O\'er the second half of 2018. In the Sur,~y 

of Professional Forecasters, conducted by 

the Federal Reserve Bank of Philadelphia. 

the median expectation for the annual rate 

of increase in the PCE price index Ol'er the 
113 

nt't 10 )ears has been 1ery dOSt to 2 perttnt 

for the paSI screral years (figure II ). In 

the Uni1ersily of Michigan Sune)S of 

Consumers. the median value for inflation 

expectations over the next 5 to 10 years has 

been around 21-S percent since the end of 

2016. though this Jerel is about '/. percentage 

poin1l011er than had pre~ -ailed through 

2014.1n contrast. in tht Survey of Consumer 

E'p«tations. conducted b) the Fedenl 

Resene Bank of New York. the median of 

respondents' exp«ted inflation Tale thn.'C )~rs 

hence-while rclatiwly stable around 3 percent 

since early 201 S-is none1 he less at the top of 

the range it has occupied over the past couple 

of)ears. 

... 11hile market-based measure.> of 

inOation compensation ha1-e come do\\0 

since the first half of 2018 

Inflation e.,pectations can also be gauged 

by market-based measures of inflation 

compensation. However, the inference 

is not straightforward. because market· 

based mmures can be importantly affected 

by changes in premiums 1hat p101 ide 

compensation for bearing inflation and 

liquidit) risks. Measure; of longer-term 

inflation compensation-denied ei1her from 

differences bem-een yields on nominal Treasury 

socurities and 1hose on comparable-maturity 

Treasury Inflation-Protected Securities (TIPS) 

or from inflation swaps-moved down in 

the fall and are below lerels that prerailcd 

earlier in 2018 (figure 12).' The TIPS-based 

measure of 5-to-10-ycar-forn-ard inflation 

compensation and the analogous measure 

from inflation 511-aps are 110\1 about I' i percent 

8. lnfi31ionrompcnsation impli.:d by1hcTIPS 

bn:ake\.tn infla1ion rate is b:lsed on lh<ddfcrtnt\~, at 

\"'mparablc maturities. betv..ttn }ields on nominal 

Tr"WIJ' ""'rili<s and yields on TIP& wh~h ,,. indt<.:d 

10 111< 101al ronsurn<r price index (CPt ). nBa~ion "''P' '" ronlra<li iu11icli on< pan) nW.<$ p.1)lll<tlb of 

C<fbllllltdiiOOlioaiJIIIOUilbio~"'<»>llloo> 

tlul ar< llldtW tocua:ubliw CP1 ..a.1.,. 01«..,.,. 

llonzon.lnlblioaromp<n131ioto dnilro fflllllonl!.ooa 

i'A~PII)~) r<«<ds TIJ'S.b3>«1 romp:n>11ion. bul 

'o\1.\"i.·tO."A<'Ck MO\'tiTh."'ts ill tbt t\\0 m._'3SUI'tS 3ft h1ghf} 

comb1ro. 

. .., 

.110\EIARYPOI.ICYRII'ORI: FIBRUAA\'2019 15 

-

- I 

-

•• 

_, " 

_,. 

dqt!pdl 

1<117 1<119 

\o'J:] l\c'dlltlllt•~ ~·'lf' ot 4Wydlud C'\~ ... 

f~U.!'81 T!Pi 1r..,I ~~S.:..~ 

SiAl(t; f~~, ... fl '<'w\a\.~Ffdcnl~a..l ..,_ . 
114 

13. Chong¢ in r<:~l gro<s dom<Sii< p<OdiiOt and gro<s 

do~i< iDCOrnt 

- QJ ' _ , 

HI 

- ; 

- I 

- I 

14. Clnng.e in real ~rsooal consumptioo e.xp..'"nditures 

and disposabk"""""" inoome 

1'-"""'-'"""- ~p..'I'S(Qij iD.~ 

--... - 6 _, HIQ) _ ' 

- ) 

- I 

_, 

- I 

_ , 

- ) 

and 2V. percenl. respeclil'ely. wilh both 

measures below their respec1i1'e ranges 1ha1 

persisoed for moll of ohe 10 years before the 

slart of I he notablededines in mid-2014.' 

Real gross domestic product growth was solid, on balance, in the second 

half of 2018 

Real gross domeslic produc1 (GOP) rose al an 

annual ra1e of ~ percen1 in I he 1hird quaner. 

and available indicators point to a moderate 

gain in the founh quarler. ro For I he year, GOP 

growth appears 10 hare been a lillie less 1han 

3 percen1, up from the ~ percent pace in 2017 

and I he 2 percent pace in 1he preceding 1wo 

years (figure 13). Lasl year's growth reflect~ in 

pan. solid growoh in household and business 

spending. on balance, as well as an increase 

in goremmen1 purehascs of goods and 

sen~ces: by conlrasl, housing-seclor actirity 

turned down lasl year. Privaoe domeslic 

final purehases-1ha1 ~ final purchases by 

households and busin~ which lend 10 

provide a beucr indica! ion of fu1ure GOP 

growth than mosl other componen1s of overall 

spending- likely posled a mong gain for 

the year. 

Some measures of consumer and business 

sen1iment hal'c recenlly softened- likely 

reftecoing concerns abou1 financial market 

I'Oiaoility, the global economic outlook, 

trade policy tension~ and 1he go1•ernmeou 

shuodown- and consumer spending appears 

to hare weakened a11he end of 1he year. 

Neverthel~ I he economic expansion 

continues 10 be supporled by steady job 

gain~ paso increases in household wealth. 

expansionary fiscal policy, and still·favorable 

domestic financial condilion~ including 

9. As thest mcasum:arc:- based on CPI inflation. one 

should probal>lr subora<1 abouo Y. i>"«nl3gc point- the 

awrn:se differential \\ith PCE inflation owr the pa$t 11\'0 

«:~ es- o infer in8aoion rompcnsation on a PCE basi>. 

10. The it~l esoimaoe of GOP by the Bureou of 

Eoono ~ Analysis for oh< founh quarter""' delayed b«ouS< of 111< panial gowrnm<nt shutdown ond 11ill 

now b< ..Oeas<d on Februal)' 2S. 
115 

moderJte borrowing costs and easy access to 

credit for many households and businesses. 

Ongoing improvements in the labor 

market continue to support household 

income and consumer spending ... 

Real consumer spending picked up after some 

transitory weakness in the first half of 2018, 

rising at a strong annual rate of 3\', percent 

in the third quarter and increasing robustly 

through November (figure 14). However, 

de>pite anecdotal reports of favorable holiday 

sales. retail sales were reported to ha11: 

declined sharply in Doccmber. Real disposable 

personal income-that is, income after taxes 

and adjusted for price changes- looks to 

have increased around 3 percent over the 

year, boosted b)' ongoing improvements in 

the labor market and the reduction in income 

taxes due to the implementation of the Tax 

Cuts and Jobs Act (TCJA). With consumer 

spending rising at about the same rate as gains 

in disposable income in 2018through the third 

quarter (the latest data a1-ailable), the personal 

saving rate was rough!)' unchanged. on net. 

om this period (figure 15). 

... although wealth gains have 

moderated and consumer confidence has 

recently softened 

While increases in household wealth have likely 

continued to support c·onsumer spending. 

gains in net worth slowed last year. House 

prirescontinued to move up in 2018, boosting 

the wealth of homeowners, but the pace of 

growth moderated (figure 16). U.S. equity 

prires are. on net, similar to their levels at 

the end of2017. Still, the level of equity and 

housing wealth relative to income remains very 

high by historical standards (figure !7)-" 

II. Jnd•"«f. iRihethirdquan<roflOtS- themost 

n."'nt period for whicll data are bl< houscll d net 

"unh was Sl.'\'tn times I he ueof disposabk income. 

the hi!)l<sl-<wr m~ding for that ratio. 11hi<h dates bock 

to 1947. HO\\\.'Wr. rollO\\ing thedtdine in stoc-k pffi.'tS 

since the summer. this r.ui~ has likel)' rallen somewhat 

MONETARY POLICY REPORT: fi8RUAAYIOt9 17 

'""" 

- II 

- 10 

- * 

- l 

- Dm<IICOJ"""'" """"""lOtl Sot,.10; iJut~aoiEcwomi.:"A::la~~\iatlll~i\IW)'t.lcf. 

t6. Prie<s of c.<isting sing!<-family houses 

,U'.Ca'<'$f'-JI"' - IS 

m!Wino.X'< - 10 

- ' 

- ' - to 

- ,, 

1009 2011 10B ~u :oon m1t 

! Th:&liiOr~ stP Clsc..sslkri:.i~C-1.1Cnd~~~ 

1'01lTh:4a&af«thcC«d.Olit:in&1 t'l:ltOd~~201&. 

SOI.:t('f: («~ Hill'llt ~ II'Ab: Zil~; S.II:P('~lkr U.S. 

