U.S. GOVERNMENT PUBLISHING OFFICE

35–694 PDF WASHINGTON : 2019

MONETARY POLICY AND THE 

STATE OF THE ECONOMY 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED SIXTEENTH CONGRESS 

FIRST SESSION 

FEBRUARY 27, 2019 

Printed for the use of the Committee on Financial Services 

Serial No. 116–5 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MAXINE WATERS, California, Chairwoman 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

WM. LACY CLAY, Missouri 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

ED PERLMUTTER, Colorado 

JIM A. HIMES, Connecticut 

BILL FOSTER, Illinois 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

JOSH GOTTHEIMER, New Jersey 

VICENTE GONZALEZ, Texas 

AL LAWSON, Florida 

MICHAEL SAN NICOLAS, Guam 

RASHIDA TLAIB, Michigan 

KATIE PORTER, California 

CINDY AXNE, Iowa 

SEAN CASTEN, Illinois 

AYANNA PRESSLEY, Massachusetts 

BEN MCADAMS, Utah 

ALEXANDRIA OCASIO-CORTEZ, New York 

JENNIFER WEXTON, Virginia 

STEPHEN F. LYNCH, Massachusetts 

TULSI GABBARD, Hawaii 

ALMA ADAMS, North Carolina 

MADELEINE DEAN, Pennsylvania 

JESU ́ S ‘‘CHUY’’ GARCIA, Illinois 

SYLVIA GARCIA, Texas 

DEAN PHILLIPS, Minnesota 

PATRICK MCHENRY, North Carolina, 

Ranking Member 

PETER T. KING, New York 

FRANK D. LUCAS, Oklahoma 

BILL POSEY, Florida 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

STEVE STIVERS, Ohio 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

LEE M. ZELDIN, New York 

BARRY LOUDERMILK, Georgia 

ALEXANDER X. MOONEY, West Virginia 

WARREN DAVIDSON, Ohio 

TED BUDD, North Carolina 

DAVID KUSTOFF, Tennessee 

TREY HOLLINGSWORTH, Indiana 

ANTHONY GONZALEZ, Ohio 

JOHN ROSE, Tennessee 

BRYAN STEIL, Wisconsin 

LANCE GOODEN, Texas 

DENVER RIGGLEMAN, Virginia 

CHARLA OUERTATANI, Staff Director 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

February 27, 2019 ............................................................................................ 1 

Appendix: 

February 27, 2019 ............................................................................................ 57 

WITNESSES 

WEDNESDAY, FEBRUARY 27, 2019 

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

System ................................................................................................................... 4 

APPENDIX 

Prepared statements: 

Powell, Jerome H. ............................................................................................. 58 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Beatty, Hon. Joyce: 

Data Brief of the Center for Popular Democracy entitled, ‘‘The Urgent 

Need for a More Publicly Representative Fed: 2019 Diversity Analysis 

of Federal Reserve Bank Directors,’’ dated February 2019 ....................... 65 

Powell, Hon. Jerome H.: 

‘‘Monetary Policy Report of the Board of Governors of the Federal Reserve 

System,’’ dated February 22, 2019 .............................................................. 83 

Written responses to questions for the record submitted by Representative Barr ........................................................................................................ 152 

Written responses to questions for the record submitted by Representative Budd ....................................................................................................... 153 

Written responses to questions for the record submitted by Representative Garcia ..................................................................................................... 157 

Written responses to questions for the record submitted by Representative Gonzalez ................................................................................................. 160 

Written responses to questions for the record submitted by Representative Lynch ...................................................................................................... 161 

Written responses to questions for the record submitted by Representative Posey ....................................................................................................... 163 

Written responses to questions for the record submitted by Representative Steil ......................................................................................................... 167 

Written responses to questions for the record submitted by Representative Stivers .................................................................................................... 168 

Written responses to questions for the record submitted by Representative Tipton ..................................................................................................... 171 

(1) 

MONETARY POLICY AND THE 

STATE OF THE ECONOMY 

Wednesday, February 27, 2019 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10:08 a.m., in room 

2128, Rayburn House Office Building, Hon. Maxine Waters [chairwoman of the committee] presiding. 

Members present: Representatives Waters, Velazquez, Sherman, 

Meeks, Green, Cleaver, Perlmutter, Himes, Foster, Beatty, Heck, 

Vargas, Gottheimer, Gonzalez of Texas, Lawson, San Nicolas, 

Tlaib, Porter, Axne, Casten, Pressley, Wexton, Dean, Garcia of Illinois, Garcia of Texas, Phillips; McHenry, Lucas, Posey, Luetkemeyer, Huizenga, Duffy, Stivers, Barr, Tipton, Williams, Hill, 

Emmer, Zeldin, Loudermilk, Davidson, Budd, Kustoff, Hollingsworth, Gonzalez of Ohio, Rose, Steil, Gooden, and Riggleman. 

Chairwoman WATERS. The Committee on Financial Services will 

come to order. 

Without objection, the Chair is authorized to declare a recess of 

the committee at any time. 

Today’s hearing is entitled, ‘‘Monetary Policy and the State of the 

Economy.’’ And I will now recognize myself for 4 minutes to give 

an opening statement. 

Chairman Powell, welcome back to the committee. I am concerned about some of the actions of President Trump and his Administration, and perhaps you may be asked some questions today 

about whether or not it is affecting the Federal Reserve’s (Fed’s) 

decisions. 

President Trump has manufactured the longest government 

shutdown in our nation’s history, which beyond the needless harm 

inflicted on effective government employees, contractors, and other 

businesses, also hurt our economy and outlook. 

However, this President declared a trade war on allies and enemies alike, leveling tariffs on steel and aluminum, and threatening to rip up other deals. His trade war is bringing down consumer and business sentiment. 

His tax scam, which was a giveaway to the wealthy and to cor- porate America, is slated to reduce government revenue by $1.8 

trillion over the next 10 years. Each of these actions by the Trump 

Administration were noted in the minutes of the Fed’s January policy meetings and may have weighed in on the Fed’s decision to 

pause for the interest rate increases. 

2 

In the midst of what some fear is slowing growth, the Administration’s economic policies are fueling the fire of a possible downturn. It is critical that the Federal Reserve remain vigilant in protecting this economy. 

The last matter I want to raise pertains to the Federal Reserve’s 

apparent efforts to modify the Dodd-Frank Act’s (Dodd-Frank) safeguards that Congress and your predecessors at the Fed put in place 

following the financial crisis. 

In particular, I am concerned that the Fed is following some of 

the Trump Treasury Department’s deregulatory roadmap to weaken the capital and liquidity buffers on some of the largest banks. 

This is particularly troubling given that many economists, including many at the Federal Reserve, believe that bank capital levels 

are at the lower end of where they should be to weather another 

downturn. 

Banks earned a record $236.7 billion in annual profits in 2018. The largest 6 banks alone raked in over $120 billion. Given these 

record profits, I do not believe there is a need for the Fed to further 

require capital and liquidity requirements. If anything, given your 

concerns about the economy, now is not the time to take the guardrails off of this industry. 

The Fed should also be concerned with the growing economic inequality in this country. In 2016, the Fed survey of consumer finances stated that the top 1 percent of U.S. families own 38.6 percent of the wealth. The Minneapolis Federal Reserve Bank reported 

that over the last 70 years, virtually no progress has been made 

in reducing income and wealth inequalities between black and 

white households. 

So I would urge you and the Federal Reserve to work to tackle 

the scourge of economic inequality. I know that we just had a moment to talk about some of these issues, and you have some information you shared with us just recently about some of the concerns 

that I have raised, and you may want to talk about those a little 

bit today. 

So I look forward to your testimony and to discussing these matters with you. 

The Chair now recognizes the ranking member of the committee, 

the gentleman from North Carolina, Mr. McHenry, for 4 minutes 

for an opening statement. 

Mr. MCHENRY. Thank you. Thank you, Chairwoman Waters. 

And thank you, Chairman Powell. 

Since his confirmation last year as Fed Chairman, Mr. Powell 

has prioritized outreach to Members of Congress and public disclosure of Fed activities, and Members and the public have benefited 

from that outreach and that public-facing interaction. 

I am hopeful that the Chairman will continue to pursue this approach, as it is important for the long-term integrity of the institution and highlights the open-book approach to Fed policy that is 

necessary for long-term market stability and understanding of Fed 

policymaking. 

The economy over the last 21⁄2 years has witnessed remarkable 

growth, and unemployment has reached lows that many once believed were impossible. Republican-led efforts for tax relief and regulatory reform have supported these trends with millions of AmeriVerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI
3 

cans benefiting as a result of those policies, and millions more seeing their wages grow as a result of that regulatory rightsizing and 

tax relief. 

The Fed’s interest in undertaking targeted rulemaking to provide 

regulatory rightsizing will help continue that trend. And it is important to economic growth and stability for the pace to be picked 

up. 

At the same time, I share the Fed’s concerns that global economic uncertainty could prove challenging here at home. As the 

minutes of the last Federal Open Market Committee (FOMC) meeting made clear, Europe and China in particular represent risks the 

Fed should continue to monitor and, where appropriate, work to 

mitigate. 

In Europe, the specter of a no-deal Brexit not only impacts the 

EU–U.K. trading relationship, but it also entails spillover effects 

that may implicate domestic and financial institutions here at 

home. Further afield, chronic weakness in Italy remains a threat 

to eurozone economies, and new movements have emerged that 

seek to disrupt the continent’s post-war politics as well. 

As for China, the days of double-digit growth appear to be gone, 

but not Beijing’s misguided, state-run economic management. 

China continues to suffer from the politicized allocation of capital, 

the cynicism towards international economic governance standards, 

opaque channels for decisionmaking, and, of course, the absence of 

the rule of law. 

In sum, China poses a massive risk, but a risk that defies conventional forms of assessment because its regime lacks conventional forms of accountability and transparency. In both China and 

Europe, we are facing systemic risks that have few historic analogies. 

China’s growth is expected to decline to its lowest point since 

1990, and European Union membership has only expanded, never 

shrunk, since its origins more than a half century ago. These are 

different times we are living through and different challenges certainly for the Fed and for the Fed Chair. 

That means that the rearview mirror will be of limited usefulness for policymakers in the years ahead. We will need to confront 

new sources of uncertainty with new insights and ideas, and the 

Fed will be essential in detecting and interpreting these challenges. 

While some of Mr. Powell’s predecessors developed a reputation 

for ambiguity, I am hopeful that he will pursue a different path, 

and it is certain that he already has. As he himself noted last 

month, greater uncertainty calls for more clarity from the Fed, not 

less. In the face of risks that we have yet to fully understand, our 

central bank must be all the more articulate and predictable. 

Chairwoman WATERS. The Chair now recognizes the subcommittee chair, Mr. Cleaver, for 1 minute. 

Mr. CLEAVER. Thank you, Madam Chairwoman. 

And thank you, Mr. Chairman, for being here today. 

Some of what I would like to focus on in this short amount of 

time is what I have spoken about with you in casual conversations, 

but I intend to say it quite openly today, and it is this: The imperative that the Federal Reserve remain independent as it works to 

4 

fulfill its mandate of maximum employment and price stability is 

key. 

I do hope that the Fed is able to resist the clamor of political 

murmurings and not allow that to drown out the critical deliberations that the Fed must have in order to head up our monetary policy in this country. The level of politicization and explicit pressure 

that you, the Federal Reserve members, have received is unprecedented and unnecessary. 

Madam Chairwoman, thank you. I yield back the balance of my 

time. 

Chairwoman WATERS. Thank you. 

The Chair now recognizes the subcommittee ranking member, 

Mr. Stivers, for 1 minute. 

Mr. STIVERS. Thank you, Chairwoman Waters, for holding this 

hearing. 

And Chairman Powell, thank you for being here today. We are 

all looking forward to your testimony. It is a really important time, 

as you know, for your dual mandate. And we finally, through some 

policies of tax cuts and regulatory reform, achieved an economic 

growth rate in the 3 to 4 percent range. We have unemployment 

at about 4 percent. 

But I have a gift for you to remind you of your dual mandate. 

Mark is going to bring it to you. It is a 100,000 Venezuelan bolivar 

note. And as you know, their inflation rate is about 65,000 percent, 

or was, and it is still growing. And they have people starving in 

one of the most resource-rich countries in the world. 

We and 300 million Americans are depending on you to continue 

your hard work to give us full employment and stable prices, Mr. 

Chairman. And I look forward to talking to you today. 

Chairwoman WATERS. I would now like to welcome to the committee our distinguished witness, Jerome Powell, Chairman of the 

Board of Governors of the Federal Reserve System. He has served 

on the Board of Governors since 2012 and as its Chair since 2017. 

Mr. Powell has testified before the committee before, so I do not believe he needs any further introduction. 

Mr. Powell, you are now recognized to present your oral testimony, and without objection, your written statement will be made 

a part of the record. 

STATEMENT OF THE HONORABLE JEROME H. POWELL, CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE 

SYSTEM 

Mr. POWELL. Thank you, and good morning. 

Chairwoman Waters, Ranking Member McHenry, 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 shortterm political considerations. We appreciate that our independence 

brings with it the need to provide transparency so that Americans 

5 

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. 

The economy grew at a strong pace on balance last year, and employment and inflation remain close to the Federal Reserve’s statutory goals. Based on the available data, we estimate that gross domestic product 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 the workforce. As a result, 

the labor force participation rate for people in their prime working 

years, that is ages 25 to 54, who are either working or actively 

looking for work, has continued to increase over the past year. And 

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 in 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 exVerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI
6 

pand 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 

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 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 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 United States 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 one quarter 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 

effect 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 

7 

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 trillion. Relative to their peak 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 demand for Federal Reserve liabilities, particularly 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, our 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. 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 very much. I will be happy to respond to your questions. 

[The prepared statement of Chairman Powell can be found on 

page 58 of the appendix.] 

Chairwoman WATERS. Thank you very much, Mr. Powell. 