~Komtrn.-t nda TlxS.t::PCw-Sbilbbhlu:pt'l.'btofs.tP 

().)oro lxlts ~ U..CDi llSll'li ir.es.(F« Jol'tr.~ln.ka. 

~~~«tb.'~~rt.con0:C~~.• 

_,. 

- ., 

- .. - S.l 

- s.o 

l!!!!dlll·l!!lll !Ill 1111 

1997 2000 lm l006 2009 !Oil lOIS l(IIS 

'-011: Om.a.l.'Od~10 &.Q3. Th:scn$Kib:~o(~ 

n.rt li'OCihCO~p.TS«W~ 

Sc:ure I'« 0r.1 ""'OM t~ Rtil.T>'C bd. ~~ ~ Z.l. 

"'f"~~Qflb:t;:dcd~-:for n."lXI'Ire &mclol£®.-e:i: 

~jiJ,itlb\tr~tir.-:ol. 
116 

IS. Indexes of C005tlmct'SI.'"flli!llCfll 

170- - 110 

:

9:1

:-

-

N

t ' J ... 

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71)-

!0- l M 

JO - 10 

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2'001 ZOO& 200? :001(1 2013 2016 .:0019 

~ tk~~~.~l .... cb:wlmd~&b~!0'9: 

ltio;f<'bn.utydata•e~·.Tb:C¢.tf«<C'C8oard@I;Wtiodt\~IO 

IOOiD 19S5.1bc- lkttipn~()daum~C'd., IOOD 1966. 

SOtl(l: U'lli\~ of Mltbip ~'t")l ofC~ Coaftt.:t~~."t 

"""'-

~~c~a\.'dil ~ 

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@ 

IIJJ 

~n~ C'b::;d ~ ~kdt<'d fr«n 'Qt<'!l4 » yde<O.I <"C\.111 MilS ~•'hl.:h:~t~:~fromZIOI~~~l(ll~l 

Sol.m.: F<&:tal RNf\'C &t-d. ~ ~ t l, -fi:nwi.ll 

~(l(lJxol.'aib!Sblts.. 

-10 

Ill _ tl 

Consumer sentiment as measured by the 

Michigan surve)' Hattened out at a high lel'el 

through much of 2018. and the sentiment 

measure from the Conference .Board survey 

climbed through most of the year, 11~th both 

measures posting their highest annual averages 

since 2000 (figure IS). However, consumer 

sentiment has IUrned down since around 

year-end, on net. with the declines primarily 

reHeeting consumers' expectations for future 

conditions rather than their assessment of 

current condition& Consumer altitudes about 

car bu)~ng ha1•e also weakened. Nevertheless, 

these indicators of consumers' outlook remain 

at generally favorable level~ likely reHeeting 

rising income, job gain& and low inHation. 

Borrowing conditions for consumers remain generally favorable despite 

interest rates being near the high end of 

their post·recession range 

Despite increases in interest rates for consumer 

loans and some reported further tightening 

in credit card lending sta dard~ financing 

conditions for consumers largely remain 

supportive of gro111h in household spending. 

and consumer credit growth in 2018 expanded 

further at a solid pace (figure 19). Mortgage 

credit has cominued to be readily a1'ailable 

for households with solid credit profile& For 

borrowers 11ith low credit score& mortgage 

underwriting standards have eased somewhat 

since the first half of 2018 but remain 

noticeably tighter than before the recession. 

Financing conditions in the studemloan 

market remain stable. with over 90 percent 

of such credit being extended by the federal 

governmem. Delinquencies on such loans. 

though staying elevated, continued to improve 

gradually on net. 

Business investment growth has 

moderated after strong gains early 

in 2018 ... 

ln1•es1ment spending by businesses rose 

rapidly in the first half of last year, and the 

available data are consistent with gr0111h 

having slowed in the second half (figure 20). 
117 

The apparent slowd01vn reflect~ in part. more 

moderate growth in investment in equipment 

and intangibles as well as a likely decline in 

investment in nonresidential structures after 

strong gains earlier in the year. Forwardlooking indicators of business spendingsuch as business sentiment, eapital spending 

plan~ and profit expeetations from industry 

analysts- hal'e softenoo T<-ocently but remain 

positil'e orerall. And while new orders of 

capital goods flattened out toward the end of 

last year. the backlog of unfilled orders for this 

equipment has continued to rise. 

... as corporate financing conditions 

tightened somewhat but remained 

accommodative overall 

Spreads of yields on nonfinancial corporate 

bonds over those on comparable-maturity 

Treasury securities wiclened modestly, on 

balance, since the middle of 2018 as in\'estors' 

risk appetite appeared to recede some. 

Nonetheless, a net decrease in Treasury 

yields 01-er the past several months has left 

interest rates on corporate bonds still low by 

historical standards. and financing conditions 

appear to hal'e remained accommodative 

overall. Aggregate net flows of credit to large 

nonfinancial firms remained solid in the third 

quarter (figure 21). The gross issuance of 

corporate bonds and new issuance of lew raged 

loans both fell considerably toward the end of 

the year but have since rebounded, mirroring 

movements in financial market volatility. 

Respondents to the January Senior Loan 

Officer Opinion Surrey on Bank Lending 

Practic~ or SLOOS. reported that lending 

standards for commercial and indumial (C&I) 

loans remained basically unchanged in the 

fourth quarter after having reported easing 

standards over the pasl se1·eral quarters. 

However, banks reported tightening lending 

standards on all categories of commercial 

real estate(CRE) loans in the fourth quarter 

on net. 

Meanwhile. financing conditions for 

small businesses ha,•e remained generally 

MONETARYPOLICYRIPORT: fi8RUAAYI019 19 

21. S<l«:l<d<OO jJOII<fl Ofn<l<kblfin3Jl(ing for 

nonfii131K'ial bus n~ 

- 10 

- 60 

_., 

Sot:l(t! r(l$cnl RtKtW ~ ~ Rtbst Z.l. -r-lfiii'INl A«oon!Softki.'~Sa:ts.-
118 

I' ! I I I I I I I ! ' I 

~ 201(1 ZCII2 101" ZCII6 8 

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J.S 

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2lll6 100S !010 !all 201: !016 MIS 

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D.'"tmbef l'OIS 16! i-nclucb sqk-ratn.ly, tce&t. ~abomt. aoi to-09 ..... SOI.wt; F« llt."ff llomr ~u.s. ('(INIS ~ b- ~11om.: 

.\"J::KcaJA.~oi~~·\Utb\ft'~~ 

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Z019. Ai am,.,.~I)(!OO, :a~~ll=i2). ._nxdy~ 

IIX«<Ic'OOq.#lif> b:am..~hom;fll(WI~.~~~ It) 

• ......w~od~l) lleo>l ..... 

$ol..t(1: F'«~~\lt\bbilgyit~k'- ~~l'.fkelhM.': 

b~r~fttd!io! x~· lfkrtSW\"ey. 

accommodative. lending volumes to small 

businesses rebounded a bit in recent mo th~ 

and indicators of recent loan performance 

stayed strong. 

Activity in the housing sector has been 

declining 

Residential im-estment declined in 2018, as 

housing starts held about ftat and sales of 

existing homes mo,·ed lower (figures 22 

and 23). The drop in residential investment 

reflects rising mortgage rates-which remain 

higher than in 2017 despite coming down some 

recently-as well as higher material and labor 

building costs, which have likely restrained new 

home construction. Consumers· perceptions of 

homebuying conditions deteriorated sharply 

O\'er 2018, consistent with the decline in the 

alfordability of housing associated with both 

higher mortgage rates and still·rising house 

prices (figure 24). 

Net exports likely subtracted from GOP 

growth in 2018 

Aller a strong performance in the first half 

of last year supported by robust exports of 

agricultural products. re~l exports dedined 

in the third quarter, and available indicators 

suggest only a partial rebound in the fourth 

quarter (figure 25). At the same time, growth 

in real imports seems to have picked up in 

the second half of 2018. As a result, real net 

exports- which lifted U.S. real GDP gro"1h 

during the first half of 2018- appear to ha\'e 

subtracted from growth in the second half. 

For the year as a whole. net exports likel)' 

subtracted a little from real GDP growth, 

similar to 2016 and 2017. The nominal trade 

deficit and the current account deficit in 2018 

were little changed as a percent of GDP from 

2017 (figure 26). 

Federal fiscal policy actions boosted 

economic growth in 2018 ... 

Fiscal policy at the federal level boosted 

GDP gro\\1h in 2018, both because of lower 

income and business taxes from the TCJA and 
119 

because federal purchases appear to have risen 

significantly faster than in 2017 as a result of 

the Bipartisan Sud get Act of 2018 (figure 27)-" 

The panial go1·ernmcn t shutdo1111, which 

was in elfect from ~mber 22 through 

January 25, likely held down GDP growth in 

the fi~t quarter of this year somewhat largely 

because of the lost work of furloughed federal 

government workers and temporarily atl'ected 

federal contractors. 

The federal unified deficit widened in fiscal 

year 2018to 3Y. percent of nominal GDP 

because receipts moved lower. to rougltly 

J6Y, percent of GDP (figure 28). Expenditures 

edged down, 10 20Y. percent of GDP, but 

remain above the Je,·els that prevailed in 

the decade before the start of the 2007-09 

recession. The ratio of federal debt held by the 

public 10 nominal GDP equaled 78 perce111 

at the end of fisca12018 and remains quite 

elevated relative 10 historical nonns (figure 29). 

The Congressional Budget Oftice projects that 

this ratio will rise om the next several years. 

, , , and the fiscal position of most state 

and local governmemts is stable 

The fiscal position of most state and local 

governments is stable, although there is a range 

of experiences across these government~ After 

several years of slow growth, revenue gains 

of state govemments strengthened notably as 

sales and income tax collections have picked 

up over the past few quarters. At the loc~l 

le1~l. property tax collections continue 10 rise 

at a solid clip, pushed higher by past house 

price n~ After dec i~ nga bit in 2017, real 

state and local government purchases grew 

moderately last year. driren largely by a boost 

in construction but aiS() reflecting modest 

growth in employment at these -ernm ~ 

11. The Joint Committee: on Taxation es:tim:alf!d 1ha1 

1he TCJA ~u d n:du« """geannuallil:< re~<nue by a liule mmt~ n t p<re<n< of DPs~ani gin lOIS and 

ftlr SC\'traJ ~'ta~ thereaf'ter. This mtnue ~ima e does 

not 3~lll'l:t for the potenlial maC'l'Oe('Onomic tff«ts or 

111< kgi>lation. 

MONETARYPOUCYRIPORT: fi8RUAAYIOI9 21 

1S. Clungdn real imports and " ponsor goods aOOsmi(\"S 

.. _. 

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HI 

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_· , J I 1 I I I I I ! ! It I I! 1 I 

:'002 !:CO& X06 2008 ~10 ~I! 1014 !016 !018 

: D$1"«2018artlbcncn;tol'O!~dwtqlt.k"'ffiol'th.::)'t"~, 

alan~ra~t GDPil~~i.::pn.\bt. 

Sotut kc.uol&\.-oomic~l)l4s\U.!il'"a"AAIJ)'tiN. 

27. Chang~: in n.-al goYcmment expenditures on 

coosumptioo and ~menl 

I F""" lllol<"""'"' 

I I I 

Ql -· Ill - 4 

-l 

_, 

-· N09~ 0 ZOI\10l110131014 lOIS 2(1161GI71'(118 
120 

- - !6 

,,11111!11· ll!l!f!!tl 

1997 1000 2003 2006 '111» !(112 ~IS lOIS 

Son" Th:t~:aod~~~d:ltlar ooaur~(~'\1~Zid 

.c~Q{6!al};:m.(~~.,.~s..~~fi'(IN.~~ 

(GOPI~.at b'lb:fQC.Irqu.r. ~II) }. 

Soll<t:~"!'ol~..:n.."''!!~~'ia flo«~tic:l. 

29. From! go'"""""' debt h<ld by tile public 

- ro 

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- Ill 

- so 

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-JO 

- 20 

196$: 1m 1m 1m 200* 201s 

"on: Tkdmnkr.d lh:OCJ&b 201$":Ql. ~ dx.l fol ~~ 

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l<dml&:h bTc asay~bel& ill kdml tmplo)~dtf!MiM!dit 

~aM:U~~S.,t\dm.-datlbrm!~Lhtquwr. 

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A.a."'OIll.,;o(thtl.'M:d~· 

Financial Developments 

The expected path of the federal funds 

rate over the next several years has 

moved down 

Despite the further strengthening in the 

labor market and continued e'pansion in the 

U.S. economy, market-based measures of 

the expected path for the federal funds rate 

om the next sereral years have declined, on 

net. since the middle of last year(figure 30). 

Various factors contributed to this shift. 

including increased in,·estor concerns about 

downside risks to the global economic 

outlook and rising trade ten ion~ as well as 

FOMC communications that were 11ewed as 

signaling patience and greater fiexibility in the 

conduct of moneta!)' policy in response to 

ad1~rse macroeconomic or financial market 

de1 lopm nts. 

Survey-based measures of the expected path 

of the policy rate through 2020 also shifted 

down, on net, relative to the le1~ls observed 

in the first half of 2018. According to the 

results of the most recent Survey of Primary 

Dealers and Survey of Market Participants, 

both conducted by the Federal Resem 

Bank of New York just before the January 

FOMC meeting, the median of respondents' 

modal projections for the path of the federal 

funds rate implies two additiona12S basis 

point rate increases in 2019. Relatil·e to 

the December survey, these increases are 

expected to oecur later in 2019. Looking 

further ahead, respondents to the January 

sur~ ey for<'caSt no rate increases in 2020 

and in2021.11 Meanwhile, market-based 

measures of uncertainty about the policy rate 

approximately one to two years ahead were 

little changed, on balance. from their le1"eiS at 

the end of last June. 

1 l. Th: ""ults of the Sun"l' or Primary !A '3Im 

and IlK Survey or ~larkct P.Jnicipants are <nililablc 

on 11tt ffflcral t Bank of New Yort ·s \\'Cbsite on 

bttP>iAiww.~~<~•yorkf<d.orglmark<t>lprim>T)d<Jkr_ 

SUM)·_qu,'Slion,.html and httP>il•ww.nt\\)OrH<d.org/ 

marktts!sunt)'_llt)rket_p.'l.r1kipanb.. respe"\tiwl)~ 
121 

The nominal Treasury yield curve 

continued to flatten 

The nominal Treasury yield cun·e ftanened 

somewhat further since the first half of 2018, 

with the 2·year nominal Treasury yield lillie 

changed and the 5-and 10-)'ear nominal 

Treasury yields declining about25 basis points 

on net (figure 31). At the same time. yields 

on inflation-protected Treasury securities 

edged up, lea1ingmarket-based measures of 

inflation compensation moderately lower. 

In explaining movements in Treasury yields 

since mid-2018, market participants hal'e 

pointed to dmlopments related to the global 

economic outlook and trade ension~ FOMC 

communication~ and fluctuations in oil ri~ 

Option-implied I'Oiatility on swap rates-an 

indicator of uncertainty about Trtasury 

yieldH eclined slightly on net. 

Consistent with changes in yields on nominal 

Treasury securities, )1elds on 30-year agency 

mortgage-backed securities (M BS}--an 

important determinant of mortgage interest 

rates-decreased about 20 basis point~ on 

balance. since the middle of last year and 

remain low by historical standards (figure 32). 

Meanwhile. s on both investment-grade 

and high-yield corporate debt declined a 

bit (figure 33). As a result. the spreads on 

corporate bond yields orer comparablematurity TreJSUT)' )'ields are modestly 11~der 

than at the end of June. The cumulative 

increases over the past year have Jefi spreads 

tor high-yield and imtStment-grnde corporate 

bonds close to their historical med an~ with 

both spreads notably above the 1·ery low !CI'cls 

that prevailed a year ago. 

Broad equity price indexes 

increased somewhat 

Broad U.S. stock market indexes increased 

somewhat since the middle of last year, on 

net. amid substantial volatility (figure 34). 

Concerns o1•er the sustainability of corporate 

earnings groMh, the global growth outlook, 

international trade tensions, and some Federal 

MONETARY POLICY REPORT: fi8RUAAYI019 23 

)0. Mark<l·implicd rc&nl funds r>le pooh 

- 1..50 

- w 

- !.I» 

S 2019 

: Tb:~fal'dso:c~~~b)'qu«.."iOtlO\'m!lgllt~"'' 

$'1o-~ 6n'n11i1'C ~ t»j t>lho tP.'~c l'<\knl ~ 111t. lk 

implicl.lplhasoiFeMixyNl.:'Ol9.tS~•it!ltlat.-of)l:)::29, 

.Nli$.Tb.-pdli!~•ith~IOC"~~~>,(tnl~ 

oiO~~lk~p11bt:'i~~~200 ~~ 

pl'r\Wi.('OtlllrouP~202t 

Solm: B~g;Ft&al~'(lkwdSI.&fl'~lllllln. 

; I. Yitlds on nominal Tn."3SUt)' S«Uritics 

""' ·-

-1 

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I ! I I I I I II , II I I I I I I ! 

lOOI YA\lOOSMI» 2009001121)13 OOIS~17.Nl19 

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tvntat~lbe~tA:M'<IIbicllllno ~~st\uilits 

•ou14kp0."rl''l~Pif.orfa.'t l'lb:' s,u..J~ailt.11tk:&I('R(tollk 

S..JIOo}Q'IIOCnicla!Tr~·)~ 

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122 

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199$ XOI Z(O.( lWI ZOIO NIB Z'OI6 Z<119 

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>leW .of tho: let \It i4>10.y" cripk-8 U.S. C~:.: llldct (CI;A'). II'sfti~ i$ 6:- O. 'UJ liipo,_i.:W 1:::4 1ct\:o.'tl tb: df~'"ti-.-r )idd o!lh: ICt&CUtl ·~~>1\).)aiJ.S.<3$h P.-yH ,PY.dJbh(UAO~ 

S«.~t!la ~of~ t."ff'iD L~tdl ~tiled "'rlb. 

-

l~. Equioypri<cs 

J ' II II II I I I 1 I I I I I I II I I 1 

~l200>20052001~:00112'013~ $ZCI172'019 

Sol.'lU..:~d&f.."oX'sO... Jooco.l ~,.g~T&-(For~ 

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JS. S&P lOth'olaoility 

.., .... 

- 0) 

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titip:a!f!I0\1r¢a\tft$o:"'07Spctl~ol•"ti~A~OI'tt~f'l$1 

Ndr)1. 

Solm:Oiox\'ob:ihl}lodt\J( IX I)~~na81.~ 

Reserve communications that were percei1'ed 

as less accommoda1ive than expeeted weighed 

on investor sentiment for a time. There were 

considerable diftcrences in stock returns across 

sectors. reHecting their varying degn.>es of 

sensitivities to energy price declines, trade 

tensions, and rising interest rates. In particular. 

stock prices of companies in the utilities 

sector- which tend to benefit from falling 

interest rates-11nd in the heallh<are sector 

outperlormed broader indexes Conversely, 

stock prices in the energy sector substantially 

underperformed the broad indexes as oil 

prices dropped sharply. Basic materials--a 

sector that was particularly sensiti1·e to 

concems about the global growth outlook 

and trade tensions- also underperfonned. 

Bank stock prioesdeclined slightly, on net, 

as the yield curve flattened and funding costs 

rose. Measures of implied and realized stock 

price volatility for the S&P 500 index- the 

VIX and the 20-day realized I'Oiatilityincreased sharply in the fourth quarter of 

last year to near the high lel'els observed 

in early February 2018 amid sharp equity 

price declines These volatility measures 

partially retraced following the turn of the 

year. with the VLX returning to near the 

30th percentile of its historical distribution 

and with realized I'Oiatility ending the period 

close to the ?01h percentile of its historical 

range (figure 35). (For a discussion of financial 

stability issues, see the box "Developments 

Related to Financial Stabilit( ') 

Markets for Treasury securities, mortgagebacked securities, and municipal bonds 

have functioned well 

Available indicators of Treasury market 

functioning hal'c generally remained stable 

since the first half of2018. with a 1•ariety of 

liquidity metrics-including bid-ask spreads, 

bid sizes, and estimates of transaction costsdisplaying few signs of liquidity pressures 

liquidity conditions in the agency MBS 

market were also generally stable. 01'Crall, 

the functioning of Treasury and agency MBS 

markets has not been materially aft'ected by 
123 

the implementation of the Federal Reserve's 

balance sheet normalization program O\'er 

the past year and a hal f. Credit conditions 

in municipal bond markets ha\'e remained 

stable since the middle of last year, though 

yield spreads on 20·year general obligation 

municipal bonds over comparable-maturity 

Treasury securities 11~re modestly higher 

on net. 

Money market rates have moved up in 

line with increases in the FOMC's 

target range 

Conditions in domestic short-term funding 

markets have also remained generally stable 

since the beginning of the summer. Increases 

in the FOMCs target range were transmitted 

efti:ctil'ely through money markets, with yields 

on a broad set of money market instruments 

mo\'ing higher in response to the FOMC's 

policy actions in September and December. 

The effecti\'e federal funds rate moved to parity 

with the interest rate paid on rescn~ and was 

closely tracked by the O\'ernight Eurodollar 

rate. Other short·term interest rates, including 

those on commercial paper and negotiable 

certificates of deposits. also mol'ed up in light 

of increases in the policy rate. 

Bank credit continued to expand, and 

bank profitability improved 

Aggregate credit provided by ccmmercial 

banks expanded through the seccod half of 

2018 at a stronger pace than the oneobsenw 

in the first half of last year, as the strength 

in C&l loan growth more than oft'setthc 

moderation in the growth in CRE loans and 

loans to househo d~ In the Jounh quarter of 

last year, the pace of bank credit expansion 

was about in line with 1hat of nominal GOP, 

leaving the ratio of total commercial bank 

credit to current·dollar GOP little changed 

relatil'e to last June (figure 36). 01'erall. 

measures of bank profitability improved 

further in the third quarter despite a ftanening 

yield cuf\'e. but they remain below their pre· 

crisis le1<els (figure 37). 

MONETARY POLICY REPORT: fi8RUAAYI019 25 

36. Ratio oft01al commercial b:W: cn."'::itto nominal gross 

domestic produd 

-i5 

_/\J_,. - _., 

- - 01 

- ll 

I I, 111 I , I I I I, I, I I I I I J 

lM> 2002 2004 200$ ZOOS lGlO 2012 lGl.l 2'016 .201$ 

: O...~l0 t~ .. - S«tO; F~l Resent ao,;d. ~bli<11 R.o;k.f;!;: H.$. ·A>SCIS. W Laah:litic1:afC:O!IItl1t1ri&l~iDiki;'~S:.r-C1":8urC'alofi;((O)(T!IC 

Afl#y;i$\'ialk."ttAW)ti'<. 

)J. cofi~biti yofl:onk holdingcompani" 

2.0 - - )I) 

1~ ·---~ -10 1~

J- - 10 

- 16 

- :» IJ -

tO - - JO 

~lk~*"qu:ncd.t.clda:c~t,~Tbc-~ 

C!&.,PWI~l. 

ScA1re Fedml RclMt" 8Ntd. r~ fJ. ''·9C'. C((S(II~ f"CJ:~o.'UI 

-~8>ol:llo1qC_.,_ 
124 

Developments Related to Financial Stability 

The Federal Reserve Board's financial stability monitoring !ramework 

The fromt\,IJ<I< uS«! by 1he Feder•l ose~~ Soard to 

monitor fon.1nciai<!.Jbility distinguishes between <hocks 

to and ,~lner•bilities of the fin.Jncialsy!(em. Shod!, 

such., sudden changes 10 financial or <eonomic 

condition<, "e t)]>ic311)·1Urprise< and are inherendy 

diiticult to pred"IC1. ~ner.as '"lnerabili~es tend 10 

build up"'"' time and are the a<pe<1< of the financial 

S)>lem !Nt are most e>:j.1<(led IOCM< "i<lesp<eod 

problems in limos of 1lteSS. Some wlner.tlilitie are 

"clic.ll in narure, rising.!nd f.!lling a.tr time,"~~'~ 

cdlots are -l.:.n>mi"' ftom iongt<-lfml 

iom5 sll.lping the ..rureoi emf~ inltmiO<foation. As. 

resu11. the &ame\\ll& iocuots primarilv on 1110111l011ng 

,1J~nmbi!i!ies and~ iwr brood ra:<gcn<s 

bosed on acodemi< ...-h 

1. Elt\1ltd ,.,..tion prOSSIIm.,. sip>altd 1>.· ...a 

prices lhalare high rda:ii .. IO ~ hmdunoolals 

ex his!Dricol norms and.,. oiton elm~ lw .. inr...!td 

'"U."""sofim'I'SlOI< 10 ul;eon risi:.As..m. 

.r..~ttd ,.r...oon p<1!SSUteS inl>h' a greattr poiSibiloty 

of OUI<iztd drops in ...a prias. 

2. £xcessi-~ bono\\·ing by bu!4ntSS<S and 

llouseholds lt.n<S them \1llnerab~ 10 dilli'<SS of their 

incomes decline or the.,.,. they own fall in .alue. 

3. Excessnel01~rage "ilhin the financialsedor 

increases the risk that financial instiMions \\ill not ha\'t 

theabilityroab!orblos&es " l>en hit by ad\...,. shocks. 

~. Funding risl<s expose the fon.lncials)<tem to the 

possibilil)' thai irn-estors \\ill •run" bywithdlowing 

their funds fronl a particular i~itution or sectOf. 

Facing a run, iin\lndal instilutions rmy need to~~~ 

as!ffl quidly a1 ·oire <ale" prices, thereby incurring 

wbslantiollosses ond polentially "~ bo<:oming 

insol\'ti"'t. Historians and economists oiten refer to 

~\ idespre.ad im~ runs: IS "fioancic.l panics.• 

\Vhile this ftJme'\\'Ofi.: pro ... idn a system31ic \\"Y 

tO assess financial stability, some potential risk< do 

noc irt neatly inro it beuuse they are flO\ -.I or diffkult 

10 quanoiy. sud! a~ q~nl)' 01 tl@o.-elopnwnll 

in Ct)~assefs-ln addiOOn, 5001e \1Jintrabilities are 

dilticull to meawre "ith <Urrendy O>ail.ll* d.u.l. •nd 

the 1<1 of \'UIIItl'abilities mav .,'<)I,~ 0\-er timt. Gi\~ 

tl!o!t li"'iWions, "~continually rei) on ongoing 

a.ru.,..;,...olrht..,..rn,........,.,,.,... 

ood ..... """""' ... Tobioso\Oiao. .-C.. ill. 

ood ,_.~~1>. "F-~ ,-...,· -~,... ofr....o.J{c_,,.._, 0..:-· IIIJ.lS:-9>. 

research b)• 1he FcdeMI Resc~t Slolff, 3(3(fcnoies. ond 

othertxP1'15. 

Sinre !he publrcation of the fedi-fal R('SM'C Soard's 

forstlilldncu/ St~brlity Rcpotl on NO\-embe< 28, 2018. 

some are~s where \·~IUJtion ptt'SSUrCS were fl concern 

h.ne cooled. p>rticul~~) !hose rel.lted to belo"' 

omes~ment-wade corporate deb!.' Regulalory copil<ll 

•nd hqurd•ty ratiO! of~ fin.1ncral in~otuttons. 

tsptei.lll) large b>nl.s, are at hi>tori<~lly hrgh 101<1>. 

fundrng nsl<s on tlw fonanci.ll !)~tl'll are low rebli\~ 

10 the period leodong up 10 tlw cnsr~ Borrol•ing by 

hcoustholcb hos l1!t<1 rooghlv in lrnt \\ rth ~ 

lftCOri'<S and hos botn COftCtl'\lt<~ted among pnme 

..,.,.,«So~$. dfbta.,tdbybWoes!esi> 

high. and ~4 !landWs, t<pCCiollv \\>lhin sqrnoo:s of the loan INII.tl fo(u!td on lo\\ft·taztd ex Ulll'.iled 

linn!, dori!ocx.o:ed rn rht !«ond !I.V of2018. 

As!CI 'aluolions W.C~a!td 10 lilt hifl end of their 

llstoncol"11;<> on mony ....U.S"'"' 2017 and the 

iint b.ti c/2018, ~ b)• the ;olid «onomc 

......,...and an~ rncre~ttrnom'I'SICn' 

appr'lltelar rrsl Hol'""'·'..,..,.red"•tlr ~ 2018, 

,.,.nd the trme cl the P'"' >OU! llotM'Ytr l'oUcy 

1/.oporl. ,aluahon ptt'SIUr!'S h.n~ ta!td -b.t 

on the~•IV, <orporatt bond. and k'"''ged loan 

morl.ers. o,., the <amt ptrrod, amod wbl!.lntial markot 

\'Oiatrhty, the fon,ard ('(juoty prrce-r~•mrng~oatro of 

S&P SOO fonns, a mt~rrc of "luations in oquity mar~e1s, 

declined •touch, on ne1. and it currently !land; jllll 