Last Congress, I and other Democrats warned that S.2155, which 

Republicans claimed to be a bill to benefit community banks, was 

in fact a broader deregulatory giveaway to large banks that would 

fuel mergers, accelerate industry consolidation, and make it more 

difficult for community banks to compete. 

Now, we have SunTrust and BB&T proposing to merge and become the sixth largest bank. Furthermore, even though banks 

made record profits of $237 billion last year, you said yesterday implementing S.2155 was your highest priority, and the Fed has 

8 

made several proposals that would reduce bank capital and liquidity reserves for our largest banks. 

Board Governor Brainard voted against these proposals, noting 

that the Fed’s tailoring proposal would reduce high-quality liquid 

assets held by large banks by about $70 billion. The FDIC originally opposed the Fed’s leverage proposal as it would reduce bank 

capital by more than $120 billion. 

The Fed is also looking at making stress testing more transparent, which could undermine the purpose of the test. And former 

Fed Chair Fischer has called these deregulatory efforts, ‘‘something 

I find extremely worse.’’ 

So, Chairman Powell, please explain, will easing big bank capital 

and liquidity requirements as the Treasury Department has proposed, and your agency appears to be following through with, not 

undermine safeguards that have been carefully built up over the 

last decade to protect our economy and which made the U.S. framework the gold standard that others around the world follow? 

Should we expect to see further industry consolidation if deregulating big banks is a top priority for the Federal Reserve? It was 

discussed in the Senate Banking Committee yesterday how the Fed 

has accelerated its merger reviews and appears to be rubberstamping them. 

SunTrust-BB&T claim their proposed merger will be approved by 

September. But can you assure us that the Fed will not rush the 

process, will consult with all affected parties, will hold field hearings, and will focus on the public’s interest, even if it means rejecting the application? 

The Office of the Comptroller of the Currency (OCC) unilaterally 

released an Advance Notice of Proposed Rulemaking (ANPRM) to 

modernize the Community Reinvestment Act, or CRA. The Fed and 

the FDIC did not join in that release. I was troubled to see that 

Comptroller Otting recently said that if he could not reach agreement with your two agencies, the OCC would go on its own with 

CRA reform. Would that be a good outcome? Could two different 

CRA regimes lead to regulatory arbitrage of our banks? 

And, lastly, a minute on diversity. I believe diversity in the Federal Reserve’s leadership, including at the Reserve Banks, is crucial because it is hard to stay committed to all communities in the 

country when the leadership lacks an understanding of those communities that comes from experience. That is why I, and so many 

on this side of the aisle, have encouraged you to continually push 

to diversify in order to more closely represent the American public. 

The Center for Popular Democracy recently found that the current Board Directors are 76 percent banking or business, 74 percent white, and 62 percent male. They also cite that, in 2013, 12 

of the 105 Board Directors were African American. That number 

has increased to 22 out of 108 today. This is an improvement, but 

it still does not look good. 

Federal Reserve Governor Brainard recently spoke about increasing diversity efforts through a better pipeline at the inaugural 

Sadie T.M. Alexander Conference for Economics over the weekend. 

Right now, even before a search is underway for new Directors, 

how is the Federal Reserve trying to build the pipeline for more diverse candidates? When you lead with Reserve Bank leaderships, 

9 

how are you encouraging a focus on increasing director diversity? 

Why do you believe increasing diversity is a challenge? 

In your testimony, again, you stated that current economic conditions were healthy and the economic outlook favorable but noted 

that over the past few months, ‘‘uncertainty is elevated around several unresolved government policy issues.’’ 

I won’t put it as delicately as you have. President Trump’s policies are damaging our economy, and are challenging growth. This 

is why you have had to pause rate hikes. This lack of an economic 

agenda that changes with the wind is presenting market volatility 

and incredible consumer and business uncertainty. 

Just yesterday, you said that uncertainty is the enemy of business. That is why former Federal Reserve Chair Janet Yellen says 

the President doesn’t understand macroeconomic policy. If he did, 

he would understand that only a stable, inclusive, economic agenda 

will support an even economic expansion. 

So, Chairman Powell, the President is engaged in a trade war 

with an uncertain outcome that seems to change every other week. 

He has also forced the longest government shutdown in our nation’s history. How are these actions affecting the U.S. economy, in 

your estimation? How can you continue to achieve full employment 

and stable prices if this erratic economic agenda persists? 

Lastly, on monetary policy, in the minutes released for the January 29th and 30th FOMC policy meeting, participants discussed 

moving forward with monetary policy while having a large balance 

sheet. In what can be seen as a course change from the gradual 

balance sheet reduction that began in October 2017, the FOMC 

now noted that it is likely to stop reducing the balance sheet which 

now stands at approximately $3.9 trillion. 

I believe—and correct me if I am wrong—the thought is to allow 

the gradual reduction to continue until the FOMC is comfortable 

with the size of the still elevated balance sheet later in the year. 

In an interest rate environment where the Fed funds rate is still 

low, between 2.25 and 2.50 percent, how is the FOMC likely to use 

a large balance sheet as a monetary policy tool in the case of an 

unexpected downturn? 

For instance, San Francisco Federal Reserve Bank President 

Mary Daly has suggested that you could use your balance sheet as 

a monetary policy tool. Does this mean that QE could become routine in this low-interest-rate environment? If so, does this entail 

buying securities as the Fed did during the financial crisis and at 

a similar size and pace, or could you consider smaller scale purchases and types of securities? 

With that, I will now recognize the distinguished ranking member, Mr. McHenry, for 5 minutes for questions. 

Mr. MCHENRY. Good morning. 

Chairman Powell, I have a series of questions for you, and I 

would love to have your answers on these questions. You testified 

yesterday regarding the bank’s balance sheet, which stands at 

roughly $4 trillion, and you gave an answer about sort of normalizing the balance sheet and what your view of that normalization 

looks like. And you referenced the demand for reserves as a reference point for that. Can you elaborate on that? 

Mr. POWELL. Sure, I would be glad to. 

10 

So, before the financial crisis, the size of the Fed’s balance sheet 

was a function of demand for our liabilities, principally currency 

and, to a far less extent, reserves. Quantitative easing comes along. 

We hit the zero lower bound. The Fed buys a lot of assets. That 

was about buying assets. 

And the size of the balance sheet as a percent of GDP went from 

6 percent to 25 percent, and that was really driven by a desire to 

buy longer-term credit assets or rather Federal Government debt 

and drive down longer-term interest rates. 

So now we are normalizing the balance sheet, and normalizing 

it really means going back to a situation where the size of the balance sheet is driven by demand for our liabilities, which has 

evolved, so currency and reserves mainly. 

What has happened is demand for currency has grown—currency 

outstanding has grown much faster than the economy, and demand 

for reserves is now much higher than it was because really we require banks to hold very high levels of high-quality liquid assets, 

and they choose to hold reserves. 

We can’t go back to that very small balance sheet. So what we 

think is that—the Committee has been working on this carefully 

for the last three FOMC meetings and devising a plan. We are 

close to agreeing on a plan which would lay out—would sort of 

light the way to the end of the process. 

Mr. MCHENRY. And do you plan to communicate that? 

Mr. POWELL. Very much. 

Mr. MCHENRY. That plan? 

Mr. POWELL. Yes, we do. When it is agreed upon. We found it 

is good to be very careful with the balance sheet and— 

Mr. MCHENRY. But your reference point was about $1 trillion in 

bank reserves at the Fed would be the reference point for when you 

sort of end the reduction of the balance sheet. Do you have a timeframe on that? 

Mr. POWELL. Yes. There is a lot of uncertainty around the actual 

level. What I did was I cited public estimates and said those appear reasonable. We actually don’t know when the equilibrium demand will be. We are going to have to find it over time. And my 

guess is we will be announcing something fairly soon. 

Mr. MCHENRY. So, in light of yesterday’s housing figures, in 

which housing starts fell to the lowest number in more than 2 

years, what impact do those housing figures from yesterday have 

on your timing on holding rates steady, or do they have any impact? 

Mr. POWELL. In terms of what we said is we are going to be patient and watch as the economy evolves and also as the evolving 

risk picture changes and how that affects the—will affect the outlook. And we will be looking at a full range of data. It would include housing starts. It would include anything that could affect 

our achievement of the dual mandate, principally growth and then, 

of course, the labor markets and inflation. So we will be looking at 

a wide range of data. That is one piece of it, but it is one of many 

pieces. 

Mr. MCHENRY. So, related to that, housing finance reform, you 

know, Fannie Mae and Freddie Mac are more than a decade into 

nationalization. You are a major holder. The Fed is a major holder 

11 

of these assets. Do you think it is important for Congress to 

prioritize housing finance reform for the American economy? 

Mr. POWELL. I do. I very much do. This is a big, unfinished piece 

of business for sort of the post-crisis era, and I think it will be good 

for the economy to move to a system where a lot of private capital 

is there supporting housing risk again, and it is not just all winding up on the Federal balance sheet. 

Mr. MCHENRY. Okay. Pivoting to a result of some recent statements, there are a lot of crosscurrents, conflicting signals in the 

terminology the Fed has used in the U.S. economy and global economy. How do you respond to those who say you are making financial market stability an unofficial mandate to the Fed’s decisionmaking? 

Mr. POWELL. No, I wouldn’t say that is what we are doing. First, 

I think financial stability has been part of the Fed’s role, and in 

fact, it really was our original role. Central banks generally evolved 

out of a desire to support the stability of the financial system. It 

has always been something that we have done. 

Our mandate from you is maximum employment and stable 

prices. That is the mandate. We also look after financial stability 

and particularly as it supports the dual mandate. 

Mr. MCHENRY. Financial stability but not necessarily stock market stability? 

Mr. POWELL. No. By financial stability, we are really talking 

about the capacity of the financial system, particularly banks but 

also other aspects of the financial system, to perform their role and 

intermediate between savers and borrowers and support economic 

activity. 

Mr. MCHENRY. So what do you say to those folks who claim there 

is a now a ‘‘Powell Put’’ in the market. 

Mr. POWELL. Anything that matters for the dual mandate matters for us. And financial conditions—our tools work through financial conditions. So I would say that when there are major changes 

in broader financial conditions, as you point out, not any one market or set of markets, but when there are, for a sustained period, 

important changes in broader financial conditions, that matters for 

the macro economy. It matters for achievement of the dual mandate, and we will, of course, take that into account. 

Mr. MCHENRY. You mentioned the headwinds internationally, 

the softening in the EU, the softening in the Chinese economy, the 

risk of Brexit. We see what is happening internationally for global 

terror and things of that sort, but I want to talk specifically about 

China and ask you, how does China’s use of state-run banks to allocate credit affect financial stability for the rest of the world? 

Mr. POWELL. I don’t know that there are important implications 

for global financial stability. It is a part of their system. I know 

they are trying to move to a more market-based system over time, 

and that is a challenging transition. 

Mr. MCHENRY. More to this point, it is an opaque market. So 

getting numbers and getting a solid understanding of that allocation of capital is much more difficult in China than it is in the rest 

of the first world, is it not? 

Mr. POWELL. That is right. In addition, so much of their economic activity in effect has the backing of the central government. 

12 

Mr. MCHENRY. Let me just wrap up with a broader question. You 

mentioned our national debt. The debt and deficit challenge is a 

real one. I firmly believe we have to right-size our spending, commensurate with long-run obligations that we have to the American 

people. But fundamentally, our deficit does have an impact on your 

dual mandate, does it not? 

Mr. POWELL. I would say in the longer run. 

Mr. MCHENRY. In the longer run. And our national debt too in 

the longer run has an impact in Fed policymaking as it results in 

stability and full employment, does it not? 

Mr. POWELL. You know, I would say the unsustainable path of 

the Federal Government is a longer-run problem. It doesn’t really 

affect—most of our thinking is about business cycle frequencies and 

supporting the economy when it is weak and holding it back when 

it is overheating. 

But that is just in general and not so much about fiscal 

unsustainability. But we worry about in the longer run what will 

happen is we will wind up spending our money on interest payments rather than on the things we really need. 

Mr. MCHENRY. I yield back. 

Chairwoman WATERS. Thank you very much. 

Mr. Chairman, as you answer the questions, they will be overlapping. Feel free to expound on some of the questions that I put before you. I took up all the time, and I didn’t give you an opportunity to answer those questions. But as you answer questions 

from the others, feel free to include in those answers some of those 

concerns. 

Now, the gentlelady from New York, Ms. Velazquez, is recognized for 5 minutes. 

Ms. VELAZQUEZ. Thank you, Madam Chairwoman. 

Chairman Powell, thank you so very much for being here today. 

I have heard from several constituents who have expressed concern about the impact the current expected credit loss methodology 

could have on lending to consumers and small businesses. They tell 

me the proposal, while well-intended, could be more procyclical 

than the current incurred loss method, especially in a downturn, 

and would disproportionately impact consumer lending and LMI 

borrowers, who, as you know, can least afford an increase in the 

cost of credit or a complete loss altogether. 

Much of the talk thus far has been about accounting policy, but 

what about economic policy? Has the Fed conducted a review of the 

economic impact of current expected credit losses (CECL) particularly in a downturn? 

Mr. POWELL. So we have tried to think carefully about the questions that have been raised by banks about this, and we have 

thought a lot about this over time. We have tried to work with 

banks so that they will be able to implement this FASB decision 

in ways that are not too disruptive and too expensive and too complicated. 

We have also allowed banks to start a 3-year phase-in of this beginning, I guess, next year. So we are doing everything we can to 

avoid a big change that is disruptive to lending. And in addition, 

we will be watching carefully to see what the actual results are. 

13 

Ms. VELAZQUEZ. But, Mr. Chairman, I am not concerned about 

how the banks will be handling this. I am concerned about the economic impact that it could have on mortgages for a segment of our 

population who is already—who have been not participating in capital access, such as low-income borrowers or small businesses. Have 

you conducted any economic impact on that? Because I know that 

the Financial Stability Oversight Council (FSOC), at their December meeting, they discussed this issue. 