beiO\Y the lop qua nile oi its his!Orical disuibution 

lfrgure A). Spreads on bolh on\tstmenl· and speculoti'~ 

gr•de corporote bonds Ol'er comparabl .. m.~turi~· 

Trwwry ""urities widened ~ty to 11:\<ls close 

to the medi.1ns of their hl~ooicalranges since 1997 

tfrgurc 8). Spre.1ds on nt:\,1y i<wcd le\~r;ged lo.1ns 

widened 111arll'dly in the founh quantr of 2018. tn 

rt.11 <Slate noar~el!. comnoerciol reol <SlJte prices h.l\'e 

betn SIO''ing f;~er th.ln ren~ for St\eral l••~.le3\'ing 

,.,luations ~retched. 

Srnre the 2007-o<J ~.household d<!>l and 

bvsi~s debt h.J,t di'trgtd lfrgurt (). 0\trlhe 

p.l!l St\eral )e.ors. borra."ng b)· ilouseholds lt.ls 11>)-ed 

on lint'"tlr income pth •nd has betn concer>o 

u.utd among..,.,.,.., '"th Slnlng credit his!Ories. 

lcon~II!Jt'IJJ 

2 ~-oter. ...... olf\t_al_tS,- •2018 .l.....cOIIS!Jb&,.., •II..,...,.. llolrdol 

er.-. •'201~~ 

.... - lcpl; -~·~ 

.... 
125 

- ll 

- l 

I !!! ! !or!l!ol!/ II Ill·!! d 

am 1~ am lKW :sm 21m Nl9 

N4:1rF:~Iinlt\1~tM10d$..~P~f~Ollu 

;w~oot.\P-"u~ror J.! ~Jbcld. Thtr6M.~'~ 

~~#.J~I.)F~N-2019. 

Sox'Ul:: ftdml ~~ lkw;! wff ~ !N!a RMili\• 

~lbxltloo~}.IBESJ~ 

B. Corpor.>l' bond spl<3ds IO~mibr m>l,rity 

T~-wySl'CUrities 

- 16 

- 11 

- 12 

- ,. 

!ttl!ll!lllll! !Ill !Ill 

1998 2001 :'004 zoo; 2010 ))13 lOt~ 2(11~ 

Noll: TlxlO.~~tripk-8:d"k\'tS6eet't<l.'tile)I<'Uollbt1CESo!A\IL 

1·~~>-l~'~:it Cf~C"k-8 lLS. C«pcn'!< ltlib (C.&.\.&). W tbr IG-)'C'II' 

h!Pyidd rt~dltrfft\~'( )'idJofik ICEIWAMl.7-40-lG-yQfUS. 

('~ hy Hit;\ Ydllrdt\ (J.M~ 11~' ~lridi 6\w ~ !,~ 

(Vtl.'f:~t\t("'(Oio(l'.c»rto.$(\'t:t'itics. 

S«.m K'EDI&a~U<.~•llh~~ottbr: 

Tu~. 

Br cont~ borrowing by businesses, including riskier 

firms, has expanded signiftcanlly. ror !p«Uialn-egrolde and unr.lled firms, the raoio of debtlo asS«s has 

incre<lled ~eadily since 2010 and remains near i~ 

histori<al peak. Furthe<, _growlh in debt to buli"""" 

wilh fowtc credit rctfings and wi1h air~· ele\•ated 

'"~Is of borrowing. such"' high-yield bonds and 

I.,.., aged loons, has been subst.Jnual Cl'er the pas1 

MONETARY POLICY REPORT: fi8RUARYI019 27 

Sou~ D.u 1ft pk11y aaj oi<'Cid lhr•10\S.Q3. 1'k Wdrni Nrs 

~ptfl(dsd~r~a,dd'IOCdbylfl(o~BI.rmvf 

~~itGOPR!. ~&tmNi.:-~ 

Sol.att F~ Rtst:f\1: &w\1. ~ R.tk~ l.l. "f"lflltrit! 

~oflbcUoilcd~"':.&.muolE~.wl}11S'il""-n 

~~ ~ Q.~ .J ~"1 ».~ T.Jbko 1~ Gl'l$ 

D..~PI'OOo."tlbrdM2ifal.~ 

" 1~ars (f~Sure 01. kswnceof thele illllrumen~ 

si0\1~ signif~ntly in NCI~tbe< and Oe«nlhe< 2018 

be< a use olthe sharply highe< lpfeads demanded by 

inl'e!tors 10 hold 1he<n, bul issuance has rebounded 

somewhat in e.uly 2019. 

Credit s~ndards for new 1..-eMged loons 

deleriOt<lted "'"' 1he second half oi 2018. The share 

of newly issued large loons to CO<pOrations wilh high 

le~'erage-<lefined as those with ralios of debt to 

EBITOA (earnin~ before inlerest, Ia'"'· depreciation, 

and amo<tilation) abo-.e ~increased lhrough 

2018\o le~-els e:<ceeding pre~ious peaks ~ed 

in 2007 and 2014. when undeo1ri1ing qualily ""' 

notably poor. In a<ldition, isswnce of CCI-enonl-lite 

loans-loans with few or no tr-.tditional maintenance 

CCI~nanls-remained high during the second half 

of 2018, although this elevated le~-el may reilec~ in 

pan. a greate< pre~·alence of in~"'!ors 11ilo<lo not 

traditionally monitor and exercise loon COI'roants.' 

Nonelheless, the strong economy has helped ws~in 

solid credit performance of iel"eraged loons in 2018, 

with !he defaul1 rate on such foaM near the ICiv end of 

its historicdl r~nge. 

(continued on net~ page! 

3. Collatera1t~:ed b.ln obli~ ""ich qce predomil\a:Mfy 

bod«! byiel«as<d lo.l,, hol-e grown ~Ap<ily01« 11-otJ"'' )"ear aod,.lSof )'f.JN~od2018, pur<hase abo!A 60 percooaof 

iel«as<d lo.llls" origiflolOO<l ~mibth: mu<"l lund$ hold 

abou110 fl"<''I ol lel•raged ioofiS. 
126 

Financial Stability (oon~IWI!d! 

- 8 lrN..cWI\Uk'-lDl'>'d"'-

• HtsJ!·)idlandlllnlcJJNnds 

- Tool 

_., 

_., I I I 1 I I I! t I I I 1 I !I 

l'0:6 :COS NJO 2012 ZON ZG16 1(11& 

Solr: Tou.IM~ofnJk:. &tc"'lbt~o(thcacc~ « 

~'llbti\~pdt·CIInltlf~*'ldlc<.~klw..Thtdxaan! 

b.l'..qD~~t«f!IO\'itcl\~ 

Soutt; M.:l\-. r"~ lm.~ Sc\~ fi'SD): ~P 

~I.C\~'\iC~&D.ML 

The cre<Jit quality of noofllldncial high-yield 

corpo<ate boods was roughly ~able<11·er the pasl 

SOI"tf<ll rea~. with the share of high-yield bonds 

outs~anding that are rated 8318- or bel<11v ~aring 

il.lt and below the financial crisis peak. In contrast, 

the dis~ibuti011 of rating> among ini"\'Simenl·grade 

corpornte bonds ooeriorat.O. The sha<e of bonds rated 

at the IC!II"elt in1""ment·grade lt~~l (for wmple, an 

S&P rating of kiple.S) rtached nt<lr-<ecord le~-els. As of 

December 1018, around 42 percent of corpornte bords 

outslanding were at the'"""" end of the im-estment· 

grade segment, amounting 'o about S3 trillion. 

Vulnerabiliues from financial-sector le~-erage 

continue 10 be low rel.ative to historical S!a:ndclrds, in 

pan because of regulatory reforms enacted since the 

financial aisis. Core 1inancial intermediaries. including 

large bonks, irliUrance companies, and broket·de•lers. 

appe.ar well positioned to weather econotnic str~s. As 

of the third quartet of1018, regulatory capitol ratios for 

the U.S. global s~emicall)• imporunt bonks rem•ined 

well iibo\'e regulat<>r)' requirernet~IS and were dose 

to historical highs. Tbose bonks will be subject to the 

1019 Dodd-Fr<nkAct stre<s tests and Cornp<ehensi1't 

C.pital Assessment and R01oiew. Consistent 11ilh the 

federal Re<en~ Board's po~lic framework thi> )~.u'< 

scenarios feature a IJrgtr increase in unemp!~ment 

and • deeper rec.,sion tlloln in 1018 as 11~11 as 

~-pically large declines in financial asset pri«s. 

Capi~ll.-~ls at insurance cornpanie< and broke<· 

dealers also remained relatil~ly robusl b)• historical 

~andards. A range oi indicators suggest that hedge fund 

le~-erage11 s roughly on(hanged 01-er 10t8; ""'''""'· cornprehensil~ dota, a~•ilablewith a signifiQJnt ume 

lag. from earl)· 1018 showed thatle-..-age remained at 

the upper end oi iB ronge over the pas~ eight yeors. 

Vulnerc'lbiliti~ associated with iunding risk~t 

is, the financing of illiquid assets or l011g-maturity 

asse~ with sbort-m.lturity debt-<ontinue to be iol1; 

in pan because of the post-crisi> implementation of 

liquidity regulation< for banks and the 1016 money 

marl<et reforms' 6anl:s are holding higbe< le~~s of 

liquid as leiS, 11~ile their use ol short-term wholesale 

Cun<rtng a:s a shafe of liabiliti~ is near histoe-ical rows .. 

~s undet man.agement at prime funds, institutions 

th.lt fl<C!I-ed ~~lnetableto run< in the past, Ml~ riSI'n 

somt\\~t in recent monlhs tx.n remained far beiO\v 

pre-relormiel..ts. 

Potential downside ri$ks to intem .. 1tional financial 

~abili~· include a dC111~turn in global gr0111h, 

pOlitical and pOlicy uncenainty, an in:ensification 

of trade ten>ions, and broadening stress in emerging 

marl<et economies (L\IEsl. In maO)• adl~nced foreign 

ecooomies, financial conditions tightened SOO'le\\hat 

in the secOild half of 1018, pa~lr reilecting a 

d<>terior,llion in the foscal outlook of Italy and Brexit 

uncertainty. The Unite<! Kingdom and the European 

Union lEU! have not )el ratified the terms for the 

United Kingdom's Mard> 2019withrlrawal iron> the EU 

IBrexiO. Without such a withdrawal agreemer~ thete 

will be no uansition period for important trade and 

financial interactions bet\veeo U.K. and EU reideflts, 

and, despite preparations for a •no-deal Brexit" a wide 

range of economic and financial adivities could be 

disrupled. EMEs also experien<ed ~ghtened financial 

~r.,s in the second half ol1018. Although tllolt sues< 1m receded 10111<11-bat more recent!)", many L\IEs 

(Ofllinue to harbor impor~ant wllliililbilities, retlecling 

one or more of >obstantial corpo<ate 1.-~rage, fiscal 

concems. or excessi\"e reli.1nct on foreign funding. 

4. S..li.S.Srorri!;.sand Exchange Commissioo (20t4~ 

'S!CAdopls •'IOOe)' M•~<t Fund Relorm Rules," pr<SS rei<..._ 

Myll. ··~""·"".go-.·.,...,~-1"""-''*""'~ot<-t•l. 
127 

International Developments 

Economic activity in most foreign economies weakened in the second half 

of2018 

After expanding briskly in 2017. foreign GDP 

growth moderated in 2018. While part of this 

slowdown is likely due to temporary factors, 

it also appears to reftect weaker underlying 

momentum against the backdrop of somewhat 

tighter financial Condit ions. increased policy 

uncertainty. and ongoing debt deleveraging. 

The growth slowdown was particularly 

pronounced in advanced foreign 

economies 

Real GDP growth in several advanced 

foreign economies (AFEs) slo11~d markedly 

in the second half of the year (figure 38). 

This slowdown was concentrated in the 

manufacturing settor against the backdrop 

of softening global trade !lows. In Japan, n.-al 

GOP contracted in the second half of 2018, 

as economic actil1ty, which was disrupted by a 

series of natural disasters in the third quarter, 

rebounded only partly in the fourth quarter. 

Gro111h in the euro area slo11~d in the seoond 

half of the year: Transportation bottlenecks 

and complications in meeting tighter emissions 

standards for new motor 1~h cles weighed 

on German economic activity, while output 

contracted in Italy. Although some of these 

headwinds appear to be fading. recent 

indicators-especially lor the manufacturing 

sector- point to only a limited recovery of 

activity in the euro area at the start of 2019. 

Inflation pressures remain contained in 

advanced foreign economies . . . 

In recent months. headline inHation has fallen 

below central bank targets in many major 

AFEs, reflecting large declines in energy prices 

(figure 39). In the euro area and Japan, low 

headline inflation rates also reflect subdued 

core inflation. In Canada and the United 

Kingdom. instead, core inflation rates hal'e 

been close to 2 percent. 

MONETARY POLICY REPORT: fi8RUAAYI019 29 

)$. RC3t gnm dottiC;1k prodU<t gro"1h in scl«t<d ad\'atlC«< roo:ign oconorni« 

lOIS ))16 l>ltl Zi~IS 

- l 

-· 

~ The dw. for lhr f\W IU.t. ~ ~ lk U.K. llllwp.nlt 

~~, C'il:iaws for lO , The~ for C'auk ole'lld ~ 

lli8:Qt 

Sol... ;f«lbo:l.' ~OJ'l' ... ~f« --~~~ 

C~O!Y'I('('.~~of~t:. C..NO~og.Ut;~~('-* 

~c~~ ilHlwtA~ti:s. 

39. CooSWOO' prict iotl3tion in scl«tcd adv311Cl.-d for.:ign 

\.'\"'f''Imics. 

- -· 

~ 

..._. 

_.f 

E•oM 

- 3 

_ , 

- 1 

- I 

I I I I I I 1 I I I 1 I I I I I I 

WI~ 2lll6 7 !GIS ZOI9 

:\ol(; Th:liluf'«Ot.N"'~Q~4b;lla:s!l~for~· 

lO)t9.Tbcdooi«Lh<t: ... ~"""<l--,l>l>to>t) lO) ... Tbc 

.... l«c.o.l>ood""""'"""'..Pll>.~l<ltl 

Scuo: f«lhrl."ri'..-d ~OJTa."t'f«~ ~blapm. 

~ r:l~ Atbits w.I UICDI~ b lhrN'\'Ift.l. 

S:.llistic.aiOff~o.>toltl.::~C~Ii-s:f«eza..ta.~ 

CarJ.a:alf\iaKI\WAml)'tio."S. 
128 

.;o. Equity indcx<"S ror sdl"\"".tOO roo.ign eoonomies 

- I., - IJO 

- 110 

- 110 

- 100 

!0 

- so 

lOIS !016 

~ fh:dl':llk 'fi'C'd.l)' ~ t.>fdailydl:.a d c).knd ~ 

Fdruxy 10, . 

SOtlt'l: F«ftii'O arr:L. OJ ED S:o:t..~ f»:\;f« ~ TOPlX&o..-k 

IDl-:ci«'UiL'\l K .... fTSEIOO&o..-i bh:all li g.. 

41. Norninal l0-)'t31 go,-._mmerl[ bond yields in 

scl"1«13d'-.n«<< economics 

- lS 

- l.D 

- l.S 

-!.0 

- u 

- u 

~ 

- J 

~ Jb:c!)l;a tt~•~ n£tSO ~·txoctam.-lr: yi.:l45~ "!<'Od 

....., ,~20. !019. 

Soo.l<C-~ 

.. . prompting central banks to withdraw 

accommodation only gradually 

With underlying inflation still subdued. the 

Bank of Japan and the European Central 

Bank (ECB) kept their short-term policy 

rates at negati1<e levels. Although the ECB 

concluded its asset purchase program in 

Dettmber, it sig~ aled an only very gradual 

removal of policy accommodation going 

forward. The Bank of England (BOE) and the 

Bank of Canada. which both began raising 

interest rates in 2017. increased their policy 

rates further in the second half of 2018 but to 

levels that are still low by historical standards. 

The BOE noted that ele1•ated uncertainty 

around the United Kingdom's exit from 

the European Union (EU) weigl1ed on the 

country's economic out lock. 

Political uncertainty and slower 

economic growth weighed on AFE 

asset prices 

Moderation in global growth, protracted 

budget negotiations between the Italian 

government and the EU, and developments 

related to the United Kingdom's withdrawal 

from the EU weighed on AFE asset prices 

in the second half of2018 (figure 40). Broad 

stock price indexes in the AFEs fell, interest 

rates on sovereig11 bonds in several countries 

in the European periphery remained elevated. 

and European bank shares underperformed, 

although these m01'tS have partially retraced in 

rettntweeks. Market-implied paths of policy 

in major AFEs and long-term sovereign bond 

yields declined somewhat. as economic data 

disappointed (figure 41). 

Growth slowed in many emerging market economies 

Chinese GDP gro111h slowed in the second 

half of 2018 as an earlier tightening of credit 

policy. aimed at restraining the buildup of 

debt. c-aused infrastruclure investment to fall 

sharply and squeezed household spending 

(figure 42). However, increased concerns 

about a sharper-than-expected slowdown in 
129 

gro111h. as 11~11 as prospecti,·e eft'ects of trade 

policies prompted Chinese authorities to 

ease moneta£)' and fiscal policy somewhat. 

Elsewhere in emerging Asia. gro111h remained 

well below its 201 7 pace amid head11inds from 

moderating global growth. Tighter financial 

conditions also weighe-d on growth in other 

EMEs- notably. Argell!ina and Turkey. 

Economic aclivily strengthened 

somewhat in Mexico and Brazil, but uncertainty about policy developments 

remains elevated 

In Mexico, eoonomicactirityincreased 

at a more rapid rate in the third quarter 

after modest advances earlier in the year. 

However. gro111h weak~ned again in the fourth 

quarter, as perceptions that the newly elected 

gorernment would pursue less market-friendly 

policies led to a sharp tightening in financial 

condition& Amid a shmp peso depreciation 

and abore-target inHarion, the Bank of 

Mexico raised its policy rate to 8.25 percent 

in December. Brazilian real GDP growth 

rebounded in the third quarter alier being 

held down by a nationwide trucker's strike 

in May. and financial markets hare rallied on 

expectations that Brazil's newg01·ermnent 

will pursue economic policies that support 

growth. However, investors continued to focus 

on whether the new administration would pass 

significant fiscal reform& 

Financial condilions in many emerging market economies IVere volalile but are, on net, little changed since July 

Financial conditions in the EM Es generally 

tightened in the second half of 2018, as 

inrestor concerns about vulnerabilities in 

several EM Es intensified against the backdrop 

of higher policy uncertainty, slowing global 

gro111h. and rising U.S. interest rates Trade 

policy tensions between the United States 

and China weighed on asset prices. especially 

in China and other Asian economies. Broad 

measures of EM E sovereign bond spreads 

orer U.S. Treasury yields rose, and benchmark 

EME equity indexes dedi ned. Ho11~1 er, 

MONETARYPOLICVRIPORT: fi8RUAAYI019 31 

~~. Rtat gross domes!ic pt0<1\1<1 growth in scl«ool 

c:mcrging rnarket economiC'S 

"'" .!016 :'OIS 

- " - 10 

s 

- 6 

- ' 

- l 

- 6 

~: lk&uiOrClmar ~~b)hd~lbrdatl 

(.:c K.«a. 1.."""'0. JDdlbnl Kt~ ~bycbtw ~"'i\~ 

g<l'~ ~~The 4au (IK Kon-:a, an4 !ok\i..'o) ~ 

pmimiox)· estinm-s. b ~I&Qo&, lb: 4.u for 8!W akcd ~~ 

lOll<()~ 

$ol.'l(t: f"«~Ct\i(u{\)I)."(QQ~o(~)l!Ci:fot ~&l'lk 

ofKOI'Q!foc .\l~lf$rtlllO~dt£Judi-.!ita ~~&:.f« 

81'l1ill~~rodt~f~e~IC".a:all,\ilh\\"f~~ 
130 

BooJ'=J~lt~aW) 

SOl - I Eq:.il)(edlbu(ri&lll"'is) - 6G 

L<o - _., 

- ;I) 

Non;lb:lx'OIIDJ~timdfkMsdafa.w~Joli!ISof"\'dt)' 

lb:a f:vm llauxy I.!OI~ IOD..,"mmt.'-.., ll. WIS.WIIIOIICbl) lli'!IScf 

,.~~daulfromlnm)·I,2(11~.10Fd:lnw} 20..:~m.lb:flld!M:ra-sC. 

~(~b.~ il!l (liN. The JJI·. "~ f'.m<'Q:lll$ ~M:m &a$ b1"1: Pbi; ~E.\18!-·) 6w: l!~ votcl:b' alm;.,~ ol 4W)• dlb anJ ~lt.'td 

~r~l9,l'li'J. 

Solm: f-cth:6JW~Wd~-s.EPI"R:G~:~EM61 . J.P. M{'(p:t[m.'fSiac_ \.attitu:Boodlodnl'b,uB~'IJ. 

-14. U.S. dolbr t.:xdnng.e ratt indtxes 

•«t:~~f.:O:.JS•IOI) 

- IS<I 

- 100 

- llO 

- Ill) 

- 11(1 

100 

£ .. - ., I I I I 1 I I I I I I I I I 'I. I I 

ZOIS 2016 Z\117' 201& :0019 

~;~tr.: Tbo:&u..•'bdllN ia ~n!IT~')'IIIibpo."''doliu.alC~ 

i'l~d~l)·d2tllr:l4~!t:l'l6.~F~·20.!019.Ai~by 

0: wrot~. ixr.:~ ~!.he da ftt!rct:CtiiiJ.S..doiLu~..., 

®~~US.«<at~i«L 

E_...._. Sol,'l(~ F-td«il Resmt lkct4. S-:ll~ Rtbsc lllt\, ~ 

financial conditions improved significantly 

in rectnt month~ supported in part by more 

positive policy del'elopments-including the 

U.S.-Mexico-Canada Agn.>emcnt and progn.'SS 

on U.S.-China trade negotiations- and 

FOMC communications indicating a mol\! 

gradual normalization of U.S. interest rates. 

EME mutual fund inflows resumed in rectnt 

months after experiencing outflows in the 

middle of 2018 (figure 43). While movements 

in asset prices and capital flows ha1'e been 

sizable for a number of etonomies, broad 

indicators of financial stress in EMEs are 

below those seen during other periods of stress 

in rectnt years. 

The dollar appreciated slightly 

The foreign exchange l'lliue of the U.S. 

dollar is bit a higher than in Jul)' (figure 44). 

Concerns about the global outlook. 

uncertainty about trade policy, and monetary 

policy nornlalization in the United States 

contributed to the appreciation of the dollar. 

The Chinese renminbi depreciated against the 

dollar slightly, on net, amid ongoing trnde 

negotiations and increased concerns about 

growth prospects in China. The Mexican 

peso has been volatile amid ongoing political 

de1•elopments and trnde negotiations but has, 

on net, detlined only modestly against the 

dollar. Sharp declines in oil prices also 11tighed 

on the currencies of some energy-exporting 

etonomics. 
131 

PART 2 

MoNETARY Poucv 

The Federal Open Market Committee 

continued to gradually increase the 

federal funds rate in the second half of 

last year 

From late 20t5 through the first half of last 

year, the Federal Open Market Comminee 

(FOMC) gradually increased its target range 

for the federal funds rate as the economy 

continued to make progress toward the 

Comminee's congressionally mandated 

objectil-es of maximum employment and 

price stability. In the second half of 2018. 

the FOMC continued this gradual process 

of monetary policy normalization, raising 

the federal funds rate at its September and 

December meetings, bringing the target range 

tO 2\1, to 2\1 percem (figure45)." The FOMC's 

decisions to increase the federal funds rate 

14. S« Boord of Gomnorsof ohe F<dernl «< ~ 

S)>O<m (2018) ... F,>der.ol Resent Issues FO~tC 

SoaO<rncno:· pn:ss rel<ase, Sepo<mb<r 16. hoops:!/ 

\\'WW,f«j~r3(rest"I'\"C',gO\IDCU'SC\t[IU; prtssrt1cav;f/ 

monmryWI80'Jl63.hom: and Boord of Gowmorsof 

ohe Fedml Resm< S)>lem (2018) ... F«lernl ..., , 

l><ues FOMC Sl31<mtnt." pres< rtl<aSt. D<o!mb<r 19. 

https:h\\\w,·,fedmlrese.ro~.go,irtr'll~\tntSipres:srdruesl 

monm~2018111~•.hon>. 

33 

reflected the solid performance of the U.S. 

economy. !he conlinued strengthening of the 

labor market, and the fact that inflation had 

moved near the Comminee s 2 percent longerrun objective. 

Looking ahead, the FOMC will be patient as it determines what future adjustments 

to the target range for the federal funds 

rate may be appropriate 

With the gradual reductions in the amount 

of policy accommodation to date, the federal 

funds rate is now at the lower end of the range 

of estimates of its longer-run neutral lel-elthat i~ the level of the federal funds rate that is 

neither expansionary nor contractionar)'· 

Developments at the time of the December 

FOMC meeting, including rolatility in 

financial markets and increased concerns 

abom global gro111h, made the appropriate 

extent and timing of future rate increases 

more uncertain than earlier. Against that 

backdrop, I he Committee indicated it would 

monitor global etonomic and financial 

developments and assess their implications 

for the economic outlook. In the Summary 

-- l 

-· 

- l 

_, 

_, 

-0 

1(138 2009 2010 roll 2012 lOB MI-l 20:1S :M16 2011 2018 2019 

Nou::: lla.:Z mj lt).)U"l ~u yt~~n•clk<'OilStlnl..atrinitkf>.NsOO u. t!.: ~T~CNat1i\'t\'y tnd.: s..'wili.-s.. 

Scutt [).~ollh!Tr~ rmli ~"<:Bl\W. 
132 

34 PART2: ,\ION!TAAY 1'0\«:Y 

of Economic Projections (SEP) from the 

December meeting- the most recent SEP 

available- participants generally revised down 

their individual assessments of the appropriate 

path for monetary policy relative to their 

assessments at the time of the September 

meeting.15 

In January, the Committee stated that it 

continued to view sustained .~pansion 

of economic activity, strong labor market 

conditions. and inflation 11ear the Committee's 

symmetric 2 percent objective as the most 

likely outcomes. Nonethdess. in light of 

global economic and financial derelopments 

and muted inflation pressures, the Committee 

will be patient as it determines what future 

adjustments to the federal funds rate may be 

appropriate to support these outcomes. 

Future changes in the federal funds rate 

will depend on the economic outlook as 

informed by incoming data 

The FOMC has continued to emphasize 

that the actual path of monetary policy will 

depend on the evolution of the economic 

outlook as informed by incoming data. 

Specifically. in deciding on the timing and size 

of future adjustments to I he federal funds 

rate. the Committee will assess realized and 

expected economic condi1ions relative to its 

objectives of maximum employment and 

1 percent inflation. This assessment will take 

into account a 11ide range of information. 

including measures of labor market conditions. 

indicators of inflation pressures and inflation 

expectations, and readings on financial and 

international developments. 

In addition to e1-aluating a wide range 

of economic and financial data and 

information gathered from business contacts 

and other intonned parties around the 

country, policymakers routinely consult 

15. St< the t:lcrember Sumn.aryof Eronon>ic 

Proj<ctions. ~bich •Pl>"lred as an addendum to the 

minutO<of the D«<mb<r IS-t9. 20t8. me<ting of tit¢ FOMC and ~ pre><nted in Pan J of this repon. 

prescriptions for the policy interest rate 

from a variety of rules, which can serve as 

useful guidance 10 the FOMC. However, 

many practical considerations make it 

undesirable for the FOMC to mechanically 

follow the prescriptions of any specific rule. 

Consequently. the FOMC's framework 

for conducting systematic monetary 

policy respects key principles of good 

monetary policy and, at the same time, 

provides flexibility 10 address many of the 

limitations of these policy rules (see the box 

"Monetary Policy Rules and Systematic 

Monetary Policy''). 

The FOMC has continued to implement 

its program to gradually reduce the 

Federal Reserve's balance sheet 

The Commiuee has continued to implement 

the balance sheet normalization program that 

has been under way since October 2017." 

Under this program, the FOMC has been 

reducing its holdings ofTreasury and agency 

securities in a gradual and predictable manner 

by decreasing its reinvestment of the principal 

payments it received from these securities. 

Specifically. such payments ha1-e been 

reim·ested only to the extent that they exceeded 

gradually rising caps (figure 46). 

In the third quarter of 2018 .. the Federal 

Reserve reinvested principal payments from 

its holdings of Treasury securities maturing 

during each calendar month in excess of 

$24 billion. It also reinvested in agency 

mortgage-backed securities (M BS) the amount 

of principal pa)•ments from its holdings of 

agency debt and agency M BS received during 

each calendar momh in exress of Sl6 billion. 

In the fourth quarter, the FOMC increased 

the caps for Treasury securities and for agency 

securities to their t'I.'Spective maximums 

of S30 billion and $20 billion. Of note, 

t6. For moo: infom1ation. ""the Add<ndum to lhe Policy Normaliza.lion J>rinciplt:sand Plan;;.. ~ticb 

isa,•ilabl< on the ll<>aro"s "<bsite at httJbJI»w~ 

f«kralr<s<nt.go,lmon<t31)poticylfik'lit"OMC_ 

Poltey onnati<at on.2011061lpdf. 
133 

46. Principal payments on SOMA se<:uriti<:S 

Trtasmystrurilies 

I R.-_ 

ftrin ~'fltS. 

-'!~("· 

- l<l 

-l'O 

- 1/J 

- so _.., r++llt-h lll 

- Jj) 

- 10 

MONETARY POUCYRIPORT: fi8RUARYI019 35 

- so 

-JO 

_., 

- so 

,~IIIIIIII ~17 lOIS IIIIIIIIIIInl l019 ~, ~ :'\on; rift,-otm."'''lmdn\km"llOcurri(IUII{so(Trc.ISIIrySCI.'\Iritksa~crroP,'tioo5.)Uru.,iafd>nw)WI9. fin,'a~JflmlilDJr~iocuiDOI.Illlls 

ol~~;o6..1Jt;aJIJmor1~'''·bkt<:d~~~~'1ioni:~ ii F'~lJII) C~p~,Meproj..,'tiotb~...d~ illdJWI~.Tht1.bunt..'IXI 

tl'II\XI$1'10..'\~Y:'OI9. 

SOI.:to: F~U esm~ lbnk DC~ YOtt: FNer.d Nn~ lkwt.l sufn\:ubliocK 

47. Federal Reserve assels :md liabili1ies 

200S ~ 1010 2011 2012 101J 2()1~ NilS 2Cll~ 2()1J 2018 2019 

:wu: '"('fNi .d~tyticilib.."$-~o((lriowr).!a.'«<Cbf} Di~cm.lit~-.'1ioo<t*(\"'''ll11Nd:~ .)1111p!':.SI.IppOftfor 

M~ lane'. Bc:w S:cam$.. and MG: :atldotbct mdil la..-ilili<$.tOCJuditls lb.:- Prirn.y i):akr('redit fkilify, lbt As.~ &rl:(lj C~ hp:t MCC~CY 

~b:k~M~fur4l~ Faci.tily.~~P'~~fM'ilic).~r:b:TttmA'i;SI('I.fb.i:N~~f._-i5!y ""()bcrttS(t..ird»."$ 

~~~andd~oos<..'\"Vl~~~~:andotbo:r!Dbiri6.-$-indobi\'\<TSC~a£l\'~tb:U..S T~ 

Go>'nl-""'lh<".S. T""'")'~r ........ A""" ll.d<o"'-""lM'Ogi>T.....,.H.l019. SI;Ayt~: f~Rc$M~Bootd.SW~Rtboic11..4.1.·F~Aff.!\'tio$RC"M-e~· 

reinvestments of agency debt and agency MBS 

ceased in October as principal payments fell 

below the maximum redemption cap~ 

The Federal Reserve's total assets have 

continued to decline from about S4.3 trillion 

last July to about $4.0 trillion at present, 

with holdings of Treasury securities at 

approximately S2.2 trillion and holdings of 

agency debt and agency MBS at approximately 

$1.6 trillion (fignre 47). 

As the Federal Reserve has continued tO 

gradually reduce its securities holdings. the 

level of reserve balances in the banking 

system has declined. In particular, the le-.tl 

of reserve balances has decreased by about 

S350 billion since the middle of last year, and 
134 

36 PART2: .IION!TAAY 1'0\«:Y 

Monetary Policy Rules and Systematic Monetary Policy 

Mone~a~· policy rul~ are matlltmaric~l formulas 

lhJt relate a policy inter<slrdte. such as the federal 

funds rate. to a small number of other «onomic 

ooriabl~pically indudi ng the deviation of inilation 

irom its wget V"afue oilod a rneawre oi tesource sJack in 

the economy. The pre<criptions for the polic.y interest 

rate from these rules can prol'ide helpful guidance for 

the r:.deral Op.n Marlet C<lmmittee(fOMQ. This 

discussion providts information on how policy rules 

infonn the FO.MC's sy>tematic conduct of m<>ne~ary 

polic)~ as well as I)I<ICfical considerations that make 

it undesir•ble for the FO.IIC to mechanicolly follow 

the pre<criptions of any spe<ifi< rule. The FO~IC's 

awroach for conducting n>Onel.lry policy p<ovidts 

suificient flexibility to Clddress the intrinsic comp!e;{ilies 

and uncertdinties in the e<::OOOfll)' whi!e ketping 

m<lnel.l')' poli()' predictal>!e and lr<lnsparent 

Policy Rules and Historical Prescriptions 

The effect~ -.ness of mone~ry policy is enhanced 

11hen it is" ell unde<stood br the public.' In simple 

models of the economy. good economic performdnce 

can he achie\'ed b)• following a spe<ifK monetary 

poli()• rulelhJI foste~> public undef>tandingand 

that incorpoMtes key princrplesof good mone~ry 

poli()•.' One such p<inciple is lhJt monetary policy 

should respond in a predic!able "")' to changes in 

economic cooditions and the economic outlook. A 

second principle is that mon<~')' policy should he 

accommodative 11hen intla tion is helow policymalers' 

longer-run inflation objecti•~ and emplormenl is below 

i~ maximum su~a nable l•rel; C001'efsely, monet.Jry 

policy should he restrictio~ 11nen the opposite holds. 

A third principle is tha~ 10 stabili>e infution, the policy 

rate should he adj~ed by more lhJn one-for-one in 

response 10 peqi~l incrf.ases or decre.J"SeS 

in inlkltion. 

I. For • discvssion ol how tho P<A>I<'s unc"'••nding ol 

01<11\fUI')'poljcy""llet<wthetiiKI••••«oiii'Mlll!lary 

pol<:y. "")llll< L. \"~leo fl0t21, 'Reodorion and (o'OI;t;on in C~r"l B.i!nk Commt.mic.ation:s.,"' speech deli\'fft'd .11 the 

""'' Sd!ool ol&siness, Un,«>ity ol Calilom " Berl<ele)', BE>d:ek:y. Qlii.,. N~-embet ll~ hl!ps.: \\WYoo.ie<lt'r.a!~t.p 

nt!w~~Kspe«M'-~ItonlOl Z 1113.1.1r.tn. 

2. fQc a discus~ion reg-arding princ,ples for d'f conduct 

ol ""'"''~'pol<):"" Board d eo-...,..., ol tho f<detal R""'~ S)•"" {20t31. 'Monewy 11>1<)· F'riiiCiplts and Practice,"' Boardoi W.'t'fl'l0f5, hr!ps.:t,\mv •. iederilresen.~.goo. 

"'""''"vol"'·"''"'"''-pol;,·.priro6plt<-Jnd.pr..:ti<e.h:m. 

Econornilll hare analyzed man,· mone~.~~· poliC)' 

rules, including the ~~~11-known Tarlo< (19'!3) rule. 

Olhet rules include the 'balall(ed awroach' rule, the 

adju~edTarloo- (19'!3)' rule, the "price lt.•el' rule, and 

the "GM diiierence• rule (figUieAJ.' These policy rules 

embody the three key p<inciples of good monetary 

polky and ~ke into account estimates of how far the 

economr is from the r:.deral Re<oo'O's dual-mandate 

goals of maximum empiO)'mentand price s~bility. four 

of the fi1'0 rules include the difference bet\1-the rate 

of uoempbymenllhal is StJSt.linable in 1he longer run 

and the current unemployment rate {the un<mplopneot 

rate gap); the f,r;t.difference rule includes the change 

in the unernplorment gap rathe< lhJn i~ level.' In 

addition. iour of the fio'< rules inclode the diiie.ence 

(continued! 

3. The Taylortt<J'IJI "'~"" wgges<<d U.)o/ln B. T.>ylo< 

(199!1 ·Oiscrt<ion '""'" ll>lityR•Ies in f'r.Kt<~· Ui~ 

R«htsltf Confe.<nce S<ri<> on Mlil: Pori:)·.'"'· l9 ([)o:emb«), PI' 195-214. The bai.Jnct'd-woach rule"" '"'1)1«1 in )o/ln 8. T.lyb (19991. 'A Hiltorkal An.l~>is ol 

Alorott"Y Policy Rv"": in )OI>n 8. TO)ior, «!., "'"'"''~ II>! icy Rules(Chicago: un•mityol<l>iugo Pr"''· Pl'lt<J-It. The .diiiSI«<T3)1or (t99)) rvlew" •ud<din O..i<l Re;fschoeide< 

and)ohnC. ll'oll~ms (20001. "'Th<<tl"""" iO< Mon<<a~· 

!\>lie)' in a low-Inflation Erj]; Jouttwl ol Alooey. Ut.Yli! Mid 

IJonlir!g_ ,'01. l2 t""'""""''· pp. 93~. A price-leoti rule '"" dO<usled in Rollett!. Hall tt984). ' 'lontW)' S<ra"S)' \\ilh an Ebstic P'rice Sl.lnd.lrd, ... in Price SUbilify and PtJbl;c 

Policy. proc...ting>ola~""""""'lpOIISOit'd by the fod«at 

"''''"IJo~' ol Karll>S C"ll)', held in Jac(ooo Hoi<, ll'i"- Augvst2-J LK.l""' Gry: f<detal Resen~ SankoiKa""' City), pp. t)i-59, h!tpo;IA,ww.l.o""sci~1<d.O<fJXI!>I<a!' 

sy""""")q!J4,'S3-I.pdi. Final~. the i.rs~.cfif"-:e rule is 

l>ll<donarv~~byAIIoanasiosO<phanMJ<s(200J , 

'His<orical•too<t"Y il>licy Ana~ >is and the Taylo< R,f<; /oumalo/Mon<Utylcooomi<;, o<l. SOI)IJ~ . pp. 981-1022. 

A<~'• r"iew olpol()·rules is ;nJol>n 8. T3)1o< and)ohn(. \l'oll~ms{)Otl), ' Simple and llobust R•1es for 

1\\onetal)' Polk)~' in 8eoj.Jmin M. rriedman and Midtael 

Woodford. Ed<., HanrlbocJ. o(,lfon<Ur)' fCOOOlllk$, od. )8 

""""'""'"'' NMh·Hdldndl, pp. 819-19. The"""' '<lume oitheHmdbootdM~l.uvlcon .irs~lsodiscu$~ 

'W'""Ms ~""!han pol<)-ru1es for do<W;,g pol<)· rate 

""''''P'""'· -'· The Ta)b (1993l ruk-ttpresetll.ed slick in reiO!Jrce 

utitil<llion usitlg an output&ap thediffeftncebetwt>«~ d~ 

"""'" leotlol reai!M'domesticprodoct (GOP) and the leotltloat GOP wo•ltl be~ the <COfiOIII)' w«e operating"' m.u..itmwn ernp'n,mentl. The rules in i~gUI'f' A ri1'pl'esent siJd; 

nresool'{eUIIiliLa'lionus.instheullemp~Wirst.xt, 

b«ause tloatg>pbetter<>jl!ur<SthefO.ItCs""~OI)'!O'I 

ro promo::emaximumemplq,menl. Howt\'(1(, too\tmeats ln 

tW a~efnati\'e me.JSUfes ol resource Vlililalion are hisf!ty correlated. foe moce inf()C'IYI.1:ion,. ~the n«e bebv iif;fJte A. 
135 

MONETARY POLICY REPORT: fi8RUARYIOt9 37 

A. Mon<t31)' policy rul« 

Taylor (1993) rul< 

Balaru:td-approach rul< RfA = r/Jt + R'r + O.S(rr1 - ;rtR) + 2(ufR .. u,) 

Taylor (1993) rule. adjusted 

Ri' = maximum (r.'' + rr, + (u)-'- u,) + 0.5(PLgap1). 0) 

First-<liftereoo: rule R{0 = R,_, + O.l(rr,-•") + (u)-'-u,)- (u~,- u,_,) 

Non.: R/ ~. Jtu. R,"W, R/'.aOO R.'lt repr~llbc' \'3luesof!htnomin:~~1 fl.'dcral fur.ds rate pr~b:d bythtla)lor (1993). 

babl'l('('d-approac-h. adju:>~ cd Ta~ior ( 1993). pric\'-b"<"l. aod first-ditrcr~oo: 11Jies.. r\'SP,."i.:tiwl)'. 

R..dcTtOtCS till: ~tool nornirt.;d fcdcr31 fuod~ r.Ht for quarw- 1. ::,is four..quartt!f pri.."\: infbtio~:~ for quartcr '·"' ~ lk 

uncmploym."'''l t.m itt quancr 1. a Ad ,,v. is 11'\c !.:wl of~~ n..'\ltt3t ml f~tll fund$: tate in1bt lotlg..."t Mil hat. Oft a\m~. is 

CXP.,."Citd 10 b.: oon..®ent ~~oillt SU51ainin,gma.Umwn cmpfO)mtnt and inllation 31 tht FO~tC's 2 pM"C1ll mttr·run objc\ih~. 

~.ln addition. u}"isd~e r.ttcofunnn)llo)'tJICOI in ttl( klflg._'f run. Z is tt.:C'\Im111Uiw$um OfJIQStdcli3tioBSoftbe r«krol 

fulld$r.ue from the pn.~pEion$oftl'le T3.ylof(l993)ru.k v.hcn tlt31 All¢ prMi~'Ssettin~ !h. f~-dcnll ruodsr3tt bclow~c-ro. 

PLgapr is t~ p.'m'llt dc\iatioo of tht actuallc\d of pric\'S fr(lm 3 prit:t k\•tl that ri$1e$ 2 p.'ro.'flt per )'<'3;t from iulc\-cl in:); 

sp.-cifiN star1ing period. 

'Th-Ta)ior (199))rulc a.nd othtr polkyntksart:g-.'tl('r.tlly 'Alilt<"n in !<"riDS ortlkdt\iationorrealoutpu! from its full 

capacit}' kwl.lnt~oCQwations. tlx 0\llptll pp Ms b.'I:P r~-pbtW llith the pp k>-1\lo'Mitfl( f3t( of un..-mploymtnt in the 

ion~"! run and it>iK'!ual kwl (IJ..<.insa rdationsbipkoo\\n as Ok.un'sb~~.')inonkrto~ntl~Rrolcsin ttnnsoftJ!c 

FOMCs stalUIOI)' g;ools.l-listoricaJiy. mowm.'llts in thcou:tput and uncm~mtnl gaps ha~'t ll«n highl~ romla!C'd. Box 

aott3pr0\idcsrtfettii!..'¢Sfortlxpolic}'rulcs. 

between recent inll.ltion and the FOMC'slonge<· 

ron ol>jecti1~ {2 percent as meas111ed b)• the annuol 

change in lhe price i~ for peM>al COIIlUmp:ion 

eq>enditu<es, 0< Pal, "~ile lhe price-10\~1 rule 

includes lhe gap beMeen the le\'el ol prices tod.l)' and 

lhe 1"~1 ol prices that 1\'0IJid be oi>sw-ed if inilalion 

had been conll.lntat 2 petcent from a specified sr.ning 

l~" PLg.~ 1he p<ice-iel-.1 rule !hereby l>l<es 

account ol the deviation of inll.ltion from 1he 

long-run objecli\•e in earlitf periods as \\'ell as the 

(Utr .. lpetiod. 

The adj"'ted Taylor 11993) rule O'<<>gnizes that 

the federal fonds •ale ca nnol be •educed malerial~· 

below zero, and 1ha1 following the prescriptions 

oi the ll.lndlrd13)10f 11'993) role after a •ecession 

du•ing ~~~ich the federal funds •ate has fallen 10 i~ 

s. c.W.ringlhe pre>enplioos cllhe prke-ia..t .. ~ 

requires selecting .1 Slclcting, )'tilt ior the pric~ Je.."el irom v.hich torornu!.lte the 2 perc~ annual ti:edinfi.llion. 

frgwt 8 uses 1998 ~!he SLlrting. )"ear. ArOI.Uid lh.'!t limt, 

tht undertying lrend oi inlbtioo AM longec~erm infbtion 

t>p«ta1Klns!libiliud ala ieltlconsi>!oot•ilhPCEp<i<e 

inilationbeingcloseto2ptrCen:. 

lower bound may 1heref0<e 1101 ptOI'ide enoogh policy 

accomrnodalion. To make up f01 the cumula1i1~ shortf•ll 

in acoomn>odation (Z). the adju<led rule prescribes 

onl1• a gradual t<tom oilhe policy <ale to 1he (positive} 

'"'"''prescribed by the standa•d Tar lor (}993} role afte1 

lhe economy begins to rec01~r. The 1-enion of lhe priceI0\ .. 1 rule specified in figure A also recognizes lh.lt the 

federal funds r.lle cannOt be redU(ed n>ale<ially beb•• 

zero. If infution runs bel01v the 2 percent ol>jec1i1 .. 

during period< when the p<ice-10\»> rule p<escribel 

sening lhe federal funds rJte well bebv zero, the rule 

will, 0\'e<time, call fo< more accommodation to make 

up for the pa~ inll.ltion shortfall. 

As shown in figo1e 8, the differen1 moneta~· policy 

roles oiren differ in rhe;r prescriptions for the federal 

fonds rale.• Ahhoogh almoslall oi the simple policy 

(continued"" II(>Xl pdgel 

6. These pr<s<ripl""' a•e ca~vll:<d Uling !11 ~ill«! 

dau lor inih6on And the Ul'ltf1"4)lo)·ment rate .-.nd (2) SUM')'· 

b.l~~imatesoithelonsec«Jn\-alue-oilhcneutr,ll 

rt.al in:ere$lrate .and the- longtc.fJJn \·a!ut oi tht 

unemplo)mMI td:t. 
136 

38 PART2: ,\ION!TAAY 1'0\«:Y 

Monetary Policy Rules (continued! 

B. Hislori<al rroml r,oo, m~ prescriptions rro111 >i"'!'k policy rules 

, ... 

- s 

-· - ' 

_, 

-· -s 

;-1)16 lOlS 

!~!ow. Th:tulcs~~\·.....,clin~lkfoi'i:dWrik,W~~'ftlrnll1k ~if~.:ooi~lbr~"-.,..:ta~.d!qc-ill 

lh.:-pMildr:'\l«p.-notlll~~i}'('El~~-Cflefl).~f'NJ(\'1iM&clb'Jt-M'~"'Ibtf.\ionli'IIUQkl6! 

ttx-~O.'U11k~cdrctii~~~<I~~'Citfr<n~C11ip~I~Thc~\·.a.\.;\•((11'10lbt.:61$ulro 

~t:2ptflltfll. "Thtllt!(ttatt.4Wpnttlc'ldil;lllta\~k<.'tl4lflbt~ifldrt:ockorP('E~i((dllld<'l'ltf!)III99St\~M1f""«ttlll"C'f 

)Qf.'fk~C1.~tbroupb'JIS..-Ql.•lllltbcC\~I.'flk~IN.'Oiblcislllt:4U...,~~tt..oup!Ois.Ql, 

S(.(n f.c«tll~'tlbckcl~\\'ollo.'f'l~d.B~Oi9f~l:~rtdmiRC(tti'C&xatd$Ulr~ 

rules would hal•e called for volues fOJ the fedetal funds 

rate lhJ!t were increasing 0\.-et" time in recMt years, the 

psescribed values '"'l' widely across rules. In general, 

there is no unique criterion ior ial'Ofing one ruk!: 

0\~r anothef. 

Systematic Monetary Policy in Practice 

Although ~·~·policy rules,..,. a~ling 

fOJ obtaining and communic'.ating current and luture 

poliC)• rote prescription>. the u~ulness of these rules 

fOJ poliC)...,ker> is limited by a r.nge of p<octical 

con>ide<otions. According to simple mone~ry 

poliC)• rules, the poliC)' interest rote mUll respond 

mechonicall)• to a ""all numbef oi voriahle<. How"'"'· 

these •ari~bles may not reffect important information 

available to policymakers 31 the time they make 

cled>iono. ffx <X<lmple. ,.,.,. of the inpu~ in:o the 

T•yiOJ (1993} rule include financial •nd credit market 

conditiortS or indicatOfS oi c:onsumer and business 

senti_, lhw: fattQIS ;ue ohen '~ infOJ!llilLive f'll 

the future course of the economy. Similarly. ~•'l' 

polir;y rules tend to include only the current \OIU<S of 

the selected \Otiables in the n~le. But the relationship 

bet\,.,.. the current -.IU<S of these voriabl<s and 

the outlook for the e<:<>nomy changesm~r time for a 

numbef of reasons. for example, the structure of the 

economr is ~'01\'ing 0\'ef time and is not known with 

certainty at anr given point in time: To cornpliute 

7. Thebo'< ~comp!e:Olitsoi Monetai) PolicyR~" in the )u~ 20t8 M<Widl)•Poll<y R<portdiscusi<S ""''shin. in the 

maners furlhet, n1000tory policy affec~ the Fedetol 

Rese~~·s goal \otiable< of inflation and empiO)ment 

with long and variabl< lags. ffx these reasons, 

good moneta<y policy mUll take into account the 

information cont<ined in the real-time forecast oi the 

economy. Finally. simple policy rules do not ;1ke into 

account that the rislcs to the economic outlook may 

be asrmmetric, >UCh "during the period \\ben the 

fedetal funds rate was still close to zero. At that time, 

the FOMC took into con>icle<!tion that it \\1)Uid "'''' 

limited scope to respond to an unexpe<1ecl "''kening 

in the economy by cuUing the fedetal funds rate, but 

that it would h;n .. ample scope to increase the policy 

r.l!e in response to an unexpec1ecl strengtheoing in the 

e<:onom)'· This i!S} mrnettic risk provided a ~tionale for 

increasing the feder.ol funds rate more gradually than 

prescribed by some poliC)• rules Ill<>\ n in fogure s.• (con!inuedi 

-Me of the «00001)'"'"" the iong«-<lJn -.lueofthe neutr.ll ftal int«tst f.Jte to \'.ill)' O'>(-t time il.tdthus oompro:e its ~ima1Don. See Boord oi Cn.'tn'IOri d the ftde.rJI Resen."t 

lys<em 20t81. ~-;uyPcliq·ll<p«rM.>shingron:Boordof 

Gc.r.tmors, }u1)11 pp. 37-41, hltps: ,'W\\W,I{>clerJ!ftst'f\'f.go'> 

'"""""pol") ~b~Ot80113_m¢uliapocl.pdl. 

8. focfurtherdi<cussiooregardinglhec:ballen&<sof"'ing 

""""'rypoliC)•rvles in pr.K1ke, see BoordoiW.'Efnorsoi the fed<fallt<>!En• Srst<m 120181. "Chll""l" Associa:ed 

" 'h Using Rut.. to~ukeMonetaryt'o!iC)." Boo:d of Coo.-emors, hn~i'IIV.,\.ft.der.,lre5ef\e.gv> rnoodM\polit"l 

<hoi~>Ssoci.>ttd-,":h-o."ng-roles-.. .w .. ..,..,.,.. pol'ocv.l<m. 
137 

The F0.\1C conduru sy;1ema1ic n10<1e1ary policy in 

a framework thatrespeccs !he key p<indples oi good 

11101le!ary policy11llile prOI'iclingsunicienl ilexibili~· 

lo address m.1ny oi the practical concer"' described 

e.~rlier. Atlhecoreoithisframework lies 1he FOMC's 

ftrm commitmeniiO the Fed<ral Resen~·s stalulory 

mandate oi p<omoting n1aximum emplorment and 

price stamli~; a commitmtnl thai I he Comminee 

reaftlrms 01'1 a regular basi"So.'To e:xplain its ~af')' 

poliC)' decisions to the public as cl<arl)' as possible, 

!he FOMC communiates aboollhe economic data 

1ha1 are relt~ont to i~ policr decisions. As part oi this 

communi"tion strateg); !he r.deral Resen~ r<gularly 

describes the economic and llnancial dala used 10 

infO<m i~ policy decisions in !he Monelary Policy 

R<>pott and the FOMC ~ing minule<. These daia 

include, but are nollimiled 10. measures of labO< 

markel condiuons, innation, household spending 

and business im'fStmer>r. asset price<, and !he global 

economic environmenL The FOMC po!tmee!ing 

$(;a!ements and the meeting minut~ detail how 

lhe dai4 infonm the C0<11mit1et's Ol'etall economic 

outlook. the risks lo this outlook, and, in Mn, !he 

Committee's '""'sment abootthe appmpriate stance 

ol rnot~e~a~· poliC)'. This appropriate stance depend! 

on the FQ.'IC's longe<-run goals, the economic outlook 

and !he rish to the outlook. and the dhannels throogh 

which monetary policy actions influence economic 

activi~· and prioes. The fOMC combines all oi these 

eletnMts in de-termining, the timing and size of 

adjust men~ oi !he policy interest rates. The qwrterly 

Summary oi Economic Projecti011< pr01·ides additional 

infonmarion aboot each f0~1C participanrs fO<ecasts 

for the econom)' and the longer-run a""'smen~ oi the 

ecO<lom)', under her or his individual viti~> conce<ning 

app<optiate poliC)'. 