Mr. POWELL. Yes. 

Ms. VELAZQUEZ. How do you— 

Mr. POWELL. We are aware of those concerns, and we will be 

watching to see whether there is any such effect. We don’t expect 

that there will be such an effect, but we will be watching carefully 

to see. 

Ms. VELAZQUEZ. Chairman Powell, you recently gave a speech at 

Mississippi Valley State University that addressed economic development challenges in rural areas. While New York City is certainly 

not rural, I believe many of the challenges you spoke about could 

also apply to urban centers, particularly those of color. 

In that speech, you noted the importance of workforce training 

due to the loss of key industries and the resulting mismatch between the skill of local workers and those demanded by new employers. As Federal banking regulators contemplate updating CRA 

regulations, should banks receive CRA credit for supporting or participating in such workforce development programs? 

Mr. POWELL. That is a good question, and I don’t know how—I 

don’t know whether that would get CRA credit or not. It is certainly—I was speaking at a conference that was looking at basically broad measures to alleviate poverty, and I will check into that 

and get back to you. 

Ms. VELAZQUEZ. Thank you. 

Recently, and the Chair already alluded to this, Comptroller 

Otting said that he was hopeful that all three bank regulators will 

join the proposed CRA reforms by the summer. But he also indicated that if you were not all able to agree, the OCC will be willing 

to propose the reforms on its own. This is counter to statements 

made recently by Governor Brainard when she stated that Federal 

regulators should speak with one voice on CRA. What is your view? 

Mr. POWELL. I think ideally we would like to have a unified view. 

It would be better to have one agreed-upon framework for CRA. 

That is obviously the best outcome, and we are going to be working 

toward that. But I want to add, though, that we are very committed at the Fed to the mission of CRA, and we are looking to 

make it more effective. 

Ms. VELAZQUEZ. Should there be a joint rulemaking, and do you 

believe the Fed will ultimately sign onto the OCC’s proposal? 

Mr. POWELL. We will have to see. I think it would be ideal for 

the three regulators to get together, and we are working with the 

other two agencies on that. I think the goal is to get to a joint answer. 

Ms. VELAZQUEZ. I yield back. 

Chairwoman WATERS. The gentleman from Oklahoma, Mr. 

Lucas, is recognized for 5 minutes. 

Mr. LUCAS. Thank you, Madam Chairwoman. 

14 

Chairman Powell, thank you for being here today. And I believe 

that my colleagues will do an outstanding job of covering the broader issues and with a number of inquiries. So, as has been my custom in recent years, I would like to focus in on some particular 

issues, and if we could once again converse about the joys of derivatives, so to speak. 

My questions will deal with those issues that are within the 

Fed’s role. First, turning to an issue I have raised several times, 

which is inter-affiliate margin, as you know, transactions between 

affiliates are risk management tools and do not expose counterparties to each other’s risks. 

I have pushed with my colleagues on the Agriculture Committee 

to exempt those inter-affiliate transactions from initial margin requirements. The CFTC and European regulators agree with me, 

and yet the Fed hasn’t changed its policy to be consistent with 

those regulations when it comes to bank swap dealers. 

I understand these issues predate your tenure, but, Mr. Chairman, I would like to know if you intend to administratively pursue 

a more risk-reflective approach on initial margin for inter-affiliate 

swaps. 

Mr. POWELL. I know we haven’t made a decision on that, but we 

are looking at the inter-affiliate margin question, and we will get 

back to you on that. 

Mr. LUCAS. And hopefully that is something in the near view as 

opposed to the longer view, perhaps, Mr. Chairman? 

Mr. POWELL. Yes, sir. 

Mr. LUCAS. I think that is a leading question, so to speak. 

Mr. POWELL. That is a ‘‘yes.’’ 

Mr. LUCAS. Thank you, sir. 

Speaking frankly, I hear a lot of good things from both you and 

Mr. Quarles on this issue, and I appreciate that very much. But 

the lack of formal action still concerns me, and I think it is time 

to quickly move onto this. These rules currently capture a whopping $38.8 billion for capital in transactions that are not inherently 

risky, and I would certainly ask you and your staff to move forward 

soon on this please. 

Now, moving to something else I raised with Mr. Quarles last 

year in this space, you are currently engaged in a joint comment 

period with the OCC and the FDIC about the Standardized Approach for Counterparty Risks (SA-CCR) proposal. That framework 

asked to hear from other industry stakeholders about the need for 

an offset for client margin in the supplemental leverage ratio. 

If I may, I would like to offer you a few thoughts here. The number of firms providing clearing services has declined from 88 to 55. 

This affects farmers and ranchers and other end users in derivative 

markets. They are steadily losing options for clearing activity. This 

part of the SLR contributes to the closing of these markets to folks 

I mentioned. For what it is worth, the CFTC Commissioners agree 

with me and have submitted a joint comment raising the same concerns. 

Now, Mr. Chairman, I know I can’t ask you to comment on any 

action now considering the recent extension of the comment period, 

but as you proceed through this comment period, I would like to 

make sure you know about those concerns and that you would be 

15 

able to take my concerns into consideration as you move through 

that joint comment process. 

Mr. POWELL. We are in the process of reviewing the comments, 

as you point out. 

Mr. LUCAS. Thank you. I have one more note, Mr. Chairman, on 

the SA-CCR proposal. I understand that the framework would significantly raise the capital requirements for over-the-counter onmargin swaps. As you know, Congress was very explicit in allowing 

nonfinancial end users to continue trading in the OTC market. We 

were this explicit in making hedging affordable to the enemies. I 

am concerned that a significant increase in capital requirements 

associated with these swaps will make them far more expensive, 

and this would, of course, frustrate congressional intent. 

In particular, it is my understanding that the capital requirements will essentially be high for commodity derivatives, such as 

those uses to hedge oil and natural gas cost. Where I am from, access to risk-management products for the energy and agriculture 

sectors are critical, and I want to make sure that we don’t come 

under pressure by way of excessive requirements imposed on those 

bank counterparties. 

Mr. Chairman, I have spent a lot of time on these issues, as you 

know, and I would very much appreciate it if you would be willing 

to bear these concerns in mind, which are shared by the end-user 

community as we move forward. I have always found you would be 

a practical person, and I like to think that I use my time and efforts to address practical issues that impact not only my economy 

back home in Oklahoma but the whole country. 

And, with that, unless you have a thought, Mr. Chairman, I will 

yield back the balance of my time. 

Mr. POWELL. Thanks. 

Mr. LUCAS. I yield back, Madam Chairwoman. 

Chairwoman WATERS. Thank you very much. 

Mr. Sherman, the gentleman from California, is recognized for 5 

minutes. 

Mr. SHERMAN. First, in responding to the ranking member, I 

think it is important that Fannie and Freddie continue to be what 

they have become, perhaps accidentally, and that is Federal Government agencies. We need a Federal backstop in terms of credit 

risk, but never again should we have a semi-public, semi-private 

agency where taxpayers take the risk and shareholders try to reap 

the profit. 

Mr. Chairman, I appreciate your patience on not raising rates. 

You have a twin mandate, but I am going to ask you to also consider an additional factor, not as important as your twin mandate, 

and that is the profit that you create is a byproduct of your efforts, 

at times turning over to the Treasury as much as $100 billion or 

nearly $100 billion in a single year. 

And I want you, in your decisions, to reflect on the fact that that 

is not just a dry accounting entry. It is life and death. We have limited amounts of money that we can spend here in Congress on cancer research, on body armor for our troops and research to make 

it better, on opioid programs. 

So people will live or die based upon whether you are able, as 

you have in the past, to turn over nearly $100 billion of unintended 

16 

profit. And I realize that it is not your mandate, but it is life and 

death. 

We talked at another meeting about wire transfer fraud, and I 

will get you some background material on that. But I do want to 

just focus the committee on the fact that people are being tricked 

through the internet to wire their funds into a particular numbered 

account thinking they are sending the money to, say, the person 

they are buying a house from, and instead, it is going somewhere 

else. So, if we have a confirmation of payee system like the British, 

we can avoid much of that. 

As to your balance sheet shrinkage, that diminishes your profit 

that you can turn over. It also, as you sell off or allow to run off 

your mortgage-backed securities, you are raising mortgage costs for 

people. 

Your testimony said that we have a good job market. It is not 

good until there is a labor shortage that drives wages up to make 

up for the 20 years of stagnant wages that we have had over the 

last 2 decades. So I hope you would aspire for more than just a 4- 

percent unemployment rate. 

I do have a question for you here, and that is, in your statement 

you comment on the Federal debt. You say the Federal Government debt is on an unsustainable path. Of course, fiscal policy is 

outside your purview but it affects what you do. 

We also have a trade deficit, about a half a trillion dollars a year, 

kind of similar in size to the budget deficit. And so every year we 

borrow another half trillion dollars to finance that as a country borrowing from abroad. I wonder if you could say that the U.S. trade 

deficit of over half a trillion dollars a year is on an unsustainable 

path? 

Mr. POWELL. Yes, I mean, I don’t think I would say that. The 

current account deficit is really set by the difference between savings and investment. And the reason the Federal budget is on an 

unsustainable path is that the debt as a percentage of GDP is at 

a high level, but much more important than that, it is growing 

faster than GDP. So debt cannot grow faster than GDP forever, 

whereas I don’t know that I would say that about the current account balance. 

Mr. SHERMAN. The accumulated trade deficit where every year 

we borrow over half a trillion dollars just adds to our foreign debt. 

But I want to go on. Some of my colleagues find these hearings 

kind of dry and so they have urged me to spice things up by asking 

an accounting principles question. We have CECL, the proposal for 

the current expected credit loss system, being proposed by FASB. 

The effect of this may be to increase reserves, but you and the 

other bank regulators are supposed to determine the size of reserves. We shouldn’t increase or decrease reserves because of an esoteric accounting theory discussion which has gone awry. 

And so I wonder whether you believe that we should make this 

major accounting change for banks that will deter, lending particularly in economic downturns, without a quantitative impact study. 

Have you had a chance to look at this issue and how it will affect 

the banks that you regulate? 

Mr. POWELL. Yes. So we don’t think that it will have that effect, 

but we will be watching carefully. And, we will be looking at this, 

17 

and it has really been under discussion for a decade now. It is a 

decision that FASB made and that we are just implementing. And 

if we find that it does have effects like that, then we will take appropriate action. 

Mr. SHERMAN. Thank you. 

Chairwoman WATERS. Thank you very much. The gentleman’s 

time has expired. 

The gentleman from Florida, Mr. Posey, is now recognized for 5 

minutes. 

Mr. POSEY. Thank you very much, Madam Chairwoman, and Mr. 

Ranking Member, for holding this hearing. 

And, Chairman Powell, thank you for being here to present your 

semiannual report. I would like to think that everyone in this room 

at one level or another is enjoying the success that we are seeing 

continue in this country right now. And I want to thank you for 

the contributions that you have made to that. 

It is also great to have a Chairman here who answers questions 

so directly, and we appreciate that. 

I saw recently some trends in banking indicating that, since 

2008, we have seen a decline in the number of FDIC-insured banks 

of about 38 percent, from 7,870 banks to 4,909 banks on the 

spreadsheet that I saw. 

Over the same period of time, assets grew by 80 percent, from 

$10 trillion to $18 trillion. Mergers have been going on at a very 

brisk pace, as you are no doubt aware. And I would like you to 

share what your research shows about the economic implications of 

increasing concentration in the banking industry and how that 

might restrict or perhaps enhance the availability of credit to those 

who take the risk on investments to grow our economy. 

Mr. POWELL. Thank you. The number of banks has been decreasing pretty steadily now for more than 30 years. I remember 14,000 

was the number, I think, when I was in the government 25—30 

years ago. And it is a range of factors. It is people leaving rural 

areas. It is also allowing interstate banking and things like that. 

But for whatever reason, you have seen a long-run process. 

Now, we know that when a small bank goes out of business in 

a rural county or a small town, that is not a good thing. And that 

is bad for the country. It is bad for that town, bad for the social 

fabric. So we try not to add to the problems of community banks 

through excessive regulatory burden. We try to be mindful of their 

important role in society. 

Actually, the number of mergers last year, 2018, was the lowest 

in quite a long time. I asked the staff to go back and look. It is 

the lowest in at least 15 years. So mergers and consolidation are 

actually at a pretty low level. 

The last thing I will say is I think we need banks of all different 

sizes. We need small banks. We need banks across the spectrum 

at different business models serving different communities. We 

want a diverse ecosystem of banks out there to have a healthy 

economy. 

Mr. POSEY. Okay, related to that same question, could you share 

the criteria that the Fed uses in evaluating bank merger applications? 

18 

Mr. POWELL. I would be glad to. It is quite detailed. There is a 

Federal Reserve Act section that lays out a lot of detail, and there 

is also plenty of guidance on that issue. Actually, I have a picture 

of it here. So we look at competitive factors, banking community 

factors, managerial resources. 

We look at compliance with consumer and fair lending laws and 

CRA record and that kind of thing. We look at the combined financials, of course, of the two companies. We also invite public comment. We have a pretty thorough, carefully worked out process. We 

go through this process carefully for mergers and look at all those 

factors and then make a decision. 

Mr. POSEY. Okay. Thank you very much. 

I wasn’t going to dwell in this realm until we had a series of 

slides up here overhead and somebody else mentioned Fannie and 

Freddie. And so I am curious if you could give us an update on the 

amount of tax dollars that have been spent to date on defending 

the crooks who mismanaged Fannie and Freddie and nearly bankrupted the whole operation. 

The last time we got a report, I am thinking it was about 8 years 

ago, that we had already spent over $600 million of taxpayer dollars defending these guys from stockholder suits. Can you give us 

an update on that? 

Mr. POWELL. I don’t actually have an update on that for you. I 

can check into that, though. 