These poliC)• communicatiOII< help the public 

und'"'"'nd the FOMC's approach to monetary 

poliC)making and lhe principle< that undedie it 

Conseq001tl~'. in response to iAComing information, 

market participan~ ten<! to adjust their expeclatiOII< 

r<gar<r.ns lllOO<Ia~· poli>cy in the direction consistent 

with achie\•ing the m.t'(i mum-emp10)'met'll and !)licestability goals ol the FOMC. N Evidence thai mar~et 

9. S.. !he SUI<'""" on long«·Run Goa~ and ''"""'"Y ~icy SltJ~\ which h a\~itable on the Board's \\ebsi!t il 

l>ttpsi·"'"''""'''"""•-!P'>·"'"n'"~policy,liWF0\1(_ 

lon:;«RIJ.C.."'¢1. 

10. 1\'ewec0f'l001ic iniocrn.uionco~nbtcomposedoi d.!!.! 

StJrprises ot of i.KIM tlutt tn.l')' PQ5(' rish to Mw.e ('(()l'l()tl1ic 

O!A:omes but att no1 )'et tetlKted in dle d.na. 

MONETARY POLICY REPORT: fi8RUARYI019 39 

C. Charlge in IO.y~-ar )'kid in n'SpOflSt lo Empto)1ncrll 

Sit~ioon·pon 

. . : .. •, 

... \ I ,: t 

---- ·'··'· . ' '..,• • ,, I • 

•••• t' • .... .. 

. . .. I I ' •' 

I I . 

-!CO -50 0 ~ ICO 

~IIIDOa6tmf?lol.ljc.betiD~I 

- 10 

-s 

- 10 

111l: Thr=~~.aoJ!h:$:181pkp."n.'4tllrUmF~ 

))10. ~cb¢t"IID IO.~at}i'it!;OtJT(Qjl.l) ~ICS~~ .. -

•1-b:u•~afkrtht&ialtk«. Tbt~illfftfaMMtoll;» 

p;if-1$mc"~~lbC'dl~•lkar."'WIIIIOII6nlr->ml~pe:il 

~3ndrb.·flll."ob.~,"W~f'ol)JCIII,»pirtsDCh; 

Sa\<r(/~M«rlhc-dlr.:lt~. 

Soi.JtE ~ofllb..Y~~ 

participan!S adjust their e>peclalions fO< policy in 

lhis manner is shown in f~&ure C. The figure plo:s the 

chanse in lhe 10.)t>r y;.ld on Treasury securities in a 

one-hour \\indOiv oroond the release oi empiO) _, 

rep011s on the \'er1ical axis ag.1inst the difier.:-nce in 

!he act<Mll'alue oi nonfa~m payroll job gains and the 

expect.ltions oi prh·ate-seclos anai)'S!S immediately 

befO<e the release oi the dat.l on the hO<izontal axis--

that is, a ptOX)' ior 'su!prises• in nonfarm payroll job 

gains. When actual nonfann parroll job gains tum oot 

to be higher than market participan~ expec1,1he )'ield 

on I ().year Treasury sec:urilits tends 10 increase. The 

rise in the 1 O.year yield ref!«~ market participants' 

e>:peclation tha~ as a result oi stronger-than-expected 

labor m.1rket dar., the path ol short-term int~ rates 

will be higher in the future. eon,~fl<'ly, the 1 O.)ta. 

y;.ld tend! to decline ahe< negati'• surprises in 

nonfarm payroll cl.1ta, retlectin~ !he path oi short-term 

interest rates will be somewhat tower in the fuMe. 

These adjustmer>~ in !he I 0-)~a< )'ield help sl4bilize 

the ecO<lom)' t~ro befO<e the FOMC changes the le.-el 

oi !he fed<ral funds rate in the direction con~~ent wilh 

achie\·ing i~ goal~ as higher long-te<m interest ales 

lend to sl01v the labO< market 11~ile 101-.r rates tend to 

~rengthen il. 
138 

40 PART 2: MONETAAY POliCY 

byabou1 $1.2 1rillioo sino: ill peak in 2014." 

AI !he Januarymeeling.lhe Commiuec 

released an upda1ed Sla!emtnl Regarding 

Mone!a')' Policy lmplcmeo!alion and Balance 

Shcel Normaliza!ion 10 provide addi!ional 

infonna1ioo ~rding i1s plans 10 implemem 

mone1ary policy orer I he longer run." In !his 

slalemenl. !he Commiuec indicated 1ha1 i1 

intends torominue to implemem monela')' 

policy in a regime in which an ample supply 

of rtStn'tS ensures !hat romrol 0\tr 1he ln'd 

of !he federal funds rate and other shorHerm 

interest rates is e.~ercised primarily lhrough 1he 

seuing of the fedtral Resem:'s adminis1md 

rates. and in which ac1ivc managemem of 

the supply of resm'CS is not required. This 

openuing procedure is oflen called a "ftoor 

S)~ em." The FOM C judges 1 hal this approach 

pr01 ides good control of shorHerm 111()r!ey 

markel rates in a l'aricty of market conditions 

and elf...-tile transmission of those ra1es to 

broader financial condi!ions. In addition, the 

fOMC stated !hal i1 is prepared to adjust 

311) of the details for romple1ing balance 

sheet normali1"1tion in light of economic and 

financial derelopments. 

Ahhough rtsen·e balances play a central role 

in !he ongoing balance sliM normaliza1ion 

prores..\ in !he longer run, 1he size of !he 

balance sheet 11 ill also be imponan!ly 

determined b) trend gr011 !h in nonresene 

liabililies. The box "The Role of Liabili1ics in 

lX!ermining !he Size of!he federal Resme's 

Balance Shec!" discusses various fae1ors thai 

inft ~nce !he size of restrl'e and nonresene 

liabili1ies. 

;\lean11hile. in1cres1 income on !he federal 

Rtsene's securilies holdings has cominued 10 

suppon substamial remi1 lances 10 !he U.S. 

17. Sii'K\: tbestnrt of the nonnalitalkm prog.rant 

'"""' ....... '"'•dropp<d b)- iowd) S600boll...,, 

18. S..~ the Stot...,.,nt Rtgatding Monttary Polic)' lllljlkmtowioa aod 8olloa SliM 1<~ 

•hid! b:l\ail3blt on the Boon!'• •<!>sit<" bliP" 

'""'"·ftJ..-ral~l'\~.~~.wt~~"'\tnl\'pJ'C'\,:~f..-Ob..Y 

IDOll<l>l)::01901?'.~:n·,. 

T n:a5U'). Prelimina')' financial staltrnenl 

resul!s indica1e !hal !he Federal Rtsen·e 

remiued abou! S65 billion in 2018. 

The federal Reserve's implementation of 

monetary policy has continued smoothly 

As 11~ 1h !he previous federal funds rale 

increases since la1e 2015. the fedml Resme 

successfully raised !he effec!il'e federal funds 

ra1e in Sep!ember and IXcember by increasing 

!he in1eres1 ra1e paid on rtStm balances 

and !he interes! ra1e oHered on ovcrnigh1 

11:\-mt repurchase agreernenl! (0:-1 RRPs). 

Specifically, !he Federal Rtsen-e raised !he 

imeres1 r.ue paid on required and e~eess 

resene balances 10 2.20 perren! in Septtrnber 

and 10 2.40 percent in December. In addition, 

!he federal Rtsem increased the ON RRP 

offering ra1e 10 2.00 perecn! in Sep!cmber 

and lo 2.25 perecm in lXcember. The Federal 

Resene also appll)led a '• perren!age poin! 

increase in !he discoum rate (the primary 

cn:di1 ra1e) in bo!h Sep!ember and Dectmber. 

Y"telds on a broad set of money marke1 

inslrumenls mo1ed higher. roughly in line 

1\ilh !he federal funds ra1e. in response 10 !he 

FOMC's policy decisions in Sep!ember and 

IXrember. Usage of 1heON RRP facili1y has 

remained low, excluding quaner-ends. 

Thcdl'ec!ire fedml funds ra1e m01t.'d 10 pari!) 

11 i1h 1he imeresl rme paid on resen-e balances 

in !he mon1hs before !he December mee1ing. 

AI ils lXrember mtcling. !he Commiuee made 

a second smalllechnical adjuslmenl by selling 

!he imerest on «cess reseno:s ra1e 10 basis 

poinls below !he top of !he targel range for 

!he federal funds ra1e: I his adjus1men1 was 

imended lo fosltr !rading in !he federal funds 

market a! rmes well wilhin !he FOMC's 

large! range. 

The federal Reser1e will conduct a review of its strategic framework for 

monetary policy in 2019 

ll'l!h labor market condi1ionsclose 10 

maximum cmploymenl and infta1ion nearthe 

Commiuce·s 2 percent obj...-ti1e. the FO~ C 
139 

MONETARYPOLICYRIPORT: fi8RUARYIOt9 41 

The Role of liabilities in Determining the Size of the 

Federal Reserve's Balance Sheet 

The size of the f<de<al Resen~·s balance shee1 

increa.ed from $900 billion at the end of 2006 to about 

S4.S uillion at the end of 201~ from 6 pe<c:tnt 

olyoss domestic product iGDP) to about 2S pe<cent 

oi GOP-mainly as a result of the largt-!Cale asltl 

purdlase [lSAPJ programs conducted in respon;e to 

persi!.tent economic weakness foltow'ing the 1inancial 

cri>is. The expansion of 101al a~s th" ~emmed from 

the lSAPs was primarily matched b)· highe< resel\~ 

balances d depository institulions, which pe.1ked in 

the fall of 201 ~ at $2.8 trillion, or almost 16 pe<cent 

oi GOP, rising from about S 10 billion atthe end of 

2006. liabilities othet tban reser\'es haw also grown 

signif.cantly and plaj..t a role in the expan<ion of 

the balall(e sheet The nlOgnitU<ie of these nonresen~ 

liabilities as well as the'""" affecting theimriabili~· 

are 1101 close~· related 10 monel.lry policy decisions. 

Since Octobef 2017, the f<de<al Resen-e h.ls ba>o 

gradll<llly reducing i~ se<urities hoklings resulting 

irom crilis-<ra purchases. Once these holffing< hai'O 

unwound to the point al which _,.., balances 

haw declined 10 oheir long€1·run Ia~. the si<e of 

the balance sheet will be ooermined by faClors 

affecting the demand for Fedetal Resen-ellabilities. 

This di!Cussion describes the Federal Resen-e's most 

signittcant liabilities and 1eviews the iactors lhal 

inTluenced their size since lhe financial Cfisi"S. ,\1.any 

of ohe Fedetal Resen-e's liabilities arise Iron> ~alulory 

responsibilities. such as supplying currency and serving 

as the Treasury Oep.1rtment's ftS<alagent Each liabili~· 

pr01ides social benefi~ to the econom)• and plays an 

import.lnt role as a 1<1ie .>nd liquid asset io< the public, 

the banking system, the U.S. ga.~rnmenl, or other 

inslitutions. 

Figure A plo~ the alllution of the r..leral Resel'e's 

main liabilitie< relati1-eto nominal GOP 01~ the ~­

World War II period. Federal Rese~-e ootesou~l.l"'fing 

h.l1-e traditionally ba>o the Jar~ Fedetal Resen-e 

l~bility and. 01-er the p.~ thr .. decades, h.l1-e ba>o 

sl0\11y gr01,·ing as a share ol U.S. nominal GOP. U.S. 

currency is an important medium oi exchange and 

~ore of value, both domestically and abroad. Despite 

1he increasing use of e!e(lroni<: means oi payment. 

currency rem<~ins widely used in retail tr~n$aCtions 

in the United States. Oen>and for currency tends 

to incre.Jse with the size of the e<:onom)' beuu~ 

households and busi""'ses need OlO<e rurrency 10 

use in exc!Mnge for a growing volume of economic 

transactions. In addition, with hea~~· us.1ge ol U.S. 

currency 01erseas, changes in global growth as 11~1 

as in financ~l and geopoliti<al ~ability can also 

(conrioued oo nw page! 

A. liabilities as a shared' nonin;J glll!Sdomcsic prodllCI 

Kc:-..:,.,t"b:ab~'li. 

Olbr:f1Ubi6li. ... 

8 Tn:bul') &o.-nl Ao.'-""'l'l 

8 C\ttTM..) 

- 2S 

-lJ) 

- IS 

Non: 1m. f~'f 20!S f\.'fQ:iD 10 Q3 iDd arc-fn.:alk fnltNI P.t:m1t &Ml (~ Quutlf Fitutrilt R.t~t iUm~t cbLI £or 1950 

ttwocp lll7~( (rom l1lc lfH.!Jt A'*" Rqqtt, j'VI1. 

SrA.m: Bo.tr.JclOo•o(fOOfioftb!fotdm.IRNntS}'it.aii(!OIS).I()I:IAMdRt{'Ott . .. 'IJn Ta~~R~~ofl)..~tct)IIN)Tubon.\ 

FCiknl R~~: 8W Oa!it.. and ~t~ l1cms (Table 6.\; 't'e!t·End 19S4-)')Ii ~ M.-clh-Et!J lll1:: T~ (.8: \'w·EA1 1913-19$~1 

~bn,to((loo.~).fiS).~.i» MI~•'~~.f'~~'f.$01'J'Iub&a~'JiJco..l))l7~cpon#f:~NoiGQ'\~(( 

ibo: R&.-nl RO(no; Syi~ .. 'm .l:IISl Ffllttcl Rntnr &Ids ~ fl-tnlf ~ Rqutt tlf~l. T~bk; Cccbirlc4 SW..."I'DC'C.;J.ci 

C~(W~OQ;:(k.an,!c(Go-,~S<t-:nn..'TJO).p.).hi;I~ .... "'.M.-ra1'1('tl'tgQ\i~I~:Wl'6l.~· ... ~·-lt'P)I1·20l~».j>lt 
140 

42 PART2: ,\ION!TAAY 1'0\«:Y 

The Role of Liabilities (cootimJ«!J 

mate<i•lll• affe<t the rate of currency gto"1h. Since I he 

st.Irt of the Global Finaocia I Cli~s. 110\es in circulation 

h.J\~ moreth.Jn doubled and, as oltheend of 2018. 

stood al about S 1.67 Vi Ilion, equil·al..,llo about 

8 pe<o..l of U.S. GOP. implying thai acromn!Odoting 

demand lor currency alone requires a larger b.llance 

sheet than before the cri~s. 

Rese•ve balances are cu rrenlly the ~e<ondlargest liabilil)' in the Feder<! RfSef\~'s balance 

sheel.lotoling $1.66 ~illion atlhe end ol2018, or 

nearly 8 peteent ol oominal GOP. Thi< l~bility item 

consi<~ of deposits held a1 Federal Reset~~ Bonks by 

depository iMiilutions, including rommercial banks, 

savings banl<s, credit unions, thrift institutioos, and 

moll U.S. branche<and agencies of foreign banks. 

These bal•nces include r~'es held to luloll resen~ 

1equirements as well as rese'\'eS hef.d in e>:cessoi 

these requirements. Restt~'e bai"ICes allow banks 10 

facili1.11e doily payn,..t flo-,,, both in ordina~· times 

and in str~ ~enarios, without borrO\ving funds Of 

selling assets. Resen~ balances have been declining 

fO< several l'"~· in part as a rewlt olthe ongoing 

balance sheet normalization program initiated in 

October 2017, and now stand about S 1.2 uillion below 

their peak in 2014. AI its ~1nuary 2019 meeting. the 

federal Open Marlcet Commin .. decided thai it "ould 

continue lo implement monet.1ry polic)' in a regime 

with anample supply of resene, which is oft.., called 

a ·ilOOf srstem" or an ·•bundont resent>Ssrstern." 

Going forward, the banking system's"'"'" dem.lnd 

for reset\~ balances and the Commill,.'s judgment 

about the q.,.nti~· that is app1opriatelor the effiCieat 

•nd eifooive impl.,...talion oi11l011etary policy will 

delermine the longer·run ""'<~of reser\'e b.llances. 

Ahhough the le-~1 of reset\" balances that bank< will 

e\'entuallydemand is not ret ~nown wilh cert.dinl)', il 

is likely 10 be appre<iably higher thon before the crisis. 

1. Set-footnote 13intherMinttxt. 

ll.!nks' higher demand for resen-es awe•~ 10 ltil«t in 

pan an incttased fOCill on liquidity rill< managen~ll in 

the context ol regulatory ct.Jnges 

lial>ilities 01her thon currency •nd resent'S 

include the Treasury General ilc<ount (TGAt, r.-,.,. 

repurcho<e agreernen~ cooducted with foreign oftlcial 

account hoi clefs, aDd deposits held by designated 

nnaocial mcul:e: utilities (0fMUs). 8}1 S!atutt, the 

feder•l Reset\~ sent'S • special role as fiscal agent 

or b.lnker lor the lederalgO'>"ern111f1nt. Consequ..tl)\ 

the U.S. Tre•sury hold< cash O.l.lnces at the federal 

Reset\'C in the TGA. using lhis accountlo recei\'C 

l.lxe< and proceeds ol~e<urities 1<1les and 10 P'l' the 

8"'"'nment's bills, including interest and principal on 

maturing ~e<urilies. Beiore 2008, the Treasury tatge(ed 

a steady, low balance of SS billion in the TGA on 

rnost days, and it ured prh·ate accounts at cornmercial 

banks 10 manage the \'ari~bility in its cash ~ .. 'S. Since 

2008.the Treasury has used the TGA as the p<imary 

account for managing cash ~~c.,._ In M.l)• 2015, the 

Treasury announced i~ intention 10 hold in the TGA a 

1.-~1 oi cash generally suff~ientto 00\"er one"~ ol 

outflows, sOOject to a minimum baf41oce objecthoe of 

roughly SISO billion. Since this policy ch.Jnge, the TGA 

balance hos genera !I)' been "~II abO\ .. this minimum; 

at the end oll018, it was about $370 billioo, or neorly 

2 petcenl ol GOP. The current policy helps prote<l 

againstlhe risk that extreme weather Of other technical 

or opet"Cllional e\-ents might cause an intt!rf'ruption in 

a<cess to debt markets and,.,,~ the Treasu~· unable 

10 iund U.S. gO'>'Oinme<ll ope<ation<-a scenario that 

could ha'~ serious conseqveoces for financial swb li~ · 

ReL-erse repurchase agreements with foreign oit1ct<~l 

accounB, also known as the ioreign repo pool. also 

rose during re<ent yea~. The r.deral Resen~ has 

loog oife<ed thi< se<vice as part of a suite of banking 

andcus!O<I! se<vices 10 foreign central b.lnks, foreign 

g0\'flnmenls1 and inu~marional off.cial inslitul.ioos. 

lcoo6nwdJ 
141 

Accounts a! the r.de<ol R"""~ ptOiide foreign oftic~l 

in~iiUlioos wilh a<Cf!ISIO immediate dollar liquidily 10 

suppoo opetiltional neEds, to dear and settle securities 

in their accounts, itnd to address unexpected dollar 

sho<l.lges or exchange rate 1ootili~· The foreign 

repo pool hast'Oim from an ''"'ogele~~l oi around 

$JO billion before1he crisis to a «'"'"' "~rage 

of about $250 billion, equivalenlto a liAie more 

th.ln 1 pe<cent oi GOP. The rise in foreign r€p0 pool 

balances has reflect«l in p.1n cenuol banl:s' preference 

10 main1.1in robu~ dollar liGuidi~· buffer~ 

Finall)', •othefdeposi~· with the Fede<ol Reser.• 

Banks ha\'e also risen stea.dil)' 0\'ff recent years, irom 

lt'SS than $1 billion before the <ti~s to about $30 billion 

at the endoi 2018. Although •othef ~~·include 

balances held b)• international and multilateral 

orgdnizations, p'!!mmet~t·sponsored enterprises, 

and other miscellaneous items. the increase has 

large!)' been driwn by the ~ablishmen~ olaccounts 

for DFMU~ OFMUs pr"'ide the infraltJUCture for 

triln~feaing. dearing. a~)(~ seuling pa)·ments. se<:urilks, 

and ~ tran"Sactions among fl~ncial instilution.s. 

The Dodd·frank I Vall Stmt Relorm and Coosumer 

Prot«tion Act ptovide< lhat OFMUHhose financial 

""rket utilities design.>t~ as S)>ternicall)' impotl.lnt by 

the FinanciaiS!ability Ol'efsight Council-con ""intain 

accounts at the Federal Reser.-e and earn intefest on 

balances maintained in those accounts. 

Putting together all ol these elements-d•11 is, 

projecloo Uend gr01,1h f1lf currenq• in circulation, 

the Committee's decision tocootintreoptf.lling with 

ample reset~es, and the higher le~~ls f1lf the TGA,the 

i01eign r'I'O pool, and DFMU balances--<xplains why 

the longer-run ~ze of the r.de<al Resm't's balance 

sheet will be considerably ~rg« thon beforelhe crisis. 

At the end of2018, the Federal Resen~·s h.llance 

sheet total«l $4.1 ~illion, Olabout20 percent ol 

GOP. Figure B considers the size of the ba~nce sheet 

in an inter~tional context. In responre to the Global 

MONETARY POLICY REPORT: fi8RUARYI019 43 

Financial Ctilis, central b.1nk balance W.:s increased 

in mony jurisdiCtion> Relati\t 10 GDP, the Federal 

Resct~e's h.lbnce sheet """'ins ""'lie< than those ol 

other reser.-e<uH<ney cenltal banks in major adloancoo 

foreign economies that cuttently Ope< ale with abund.Jnt 

resen'OS-!Uch as the Europe.1n Cenltal S.nk. the 

Sank of ).1pan, and the Bank of Englan<hlltbough this 

difference is partly due to the r.de<al R""""' being 

much funhe< along in the policy nom"'lization process 

after the crisis. In addition, the r.de<al R"""•e's 

b.llance sheet relati1't to GOP is only modeslly larg« 

than those ol centro I hdnls, SU<h as the Norges Bank 

and the Resm• Bank of Ne~v Zealand, thatoim to 

operate at a rei.Jtil'ei)' low lewl of abund.Jnt reserves. 

Of cou ... differences in central bank balance shee1s 

.ill so rer'lect diffetences in fioanci~l S)'Slems ac;rtl$~ 

counlries. 

B. Ctntra.l baJ!k balaACe shffis rda1h·e to gross domestic 

prodl>.' 

r~~~ 

~(fti7118.W 

.... " .... .... " ....... 

~""" ~'t(bcl.:o( 

""'"""'~ 

- too 

- 00 

- ,. 

:V,nc ~I'«2D!Sp«1210k'IQ3.o«pcfore.:-B::ll:o!~•llo:K' 

- pcnl11110 ~li:Q1 N«~ bit &u. t\rbit ~ tl ~'If' 

G<r\«nmm~~FIIld()lobll. 

S«."Ut; Hll\"fANI)U..'i. 
142 

44 PART!: MONETARY POUCY 

judges it is an opportune time for the Federal 

Reserve to eonduct a re1•iewof its strategic 

framework for monetary policy- including 

the policy strategy, tool~ and communication 

practices The goal of this assessment is 

to identify possible ways 10 improve the 

Committee'scurrent policy framework in 

order to ensure that the Federal Reserve is 

best positioned going forward to achie1-e its 

statutory mandate of maximum employment 

and price stability. 