Mr. POSEY. I know. Okay. If you would communicate that to us, 

I would appreciate it very much. And I yield back the balance of 

my time. Thank you. 

Chairwoman WATERS. Thank you very much. The gentleman 

from New York, Mr. Meeks, is recognized for 5 minutes. 

Mr. MEEKS. Thank you, Madam Chairwoman. 

Good morning, Mr. Chairman. 

Mr. POWELL. Good morning. 

Mr. MEEKS. Let me ask you a question. There was a study that 

was done by the New York Fed that found that Americans are borrowing more for cars while borrowing less for houses. And the reason why the statistic caught my eye is because of my strong belief 

in home ownership and that it is the best value for low- and moderate-income households to build wealth over a long period of time. 

And I often have said I would want individuals to rent the car 

and own the home as opposed to owning the car and renting the 

home. And in a separate report, the Federal Reserve described a 

link between rising student debt and an acute decline in home 

ownership, particularly among young Americans. 

So my question is, what does declining home ownership rates, especially among young people saddled with student debt, say about 

the overall health of the United States economy? 

Mr. POWELL. I think the overall household picture of debt, if I 

can start with that, is basically a healthy one. There are a couple 

of areas of concern. And you touched on the main one, which I 

think is student debt. And there is a growing body of research that 

shows that students who borrow for their education and wind up 

not getting the kind of value they thought they would get so that 

their incomes are lower than they expected, can’t pay the debt 

back. That debt can hang over their economic and personal lives 

19 

for many years, meaning lower levels of home ownership and other 

sort of measures of economic success. So we are seeing more and 

more evidence of that as student debt grows. 

Mr. MEEKS. And on I guess a different column the same way, you 

have identified that debt is also high among low-rated or unrated 

nonfinancial firms, and that underwriting has deteriorated in lending to highly indebted businesses. I am switching from the individual to the business, this leveraged lending. And obviously, we 

want to encourage prudent lending to American businesses, even 

those with existing debt, but I don’t want to go back to 2008. 

So does the Fed believe that increased credit risk in the leveraged loan market poses systemic vulnerabilities, particularly in the 

event of an economic downturn? 

Mr. POWELL. This is an important supervisory focus. And the 

headline answer to your question is we don’t believe it poses systemic kinds of risks, but we do think it poses a macroeconomic risk, 

particularly in the event of an economic downturn. These are companies that have borrowed in good times and borrowed high 

amounts of debt. And if there is a downturn, they will be less able 

to carry out their roles in the economy and that may have an amplification effect on a downturn. 

Our supervision of banks indicates that the banks do not have 

excessively high exposures to these highly leveraged nonfinancial 

corporations and also don’t have excessively large pipelines of commitments that they have made. Those are two things that they did 

have before the financial crisis that they don’t have now. 

So the actual—the banks—and that is our window into this is 

largely through bank supervision. The banks have really changed 

the way they manage their involvement in this business in a way 

that puts the risk out in the holder’s hands rather than the bank’s 

hands. 

Mr. MEEKS. So we tried to—and we came up with Dodd-Frank 

to deal with the mortgage crisis back in 2008. And we try to make 

sure that we are now watching with reference to living wills and 

other things to prevent—do you think we are prepared and we 

have enough regulators are watching closely enough so that we can 

avoid leveraged lending ending up being the next bubble that 

bursts and that causes us to have the same kind of financial crisis 

that we had in 2008? 

Mr. POWELL. Yes. I think our financial system is so much better 

capitalized and has so much more liquidity. It has a better sense 

of its risks and a better ability to manage those risks. Stress tests 

require banks to take a forward-looking—particularly the largest 

banks—assessment of their capital adequacy. They have also done 

resolution planning. 

So our banking system is so much more resilient and so much 

stronger than it was before the financial crisis, so that it should be 

able to withstand the kinds of shocks that we are talking about. 

If there were, for example, unexpectedly high credit losses among 

nonfinancial corporates, then yes, the banks should have plenty of 

capital and liquidity to absorb those losses. It doesn’t mean there 

wouldn’t be disruptions and losses, because there would be in the 

economy, but it would not be, we don’t think, the kind of thing that 

we saw in 2008. 

20 

Mr. MEEKS. So, by and large, Dodd-Frank did a lot to help us, 

and there may be other avenues that I think that we may need to 

include therein to continue to protect ourselves. Is that correct? 

Mr. POWELL. I think Dodd-Frank and the whole broader regulatory program, which went way beyond Dodd-Frank, did serve its 

purpose in strengthening our financial system, yes. 

Chairwoman WATERS. The gentleman from Missouri, Mr. Luetkemeyer, is recognized for 5 minutes. 

Mr. LUETKEMEYER. Thank you, Madam Chairwoman. 

Chairman Powell, welcome. It’s good to see you again. Before I 

get to my questions, I would like to bring up one issue related to 

guidance. I have consistently fought to ensure that the difference 

between guidance and rule is clear. You and I have had a number 

of conversations on this, in fact, in this committee before. 

However, just last week I saw a letter from Senators Tillis and 

Crapo to the Comptroller General regarding the Large Institution 

Supervision Coordinating Committee (LISCC). From reading this 

letter, it appears that the Fed, throughout the Obama Administration, created a regulatory and advisory regime that forced banks to 

meet numerous requirements related to liquidity and capital without going through the rule-making process. If this is true, the Fed 

has to take a second look at the guidance issued in relation to 

LISCC and ensure that the proper rule-making process is followed. 

I just want to give you a heads-up. I am going to be watching 

this issue very carefully and I appreciate your attention to this 

matter. 

With regards to my good colleague from Oklahoma, Mr. Lucas, 

I just want to add my thoughts to his with regard to inter-affiliate 

margin. This is also an issue I want to watch very carefully, and 

I want to watch your actions. I think it is important that we take 

action on this issue. So I am looking forward to working with you 

on that as well. 

The issue that is of most concern to me this morning is CECL. 

We talked about this a number of times earlier this morning with 

a number of my colleagues. There seems to be a growing concern 

from more and more, not only bankers but consumers, whether it 

is the realtors, the mortgage bankers, the Chamber, the home 

builders, as they begin to understand the costs that are associated 

with this. 

I know you indicated a minute ago that you didn’t think it is 

going to have much effect, but, my colleague across the aisle a 

minute ago said that she is not concerned about how it is going to 

affect banks. So I am desperately and very, very concerned about 

how it is going to affect banks, because how it affects banks is 

going to affect consumers. 

If banks have to raise their cost of being able to make a loan, 

that is going to cause people to no longer have the ability to have 

home loans. We had in this committee back in December home 

builders testify that for every thousand dollars worth of increased 

cost, it deprives 100,000 people people across this country of the opportunity to have a home loan. And, of course, those are going to 

be the low- to moderate-income folks. This is very concerning to 

me. 

21 

And when you look at the banks having to either pass that cost 

along or eat it and, therefore, ensure that they spread the cost out 

against other costs, other incomes they have, or they just curtail 

their lending activities altogether, which in some cases has happened. In my district, I have banks that no longer make home 

loans because of increased cost. 

So I guess my question to you this morning, Mr. Chairman, is, 

this to me is going to have a devastating effect on the home lending 

market, especially when you start to talk about the GSEs. And 

when we start having a dramatic effect on the government-sponsored enterprises (GSEs), which no longer have—if we lose 100,000 

homeowners, that is going to affect the economy. You already 

talked about the building that is not going to go on, about all the 

sales of materials that are not going to go on. This is going to have 

a devastating effect on our economy, which is directly in your purview. 

So in conversations with Chairman Otting, who now oversees 

Freddie and Fannie, he gave me some figures, which I am trying 

to get him to verify in a written letter request that are going to 

be out of this world of how he is going to have to reserve for this 

and have to pass those costs along. 

So can you tell me, from just this conversation I am having here 

with you, what your thoughts would be along those lines? Would 

you have concerns about the GSEs having to pass those costs along 

and the inability of consumers to have access to credit as a result 

of that? 

Mr. POWELL. Sorry. Were you tying that back to CECL? 

Mr. LUETKEMEYER. Yes. 

Mr. POWELL. You are, okay. Well, yes, I think we know that regulation does have a cost and that is why we try to make it as efficient as we can and no more burdensome than it needs to be. 

Again, I think on CECL, we have tried—we put a lot of resources 

toward trying to understand how it will affect the behavior of 

banks, and we are going to be watching that very carefully. Again, 

for our banks, we have allowed a 3-year phase-in that doesn’t even 

start until next year. So we are going to be seeing it coming in 

gradually, and we are going to be watching very carefully to see 

whether these effects happen. 

Mr. LUETKEMEYER. Well, I know in talking with banks from Wall 

Street to Main Street, especially small guys, nobody likes this rule. 

And it is going to be—and to me, what was told by FASB is the 

original reason for it was to have better transparency, understanding risk on the balance sheet with regards to home loans. But 

if you are an investor investing in a limitly held bank or a credit 

union or a a single individual owning a bank, there is no need for 

this sort of risk exposure and, therefore, it is unnecessary. 

So I am very concerned about this and, as I said, there is a growing groundswell of concern out there and I hope that you take this 

into consideration. 

I yield back. 

Chairwoman WATERS. The gentleman from Texas, Mr. Green, is 

recognized for 5 minutes. 

22 

Mr. GREEN. Thank you, Madam Chairwoman. And I thank 

Chairman Powell for being here with us today. I am honored to be 

in your company again. 

I have great respect for your intellectual prowess. And I say this 

because you have had to deal with a level of inanity that most Fed 

Chairs don’t have to deal with. I would like for you to hear now 

the words of the President of the United States. He indicated, ‘‘I 

am doing deals and I am not being accommodated by the Fed.’’ 

That would be you. ‘‘I am not happy with the Fed. They are making mistakes because I have a gut and my gut tells me more sometimes than anybody’s brain can ever tell me.’’ 

You have access to some of the greatest minds in the world. You 

do research. I assume that when you are setting the Federal funds 

rate that you rely on that research and not on the President’s gut. 

I assume that you do this because you understand the impact that 

it can have on the economy. And I would just like for the record, 

would you indicate that you do have the level of research necessary 

to make these decisions without the benefit of the President’s gut? 

Mr. POWELL. I think we have quite adequate resources at the 

Fed. We have terrific people, and we have a very strong culture 

more than anything, which is a culture of commitment to making 

these decisions for the benefit of all Americans, based on our best 

thinking, diverse perspectives, and without considering political 

factors. That is our culture, and it is a strong one. 

Mr. GREEN. Thank you. And you do quite a bit of research in various and sundry areas. You have done research in terms of AfricanAmerican unemployment, unemployment of teenagers. Is that a 

fair statement? 

Mr. POWELL. Oh, yes, quite a bit. 

Mr. GREEN. I would like to ask you, if I may, if the stock market 

is a fair acid test for the health of the economy? Should we rely 

solely on the stock market? It seems that the President does. 

Mr. POWELL. We, of course, look at a wide range of financial conditions, credit market conditions. The stock market is one of many 

factors. 

Mr. GREEN. One of many, but not the sole factor? 

Mr. POWELL. No. It is simply one of many. 

Mr. GREEN. Not the one that supercedes others? 

Mr. POWELL. No. It is one of many. 

Mr. GREEN. One of many. Why is it so important for the Fed to 

be independent? 

Mr. POWELL. I think it is important because you have given us 

an important job, which is to achieve maximum employment and 

stable prices, and we need to do that in a way that is strictly nonpolitical. You have given us long terms. You have given us protection from sort of shorter-term political considerations, and you have 

kind of ordered us to do our business that way. And the record is 

that central banks that are independent, that have a degree of 

independence from the rest of the government do a better job at 

serving the general public. 

Mr. GREEN. Would it also have a little bit to do with the fact that 

you want people to rely on what you do and you want people to assume that what you do is not predicated upon the whims of some 

political personality? 

23 

Mr. POWELL. It is very important that the public understand who 

we are and how we do our business, which is strictly nonpolitical 

and based on the best thinking we can muster. 

Mr. GREEN. Now, let me get to the question that I really wanted 

to ask, and it is this: Invidious discrimination. You have done 

many studies. You have acknowledged it. You have acknowledged 

that you have some of the best minds in the world. I want you, Mr. 

Powell, to do a study to determine the impact that invidious discrimination—that would be racism; sexism; homophobia; Nativism; 

anti-Semitism—has on the economy. This is a question that will 

help us to better assure that you can meet the mandates that have 

been accorded you. 

It is unfortunate that we try our best to change the circumstance, but we have been doing it without the benefit of this 

intelligence. How soon do you think you can help me with this intelligence, please? 

Mr. POWELL. I will speak to some of my research colleagues and 

get back to you. I will get back to you quickly. 

Mr. GREEN. I will look forward to hearing from you. Thank you. 

Mr. POWELL. Great. Thank you. 

Chairwoman WATERS. Thank you. The gentleman from Michigan, 

Mr. Huizenga, is recognized for 5 minutes. 

Mr. HUIZENGA. Thank you, Madam Chairwoman. 

And, Chair Powell, it is good seeing you here today. I have four 

areas I want to quickly go over: the Volcker Rule; options, specifically exchange listed options; a Fed inflation target increase discussion, if at all possible; and then workforce participation that you 

had brought up in your opening statement. 

First on the Volcker Rule, as ranking member of the Capital 

Markets Subcommittee, I have been very concerned about the 

Volcker Rule and how the rule has been detrimental to U.S. capital 

markets. And last October, myself, Chairman Luetkemeyer and 

Chairman Hensarling at the time sent you a letter dated October 

16th. I don’t believe we have actually received a response as of yet. 

But in this, it was concerning, we raised concerns that the 

Volcker Rule unnecessarily restricts a bank’s ability to make longterm investments in small businesses as a result of the covered 

funds provisions. And as you know, such funds provide the same 

type of financing that a bank is authorized to do on its own balance 

sheet, but the Volcker Rule prohibits a bank from performing this 

activity through fund structures. 

Previously, you have recognized that a bank’s long-term investments in covered funds generally do not threaten safety and soundness, and said regulators would look for ways to encourage this important activity within the language and intent of the statute. 

Now, the letter was addressed to Secretary Mnuchin, yourself, 

Chair Clayton, Comptroller Otting, Chair McWilliams, and Chair 

Giancarlo at the time—this has been referred to at various times 

as the ‘‘five-headed hydra,’’—and I am wondering when you are 

planning to address this issue? 

Mr. POWELL. I think we received quite extensive comments on 

that proposal, and you mentioned the covered funds part of it. I 

will just say we are looking carefully at ways to address some of 

24 

the concerns that were raised on that and also on the accounting 

part. 

Mr. HUIZENGA. How quickly can we expect clarity? 

Mr. POWELL. I don’t have a date for you, but I can get you a better sense of that quickly and get back to your office. 

Mr. HUIZENGA. That would be helpful. 

And last May, the Federal Reserve issued a proposal that would 

focus compliance and application of the Volcker Rule on the size of 

a banking firm’s market trading business rather than on the size 

of the bank’s assets. The two are not always the same, as we know. 

And when do you envision finalizing that proposed tailoring rule? 

Mr. POWELL. This is S.2155? That one, so, again, we have comments. I think we have a dozen rules out for comment and back. 

Mr. HUIZENGA. That was last May that you issued a proposal. 

Mr. POWELL. If you are talking about the overall tailoring proposal or are you talking about—this isn’t the Volcker Rule. This is 

the Volcker part of the— 

Mr. HUIZENGA. Correct. It is dealing with the size of the firm’s 

trading business rather than the size of its assets. 

Mr. POWELL. I will get back to you with a time. 

Mr. HUIZENGA. Okay, I would appreciate that. 

Options. As you know, for the centrally cleared exchange listed 

options market, the Current Exposure Method has negatively impacted liquidity and has increased cost to customers. Last Congress, the Options Market Stability Act received unanimous support. And I know America doesn’t believe us when we actually say 

we can agree on something on occasion, but I believe it would have 

solved some of these issues. 

Thankfully, the Federal Reserve, along with the OCC and the 

FDIC, issued a proposal in October of last year to replace the Current Exposure Method proposed for purposes of exchange-listed options with a more risk-sensitive methodology to be applied, known 

as the standardized approach for calculating counterparty risk. 

Can you indicate when the banking agencies intend to finalize 

this rulemaking? 

Mr. POWELL. I know that is another one for which we have comments out. I think that is coming soon. I will get back to you with 

a particular date. 

Mr. HUIZENGA. All right. I am looking forward to that. It sounds 

like we are going to have a long meeting after this one. 

In my remaining minute here, the Fed inflation target increase— 

and by the way, the dual mandate has been brought up, and I have 

never quite understood why it is called the ‘‘dual mandate’’ when 

it says, ‘‘from 1977, Congress mandated that the Fed, promote effectively the goals of maximum employment, stable prices, and 

moderate long-term interest rates.’’ We somehow forget that third 

part all the time when we have this discussion. 

But last week, news reports indicated that the Fed may be considering a higher inflation target rather than the 2-percent that 

has been adopted, not mandated but adopted. And I am concerned 

that the Fed, frankly, is going to be rushing into some new approaches when we are not necessarily understanding what we are 

living with right now. And I wonder if you can comment on that. 

25 

Mr. POWELL. We are not looking at a higher inflation target, full 

stop. 

Mr. HUIZENGA. Okay, excellent. 

Mr. POWELL. What we are looking at is a way to more credibly 

achieve our existing symmetric— 

Mr. HUIZENGA. Two percent. 

Mr. POWELL. A 2 percent inflation target. 

Mr. HUIZENGA. Great. And then, in the remaining seconds, why 

is the labor participation rate for ‘‘prime age workers,’’ as you had 

said in your opening statement, falling? We are seeing older workers, those labor rate increasing, but seeing prime age. 

Mr. POWELL. That is a longer conversation and a really important one. And I think it is a range of things. It is people who—it 

is largely in younger workers. It has to do with globalization. It has 

to do with technology. It has to do with the opioid crisis. It has to 

do with the flattening out of U.S. educational attainment over the 

years. So this is an incredibly important issue, and I would love to 

talk more about it, but— 

Mr. HUIZENGA. I look forward to our next meeting. 

Mr. POWELL. Thanks. 

Chairwoman WATERS. The gentleman from Missouri, Mr. 

Cleaver, is recognized for 5 minutes. 

Mr. CLEAVER. Thank you, Madam Chairwoman. 

Mr. Chairman, I think at this very moment, the U.S. Trade Representative is testifying before the Ways and Means Committee. 

And one of the issues they are going to raise is U.S.-China trade 

issues. And according to the U.S. Trade Representative, in 2016, 

about 85,000 workers in Missouri were employed because of our 

trade. That trade is very critical because of the employment. And 

then, in 2017, the Trade Representative reported that about $14 

billion a year in agricultural exports actually promoted the employment situation in Missouri, 85,000 jobs. 

I don’t want you to get into policy, but how do you weigh the uncertainty in trade with the Fed actually trying to create healthy 

monetary policy? 

Mr. POWELL. So, as you know, we have this thing called the 

Beige Book, where we accumulate the comments of our vast array 

of economic and other contacts around the country. And really for 

the last year or so, a principal feature of those comments has been 

uncertainty around trade. We have companies say that they are 

concerned about higher prices, because they are importing materials as part of their product. And some of them saying that they 

are delaying investments of various kinds and hiring of various 

kinds. We can’t really see through to what the effect of it is. Probably at the aggregate level, it is not big. Individual companies, of 

course, can be very much affected. 

So there is a lot of uncertainty out there, and it would be good 

to have trade issues resolved. That said, of course we don’t have 

a role in trade. 

Mr. CLEAVER. Right. 

Mr. POWELL. We don’t advise the Administration, and we don’t 

comment on particular policies, as you indicated. 

Mr. CLEAVER. That $14 billion that comes into our State to support these jobs, much of that comes from my congressional district. 

26 

Saline County, for example, is one of the top spots in the nation 

for the export of beans to China. And the farmers are—just to— 

actually what you just said, the farmers, some of them are even 

saying, ‘‘Maybe we should just leave our beans in the ground. Why 

go through the whole process?’’ 

And even though they have been getting a little compensation 

from the Federal Government, they are saying, ‘‘We want trade, 

not aid.’’ 

And so there is a serious issue. 

But the U.S. deficit and fiscal concerns as it relates to the tax 

bill are something that you have heard us speak about. And, again, 

I want to try to ask a question so that it doesn’t require you to get 

into policy. But it would be interesting to know what the economic 

impact of the tax package has been and may continue to impact 

our economy. Is there any data available that would give us an 

idea about that impact of the tax package? 

Mr. POWELL. I think CBO would be the best source to sort of 

score what is happening to the economy from a particular law. We 

look at the aggregate economy and the effects of the tax package 

are mixed in with everything else that is happening, from our 

standpoint. 

Mr. CLEAVER. Okay. So the Fed wouldn’t speak to that? 

Mr. POWELL. We had estimates, but with a $20 trillion economy, 

we don’t spend a lot of time trying to look back. That is really not 

what we do. We made estimates at the beginning, and I think we 

have adjusted them along the way. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

Thank you, Madam Chairwoman. 

Chairwoman WATERS. Thank you very much. 

The gentleman from Wisconsin, Mr. Duffy, is recognized for 5 

minutes. 

Mr. DUFFY. Thank you, Madam Chairwoman. 

Welcome, Mr. Chairman, it’s good to see you. Just a quick question on insurance before we go to other topics. I think you have indicated that the U.S. insurance regulatory model has provided for 

strong solvency, our insurance companies are well-capitalized, but 

now the IAIS is developing a new international capital regime. I 

think your colleague, Mr. Quarles, indicated that it would be a 

challenge for us to implement that new regime in the United 

States. 

And so my question for you is, as you are part of these negotiations, is the U.S. going to agree to a new insurance capital set of 

regulations, or are we going to provide some pushback and try to 

get formal recognition of our U.S.-based model? 

Mr. POWELL. My understanding is that we are working with that 

group internationally to make sure that whatever they do adopt in 

the end works for our system, which we think is a good system. So 

we are, of course, not going to implement something that doesn’t 

work for us. And we are working with that international group to 

make sure that what is ultimately adopted does work for us. 

Mr. DUFFY. Okay, fair enough. In 2018, you said the U.S. GDP 

growth was what? 

Mr. POWELL. It looks like it is just a tiny bit under 3 percent. 

It might turn out being 3 percent. It might be 2.9 percent. 

27 

Mr. DUFFY. Pretty good. When is the last time we hit 3 percent 

growth for a year? 

Mr. POWELL. 2006, I believe. 

Mr. DUFFY. 2006. So it has been over 10 years. 

Mr. POWELL. Twelve years. 

Mr. DUFFY. I think some other people had indicated that the U.S. 

economy could never hit 3 percent again. What happened? Why are 

we hitting 3 percent? We are pretty long into this recovery, right? 

This is one of the longest expansions that we have had since the 

Great Depression. Fair enough? 

Mr. POWELL. It is one of the longest in U.S. history. 

Mr. DUFFY. So, at the end of the expansion, you should see this 

petering out, but you didn’t. You have actually seen some of the 

highest growth in the whole expansion in over 12 years. What happened? 

Mr. POWELL. Well, it was a good year. There are a lot of things 

that happened. 

Mr. DUFFY. I know it was a good year. What happened? 

Mr. POWELL. Well, a lot of things did. And I think that the tax 

cuts and spending increases, the fiscal package certainly supported 

demand in a meaningful way. 

Mr. DUFFY. So lower taxes actually contributed to growth? 

Mr. POWELL. Yes, they supported demand. I think the real hope, 

though, would be that there would be supply side effects over time. 

And that is something we hope will be big, but that takes longer. 

It takes more time to work its way through the system. 

Mr. DUFFY. And so tax cuts have contributed to 3 percent 

growth. Has any kind of regulatory reform from the Administration 

helped with that growth as well? 

Mr. POWELL. It is really hard to isolate that. That is a question 

that people really struggle with. The way I think about it is we 

really don’t want regulation to be any more costly or burdensome 

than it needs to be to get the job done. 

Mr. DUFFY. And so 3 percent growth. And did you make some 

commentary about the unemployment rates of whites, Latinos, and 

African Americans? 

Mr. POWELL. I did. 

Mr. DUFFY. What are they? Is unemployment higher today, or is 

it lower for those individuals? 

Mr. POWELL. I think for Blacks and Latinos and Latinas, we are 

at historic lows, since the data haven’t been kept for more than the 

last 40, 50 years. You are near historic lows there. 

Mr. DUFFY. So, more people are working. And if we want to look 

at all of the races, everyone is working more, right? 

Mr. POWELL. Yes. The labor market is very healthy. 

Mr. DUFFY. Very healthy. And their wages, did you testify was 

what? Their wages are going down or their wages are going up? 

Mr. POWELL. Wages have been moving up nicely in the last year 

or so. 

Mr. DUFFY. They are making more money, right? 

Mr. POWELL. Particularly for people at the lower end of the labor 

force. 

Mr. DUFFY. So more people are working. More people are making 

more money. And more people I think you indicated with the lower 

28 

education or lower skill sets are making more money. Is that correct? 

Mr. POWELL. Yes, that is right. 

Mr. DUFFY. So I find it fascinating that some of my colleagues 

across the aisle bash the tax cuts. They bash the President and the 

economic policies that have come from this Administration and a 

Republican Congress. But the net end result has been that more 

people work, more people make more money. The economy grows 

at 3 percent. 

And when all those great things are happening for all of these 

Americans, no matter whether you are a Republican or a Democrat, whether you are African American, you are white, you are 

Hispanic, you are Latino, everybody is doing better under these 

policies, but all the same, my friends across the aisle try to tap me 

down as they also bash the President on policies that have helped 

every single American. I think that is shameful. 

I yield back. 

Chairwoman WATERS. Thank you. 

The gentleman from Illinois, Mr. Foster, is recognized for 5 minutes. 

Mr. FOSTER. Thank you, Madam Chairwoman. 

And along the same vein, I think if you look at figure 1 in the 

report that you gave us, you look at the rate of job creation. And 

I think it is remarkable how constant it has been, with no visible 

change as a result of any of the policies of the last 2 years, and 

I think that is the relevant observation there. 

Now, this Saturday, March 2nd, the currently suspended debt 

limit, ceiling on the debt limit is going to come back into effect unless we pass legislation or do something about it. Now, we have 

some runway on various extraordinary measures that can be done 

by the Treasury and others. 

Do you have a feeling, first off, on how much runway we have 

before Congress has to deal with the debt limit, and can you say 

a little bit about what the implications of defaulting on that would 

be? 

Mr. POWELL. I think that there is real uncertainty about when 

the actual date that the government will run out of cash and not 

be able to pay all bills when they are due will come, but it will be 

later this year. It could be late in the summer. It could be in the 

fall. I think it remains to be seen at this point. 

And, I think the main thing is we have never failed to pay all 

of our bills when and as due, and I think that can never happen. 

That is just not something we can allow to happen. I think our 

credit rating and our credit as a country is such an important asset 

that we need to stop short of letting that happen. I think it could 

have very hard to predict but possibly quite bad consequences if we 

were to default on our payments. 

Mr. FOSTER. In the past, when we have come close to defaulting 

and sort of walked up to the cliff on that, what have been the effects to markets, credit ratings, what were the implications for the 

general economy? Any way to quantify that? 

Mr. POWELL. It’s very, very hard to quantify it. I know, in 2011, 

we were downgraded as a consequence of this. And I know that fiVerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI
29 

nancing costs went up for a period right at the height of the crisis, 

and there was significant cost imposed on the taxpayer for that. 