Specific to the communications practices, the 

Federal Reserve judges that transparency is 

essential to accountability and the eft'ectiveness 

of policy. and therefore the Federal Reserve 

seeks to explain its policymaking approach 

and decisions to the Congress and the public 

as clearly as possible. The box ·'Federal 

Reserve Transparency: Rationale and New 

lnitiati1-es'' discusses the steps and new 

initiatives the Federal Reserve has taken to 

improve transparency. 
143 

MONETARY POLICY REPORT: fi8RUARYI019 45 

Federal Reserve Transparency: Rationale and New Initiatives 

0."« 1he pa~ 21 )'tors, the Federal Resm~ 

and otMI m.Jjot cen~JI b.lnks n.ll~ t.1ken !I~ to 

impw.-e llansparency, which fMOvides three importanr 

benefi~ First.transparenq• helps ensure that centrJI 

banks are held accoon~ableto 1he public and its 

elect.O repcesentatii'<S.Accountability is essential to 

democratic legitim.1cy and is pMicularly important 

for central banks thai""'"' been grant.O exlensive 

operational independence, as is the me for 1he 

Fette..! Resen•. Second_ ~ansp.~rency enh.Jnces 

the "'ec1""'""" of monet.J<y policy. If the public under<t.Jnds 1he central b.lnk's vie11~ on the economy 

and monet.l<y policy, then households and busi,..... 

will take those views int() account in ma~ing their 

spending and im..,~t plans. Third, tra0sp.1rency 

supports a cen~al bank's eiiortlto pronlOie 1he SJfel)• 

and soondr~eSS oi finan<:ial in~itulion) and the o~'ef<tll 

financial system, including b)· helping financial 

institutroos know what is expected of them. Thus. for 

e><h of these reaSOIIs. tl>e Fodera I Resen"eseeks to 

explain i~ policymaking approach and decisions to 1he 

Congress and the public as ci<arl)• as possible. 

To foster tr30sp.l«'fl<)' and accoontabilit)', the 

feder~l Reser\'e uses A '''ide ''~riety oi communications, 

including ,...iannualtellimonr b)• lhe Chairman 

in conjunction with this report, the Monewy 

Policy Report. In addition, the FOOeral Open Market 

Committee IFOMCl has released a st.Jtement after e~·ery 

regularly sdl«iuled meeting for almo.t20 l•ar<, and 

det.liled minutes oi FOMC meetings hal~ be<n released 

sioce 1993' In 2007, tl>e Fodera I Resen~ expand«i 

the economic projectioB<that hal• accompanied the 

Monetary Po/ic)' Report since 1979 into the Summa<y 

oi Economic Pmjections, ~\~ich fQ,\:\C par1icip.1nts 

submit e~ery quaaer. And in 2012,the FOMC first 

rel<ased i~ Stat"'""' I on Longe!· Run Goals and 

Moneta~· Policy S~tegy, 11hich it reaiti""' annwll)'·' 

The r.deral Resm'Oconlinuesto make 

impro\'·ernenu 10 its coo1municC!Iions.. In January, the 

1. In Oe®lber 2QO.I, <he FO.\\C de<;ded to ~><gin 

publislling rheminut<'S m. .. we<baltor ""'l'mot<ing. ~ing thepubfication smedu~toptO'.ide tbe~ic\\lt.h 

morerimely infOI'll'lation. 

1. The~~"""""''~""'"'ho~bogiooiogollnisrepon on p. ii.TherO.\tC ~lsopubliW:'str<~~ofitsmeetings 

.litet a fl\'t-)Wr &a,g. For a tf:\~' ol the rNin comn..mic<~liotl 

<ools US<C!IJr lhe Federal R<Sfl\eandccber ctnllalb.!nl:s.,.. 

~c~oru-·~-•rr~'<>~icySir•teg;esoi~~i«C"'"al 

S..ks: .~;en is Milable on ~ webpoge 'Monetary ll>licy 

Princip&s.aOO Pt.Ktice"' on the BooKI's lll>bsite.lt kr~~'.\\wN. 

i<der•l•htne gc>~,...,...I)!>Oirul"""""'t'f'OI<I·pr"'<~· 

•n<i1"0<1i<e.htm. 

Chaim1an began holding a p<ess conference aner 

ea(h FOMC meeting, doublin& the freqwncy of the 

press conierences lh.lt were fntnxfuced in 2011 . 

These press conferences are held 30 minutes aner 

the release olthe ~meeting staterner>tand p<ovide 

ad<li~onal information aboulthe economic outlool:, 

the Commi«ee's policy deci~on, and policy tool< 

Press confereoces also aUow tht (bairm;~n to answer 

questions on mont~al)' policy and o;her i~ in a 

timelr fashion. 

In Nol'ember 2018, the FOO..al Resen~ announ«<i 

that it would conducla broad review oi its moneta<y 

policy framework-->pecifiully. oi the policr w"egy. 

lools. and communication praetices that the FOMC 

US<:S in the pursuit oi i~ dual·mandale goals ol 

maximum employn>entand price stability. The FOO..al 

Resen..,'s existing policy framework ~the result oi 

decades ollearning and refinements and has allowed 

the FOMC to pursue eiiectivtl)' its dual·m>ndale 

goals. Cenv•l bonks in a number ol o1her adl'anc.O 

economies ha1~ ako found it useful, at times, to 

conduct reviN> of their moneta<y polic)' iranleii'OiksSocha re~ i"'" seems pMicularly approp~iate 11flen the 

economy appears to ha1• changed in wars that matter 

for the conduct oi n>onelal)' policy. for exampl<t the 

naJir<~lle~•l oi the policy inrerest rare appears to ha1.., 

fallen in 1he Unit.O Slates and a brood, increasing the 

risk thai a central bank's policy rate will be con<trained 

b)' its eiiecrive lowe< bound in fu1ure ecooornic 

downturns. The review will consider \\"a)'S to ensure 

thatlhe Fodera I Resen'e's moneta<y policy strategr, 

tools, and communications going forward ptOI'ide the 

best means 10 J(hie"\~ and mairnain lhe dual-mandate 

objeail .... 

The revif:ll•will ior:lude outreach to and consultation 

with a broad Mnge of sr.U:eholders in !he U.S. economy 

th<ough a series oi 'Fed LiSiens• f:l'l'llts. The Reserve 

Sanl:s will hold forums "ound the countrv, in a 101m 

hall forma~ allowing the Federal Resen.., ro garber 

l""f'ec1i1'<> from the public, including repcesentaiii'OS 

oi busin<SS and ind~<y.labor leaders, community and 

economic del'elopmont officials, ocadernics, nonp<ofit 

Otganiz.alioos, community bankerts, focal ~-ettunent 

oifiCials, aod representati\'es of conyessiooal oftH:es in 

Resen~ Bank Oistric~.' In addition. the federal Resen.., 

con~nued oo II<:Xl page! 

). •fed lil<ens' ""'"~ w;tl be hel<l a1 <ile fed« a I R"'nt Bani oi D.lll.!s 1)\is ftbruary and ao rile Federal Rfsmt Bani 

ofMinnt.apoHs thisAprii.Othef ·r.ro listens .. e\en:s ill be antiOUnctd in coming v.uk$. 
144 

46 PART2: ,\ION!TAAY 1'0\«:Y 

Federal Reserve Transparency lcommU<'d! 

Syslem will spon10r a research conf«ence !his June a1 

!he Fode<al Resen~ Ban~ of Chicago. wilh academic 

speak«S and non ... cademic paneli~s from oulsidt the 

Fode<;l Resen·e Syslem. 

Beginningi\IOUnd !he middleoi2019, as part oi 

!heir review ol how to be>~ purwe !he Fed's ~a!Uiory 

mandate, Fode<al Resen" policym.l~«S will discu;, 

ctlevan1 ercooomic research as well <~s the ~"tS 

offetoo during 1he OUireach """K AI !he end of !he 

proce<~. poli<ymak«S '~ll•ssess 1he informa!ion and 

pe<Sp«ti'"' ga1heroo and will report !heir findings and 

conclusions 10 !he public. 

This review complements otMr recent chc1nges 

10 !he Fode<al Re!ro'e's communicalion prdClicts. 

In N01,..,be< 2018, !he Board inauguroled ~'" 

report!, !he Su{JI!fv~ion and 1/Rgul.!tion IIA!potl and 

!he FiniiJICiaiS!dbility 1/.epo<t.' These report> pr~dt 

information abou11he Boord's relflO"'ibili~\ shared 

wilh Olher gos...,men1 ag<tlCies, lo fos1er !he s.fe1y 

and soundness ol the U.S. banking sys~em and 10 

promote finaocial ~bilily. Transpareocy is key 10 1hese 

effof!>, as i!enll<lnces 1Jtlblic ronfodeoce, all01'' for !he 

consideralion oi outside idea5, and males il e.Hitr i01 

regulaled entilies to k001v wh•l i< expected ol1hem 

and how bes110 comply. 

4. The~'"""'lldR<gui>IIOI1R<jx>!Ondlhe 

fitlJoci.JJ SIJbi,r,l)' Repotr .areA-Aibble on the Board's 

1\'tbsi!:tal, respecth'tfy, b·~A WYo' ft.der.attest'nf.'.go'o'' 

publ<a -~OIS<rq.<rrobor wp!f\•,.,._.~~ .,.,_ 

"!J0111'f'l'"'•·""" .oo hllp<:J''"''·.i.oo-. """"~-sos pobi<""""QOI S<rq.«"ber loi\Oil<i~-!Ub "~'"!JJOI· 

P"'P""-htm. 

The Supetv~ion and RegulaU<Jn IIA!pott pro<•ide< 

an overview of banking conditions and the currenl 

areas oi focus ol the FOOeral Resen-e'< regulaiory 

policy frame~'orl;. iocluding pending rules, and key 

1hemes, !rends, and priorihes regarding supervi!OfY 

progranrs. The report i~ingui<hes beo,·een large 

finaocial inS!ilulions and regional and comn>unily 

banking organizalions becau<e superviiOr)' approach« 

and priotilies for !hese instilulions frequently differ. 

The report ~de< information to !he public in 

conjunction with semiannual testimony bei01e the 

Congre;, by !he Vice Chairman fot Supervi<ion. 

The r.nanci.l!Subiliry Rripotl summarizes the 

Boa1d's monitoring ol vulnerabilities in the flnan<ial 

<y<lem. The Boord monilors four broad calegories oi 

vulneabililies, iocluding ele~•aled \•aluahon pressures 

(" <ignaled by asl<l price> thai are high relalh-e to 

ecoOOtnic fundamentals 01 historical nom'IS), e.xcessi\'e 

borr01ring by businesses and hou<ehold<, exces<i•-e 

le\"e(age within the iinai'ICial SOOOI, and iunding 

risks (risks associated with a withdrawal oi funds 

frorn a partkul.ar linandal in>titulion 01 seaor. for 

example as pa~ of a •financial panicj. Assessmen~ 

ollhese '" lne<lbili!ies inform FOOeral Resen'O ..:lion< 

10 promote !he resilience oi !he financial sys~em, 

including through i~ <u~sion and regula!ion of 

finandal institutions.. 

Through all ol!hese eifO!I> 10 impr01-e ill 

communicalions, !he Fode<al Resen" .,.ks to enhance 

lransparency and acroun!.lbilily regJrding how il 

I"'"""' i!S ~a!Uiory responsibilities. 
145 

47 

PART 3 

SUMMARY OF ECONOMIC PROJEOIONS 

The following materia[ appeared as an addendum to the minutes of the December 18-19, 2018, 

meeting of the Federal Open Market Committee. 

In conjunction with the Federal Open 

Market Commiuee (FOMC) meeting held on 

lftcember 18- 19, 201&. meeting participants 

submiued their projections of the most likely 

outcomes for real gross domestic product 

(GDP) gr0111h, the unemployment rate, and 

inflation for each year from 2018to 2021 

and over the longer run.~ Each panicipan!'s 

projections were based on informal ion 

available at the time of the meeting. together 

with his or her assessment of appropriate 

monetary policy- including a path lor the 

federal funds rate and its longer-run valueand assumptions about other factors likely 

to afl'ect economic outcomes. The longerrun projections represent each participant's 

assessment of the l'<liue to which each variable 

would be expected to converge, over time, 

under appropriate monetary policy and in the 

absence of further shocks to the economy." 

'·Appropriate monetary policy" is defined as 

the future path of policy that each panicipant 

deems most likely to foster outcomes for 

economic activity and inflation that best 

satisfy his or her indilidual interpretation of 

the statutory mandate to promote maximum 

employment and price stability. 

All participants who submiued longer-run 

projections expected that. under appropriate 

monetary policy, growth in real GDP in 2019 

would run somewhat a bore !heir individual 

estimate of its longer·run rate. Most 

19. fi,·,mcmbersofthe BoardofGowmors.one 

more than in Septl'111be:r 2018. wtre in office a11he 1irne 

of tit< De--ember 2QtS m"'ting and submitted "-onomk 

pmje<1ion< 

20. On< panicipont did 11ot submit long<r·run 

proje<1ions for ml GOP growth. tilt unemptoymtnt ratt. 

or the federal funds rnt~ 

participants continued to expect real GDP 

gro111h to slow throughout the projection 

horizon, with a majority of participants 

projecting growth in 2021 to be a lillie below 

their estimate of its longer-run rate. Almost 

all participants who submitted longer-run 

projections continued to expect that the 

unemployment rate would run below their 

estimate of its longer-run lel'el through 

2021. Most participants projected that 

inflation. as measured by the four-quarter 

percentage change in the price inde.x for 

personal consumption expenditures (PCE). 

would increase slightly orer the next two 

years. and nearly all panicipants expected 

that it would be at or slightly a bore the 

Commiuee's 2 percent objecti1-e in 2020 

and 2021. Compared 11ith the Summary of 

Economic Projections (SEP) from September. 

many participants marked down slightly their 

projections tor real GDP growth and inflation 

in 2019. Table I and figure I pr01ide summary 

statistics for the projec ion~ 

As shown in figure 2, participants generally 

continued to expect thattheerolution of 

the economy, relative to their objectires of 

ma.,imum employment and 2 percent inflation, 

would likely warrant some further gradual 

increases in the federal funds rate. Compared 

with the September submissions. the median 

projections for the federal funds rate for ihe 

end of 2019 through 2021 and over the longer 

run were a little lower. Most participants 

expected that the federal funds rate at the end 

of 2020 and 2021 would be modestly higher 

than their estimate of its le1•et Ol'er the longer 

run; however. many marked down the e.xtent 

to which it would exceed their estimate of the 

longer-run le1~l relatire to their September 

projection~ 
146 

48 PARTJ: SUM\~RY Of ECONO C PROitCTIO:<S 

Table I. Economic proj«1ions of Fcdtr.!l R"'"' Beard n>emb<rsand Federal R"'"' Bank presid<ni< under lh<ir ndi, du~ assessmenJS of proje<1<d oppropriat< mon<lal)' policy. IA'<'<mber 2018 ........ M!di.J.tl1 CC61ul~.: R•nsc-' 

zcnsl10liJI!ll~IN21 ~ 11)Jsj10 ~120~110!1 ~f 10181 !O ~ I :!1)1(1 I !011 IL:!.:' '" Cha~inraiGDP 

Stf'W\~"tpt~'1ion 

» 