Mr. FOSTER. Now, a few days ago, the President proudly announced that he had reached a currency manipulation deal with 

China, which I understand you indicated you consult with the Administration on this. Have you been told what that deal is? Has the 

Federal Reserve been informed? 

Mr. POWELL. I think our staff is—basically, our point is—we 

don’t handle currency. That is really the Treasury’s job. The thing 

that is our concern is that we be allowed to conduct monetary policy with a free hand. 

Mr. FOSTER. But have you been informed of what that deal is? 

Mr. POWELL. At the staff level, I think people are in contact and 

made sure that that limited interest has been addressed. 

Mr. FOSTER. Was that a yes or no or— 

Mr. POWELL. Yes. 

Mr. FOSTER. So you have been informed. So people in the Fed 

know what that deal is, although I understand you might not— 

Mr. POWELL. As it relates to our interest, I believe so, yes. 

Mr. FOSTER. Okay. Are there other tail risks that you think we 

should be worrying about, things like hard Brexit? What are your 

top few sources of tail risk that you think we should be thinking 

about in Congress? 

Mr. POWELL. I think the outlook for the U.S. economy is a positive one. And I think that I would start with slowing global growth. 

We have seen global growth, particularly in China and Europe, 

through the course of 2018 and right into 2019. Growth in 2017 

was a real tailwind for the United States economy. It was synchronized global growth around the world. 

As the global economy slows outside the United States, it becomes a headwind. So we are feeling that. Brexit is just an event, 

and it may pass without much implication for the United States, 

but it is unprecedented and so it is hard to say exactly what the 

implications—of course, we are monitoring it very carefully. 

Mr. FOSTER. Now, late last year, the comment period closed on 

considerations you had for developing a real-time interbank settlement system. And can you say a little bit about—just give us an 

update on what your current thoughts are on that, the schedule we 

might be looking at? 

Mr. POWELL. Yes. We put this proposal out for comment. We 

have gotten a lot of comments. We are reviewing them. And the 

idea is that central banks can really provide immediate final settlement, real-time payments, and really— 

Mr. FOSTER. And some do internationally. 

Mr. POWELL. Many do internationally. And the question is, 

should we take this on? And I think it is a question we have to 

evaluate under our existing statute, and we will take our time in 

doing that. We have to conclude that it is economically viable, that 

we can charge for it in other words, and also that it is something 

that the private sector can’t adequately handle. 

So we are going to look at that. We think, clearly, it could support real-time payments, which we think would be a positive thing. 

On the other hand, it has to work under our statute. 

Mr. FOSTER. Thank you. 

30 

Mr. POWELL. Thank you. 

Mr. FOSTER. I yield back. 

Chairwoman WATERS. The gentleman from Ohio, Mr. Stivers, is 

recognized for 5 minutes. 

Mr. STIVERS. Thank you, Madam Chairwoman. 

Chairman Powell, thank you for being here. I want to follow up 

on some questions that the gentleman from Wisconsin, Mr. Duffy, 

was talking to you about. Obviously, 3 percent economic growth, 4 

percent unemployment, real wage growth is growing. It was a pretty good year for the American people and the American worker, 

correct? 

Mr. POWELL. Yes, it was a good year. 

Mr. STIVERS. One of the things that you talked about with Mr. 

Duffy as a result of the tax cuts, one of the things that we would 

all like to see is some supply-side growth over time. Can you help 

us understand what that would mean? It would mean capital investment, which would grow productivity and then make the economy grow even faster, correct? 

Mr. POWELL. Yes. I think a couple of things. The first would be 

the one you mentioned, which is if you give more favorable treatment to capital expenditures in the Tax Code, over time you ought 

to see more capital expenditures. Capital expenditures drive productivity, and productivity is what drives the rising of living standards. 

But I think with supply-side initiatives, it takes time. It has to 

work its way into the thinking of businesses and into the capital 

stock, and I just think—we hope those effects are large, but we will 

have to be patient to see them come in. There is also a smaller possible effect in lower tax rates on individuals, which could call forth 

more labor supply. So these are highly uncertain supply-side effects 

and they will take longer to emerge, but we hope— 

Mr. STIVERS. And can I ask you about the beginning parts of 

what we are seeing on that? We have seen new people enter the 

labor market in the last 6 months, who had given up on working 

or staying in the market and were starting to leave. Isn’t that correct? 

Mr. POWELL. Yes. The test of—so what we don’t know is how 

much of that is cyclical, in other words, because the labor market 

is so tight right now. 

Mr. STIVERS. And the second question, we have seen capital expenditures go up in the last 6 months, but we have not seen those 

pay off yet? 

Mr. POWELL. Well, we saw—so capital expenditures were very 

strong in the early part of 2018. They petered out a little bit, and 

it may be because of— 

Mr. STIVERS. But in the total year, they were up, correct? 

Mr. POWELL. Yes. And we expect them to continue to be at a 

healthy level. 

Mr. STIVERS. Great. And so hopefully what we have done on tax 

cuts will continue to pay dividends into the future, but I wanted 

people to understand how that works. 

Second, quickly on monetary policy, it seems that there has been 

a change in the way that monetary policy has worked. The Federal 

funds markets for non-GSEs is at a 40-year low of volume. And so 

31 

it seems that the interest on excess reserves is getting to be a more 

important part of what you do. Can you talk about that shift since 

2008? 

Mr. POWELL. Yes. So pre-crisis, there was a small amount of reserves, and we could manage the Federal funds rate by making relatively small adjustments in the quantity of reserves. In the current era, where the demand for reserves is so high and, frankly, 

a little bit volatile too, trying to do that, trying to manage scarcity 

in that kind of a very large pool, we would have to have a very 

large presence in the markets on an ongoing basis. 

We don’t think that is a good—that is not something we—so we 

think—we have decided to continue to use our existing framework, 

which is to use our administered rate, administered. So the interest 

on excess reserves is very fundamental for the way we manage our 

policy now, and it seems to work very well. 

Mr. STIVERS. Thank you. Great. And two more quick questions. 

One is, hopefully you can answer quickly, but there is a new sort 

of focus on modern monetary theory that says taxes can better 

fight inflation than monetary policy. Do you have a basic philosophical view of that? 

Mr. POWELL. So that aspect of it would be a complete change. I 

would say the reason why the Fed does that is that we can move 

quickly with our tools. And to give the legislature that responsibility, in principle, you could do that, but we have a system that 

has lots of checks and balances. 

Mr. STIVERS. So let’s assume for a second those two tools work 

equally. Who can move faster, the Federal Reserve or Congress? 

Mr. POWELL. We can move immediately. 

Mr. STIVERS. Much faster. Thank you. And that is assuming they 

are equally effective, which I would argue that monetary policy is 

far superior as well. 

Quickly, one last thing on real-time payments, something you 

said that I hope you will stay focused on is whether the free market and the private sector can actually provide a real-time payment 

system, because if they can, there is no need for the Federal Reserve to do it. 

Mr. POWELL. That is part of the thing we have to look at under 

the Monetary Control Act. 

Mr. STIVERS. Thank you. 

Mr. POWELL. Thank you. 

Mr. STIVERS. I yield back the balance of my time, Madam Chairwoman. 

Chairwoman WATERS. Thank you. 

The gentleman from Washington, Mr. Heck, is recognized for 5 

minutes. 

Mr. HECK. Thank you, Madam Chairwoman. 

Mr. Chairman, I always ask the same question of the Chair of 

the Federal Reserve Board, which is, when does America get a 

raise? I may have to revise that slightly, because, obviously, we are 

beginning to see some evidence of that, which I think is an indication of the full employment objective mandate that you have. So, 

good job. In fact, I commend you for your hitting the patience button of late. 

32 

But I am looking at these payroll gains of, I think you indicated 

an average of north of 200,000 jobs added every month, and I don’t 

think that yet looks like full employment, month in and month out. 

And, as Minnesota Fed President Kashkari has noted, the share of 

income going to labor isn’t really reversing its long-term slide. 

So, when the FOMC is being patient and watching the data, 

what are you looking for in the labor market? How much slack do 

we have left? 

Mr. POWELL. We look at a very broad range of indicators. With 

inflation, we can look at one indicator, and, actually, we think central banks control that. The labor market is different. So we look 

at the unemployment rate. We also look at labor force participation. We look at wages. We look at job openings. I could go on. 

There are 20 or 30 things. 

Mr. HECK. And how much slack do we have left? 

Mr. POWELL. You never know precisely, and you are learning in 

real time. So I think we have learned from the performance of 

labor force participation over the last few years and particularly 

the last year that there are more people out there who will come 

back into the labor force. And that creates more slack. 

Mr. HECK. More slack to come? 

Mr. POWELL. We hope so. We don’t really know. There is a longrun aging trend in our country by which, you know, my generation 

is now retiring. And so you are going to have lower labor force participation compared to what you would have had. But the very 

strong labor market seems to be pulling people in and holding people in from leaving. So it is a very, very positive development. We 

hope it continues. 

Mr. HECK. So, once we get to full employment, the definition of 

which you will acknowledge has been a moving target on the part 

of the Fed, are you willing to let wage growth climb to 4 percent, 

either to begin to recover some of the decline that we have experienced over labor’s share of income or, alternatively, an idea that I 

don’t think is discussed often enough, to see if tight labor markets 

themselves can improve or boost productivity? Are you willing to 

let wage growth hit 4 percent? 

Mr. POWELL. We are really targeting price inflation, not wage inflation. So, wages should equal to it in the aggregate. 

Mr. HECK. Okay. 

Mr. POWELL. Inflation plus productivity. 

Mr. HECK. As a follow-up, I have a couple of charts. Do we have 

them? These are your two mandates, obviously, full employment 

and price stability. You referenced the price stability. My second 

slide focuses just on it. So can we go to the second slide or not? 

The second slide. I am burning daylight. Evidently, we can’t go to 

the second slide. 

This shows the record over the last 25 years with respect to the 

Fed’s price stability target of 2 percent. I think what is important 

to note is that we have underperformed 85 months versus overheating 2 months—213 months within a half a percent of target, 

and good on you for that as well. But, clearly, the long-term record 

of the Fed has been to underperform. 

So there is a relationship between wage growth and price stability. And on the issue of price stability, the Fed has been underVerDate Nov 24 2008 17:06 Jul 25, 2019 Jkt 095071 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\HBA058.000 TERRI
33 

performing way more, a multiple of I don’t know how many, than 

overheating. And this speaks, obviously, to the issue of, when are 

we going to get wage growth that begins to compensate for years 

and years of decline? 

I know you are engaged in a healthy exercise to review the tools 

and communications. Frankly, sir, what I would hope is that it 

would be taken into account, frankly, some more transparent advancing of the historic record as a means of informing policy going 

forward because I think this data speaks very clearly that we have 

a need to place a greater emphasis on wage growth and the factors 

that it affected. 

Thank you, Madam Chairwoman. 

Mr. POWELL. If I can just say, you are absolutely right about the 

inflation data, and I think a number of us have commented on that 

recently. So I like your charts. 

Chairwoman WATERS. Thank you. 

The gentleman from Kentucky, Mr. Barr, is recognized for 5 minutes. 

Mr. BARR. Chairman Powell, welcome back to the committee. 

And I will note that when you were first confirmed, you did make 

a commitment to improve Fed communications. And I want to compliment you and thank you for our conversations. And I think you 

have fulfilled, by and large, that commitment to improve Fed communications, but I suppose it is my job to hold the Fed accountable 

and so I am going to press you on a few issues here today, the first 

of which is the Fed’s negative net worth. 

The former CEO of the Chicago Federal Home Loan Bank, Alex 

Pollock, recently observed that the Federal Reserve is insolvent on 

a mark-to-market basis. You may have read his commentary on 

this. Pollock’s analysis is that, as of the end of September, the Federal Reserve had $66 billion in unrealized losses on its portfolio of 

long-term mortgage securities and bonds. This equates to 170 percent of the Fed’s capital and means that on a mark-to-market 

basis, the Fed had a net worth of negative $27 billion. If interest 

rates continue to rise, the unrealized loss will keep getting bigger 

and the mark-to-market net worth will keep getting more negative. 

Chairman Powell, does it matter that the Federal Reserve is insolvent? 

Mr. POWELL. No, it doesn’t matter at all for any purpose. The unrealized losses have no effect whatsoever on our ability to conduct 

monetary policy. You will recall that we have been giving close to 

$100 billion every year in our profits back to the Treasury at the 

end of the year or during the course of the year. 

So, really, in no sense are we functionally insolvent. 

Mr. BARR. Does the mark-to-market negative net worth make it 

more difficult to raise the Federal funds rate? 

Mr. POWELL. Absolutely not. 

Mr. BARR. Okay. Next question is another discussion on the balance sheet and the balance sheet reduction program. In your testimony, you stated that the Fed had made ‘‘substantial progress on 

reducing reserves’’ and that the Fed is ‘‘prepared to adjust the balance sheet normalization program.’’ This does seem to be a shift 

from your comments in December when you said you believed that 

34 

the runup of the balance sheet has been smooth and has served its 

purpose, and I don’t see us changing that. 

I think I heard you explain that banks’ demand for reserves have 

increased, and I recognize that currency has doubled from about 

$850 billion to $1.7 trillion, but please explain what caused the 

shift in the Fed’s balance sheet reduction plan and give us a better 

understanding, if you can, of the final destination between the $4 

trillion size right now and the $1.7 trillion currency level. 

Mr. POWELL. In our November meeting—I should go back another meeting. We began a series of meetings to engage on just this 

set of issues and what is balance sheet normalization going to look 

like? And, I didn’t want to get ahead of the committee in December. 

And also, I think the markets became much more sensitive to these 

issues. They had been pretty insensitive to them for some years. 

So the truth is we have now had three consecutive meetings on 

the balance sheet, and we have worked out, I think, the framework 

of a plan that we hope to be able to announce soon that will light 

the way all the way to the end of balance sheet normalization and 

that will result in the end of asset runoff sometime later this year. 

Mr. BARR. Well, thank you, and thanks for that explanation. I 

would just urge you and your colleagues to remain mindful of the 

fact that there are critics out there who continue to express concern 

about the size and the composition of the balance sheet as remaining fairly unconventional and the risk that that could pose. 

My final question is related to a regulatory matter, the G-SIB 

surcharge. In July, I sent a letter with 28 of my colleagues to Vice 

Chair Quarles regarding the G-SIB surcharge. We expressed our 

concern in that letter that that surcharge puts U.S. banks at a disadvantage when it comes to international competitiveness. The surcharge is more stringent than the one adopted by the international 

Basel Committee and was adopted before many of the measures to 

increase resiliency and resolvability were fully implemented. 

Yesterday, before the Senate Banking Committee, you stated 

that the financial system has much higher capital, much higher liquidity, better risk management, and the stress tests have really 

helped banks understand managing their risks, and you said that 

our banking system is strong and resilient. 

Given these enhancements to resiliency and resolvability, would 

it be appropriate to reexamine the calculation of the G-SIB surcharge since it was originally formulated in 2015, prior to the 

aforementioned improvements? 

Mr. POWELL. I think that the overall level of our capital, particularly at the largest firms, is about right. I am open to evidence that 

there are problems with that. I don’t see U.S. banks having difficulty competing, particularly internationally. They seem to be 

competing very well. They seem to be profitable. Their stock prices 

seem to be fine. 

But in terms of the surcharge in particular, it is one of a bunch 

of pieces, but I would say the overall level I think is just about 

right. 

Mr. BARR. I appreciate your testimony. Thank you. 

Chairwoman WATERS. The gentleman from Illinois, Mr. Casten, 

is recognized for 5 minutes. 

Mr. CASTEN. Thank you, Madam Chairwoman. 

35 

And thank you, Chairman Powell. You mentioned in your introductory remarks that a significant amount of the recent growth we 

have seen is due to consumer spending and business investment, 

and I would like to focus on the second of those and specifically on 

the impact of energy prices. I want to read a couple of quotes from 

you in a recent article. 

The chief economist at UBS Securities has said that the increase 

in oil prices was responsible for much of the rebound in fixed investment in 2017, noting specifically how oil and gas shale plays 

now make us very dependent on the price of oil to drive U.S. fixed 

investment. Alexander Arnon of the Penn Wharton Budget Model 

has gone further, to say that firmer oil prices ‘‘accounted for almost 

all of the growth in investment in 2018.’’ The article goes on to 

mention how several of the Fed offices have been concerned with 

the softening of oil prices and what it reflects. 

The first question is, do you agree that the rise in oil prices over 

the prior year and a half have been a meaningful contributor to 

capital investment in the United States? 

Mr. POWELL. Yes. As oil prices go up, that makes it more economic for more drilling and you see more capital expenditure 

(CapEx.) I don’t know that it accounts for—certainly, that was very 

much the case in 2017. I would want to go back and look at 2018. 

I thought that CapEx went up more broadly in 2018. 

Mr. CASTEN. Okay. Well, the oil prices certainly started to fall late last year, I think from $70 and now they are down in the 40s 

or so, I believe. 

You had mentioned in your forward growth forecast that you expect inflation to be lower than planned, in part, because energy 

costs are down and so you are sort of adjusting for energy there. 

Does that not apply in reverse, that if we were looking at prior 

growth being higher, are we treating energy cost fluctuation the 

same when we look at explanations of prior growth as we are when 

we are discounting inflation growth going forward because of energy price volatility going the other direction? 

Mr. POWELL. I’m sorry; I didn’t get your question. Say that 

again? 

Mr. CASTEN. So, if I understood your commentary correctly, you 

were saying that going forward, inflation is going to be below target, but that is largely driven by energy. And if I am following 

what is written here, the prior growth was driven in part by energy 

prices being more positive. 

So are we treating the impact of energy prices on the economy 

the same in a positive direction as we are in a negative direction? 

Mr. POWELL. Yes. Yes, we are. Sorry. So, if oil prices are flat, 

then they are not adding anything to inflation, and if they grow at 

2 percent—so that is why we have core. We obviously exclude energy and food because they are volatile. We look through to the 

core for that reason. 

Mr. CASTEN. Are we also factoring the impact of those prices on 

business investment? 

Mr. POWELL. More broadly, yes, absolutely. 

Mr. CASTEN. Madam Chairwoman, I would ask unanimous consent to enter this article into the record. 

Chairwoman WATERS. Without objection, it is so ordered. 

36 

Mr. CASTEN. My final question is: I just came here from—I am 

bouncing between two hearings today in the Science Committee 

about ocean sea level rise and, again, ties to the energy markets. 

I listened to scientists explain how over the course of the next century and much sooner than that based on current CO2 levels and 

based on current temperatures, we have very realistic expectations 

of 3 to 8 feet of sea level rise, with fairly significant impacts on the 

elimination of coastal communities, the collapse of housing, and 

significant migration inland. 

As we think about financial markets going forward and, in particular, 30-year mortgages, are we factoring that into the value? 

When I put that question to them, they said that there is going to 

be a significant diminution of that value long before the houses are 

flooded because it is going to be pretty obvious what is coming. 

My question is, as you think about forward rates and how we 

think about housing policy in general, how should we be thinking 

about what at this point is largely inexorable? 

Mr. POWELL. It is a good question. So, in our supervision of financial institutions, we do take into account, for example, if you 

are a bank that is lending, that is in the Gulf area, let’s say, and 

you are subject to climate events—or not climate events, but 

weather events and natural disasters, then we are going to supervise you to make sure that you have the ability to understand and 

manage those risks as part of your business. That is how it enters 

into—that is how this subject enters into our work. 

I think in terms of broader macroeconomic consequences, it is 

hard to do, it because it is such a long run. You are talking about 

climate change, right? 

Mr. CASTEN. My question is the interest rate on a 30-year mortgage in an area that is on the coast and in any reasonable scenario 

may well be underwater before that mortgage is fully recovered. 

Mr. POWELL. Again, we supervise our banks to have them take 

into account that risk of having—but do we have it exactly right? 

I am sure we don’t. 

Mr. CASTEN. Thank you, Chairman Powell. 

Chairwoman WATERS. The gentleman from Colorado, Mr. Tipton, 

is recognized for 5 minutes. 

Mr. TIPTON. Thank you. 

Chairman Powell, it’s good to see you again. 

The U.S. Chamber of Commerce released a report last fall that 

found that bank lending to small businesses has not kept up with 

the needs of the economy, suggesting small business loans remain 

down 13 percent from 2008. 

The report goes on to point out that several regulatory actions 

have contributed to the slow growth in small business loans and 

particularly pinpoints that U.S. regulators have imposed substantially more stringent standards on our largest institutions than 

what is required under the Basel III international standards. 

As a former small business owner out of Colorado, I can testify 

that the ability of a small business to be able to access capital is 

vital not only in my district but nationwide. As you have acknowledged, the banking system today is well-capitalized and highly liquid, and there have been significant improvements to the risk management and resolvability. 

37 

Given that, wouldn’t it be appropriate to recalibrate some of the 

international standards that have been gold-plated in the U.S. so 

that the excess capital tied up by those regulations can be deployed 

back into the economy to support small businesses and/or consumers? 

Mr. POWELL. As I mentioned, I think that the capital levels we 

have in our banks are about right, and I am open to evidence that 

that is not the case. But I do see our banks competing successfully 

and being profitable and also being resilient to the eventual 

downturns that will inevitably come. So I think I would like to see 

more evidence before we start lowering capital standards. I think 

we ought to hold them where they are for now. 

Mr. TIPTON. Okay. I appreciate your comments on that. It is my 

understanding that we had not only met but exceeded under Federal regulations the Basel standards. Our European counterparts 

have not done the same. And the goal is is to be able to make sure 

that we are keeping the robust economy and job growth going and 

opportunity and hope that is something that you will continue to 

keep in mind. 

Mr. Chairman, we have talked a lot today about some of the 

CECL requirements that are going to be coming into place with the 

accounting method, and I do want to express that I have heard concerns that implementation will be expensive and that inevitable 

mistakes are going to be made after the implementation that will 

also be expensive. I have also heard concerns about how CECL 

standards will interact with the ongoing stress testing. 

Mr. Chairman, with the implementation of CECL on the horizon, 

is the Fed preparing to incorporate CECL into its supervisory 

stress tests before it applies it to all banks in 2022? 

Mr. POWELL. I think the answer is, we are not incorporating 

CECL at least for the next couple of cycles in the stress tests. The 

stress tests are already forward-looking, of course. They have forward-looking losses that are assumed to happen, so eventually we 

will incorporate it but not for the time being. 

Mr. TIPTON. Do you feel that the regulators are well positioned 

giving some of the implementations, inevitably some of the challenges that are going to come out of that implementation, to be 

able to respond in a timely manner? 

Mr. POWELL. To respond to? 

Mr. TIPTON. Some of the challenges that are going to be paced 

by the cost and the implementation of CECL. Are they going to be 

able to respond? 

Mr. POWELL. Ah, CECL. Sorry. Yes, I do. I think we are alert to 

what we are hearing. And we—again, we have put—we have given 

our institutions a 3-year phase-in period so they can—and they 

have also had some years to study and understand it. And, we have 

worked with smaller institutions so they know they don’t have to 

have a department of CECL implementation, try to get that done 

in an efficient way. 

Mr. TIPTON. Well, I appreciate that. And I know that you are 

going to be keeping an eye on it, and I would like to encourage you 

just for the impacts potentially on the industry and on our economy 

just to monitor the subject. 

38 

Mr. Chairman, in your testimony, you did also note something 

that is important for my part of the world. There is a noticeably 

lower employment rate in terms of the communities in rural areas 

compared to the urban areas, and that gap has widened over the 

past decade. 

Has the post-crisis regulatory environment for community financial institutions impacted job creations in rural communities? 

Mr. POWELL. I don’t think that is really the story. It seems to be 

more loss of manufacturing jobs. If you read the box, there really 

isn’t—I wish there were a clear answer at the end of the box, you 

get there and it says, okay, here is why, and here is what we can 

do about it. It is not that simple. 

So essentially, the unemployment rates in rural communities and 

metropolitan areas haven’t diverged that much. What has diverged 

is the labor force participation, and it seems to be—it possibly 

could be tied to lower education levels in rural areas, but that 

doesn’t seem to explain much of the difference. It may be that it 

is more about loss of manufacturing, which is more likely to take 

place away from metropolitan areas. 

We are still looking at why, but it is a significant disparity that 

emerged really after the crisis. And if you go back a ways, rural 

areas had higher participation and lower unemployment. So it is a 

curious development and one that we are calling to your attention 

and trying to understand. 

Mr. TIPTON. I yield back. 

Chairwoman WATERS. The gentlewoman from California is recognized for 5 minutes. 

Ms. PORTER. Thank you, Madam Chairwoman. 

Mr. Powell, thank you for being here today with us and for your 

patience during what I know is a long hearing. 

I wanted to ask you about the hedge fund working group that the 

Financial Stability Oversight Council (FSOC) formed a few years 

ago. Can you describe whether this working group is actually, in 

fact, doing any work, and the nature of that work, and when we 

can expect to see any work product? It has been a little over 2 

years since we have had any information from that working group, 

and I would like to see its results and what it is doing. 

Mr. POWELL. I will have to look into that for you. I am sure that 

we have a number of staff who work full time with the FSOC, or 

part time at least with the FSOC, and I can get back to you on 

that. I don’t personally know what that working group is doing. 

Ms. PORTER. Okay. So in your role as a member of FSOC, I 

would appreciate your following up with that working group— 

Mr. POWELL. I would be glad to. 

Ms. PORTER. —and getting a briefing for yourself and sharing it 

when you can on what they are doing. 

As you know, no banks failed last year. The period in American 

history when the nation went the longest without a single bank 

failure was across 32 months, from 2004 to 2007, just before the 

financial crisis. Then we had three banks collapse in 2007; 25 

failed in 2008; 140 failed in 2009; and 157 banks failed in 2010. 

Since the FDIC was created in 1933, until that run-up in the financial crisis in 2004, not a single calendar year had passed without 

a bank failing. 

39 

Do you agree that a long stretch without any bank failures can 

lull the public and even financial market experts and regulators 

such as yourself into a false sense of security? 

Mr. POWELL. I think really we are talking about human nature 

here, so, yes, I do think so. I would say though, if I may add, that 

the banking system is now so much better capitalized and more resilient than it was. And we have made sure to kind of allow for 

that aspect of human nature, I think, by making a system that is 

much more resilient to shocks. 

Ms. PORTER. So I appreciate your point about the importance of 

making sure the system is correctly capitalized, but is the Fed not 

reducing loss absorbing capital requirements for big banks? 

Mr. POWELL. No, we are not. 

Ms. PORTER. And have you changed the capital holding requirements and the leverage ratios and the measures that are used in 

the stress tests, especially for banks that are under the $250 billion 

threshold? 

Mr. POWELL. Well, I think overall we have raised capital standards. We have effectively doubled the amount of capital in the largest institutions. 

Ms. PORTER. Since when? 

Mr. POWELL. Since before the crisis. 

Ms. PORTER. Oh, okay. So I am speaking about in the most recent couple years. What has the direction been generally in terms 

of capital holding? 

Mr. POWELL. It has been to hold capital right where it is. I think 

we—the Fed’s view has always been that we don’t want the leverage ratio to be the binding. We want it to be a high and hard backstop. We don’t want it to be binding. And it had become binding 

at its current level so we lowered it a bit. The actual amount of 

capital that will leave the system, including the holding companies, 

is very, very small. 

Ms. PORTER. So, in fact, in the most recent couple of years we 

have, in your view, moderately reduced the capital holding requirements? 

Mr. POWELL. It is actually de-minimus, I would say. 

Ms. PORTER. Okay. But we are going slowly somewhat down? 