11 

).1 

2J 

!.S 

).$ 

~~ IJ 

~~ 1$ 

).6 l.l 

1.9 JO.U 2.3 :u 

1$ J..l) 1! 2.l 2.7 

'·' ).1 l.H1 

I.S lO L~ lO~ 1.8 !.0 }.OH 2.&-U tS!.Z I...J2JjUl1 

Ull 1.6!.0 ji.S!.O 1.912 !.1 u: I.?H 15 !.1 ~ 1.111 

Uo.•~~nln:t JS U M MjJZ 4.~ ).1 J.; .t.O J" 4.3 M-.12jto "-~ 

~~~'1ion 

PC'EifiA~Iio. 

).1 J.l J.l ).1 J,j ).1 )..1 ).6 .t.a lS H .t.Oj.0-4.6 lll.S UU U .t.O ;.. .. --...zj.a.o 4.6 

Scpinabcfpt"~~'liotl 

CouPCEil'IIUtioe' 

St'fli~mbd~"'ion 

\kcxc t~od 

appropN~~polit) f'llb 

1.9 

u 

1.9 

~~ 

1.9 

~~ 

!A 

H 

Ll Ll 2.0 

!J 2.1 l.O 

~~ lA 

'-' H 

1.819 1.$2.1 20.2.1 l.O 2.1 j lO 1.8:1.9 J.S .U 1.0!.2 Z.Ou: 2.0 

2.1)..2.1 z.o 2.1 2.1 1.1 lO l 2j 2.0 19 ZJ 2.0 n 20 22 20 H l.O 

uu to u 2.01.1 HIZ.I j U- 1.9 J.9 !..! 2.0 2.2 2.0 l3: 

1.9111 Z.~l.l 1.11-1 z.on j 1.91.0 l.OU 2.02.2 lOUj 

Mkr.alfltlld~u c 

Scplclllbn'pt~~"lio!! 

!A 2.9 ~.1 .t.l ! 2.8 

H 3.1 14 JA i J.(l 

2.4 2.'-ll 2.9U 26-H jHHI !JH 2.4 11 2.4 M Ht6~H J.S 

! I H 29 14 1 1 H 29 t6 lS 10 ! I H 11 H l.ll~ 21 J I !5-35 

~n;Pl"5"'>"~~et,"it..••r~a!sl\"ol~~o~~•·:1(Ciw.•~rr~"'~-...-~c{tabw.~.:~f'I'C'"'-~r,.thrf"""tlllpl~«\"ltbtrrn""<<h 

)C&r~tiii:(OCIItltq~~~orkrolihr~&rtllh.:-"o:-d.f'C[ilbl"""alld«>rci'C£ii&.IK-oan*r-"~~'~ol~.a.r"f"'"'~i\d).llKprir.....:tiiJon.r«~"I(IU]~ 

IWII~~;ro~PC(J~~~J.>ti!Nn((JfPC'EC"\OhJ~,I«,ji!JSnKff1,~10ti((lf~~IDICIII'1CC.Utf.x~,_.:T''fC(t'!W I~..-.tfllC•tilc 

fvo.rtll~n(l(t~qNift..:XII<'d.OOI\NC~#\~~~.U~-a.K«b.:rl~Ohrf'C~lc~~-Uec«.ft~~~~<'l'feftC(",d 

ru~t~~c(tbcuu~q•bJdltJo""\ur~•I"'~t-f~~~o~c=dcflCIPI'~i.J:t~ry~)lo:lidi Ubt~oUon-.~tolkf\"\,. 

~~ Tbcpr*-~~f«L~~UH1lO~UI:t*IClbcl1klcolcbt._>.~ctfftMtt<t)'(\'ttd'~IUUI'$(lntl(bl.!lt&ctJ1'UH*u:r.1c«t~~"'tdt~ 

biJ"(~b"tbc€i-&rJlflf!llmlUUllfcW(I(l)r~~;.rlt!Wr)m"'(IIC'flb!:~.-TkScp(~~;.-""<"IU&II~"t»>l•01illiWd~ot' 

lbcr~al(}pco\hA<1C"(G.II~t.-,:OCIS.~:!S:6.a!C)wpan~dlll.OC'*ll~.,..~-~llK"-.~,~tar:a1G1>P,tK~--''~ ot 

tb:k«ftJ(Iil)dlliiCI~~o.-tiO!a•iiiiJbc~!>~;"')Jl~ifl$..:4tfii:!'W~d~!i«~JU(bf'CO)M"*•U«,. .. "''iofl•illlfk~~~$.-Jt. 

~\ll:lfrtt .. 

I, f«u<i r.~till~J!JtbtiiM"pllj(lo_. • ....._,ilt~,ufaruop.!fr..-. ..... N~~\\ltd&bt~c(~la*itf'ft.l!lt_.t'l.)t\lbc 

.t.•«'ftc!I~C..·o~rt~"llt::Ii. 

!. l~A':'Irll~a.,-w&o.IWtliuc·opN~-.it~-blol"''p~ .... V:OO.f<.ftK~•Wbki ~.edi~car. 

; l!J.:t~fotl.lUWlc .. tpvt•)WICo:W:-uJifllllqt.~IU'fl'""~(rN~IO ~.f.x~t•I~I&Wt~ll. 

: t~~'Wctif.x«tt(Pcr.id.lli.'OI.ff~(olkatd 

On balance, participants continued to view 

the uncertainty around their proje<:lions as 

broadly similar to the a,·erage of the past 

20 years. While most participants viewed the 

risks to the outlook as balanced, a couple 

more participants than in September saw 

risks to real GDP gro111h as weighted to the 

downside, and one less participant vie,wd the 

risks to in Hat ion as weighted to the upside. 

The Outlook for Economic Activity 

The median of participants' proje<:tions for the 

growth rate of real GDPfor 2019, conditional 

on their individual assessment of appropriate 

monetary policy, was 2.3 percent, slower than 

the 3.0 percent paceexpocted for 2018. Most 

participaollscontinued to expect GDP growth 

to slow throughout the projection horizon. 

with the median projection at2.0 percent in 

2020 and at 1.8 percent in 2021. a touch lower 

than the median estimate of its longer-run rate 

of 1.9 percent. Relative to the September SEP, 

the medians of the projections forreal GDP 

growth for 2018 and 2019 were slightly lower, 

while the median for the lonQer-run rate of 

growth was a bit higher. Sev~ral participants 

mentioned tighter financial conditions or a 

softer global economic outlook as factors 

behind the downward re1·isions to their nearterm gro111h estimate& 

The median of projoctions lor the 

unemployment rate in 1hc lourth quarter of 

2019 was 3.5 percent. unchanged from the 

September SEP and almost I percentage point 

below the median assessment of its longer· 

run normal level. With participants generally 

continuing to expect the unemployment rate 

to bottom out in 2019 or 2020, the median 

projections for 2020 and 2021 edged back up 

to 3.6 percent and 3.8 percent. respecti\'ely. 

Nevertheless. most participants continued to 

project that the unemployment rate in 2021 

would still be well below their estimates of its 

longer-run level. The median estimate of the 

longer-run normal rate of empiO)~nent was 

slightly lower than in September. 
147 

MONETARY POLICY REPORT: fi8RUARY 1019 49 

Figure I. Medians. muraiiC"ndertcies. and rangesorecooornk pro~'1ions. 2018-21 and owr the longtr run 

""""' 

CMogeinn.-alGDP 

M~({~'~ 

IJ CcaLJ~!Cndco.i'dPf'O'P,1i;xzj 

- R>'$'o(~W. 

~ ~ ~ ~ ~ 

21)1) l1l14 l1lll l1ll6 lOll l1l1S 21119 21121) l1lll Loag<r 

""' ""'""' Uotmplo)m.."''''tt3tt 

~ - 1 

-6 

- l 

~ ~ ~ -4 ~ - ) 

21)1) 21)14 lOll l016 lOll l1l18 21119 :!()lO lOll longer 

""' P.:11.'<111 

PCE-in&uioo 

~ CEi ;;;!; 

lOll 

~ 1014 lOll l016 :'011 lOIS 2()19 :!()lO l\Jll Lonscr 

run 

"""" CortPCEinllali.oi'J 

§§ a:; -r 

~ = = -I 

2(11) l014 lOll l016 lOll lOIS 21119 lOlO ltl11 Lonscr 

run 

Non~ l):finitionsof,'Sriabksandotbtrt~pbnatioosar( it~ttK-nottslo tabk I. Tkda!JI rorlhcactwl ''31urso(thc \'3ri3bk$aJ~:J.n.nual 
148 

50 PARTJ: SUM\~RYOf ECONO~I C PROitCTIO:<S 

Figure 2. FOMC particip3 nls' assessments of appropriate mone1ary policy: Midpoiru of target range or 13rg<"l ~rd fori he federal fund; nne 

"""'' -------------------;-----;_o ..................•.......................................................................... j'' 

·····- ~.; 

............................................................................................. ;·························-

------------------~----- ~] 

.. .. .................................................. .. .............. _).) - . ·········•···-··· 

---------===::....--~-==-==---.....:;:=::....-:---~-- 3.0 ................... j•• • --....o• .... f ... I 

-·····"''"''''''"''"'''''''"''''"'''"''"''''"''''''''''''''''''"'''''"'''"'''''"'''''''''"''''' ''"'"''40.t+"''''''"- 2.5 IIIIIUIIllllll M I .•-............. ! ....... . 

_, ...................................................................................................... ;""""'""""""''"'- 1.) 

-----------------+----- 1.0 

,,_ 0.5 

0.0 

l(IIS 2(119 

Nott Each$batkd i.rdc iDdi<'-.Uti t)l.:,oaluc(rou.ndcd to the' l'lt.l~ liS ~f\'tl'ltag.:point)ofn indi\idual p.:mK:ipanfs 

judgmco.t ofd~e midroitu of the .appropri:ne tart<{ f'3~ ror the-(C\kral fllnds r.l:{( 01 ~ :lJl'PfopriltC' tar,get k\d fot' the fcdcr.tl 

fantJ$ nuc at the end oft~ ~"ifk'd ~r )tar« 0\tr 1~ lon~f run. Oot participant did nQ4 $ubmit loll~r-rum pcoj..X"Iio~s 

fortbtfOOcr.dfundsrat('. 

Figures 3.A and 3.B show the distributions of 

panicipants' projections for real GDP growth 

and the unempiOJ1nent rate from 2018 to 2021 

and in the longer run. The distriblllionsof 

individual projections for real GDP growth for 

2019 and 2020 shifte\1 down rdative to those 

in the September SEP. while the distributions 

for 2021 and for the longer-run rate of GDP 

growth were little changed. The distribution of 

individual projections for the unemployment 

rate in 2019 was a touch nnore dispersed 

relative to the distriblllion of the September 

projections: the distribution mored slightly 

higher for 2020. while the distribution for the 

longer-run normal rate shifte\1 toward the 

lower end of i1s range. 

The Outlook For Inflation 

The median of projec1ions for IOta! PCE price 

infla1ion was 1.9 percent in 2019, a bit lower 

1han in the Seplember SEP. while I he medians 

for 2020 and 2021 were 2. I percent, I he same 

as in 1he previous projection~ The medians of 

projeclions for core PCE price inflation over 

the 2019-21 period were 2.0 percenl, a louch 

lmrer I han in Sep1ember. Some participants 

pointed 10 softer incoming data or recenl 

declines in oil prices as reasons for sha,•ing 

their projections for inflation. 

Figures 3.C and 3.D pro,~de information on 

the distributions of panicipanls· views about 
149 

the outlook for inflation. On the whole. the 

distributions of projections for total PCE price 

inflation and core PCE price inflation beyond 

this )\'<lr either shifted slightly to the left or 

were unc.hanged relative to the September 

SEP. Most participants revised o11~1 slightly 

their projections of total PCE price inflation 

lor 2019. All participantmpected that total 

PCE price inflation would be in a range from 

2.0 to 2.3 percent in 2()20 and 2021. Most 

participants projected that core PCE inflation 

would run at2.0 to 2.1 percent throughout the 

projection hori.zon. 

Appropriate Morretary Policy 

Figure J.E shows distributions of participants· 

judgments regarding the appropriate targetor midpoint of the target range- for the 

federal funds rate at the end of each year 

from 2018to 2021 and 01·er the longer run. 

The distributions for 2019 through 2021 11~re 

less dispersed and shifted slightly toward 

lower values. Compare{! with the projections 

prepared for the September SEP, the median 

federal funds rate was 25 basis points lower 

over the 2019-21 perio;!. For the end of 2019, 

the median of federal funds rate projections 

was 2.88 percent, consistem with two 25 basis 

point rate increases over the course of 2019. 

Thereafter. the medians of the projections were 

3.13 percent at the end of 2020 and 2021. Most 

participamsexpected that the federal funds 

rate at the end of 2020 and 2021 would be 

modestly higher than their estimate of its le1-el 

over the longer run; however, many marked 

down the extent to which it would exceed their 

estimate of the longer-run level relative to their 

September proj~tions. The median of the 

longer-run projections of the federal funds rate 

was 2.7) percent, 2) basis points lower than in 

September. 

In discussing their projection~ many 

partic.ipants continued to express the view 

that any further increases in the federal funds 

rate over the next few years would likely be 

gradual. That anticipated pace reflected a 

few factors. such as a short-term neutral 

MONE!ARYPOLICYRIPORT: fi8RUAAYI019 51 

real interest rate that is currently low and 

an inflation rate that has been rising only 

gradually to the Committee's 2 percent 

objecti1-e. Some participants cited a weaker 

near-term trajectory for economic growth or 

a muted response of inflation to tight labor 

market conditions as factors contributing 10 

the downward revisions in their assessments of 

the appropriate path for the policy rate. 

Uncertainty and Risks 

In assessing the appropriate path of the federal 

funds rate, FOMC participants take account 

of the range of possible economic outcomes, 

the likelihood of those outcomes. and the 

potential benefits and costs should they occur. 

As a reference, table 2 provides measures of 

forecast uncertainty- based on the forecast 

errors of l'arious private and g01'emment 

forecasts over the past20 years- for real GOP 

growth, the unemp o)~e t rate, and total PCE 

price inflation. Those measures are represented 

graphically in the ''fan charts" shown in 

the top panels of figures 4.A, 4.B, and 4.C. 

The fan charts display the median SEP 

projections for the three variables surrounded 

by symmetric confidence intervals derived 

from the forecast errors reported in table 2. 

If the degree of uncertainty a11ending these 

projections is similar to the typical magnitude 

Table 1. Awrag< historical pro;.-.:tion error rangos 

1\:r"-nllfC r'(lin;~ 

\'3-riaN: :018 llll 

Cl!Jntcinri:aJGJ)J¥ IO.S ! 2.1 

u~·lll(nt nct' 10.1 ! O.S ±I.S ±1.9 

o)l:de«ll ~rpti.'C:Sl ±0.2 !1.0 ti.O ! 1.0 

~N«mi m~n -,;• ~I .U..I ~ .• !~.~ 

~rt:l'.lf\'lf •~tJn ~,..Utt~rc\I~~PMcc~lllrrMWOC"» 

~o,..._t.:I Arol~p!~"tioti$cociWS !:~~I71111•m-rdt,a-o!~t.k,.utn 

b) ~tl(IIRtptnKru4pnc-m~n,~&!.."''iiMMo be~\\·f'«a!"i .. 

t~."tnatll~;....sctmu •»~~ bd<n.~•))~~~~~~~~~ 

W...,o.at~S....rul GOP.a~*lt..WiiiMIWf~~IM 

ro.kriJfi!Jiikrll<•\lt~dlf"F!I~t,' ll(t\\'f.t,tt'I<M<of~'Wf(U*'S 

IWr •~9'-!tfill'a.'Ni•~i.»..ttt D''"' fk.('idi~•IIJ'Prttrlq 

{1017, -(;J.,,p~C '.:uLu.C (O/IM£C\.-II."();&Ic.X l.'-w., Non:l] 

r .... a!"a..:~t., non..Thrr~d n.:~ r .. ,..,~·rwtKorn.ltt-J..., 

Dftm...:4s.m.-.~~~~\\ o.:~~(l{~d'lkr«<t•t 

Rad•tS)il.ra,fC'Or~"'-"'1>' J\6oiM1 i01"¥~,fl0S;!'(IJ'O)l 

I.Ddi:o~l(lll.,c( 'UQ.,.'IeoiU oiiiN:JCIWU1IIol(cloubi< J 

l '~f'fi-th:qrcu1JNCW.~-rn.'tQo$n.l.bcrt»-ciiiU .. r~ LII.t.l~l\.,.. 

~•16d)tie'd•fO'ftliiiCDIU~Sf"!>lkC\.'"C'O(ICCII."kc b.~'l*u:t 

~~~ooafolvttlt\Wortalofattbqwta"~IIL 

.t f« ~.al lt.(S(('I t~d'~~t~ttWtls bcktkf.al ,~u.nc, or 

<Uc'fk'll«fiCt.a.:f,.;t<PlUc'rlltCOOJ-..ot.Tt iM~IN!ll.~, ..... <ff«\ 

J! ~ahbtti$~.,¥11(1'~~111rm-nt.llllk~dt~ 
150 

52 PARTJ: SUM\~RYOf ECONO~IIC PROitCTIO:<S 

Figure 3.t\. Distribution ofpanicipants' proje..""tions for the change in f\'al GOP. 2018-21 and O\'"er the lo!lg('r run 

c 

c 

c 

c 

JliiS 01):1.~~'*'-,~ 

··S.~"fttt«~'tll)tt) 

u 

1.3 

2019 

u 

1.) 

.lOlO 

l.l 

1.) 

Jllll 

IJ 

1.3 

1.' 

1.5 

1.4 

1.5 

1.4 

1.5 

1.4 

1.5 

1.6 

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1.6 

l.l 

1.6 

l.l 

1.6 

1.1 

_Lon-gtrrun 

r 

1.2 

1.3 

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1.6 

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I.S 

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I.S 

1.9 

1.8 

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1.9 

1.8 

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2.1 

2..2 

lJ 

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u 

l.O l-1 H 

2.1 2.3 2.S l'~'fl.'\"ntl'1n~ 

2.0 2J 2.4 

2.1 1.3 2.$ 

~~ 

2.1 

P~m'tltt':ltlg.: 

2-2 

2.3 

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PM.'\'fltr:IJig;: 

2.6 

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1.6 

2.1 

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l.l 

N'on: Ddin lionsof,-:~rUbks:md othcrt:\rb~tions.artin the notes totabk I. 

-14 

I - - I =I~ -8 I I - ; 

---·-" 

n =:: 

-- ~ ,=,l 

l.! 

2.9 

2.8 

19 

l.S 

1.9 

lS 

29 

3.0 

3.1 

3.2 

3.3 

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3.1 3.3 

-18 

-16 

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-10 - s -6 

_, 

...,, 

~'l'«'~ip;ll:lts 

-I! 

-16 

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- 11 -10 - s -6 

_, .,2 3.0 3.2 

J.l ).) 

~'wrlt\.'fol~t!.L':Iplnts 

3.~ 

3.1 

l.O 

3.1 

l.l 

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l.l 

.U 

-IS -16 -14 

-12 

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- 6 

=Ji 

-IS 

-16 -14 

- 11' -10 - s -6 

_, 

---, 2 
151 

MONETARY POLICY REPORT: fi8RUARYIOI9 53 

Figure lB. Distribution ofpantcipants· projtt1i1Jns for 1he unemployment rnte~ 2018-21 and O\X"r 1he longer run 

c 

c 

c 

c 

c 

).0 

).I 

l019 

3.0 

).I 

li)ll) 

3.0 

J.l 

20"21 

).0 

3.1 

3.0 

).I 

u 

JJ 

u 

lJ 

14 

).$ 

).4 

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---I 

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3.7 

J.S 

19 

4.0 

4.1 

41 

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)~ 4.0 4.2 

).9 4.1 4.) 

PtlmliR~ 

--- ~ c - - I f=:-11 

c==? .[":"":)I c===? 

1l ).4 ).6 )~ 4.0 4.2 

HU3.1l9.U·U 

Pt'A'-""113~ 

).2 

j.J 

J.2 

).) 

3.4 

J.S 

3.6 

).1 

J.S 4.0 ~l 

).9 H 4.) 

Ptl\.'«<lrangt 

4.4 

4.5 

4.4 

45 

4.' 

4.5 

4.4 

4.$ 

4.4 

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4.6 

4.1 

4.6 

u 

4.6 

u 

4.6 

4.1 

4.6 

u 

4.8 

4.9 

1.0 

S.l 

4.8 s.o 4.9 S.l 

-IS 

-16 

-II 

-ll 

-10 

-s 

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_, 

=-tl 

-IS 

-16 

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-12 

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Numt..-fcfrurc~1$ 

4.8 s.o 4.9 1.1 

4.8 

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s.o 

S.l 

s.o 

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-IS 

-16 

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-IS 

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-12 

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-6 

_, 

-,2 
152 

54 PARTJ: SUM\~RY Of ECONO~IIC PROitCTIO:<S 

Figure 3.C. Distribution crpanidpants' projections fQr PCE infta1ion. 1018-21 and owr 1he longer run 

r 

11)19 

r 

r 

lOll 

r 

_Loo.gtrrun 

r 

1.7 

u 

1.7 

u 

1.7 

u 

1.7 

I.S 

1.7 

u 

1.9 

l.O 

2.1 

l.l 

-IS 

-I< 

-I' 

-ll 

-10 

- s 

-· _, 

-,2 

B 

2.4 

;\\lrnb«ol,wtir..~ 

-IS -I_, ~ 

-IZ 

I --------, -8 -~ 

I L - - - - ---1 -• I, I I I I - ---- -- - ,:; ~ 1.9 

2.0 

1.9 

1.0 

--- --,;I 1.9 

1.0 Pcrn"'''lr.tnJ(' 

r---r 1.9 

l.O 

Pttt«~lr.tnst 

2.1 

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l.) 

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2.4 

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-· _, 

, -.,! 

:-.•ombct o{ fWt~Zlt5 

lJ 

2.4 
153 

MONETARY POLICY REPORT: fi8RUARYI019 55 

Figure 3. D. Oistribution of pankipants" proje..'1ions for ron: PCE inflation. 2018-21 

-11 

ro1s oo..,·cmO.:r~~ 

.• S.1<"*-'I'Oi<\-- - - - - - - - • -16 

1019 

ro21 

1.7 

1l 

1.7 

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1.7 

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1.9 

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I 

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u 

_,, 

- 11 

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ll 

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-IS 

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:-------, 

r ----- J -• 

I -------- -~! 

1.9 

2.0 

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l.O 

2.1 

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~~~"fof~~fWliS 

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_,. -I< 

-I~ 

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-s 

-· _, 

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154 

56 PARTJ: SUM\~RY Of ECONO~IIC PROitCTIO:<S 

Figure 3.E. Distribution of panicipants' jLtdgments of the midpoint of the appropriate target range for the federal funds rate or the appropriate targetlewl for the federal funds nue. 2018-21 and O\'er dtt longtr run 

c 

c 

2018 

n

-, -- -~~ 

tC""J_ 

l.SS 2.13 1.3S 2.63 2.88 3.13 lJ.S 3.63 3.SS 4Jl .us 4.63 ·l.SS 

~11 1.)1 1.61 1.81 ).12 ).)1 ).62 J.sl ~.12 -li -62 4~1 SJ1 

2019 

I.SS l.U 2.3& 2.63 2.88 3.13 3.3S }.63 J.SS 4.ll .US 4.63 4.88 

1.11 l.J1 2.62 2.81 J.ll J.J1 3.62 J.Sl 4.12 4J1 ~.61 4JIJ HI 

-IS 

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--· ..,2 PCKCt~t range ~=b.'fofroW-;J:Qnb 

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US 2.13 l.JS 2.63 l~ J.IJ J.!l ).63 l.SS 4,1; US 4.63 4.88 

2.12 2.37 u2 2.S1 >.n 337 3.61 3.S7 .u2 4.37 4.62 4.S7 s.12 

Ptl\'\'fltr3JJ~ ~~'1'o(flltti:lf'<l.tll$ 

1021 -IS 

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c 0 --, c - =. f:"ltD~ r::r= - - - - I 

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- IS -1_,. 6 

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c LJOD~=· -· _, 

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I.SS l.ll 2.38 2.63 l~ J.IJ J.J! J.6J J.SS 4.1) •.38 4.6) 4.SS 

l12 lJJ 2.62 2.87 112 B7 162 1.87 4.12 4.H .Utl 4..87 5.12 

P~-n.'l.'lltr.lfl~ 
155 

of past forecaSt errors and the risks around the 

proj<etions are broadly balanced. then future 

outcomes of these rariables 11·ould hare about 

a 70 percent probability of being within these 

confidence intervals. For all three variables. 

this measure of uncenainty is substantial and 

generally increases as tl!e forecast horizon 

lengthens. 

Panicipants' assessments of the le.cl of 

uncenainty surrounding their indi•idual 

economic projections are shown in the 

bottom-left panels of figures 4.A, 4.B. and 4.C. 

Participants generally continued to view 

the degree of uncenainty attached to their 

economic projections for real GDP gro111h and 

in Hat ion as broadly similar to the a•erage of 

the past20 )ears." A couple more panicipants 

than in September viewed the uncenaint) 

around the unemployment rate as higher 

than a•eroge. 

Because the fan chans are constructed to be 

symmetric around the median projection~ 

they do not reHect any asymmetries in the 

balance of risks that panicipants may see 

in their economic projections. Panicipants' 

assessments of the balance of risks to their 

economic projections are shown in the 

bottom-right panels of figures 4.A. 4.8. 

and 4.C. Most panicipants generally judged 

the risks to the outlook for real GDP gro111h, 

the unemplO)"'tent rate. headline in Oat ion. 

and core in Hat ion as broadly balanced in 

othen10rds. as broadly consistent 11ith a 

S)mmetric fan chan. Two more panicipants 

than in September saw the risks to rtal GDP 

gfOIIth as weighted to the d011nside. and 

one Jess judged the risks as 11cighted to the 

upside. The balance of risks to the projection 

for the unemployment rate was unchanged. 

21. A11hcrnd of tbi>summal). the bo< "l'orttast 

UI'IC'trtaint)-di!C\ISSCS the sourm and intttpttatton 

o( "D<'tiUIDI) surrounding tb< t\vnomi< for«<OU and 

"plms tit< approodlll!<d to aSl<i\ til< -.uint) aod 

nsksatttod"""" ponirip;lDI>' p<Oj<.'liom. 

MO\ETARYPOliCYREI'ORT: F£8RUAAYl0l9 57 

"ith three panicipants judging the risks to 

the unemplO)ment rate as weighted to the 

downside and t110 participants viewing the 

risks as weighted to the upside. ln addition. 

the balance of risks to the in Ration projections 

shifted down slightly relati•·e to September, as 

one less panicipant judged the risks to both 

total and core inflation as weighted to the 

upside and one more panicipant 1iel1ed the 

risks as 11cighted to the downside. 

In discussing the uncenainty and risks 

surrounding their economic projection~ 

participants mentioned trade tensions as 

well as financial and foreign economic 

developments as sources of uncenainty or 

d011nside risk to the gro111h outlook. For 

the inHation outlook. the elfects of trade 

restrictions litre cited as upside risks and 

10\\tr energ) prices and the stronger dollar as downside riskt Those "ho commented on U.S. 

fiscal policy 1'ie11ed it as an additional source 

of unccnainty and noted that it might pn.'SCill 

two-sided risks to the outlook. as its eH'octs 

could be waning faster than expected or turn 

out to be more stimulatile than anticipated. 

Participants' assessments of the appropriate 

future path of the federal funds rate 11tre also 

subject to considerable unccnainty. Because 

the Committee adju>tS the federal funds 

rote. in response to actual and prospect ire 

developments over time in real GDP growth, 

the unempl0)1ncnt rate. and inHmion, 

uncenainty surrounding the projected path 

for the federal funds rote imponantly reftects 

the uncenainties about the paths for those ktj 

economic \'ariables aloog "ith 01her factors. 

Figure 5 prorides a grophkal representation 

of this uncertainty. plotting the median 

SEP projection for the federol funds rate 

surrounded by confidence intervals derived 

from the n.>sults presented in table 2. As with 

the macroeconomic 1ariables. the forecast 

uncertainty surrounding the appropriate path 

of the federal funds rate is substantial and 

increases for longer horilont 
156 

58 PARTJ: SUM\~RYOf ECONO~IIC PROitCTIO:<S 

Figure 4.A. Unrenainlyarn! risks in projectionsofGDP g.ro'"1h 

Median projec1ion and confide~ int(l'\'l!l ~on historical for~XaS' errors 

Cb3n~ in rc.3l GOP ~<rl~~ 

- I i\l ,.OOfiM'ft."'t ilun21 

llll4 lllll lll16 lllll 

-4 

-J 

-2 

-I 

- 0 

llliS 2()19 llllll 2021 

FOMC participants' a~"QQ''(: ts of uoctnainty and risks around 11ttir economic proj«:ti{)ns 

~ctnkfofrwti,~nts 

ltllto.'l.'ftainty :11bou1 GDP~r.;w.1h 

0 ().'Ctfllb«l'f\..,.'\.'fiotb. 

-- ~~,ion$ - IS 

-16 

n

l -14 

I 1 = :~ I I - S 

I 1 - 6 

I - ' 

~1 2 

8roadl1 H~ ~mibr 

Risk> lo GOP~''"''" 

0 I).,'Cftlb:t,..'*''tion) 

·· 5<!<<10bcr~ ... -IS 

-16 

-nI , I ::: -10 

= I I =: - I I -' 

r..r:-;:1 ~-...=-:-::-:; IJ 2 

Non: 1lK:-bll:k' 3nd rOO lines: in tk top p.lnd $ht»\·l<'\uaJ ~IA'$3nd m.."dUn projl\'tcd '11~ rC\fl('C1iH·Iy. oftht ~A.'\'TII 

dungtin fl'algroocfomeslk"prodoo (GOJl')fromW fou.nhquanerol1bt pt\"\'iotJS }'tar toW fourtl! quanerol1bt ytu 

iodi.:-3tt'd. Thcwnf~ inttn'3.1 :u\l\100 the mcdi3n rroj.~t«< ,.,.lues is as:;l.UIK'd to ~s;.lflmclrl:3nd i) ba~ on roo1 m:-.111 

$Qll3r00trrors of \1rious pri\'::11(' 1nd gc>\tmmcnt fM\.'3Sam1dc O\'tr the prt'o·ioUf 20 ~"t.ars: more infornution about ~ 

da11 is3\'3ibbk in tlbJe l ~UstCUITttUC'OI'IIJitioru.ma.~ diff'~from those IDlt !)rt'\'3ikd.on;a ttagt.O\ttl~ pmious 

2'0)~r~ 1t.t~idth artd$hap:ofch-:~·onfldc~intc"'JI~im3ttdoal"'~ofthc l't~or);'3l ro~tm>r$rna)·not r.:&\"'1 

F0~1Crun~"ip.1.nt$' currmt a~~ncsof1hl: utK'tnainl)':a00risl:s3round thcirproj..'l."tioM.: l~turrtRt3~nts3rt 

wmmariud in thl: lo~~o~r p;u~Cls.. GtMr.l!l)· sp;."3ti~~g. panicil'lnts\\bo ~ 1~ unctt12int} aboutltlcir pr"'j«tioos3s .. broad!}· 

~mi u" to ll'h: \\"r:l~ k\clsoflbc pa_.q 20 )\"Jrs \\OUJd \'icwd'lt' llil.ltl't ofthc('Oilrx.lmct ini.Ct\'11 sbo\\11 in t~ ~i)toriQI fan 

dun as la~l)· consbt~1 ~-ith tfk-ir 3..~"'11K'flhoilht unetrUJincy 3'boot Lhcir pro]:-dioos.. l.iknis.:. pmici{\'lnt), \\flo judge 

t~ risl:sto tbcir proj.'l.'tions as "btoodl)' ba.lai')C('() .. \\OuJd \icw ll)croail&:ar< intm'31 :uound 11Kir proj-:~.'tions 3S3PPfO\imatc~· 

~)mm.."tric. Fordtflnilioas or Ur'll:~nainty and s ir:r (\"'C''Ittlic projo.'\1ions. ~ chr;.· bo~ '"fom."3SS Ufk.X'rtail'!l)' ... 
157 

MONETARY POLICY REPORT: fi8RUARYI019 59 

Figure 4.6. Unttrtainlyand risks in proj«tionsofthe unemployment r.ue 

Median projection and con"d~nct interval based on bi.s.torical ron.'Ca)t errors 

UIX'fllp!~ll"'"tltrat~ 

- MOOWI('(~~ 

I ~oonfd."fl('(~trnl 

2013 2014 2015 2UI6 

- 10 

-9 

-s 

-7 

-~ 

-s 

-) 

-l 

-I 

2011 2018 2019 2021 

FO~IC p:uticipanls· assessments of unctrtainty and risks around their economic projt.>cti<ms 

Nuttlt\'tolN~) 

lloo.'f1ainty about the u!K'mpiO)~ct mt~ 

0 ~'l.'ttllt\Yf'C\'P,"tiott$ 

: • • Scpcd<t ~'1ioos -IS 

-16 

-I' ·nI : ::: - S I I - 6 

I - 4 1I 0·1 tl 

Broad I)' 

~mibr 

Rbl:s tot)).: '-!Jl('mploymcn\Qtl.' 

0 D.'l.\"':llb.'ffll'(lj:..~ 

: • • Sct't~"~'fli'<;,~IOIM -IS 

-16 

-I' 

- n --- I _., -10 

- I I - S 

= : I =! rr=JT::=l 1 

W~to 

Non: The bli.K' :aDd «d lirxs in tbt top l\'lllC'l s.bo~· 31.1W) \-atucsand tnt..'dia.n rroj.'\.'kd \'a lues. re5pe\.1h"dy. oftbta\c:ra.y 

ci\il:i3n U!\.'mpfo)m;nt ra,~ in the fourth QP.13ncr of 1~ )\'.U in<la.."3tcd. The confilk'flC\' int~-n-al ;~round the m«<i.Jn pr\l',i«tcd 

\'<1fue3: is. assumed 10 be S)'TI'I~uic aDd is based on fOOl nwl'l sqLLlr\'tl «ro~of '~Mus pri\'3!C: and go1tmmcnt (Of('I."3StS ITltl& 

0\'tt lk Jlfl."'ious 2i.l )"tarS; mo~ inrOfTil.1tion aboutthcsttbt.J i:s.a,'3ibbk in ublc 2. &,.,~usc current C'Oflilitiorrs may di!fcr 

ft<Jm those t!ut pre\"li\td. 003\CrJ.sc. O\tr 1bc pm'iou$ 20 )~IS.. tbr \\idth 3nd $b3~ of the 0011fed...~ in1er.1l ~~uxl on 

theN.sisoft~historirJI(orC\"aS4ffl'\ltsmayootl'tlk\.'1FO~ C~rticipatnfturrtnt~ISol'lhtW'Il'('rtaint)'arwirisb 

:.round tbrirproj.'\""t~•OOcCl.lfrcnt :l.~IS3rc wmlll3riudin tbc~\'f p:lOCk.. G~ra0) sp.';ll;ing. p;.rticiprul!S\\ho 

jOO~ the urk."tttairu~· abo-ut 1bcir ptoj.\.'tiol\$ :ss Mbroadl)' similar-to t11t ;)\'tt.1~ l"\'tkoft~ p.'bl ZO ynrs W(IUid ,w t~ 

uidth ohbe roolioknc< io1mol sllo\ln io 111< bi~oritll fan cllln "'br~lr rooiillt111 •ilh 11i<ir 3=m<111<ofll< ooo:ruiDiy 

3bouttB..;r proj.;~tions. Likcwi~. !X)rticipants who jud~ th: risks to their proj.·'l:tioo~as Mbroodty b3\anoo.l--.ou3d ''lew the 

CMf»dcore inltn'31 :lrou.nd th..;r (II'Oj.\.'tionsasappro.\im:stc\)'S)TI'UYICirie. FM do.:finitioru. of un.xnaint)' 3nd ri~s in C\'OOO!mic 

pr~1ions. S« the bo'l: Mfot«"aSI Uncm;~ioty."" 
158 

60 PARTJ: SUM\~RY Of ECONO~IIC PROitCTIO:<S 

Figure 4.C. Uncenainty and risks in proj«tions of PCE inflalion 

Ml"dlan proja.":tion and cor~fidcnce interval based on histori('al forecast ~trrors: 

PCEinlbtioo 

~1.-..Jian oi~Ucb 

'Xr.t~-cillt('f\1.1 

2013 lOIS 2016 2011 

-J 

- 2 

- I 

- 0 

2018 2019 2020 lOll 

FOMC p3nicipan1s.' as:stsSmtnts of un<trtainty and risks around their e\"()nomic projections 

~~'f<iP~-ni~ 

Ul')."\.'f'llint~ about PC£ inlbLlon 

Oll\.'tfllllct~"'JQG$ 

: •• $efltMitxt)'fQ)....,;..~ 

UDCC"n.3intyabout cott liCE infLuion 0 l);"aW~krfiC'O:ia:1iocK 

: - . $cpttmbcrprc;:,."ti."GS 

rood~ 

'(j_mila:t 

-18 

-16 

-14 

-12 

-10 

- s - 6 

- 4 

-18 

-16 -I• -ll 

-10 

- s 

- 6 -' l 

Hi!l<r 

Risis 10 PCE inflatjoo 

Ql)..'\'tii'Jb:t~"''iolt$ 

S.~"o;."~~ -IS 

-16 

-n I ---

I 

I -ll 

-10 _, I - 8 

I I - 6 

~ ~ ~ ----.-; r==JI I]-

W~¢tuN 10 Btoadlv dO'o\11~ Nblli.'\-d 

Risls torort PCE inllalioa 

0 "'-'\'lllb:Tpr~11oes 

•• $cptont\'Tpr'*'-1i.'GS -IS 

-16 

-n I --- I 

I 

-ll 

-10 _, I - 8 

I I - 6 

I - 4 

= ~ -r=--=--=i ;, l 

Non: The l.i~.~~:3nd n:d lillt...~ in tr.:lopr-'IXI.shouo· ai.1wl ,·;tlucsand mcdi3n rco;xttd ''31\K'$.. n.'$JX"CCihiy. ofthocp:ro:nt 

l"b!ngc in 1br pritt it'M.l'1: for p.:rson3l ronsump2ioat.\p.-ndi1un:s (P('E)from tbc founb qt11rtcr of 1~ pmiollS }'\".1t to 1br 

fourlhquartcu(lhc )Wf icdkat«<. Th:oonfll.lc1wx intcr.'ll~Dd tk median rro~i.td \"JIUC'$ i-sassl.lfDIN to tx)ymmccrk 

:.\nd is ba-ed on rOOtiiiC'in squ-ared crross of \-ariQ!J$ pri\'3tt Jed ~~'tmfl.l('flt forttJSIS m.ld-:0\\'f the rrc,iou5 20)\";,\fX more 

W'ofl'l'l.'ltion :~boot tho..'ii!'dll:l i.s :ll'lilabk in tabk 2. Be\"3tN: rum•nt oonditioM may difft.r from thost tll:u pm':llil..-d. oa 

a,·crar:.O'Itr th;:-prt."\ioUS 20;.~~ ~"idlban<l shap:-oftho:confldcl),~intcn~l es~imltfd oa tlwbo.sisoftbc: h~~ 

rort'C3~ cn'OJ"nuy 001 rrtl«:t FO~fC p;utio."ip;lllb' currtnt ~~tsoftb.:-W'ICtrtJitlt)·Jnd ri.~s:~routld tbrir pt'Qj.\.1.~ 

tbrse currtnl a_~"Stlltnts art .so\Jmrnari.ud in tlK ltw.;;r JXlliCb. Grnerally sp:al;iJlg. p.3rtidpwltS v.ho judp:-tbc uncertaint)' :sbotlt 

tb<"irJifoj."\.1ions~ ~brood~ :-irnilar~ to th.:;ntr.!~~·fuoft~p3.$l20)l".li'Sv.oukl 'ic11 th.:v.idthoft~('C)fi!W.'fl!Xinl\"n'31 

$hO'o\YI in tht hi~oti--al fao th3irt 3$ laf!l'l)' -oo;.is ~l 1o1itb thcir ~~'titS of' I~ lltM.'trtail'll)' 3bot.Jt th..'ir proP,"1icol'li 

Lil;c1o1~. ~rtkiJ'Kl.fiiS v.ho ud~ tbc risk5 to tbcir pro~"tions 35 ~bfoodty balati'.:af 1roukl ,._"" tbccontidrna: intc:n-al 

3rwnd tMr proj«tioM as JPPJO~m3!dy S)TntrM:tric. For d:fioitioosof W'll.\'rtainty a !XI risl:.s in ccononUc projc('!ions. $C<' th..! bo'( ~Fota.-;a~ Urx:trulnt)'-~ 
159 

MONETARYPOLICYRIPORT: fi8RUARYI019 61 

Figure 5. Unetnainty in projections ofth.e federal funds r.l!e 

Median projection and oonftdeoce int(r\'al b:k~ on his1orical foret"3Sl errors: ""'''" Fcdcl11fuod3;rn1~ 

\tifJr.iDIMU.rt-'1~ 

- ~ICI.Smolrro:fC\1iom 

111: "-"Cdidmo."Ymtm-ai' 

2QJJ lflll 1016 1017 

-6 

-5 

_, 

-J 

-l 

-1 

-o 

lOIS 1019 lfllfl lOll 

Noi£ Th.:bluc:ll'ld n.'d li~arc b.ts4'\l onxtU3.1 \"3ll)t."$.1nd mcdiJn pro~'1cd ''ll!A~ l\."$p.'<1il"tl)'. oftl'lcComminiX's 

taJi<1 for the fcd.."RI furd~ rate a11bc: (11<1 of liM: ynr in<lica1cd. The anual 1"JJ~KS arc-1hc midpoinl oflhc tare~ r:any: tb: 

n'k\li3n proj.'l."ted \'llurstmbG.~or~ cithtrab.:midpoinl oftb!-13.r$('1 1'3.tl~Of the ta~"tlcltl.lhc®r:..i.'M: intl!'n":!l 

ll'OUod the median proj.'\.1«1 \'3IUCS i:s Nscd on root me:111 squll'Cd errors of ~~us pri\:Jte aDd yrwmm.:-nt forf'('J.Sts n~ 

Oltrlhc pm·iou:slO )~f'S. Tht('()Gi»,"'X(intm;~li~nots&ri.1~·c:on~rnl 'lltith IJlc projmion.s for tkfedmlft~ods ra1c-. 

prirrorilrl\."'(':)11$( tbc$c-pc0j."t'tions311:'not fOM."'3.,t$ofthclikcl~ outCQn'IC$for 1hc f('ojcQI fund~r.l!r. but ~1hcrprojc<1ion( 

ofp:~niclpa~~b'indhiduala..~ntsofappropriatcmoi'ICW}'poiK.').St~l.hi>r:oricalfom.-ast.Morsp:-O\itkabr~sell5(' 

oftfl.:u/X\'ftaint~ arOllnd t.hdutllrt path oltbc fOOe-ral fundsr.ttc"'~~ b)· the u~nainl) 3boul tlx ma\'l'O('I.voomk 

\'3ri3~.1$\\'dl:uadditi«l:aJ:tdjLmi'IX'nt$10tJu)nct31) ~'thltrna)·~aflfiWPri3.tctoolT~It~dT~'tsof~l:$to 

ttxt\'OOOm)'. 

ThcwnfM.knlx int(n1) i$ :muiTII."d to be S)1Timct~m~pl \\'hen it istf\l~wdat t~--ro the bollom oflt'..: bA~ ~~1 

r.tng.c for the ftd..v.tl fund$ r:ucth.at hasb.'tn:ldop.:.cdint~p3St by th<-Commin~. Thistrut~t<~li«< ~'OIIkll\01 be inttn<kd to 

indil.:ale tb.:-lil:dihood oil be I.I5C' ol~ti\'t iatmst rnlrs lo pro\ick adJitioaal monetary polic}· :N.wmnM>datioo if doing so WO\S j\ldgl,'d ;tppr()pri.~lc. In ~il $itU3l~ th.: ((lllUl)jlt~~l'Ould 3ko crnplo>•Oihcr tool(. ini.it.ldingfOA'3rd gllidaoo: 3[')1j 

b~~·SI..'ak~l pu~lwt5.tOpro\ilk:Jdditiorulan'OIM'!(Ida!ioa.lk\.'"3USC'C'Umtll ronclitiot!smaydifl'« from tbostdUI 

rm~IOO. on3\~, 0\·crlhc pmiot.JslO)'t3~ thcwidthaodslupcofthc('Ofltic.t,.'fl«intmillcstimatcdon tbc k'lisofthc 

bi'lorit-J.I fofl."C;t)) crrOJ' Dl3.Y ~ nila.'t FO~tC pl:dirip.1111>" amtttl3..~'tll\,l$of 1~ utKXrt3inty 01nd ri~saroond tll.,;r 

projc\"tions, 

• Thecoo~inlm'3lisdC'riwdfromfon.uStsofthcawr.t,p:hclolshor1·termintc~ratt5iJitbefoonb~o~U3rt(ro( 

lbcyc.uiildt.."3t00: mortinfomution :t.botltt~cht3 i$;h':lib~int3bk 2. TbtWikd lrt3 cDC'MI~l'\S than3 

10pc«"«'trofltid.Mctir.tM>alifttxronfltkoo:-intm-;~lhas~atruM3tNatzcro. 
160 

62 PARTJ: SUM\~RY Of ECONO~IIC PROitCTIO:<S 

Forecast Uncertainty 

The ecOOQmic p<Qjections provided by the members 

ol the Board oi Go\~nor. and the presidenb of 

the f<dernl Resen~ Banl;s inform discussionsoi 

moneta')' policy among policymaktrs and can aid 

public ur>dtrstanding olthe bas~ for policy actions. 

Consi<lerab!e uncertainty attenck these projections. 

hoWt\'ff. The economic and ~ .. nistic.al models and 

relationship< Ul4'd to htlp produce economic foroca<ts 

are noces~arily imperfe<t des<ripuons of the real ""'ld, 

and the future paih of the economy can be aiie<ted 

b)• myriad unforeseen de\-elopmen~ and ewn~. Thu>, 

in letting the Stance ol monetary policy, participan~ 

con>ider not only \\hot appea15 to be the most likely 

ecooornic outcome as embodied in their pt~«tions, 

but also the range oi alte<nati\~ pos~bilities, the 

likelihood of their occurring. and the po:ential rosts to 

the economy should they occur. 

T<tble 2 summilri'!es the a\'ffclge hi~oric~l Clccuracy 

ol a "nge of foroca~s. including those repocted in 

paSI.IIoae!ar)• Policy Repo<IS and those prepared 

by the federal R"""'" Board's staff in advance oi 

meet ins< of the Federal Open Market Committee 

lfOMQ. The projection """ ranges shown in the 

table illUStrate the considerJb!e uncertainly associated 

with economic foreca%. For eX<Jmple, suppose a 

participant projectS !hat real gross domestic ]l<Oduct 

IGOPJand tottl consume< !"ices will rise sle.lcfily at 

annual rates ol, relpe<li1-ely, J percent and 2 percent. 

II the uncertainty attending those projections is similar 

to that e>.perienced in the j)<lsl and the risl;s around 

the p<Qjections are broadlr balanced, the numbers 

repocted in table 2 \\Ould imply a pro»Jbility of about 

70 percent !hat actual GOP\\wld expaod 1\ithin a 

rang< of 2.2 tO 3.8 percent in the CUrter!! yea\ 1.4 tO 

4.6 percent in the seconc year, and 0.9 to $.1 percent 

in the ihird and fourth l~"-The corresponding 

70 percent coniidence inter~~ls ior Ol'efall inilation 

would be 1.8 to 2.2 percent in the current)'"" aod 

1.0 to 3.0 percent in the second, third, aod fourth ~~ars. 

Figures 4.A through 4.( illustrate these confidence 

bounc~ in •fan ch>rts" !hat are symmetric and cen:ered 

on the ~ians of FOMC participant( proje<tions for 

GOP g<0\11h, the unem~loyment rate. aod inflation. 

HOWe\'ef, in some in~aoces. the risks ~cound lhe 

projections may not be srmmetric. In particular, the 

unent~IO)'ftl<flt rate cannot be negati1-e; furthermore, 

the risl;s around a particular proje<tion might be tilted 

to eiih« the up< ide e>r the downsi<le. in 1\ltich case 

the corresponding ian chart 1\00id be asymmetrkally 

posilioned arouod the ~ian projection. 

Because current condilions may differ from those 

that pr01~iled, on "'"''g<l. 0\., h<s!ory, participan~ 

p<O\;<fe judgments as to "1lether the uncertain~· 

attached 10 their projections of e.l<h economic variable 

is gre>ter !han. smalle< than. ori><Oadly similar to 

~'Picall01-.ls of forecall uncertain~· seen in the pa~ 

20)~ars,as presented in table 2 and rellected in 

the widlhs ol the confidence inter\OIS """'" in the 

top panels of figures 4.A through 4.C. Participan~· 

currenl a~ oi the unceruinry Sllnotmding 

their proje<tions are summari>ed in the bonom-leit 

(contrnwd! 
161 

panels oftho<e figures. P.lrticiparus also p<Ovide 

judgmems as to whether the risks to their projections 

are weighted to the upside, are weighted to the 

downside. "' ille broodl)' b.llanced. TIIJt is, 11Me 

the S)'mmettic historic~ I fan charts sho<.\n in the top 

panels of f&gures 4.A through 4.C imply thJt the risks to 

participan~· projections are balanced, participan~ ma)' 

judge that there is a greater risk thJt a gh-en variable 

11ill be above rather than below their projections. These 

judgmen~ are summari>ed in the ,.,_,..,.right panels of 

figures 4.A through 4.C. 

As with feal activity and inflation~ the oudook 

for the future path of the federal funds rate is subject 

to considerable unceminty. This uocert.aint)• .arises 

f)limarily ber:ause tach participants assessment of 

the appropriate stance ol rnone1ary policy depends 

impo11antly on the <!\dution of real activi~· and 

inftation 0\~ time. If economic conditioos e\'01\'t' 

in an unexpected manner, then a~ts of the 

appropriate se«ing of the federal funds rate 11oold 

change irom that point fM10rd. The final line in 

t.lble 1 shol1; the error "nges fO< forecasts of short· 

term inle<est rates. They suggest that the hi~O<i<:al 

conMence intervals as!Oeiated with projections of 

the federal funds rate are quite wide. II should be 

noted, however, that these confrdenc:e inler\oals are OOl 

stJictl)' oon~~ent "ith the projections lor the federal 

funds rate, as these projections are not fO<eca~s of 

the most like!)' quarterly outcomes brrt rather are 

p<ojections of participan~· individualas,...rnen~ of 

MONETARY POLICY REPORT: fi8RUARYIOt9 63 

apprq>riate rllOf>etlry policy and are on an encJ.of. 

)"-'r basis. However, the foreca~ e<ror< should p<ovide 

a seo<e ol the uncertainty around the fu1ure path of 

the feder•l funds rate gene<ated b)• the uncertainty 

about the macroeconomic vJriabtes as \\~I as 

additional ddjustmeo~ tornone1•~· policy thai would 

be appropriate to offset the eli~ oi shocks to the 

economy. 

If at SO<ne point in the fu1ure the oonfr<lence inte<Val 

around the federal funds "te were to extend below 

zero, it would be truncated dt Ze<O fO< purposes of 

the f.1n chart shown in figure 5; zero is the bottom of 

the lowest target range fO< the federal funds rare that 

has been adopted by the Commiltee in the pa~. This 

approoch to the constJUction of the federal funds ldtt 

ian chart would be merely a con,'E'ntion; it would 

1101 hM any implicotions fO< possible future policy 

decisions reg~1rding the use of negath·e inteteSt rcl!es to 

provide additional n1011e~ry policy acconlrnodation 

if doing so were .appropriate. In AAh situation}, the 

Cornmi«ee could also empiO)' <>~her tools, including 

fonvdrd guidance and asset purchases, to provide 

additional a«ommodation. 

While figures 4.A through 4.C provide infom!.ltion 

on the uncertainty around the econon1ic projections, 

frgure I provides information on the range of vi0111 

.cross FOMC participants. A comparison of figure t 

with frgures4.A through 4.( shol'' that the di<perSion 

of the projections across partkipants is much smalle< 

than the a\ffage i01ecast erro~ 01-er the past 20 )~'"· 
162 

ABBREVIATIONS 

AFE 

BOE 

C&I 

CRE 

DFMU 

EBJTDA 

ECB 

EME 

EPOP 

EU 

FOMC 

GDP 

JOLTS 

LFPR 

LSAP 

MBS 

Michigan survey 

ONRRP 

PCE 

SEP 

SLOOS 

SSDl 

TCJA 

TGA 

TIPS 

VlX 

advanced foreign economy 

Bank of England 

commen:ial and industrial 

commen:ial real estate 

designated financial market utility 

earnings before interest. taxes, depreciation. and amortization 

European Central Bank 

emerging market economy 

empiO)'ment-to-population 

European Union 

Federal Open Market Comminec: also. the Comminee 

gross domestic product 

Job Openings and Labor Turnover Survey 

labor force panicip;ltion rate 

large-scale asset purchase 

mongage-backed securities 

University of Michigan Surveys of Consumers 

overnight reverse repurd1ase agreement 

personal consumption expenditures 

Summary of Economic Projections 

Senior Loan Officer Opinion Survey on Bank Lending Practices 

Social Security Disability Insurance 

Tax C1us and Jobs Act 

Treasury General Account 

Treasury lnHation-Prota:ted Securities 

implied volatility for the S&P 500 index 

65 
163