Mr. POWELL. No. I like to see that—I think we are holding the 

level where it is. The leverage requirement, it is far less than 1 

percent of capital. It is a relatively tiny amount of capital that 

leaves the system. Some of it can leave the bank to go to other 

parts of the holding company, but it doesn’t get out of the holding 

company. And from—other than that, we are absolutely holding the 

line on capital. It is not in our thinking that capital levels are too 

high. 

Ms. PORTER. And with regard to stress testing, which is one of 

the ways that we assess risk, my understanding is that the Fed 

has recently advanced proposals to reduce the stress testing standards. 

Mr. POWELL. No, I wouldn’t say that is right, no. 

Ms. PORTER. Can you describe then for me and the committee 

what have been the changes and then maybe we can characterize 

them differently. But I would love to hear from you about that. 

40 

Mr. POWELL. We have tried to improve transparency without— 

the whole idea of a stress test is it should be stressful and in some 

sense surprising, and the scenarios change every year and that 

kind of thing. At the same time, we have tried to be more transparent about the way we look at losses and that kind of thing. 

I think the banks make the point that, you know, this is our 

binding capital requirement for the biggest banks and we ought to 

have some transparency in terms of what it is going to be so that 

our own capital isn’t volatile year to year. So we have tried to address those concerns but without undermining safety and soundness and without at all limiting the bindingness of the stress test. 

Ms. PORTER. Okay. Thank you very much. 

I yield back. 

Chairwoman WATERS. The gentleman from Texas, Mr. Williams, 

is recognized for 5 minutes. 

Mr. WILLIAMS. Thank you, Madam Chairwoman. 

And, Chairman Powell, thank you for coming to the committee 

today. We always appreciate having you here. 

And I would like—I have started asking the witnesses who come 

before us if they are socialists or capitalists. And I can adjust my 

questions accordingly when I hear that, but with you, I know what 

you are. You are a strong capitalist, and I appreciate you for that. 

Briefly, I am going to touch on—as you probably remember, I am 

a car dealer. I have been in the car business for 50 years, and tariffs have us really concerned right now. But besides tariffs, which 

you have no control over, we are concerned about interest rates. I 

come back from a 20 percent—I was in business at 20 percent, so 

I know what interest rates can do, and in my lifetime 6 percent has 

always been a good rate. 

The problem is today balances of the cost of goods sold are very 

high, much higher than they were in 1981 at 20 percent. We are 

concerned about the interest rates. Sometimes you can tweak the 

interest rate a little bit and it could change a person’s payment on 

a car or whatever, 50 bucks, it could put them out of the market. 

We are a consumption-driven nation and people want to buy. So 

I merely take advantage of you being here today to just ask you 

to be generous or be careful when you start raising the interest 

rates because it can affect the economy. And in my business, if people can’t buy, we cut orders and we cut orders. The plant has to 

lay people off and so forth. So it does trickle down. So interest rates 

are a real concern that we have, that—all of us at finance inventories, and I appreciate you being gentle to us when you consider 

raising those rates. 

Also, we need to reward people for going back to work. We need 

to get more people contributing to the economy, and we cannot 

have our citizens making rational economic decisions to stay on the 

sidelines of this booming economy because our government is paying them to do so. 

The Monetary Policy Report says that the labor force participation, which we have talked about today, grew by only one-fourth of 

a percentage point since June even though there are 7.3 million job 

openings. 

41 

So my question to you is, are we creating an economy that encourages people to sit in the dugout rather than get out and play 

the game? 

Mr. POWELL. Well, clearly, we have a problem with labor force 

participation, and I think there are a range of opinions and views 

and research about why that is. I do think there are some disincentives to work. For example, if you—it is not that our benefits are 

that generous, but it is in some cases you lose all of your benefits 

when you go back to work. And so it becomes a pay cut in effect 

even though the benefits themselves have lost value in real terms 

over time. So that is an important thing. 

I also think it is just—it is people with relatively low education 

and skills. It is a lot of young males. It is certainly opioids. Low 

labor force participation is a function of many things, but many 

things that I think would be able to be addressed by the kinds of 

things that Congress can do as opposed to what we can do. We can 

run a strong labor economy, and I think we have that now, but to 

sustain that over time it needs more active measures. 

Mr. WILLIAMS. Well, I can tell you as an employer, we are looking for people to work. There is no question about it. 

Mr. POWELL. Yes. 

Mr. WILLIAMS. Next question, it seems like some of my colleagues on the committee believe that banks bringing in more profits is a bad thing. Well, just because we can’t turn a profit up here 

in this business, it doesn’t mean that the private industry has to 

suffer along with us. 

When a bank is more profitable, there is more money to lend to 

small businesses like me and hire more people like we do and ultimately grow our nation’s GDP. We have a slide that keeps popping 

up there that says record profits for banks, so I personally think 

that is a good slide. We should show that more. 

So, Chairman Powell, do you believe that a sector’s profitability 

should be used as justification for more regulation? 

Mr. POWELL. I think it is important for businesses to be profitable. It is a good thing. And for banks it is how you accumulate 

capital. It is the reward for servicing your companies, your customers well. 

Mr. WILLIAMS. ‘‘Profit’’ is not a dirty word. It never has been. 

Next question, we need our economy to let the private sector continue to build wealth for individuals. And the government—the 

people in government don’t understand the government can help 

create a job, but it is the private sector that creates net worth. And 

the Tax Cuts and Jobs Act took a big step in allowing businesses 

to keep more of their hard-earned money and invest it how they 

see fit. 

The other major step that was taken last Congress was the passage of Senate bill 2155, which will continue to roll back the overly 

burdensome regulations that have been hurting small businesses 

and Main Street for years. They are finally seeing a little respite 

and they are able to do business. 

So do you believe the Federal Reserve has been coordinating effectively with the other Federal regulators to implement this muchneeded regulatory relief bill? 

42 

Mr. POWELL. I do. We are implementing it. We have a lot of resources, and there is a lot to do under S.2155, as you know, and 

as I mentioned yesterday, it is our highest priority. It is the biggest 

thing we are working on right now. 

Mr. WILLIAMS. Thank you for being here, and I yield back. 

Chairwoman WATERS. Thank you very much. And I am pleased 

you like our slide. 

The next person that we have up is the gentleman from Illinois, 

Mr. Garcia, for 5 minutes. 

Mr. GARCIA OF ILLINOIS. Thank you, Madam Chairwoman, and 

ladies and gentlemen of the committee. 

Chairman Powell, when you served as Governor overseeing the 

Reserve Banks, you sent the Reserve Banks an annual letter suggesting candidates from a range of labor and community groups. 

Why do you think it is that your suggestions have largely been ignored, and why is the Fed still sluggish in choosing and electing 

class B and C directors from backgrounds outside of business and 

the Wall Street community? 

Mr. POWELL. Actually, Congressman, I think we have made pretty good progress there. We now have, I guess, it is 24, I think, community interest—community group people, and I think six of the 

Reserve Banks have a person from labor on the board. So we have 

made real progress there. 

And I think also, I think our record on diversity for the B and 

C directors is actually an excellent one and a record that I am 

proud of. In the last 5 or 6 years, we have really made quite big 

strides there. 

Mr. GARCIA OF ILLINOIS. Well, Chicago for one, I think, has been 

a leader in that regard. The Chicago Fed has one of the most diverse boards—as I understand it, it is the only Reserve Bank to 

have one director from a labor background, one director from an 

academic background, and one director from a community organization on its board. 

As a matter of fact, two women who happen to be African American and one Latino comprise that diversity in Chicago. Have you 

spoken with anyone in Chicago at the Chicago Fed about how they 

have been able to surpass other Reserve Banks in racial and occupational diversity, and if so, what are the best practices that they 

have shared? 

Mr. POWELL. We have an office that deals with the Reserve 

Banks around this particular issue, and I think—I actually would 

say that the progress across the Reserve Banks has been quite 

broad. I know that the—the statistic you are referring to is including an academic as well, and there are not as many academics. 

Also with many labor people, you have to give up all political activity to go on our board. I think that is hard for a lot of senior 

labor people, so it is a challenge for us to find—still we do though 

and we focus very hard on doing that. So, yes, we talk to Chicago, 

but, I wouldn’t want to say the other Banks haven’t made good 

progress too. I believe they have. 

Mr. GARCIA OF ILLINOIS. Thank you. 

On the subject of mergers and market concentration, switching 

gears briefly, last year the Office of the Comptroller of the Currency issued an advance notice of proposed rulemaking around the 

43 

Community Reinvestment Act. Fourteen state attorneys general, 

including the former Illinois attorney general, issued a public comment on the OCC’s proposal expressing concern that the proposal 

might soften the conditions under which a bank’s violations of consumer protection laws would cause it to be downgraded. 

According to the attorneys general, ‘‘Such a minor downgrade 

will not impact regulators’ review of their mergers and acquisitions, the only real stick for the CRA compliance.’’ Do you share the 

concern that these attorneys general express that the rare circumstances where the Fed presently steps in to interfere in a 

merger might be undermined by the OCC’s proposal? 

Mr. POWELL. I wouldn’t want to comment on the OCC’s—on that 

proposal, but I will just say, we haven’t changed our policy on CRA 

and mergers. And it still is that we—it is one of the things we look 

at. And we want companies to have satisfactory or outstanding 

CRA ratios who are presenting merger applications. 

Mr. GARCIA OF ILLINOIS. On the merger review, is it correct that 

about 97 percent of all mergers are approved and that over the 

past decade approximately 450 such mergers have been approved? 

Do you expect that to rise even more so? 

Chairwoman WATERS. The gentleman’s time has expired. 

Mr. POWELL. May I respond, Madam Chairwoman? 

Chairwoman WATERS. Yes, you may. 

Mr. POWELL. Sorry. I have to look at the numbers. Many merger 

proposals are withdrawn when we raise questions about them. 

Most often, you don’t wind up actually turning down a proposal. 

People just withdraw it because they can see it is not going to be 

approved. And there is a fair amount of that. It is way more than 

3 percent, I believe. 

Mr. GARCIA OF ILLINOIS. Do they withdraw because of CRA? 

Mr. POWELL. They withdraw because they know—yes, I mean, 

among other— 

Mr. GARCIA OF ILLINOIS. Compliance. 

Mr. POWELL. Well, they withdraw because they can see that this 

is either going to take a really long time or it is probably not going 

to be a successful effort. So—or for other reasons, but in any case, 

we haven’t changed our policy on CRA. 

Mr. GARCIA OF ILLINOIS. Thank you, Madam Chairwoman, for 

your indulgence. I yield back. 

Chairwoman WATERS. Thank you. 

The gentleman from Arkansas, Mr. Hill, is recognized for 5 minutes. 

Mr. HILL. Chairman Powell, welcome back to the committee. We 

are delighted to have you here. Thank you for your steady hand on 

the tiller of monetary policy at the Fed, and we are grateful for all 

the time you spend on both sides of the Hill answering our questions. 

I want to follow up on my friend from Kentucky, Mr. Barr’s, line 

of questioning on the balance sheet, and, again, just looking for 

some detail as you look at the normalization process. I noted that the balance sheet was down about $368 billion January to January or about a 9 percent reduction. And if you think 

about the size of the economy and your comments that you have 

made about the future balance sheet size, it occurred to me that 

44 

if, just for discussion purposes, the Fed balance sheet was down at 

10 percent of GDP, so $2 trillion in theory as opposed to the 6 or 

7 percent it was before the financial crisis, that at this rate it 

would take about 5 years to normalize in that range. 

And as you began to think about the balance sheet, have you 

all—that would be about 16 years after the financial crisis that the 

balance sheet would be normalized. If you look at the rolling off of 

the portfolio, what range of years do you think it would reach? I 

know it is—I am looking for some range of the denominator. 

Mr. POWELL. So the level of demand for our liabilities, principally 

reserves and currency, but also the Treasury general account, 

which is a place where Treasury keeps cash, more cash than they 

used to, and also the designated financial market utilities keep 

their rainy day cash there. The demand for those liabilities is so 

much higher that we are actually not very far from the level of that 

demand. And our estimates of the demand, particularly for reserves, among the large banking institutions have gone up quite a 

lot just over the course of the last couple of years. 

So in terms of years, I actually think we are going to be in a position, we are working on a plan, in fact, to stop runoff later this 

year. We may still be a bit above equilibrium demand for reserves, 

but we are not looking to limit the growth of the other liabilities 

because we think they meet important demands from the public. 

Mr. HILL. So you are suggesting that sometime this year, on the 

asset side, you would stop letting the securities roll off? 

Mr. POWELL. That is right. And so that will be about 16, 17 percent of GDP, whereas it was 6 percent before. 

Mr. HILL. Yes. 

Mr. POWELL. And the difference really is currency is a bigger 

part of—currency as a percentage of GDP and the same thing with 

reserves. 

Mr. HILL. When you look at the composition, I know you have 

testified, and Vice Chairman Quarles has too, that you prefer a 

Treasury-only balance sheet, and you have heard discussions in 

this committee previously where we recognize in periods of crisis 

that the Fed might take other assets but that many of us believe 

they should have swapped those back out over at the Treasury so 

that the central bank only maintains a Treasury portfolio. 

Do you still hold that view? And what is your view of Mr. 

Quarles’ comments last week that he would look at limited sales 

of the CMBS portfolio? 

Mr. POWELL. We have said that we want primarily a Treasury 

balance sheet. We have also said that we hold the possibility out 

there that at some point—and this isn’t something we have decided. It is not something in the near term—we would do limited 

sales of MBS to hasten that process along. 

I think where we are with the balance sheet is we have a bunch 

of decisions to make, and the one on MBS sales is probably closer 

to the back of the line. Really we have to decide about the maturity 

composition and things like that. We will be working through that 

in a very careful way. Markets are sensitive to this so— 

Mr. HILL. Yes. I know the markets would certainly connect with 

those sale, and I think I would encourage that. 

45 

I want to switch gears and talk about another U.K. issue that 

is not Brexit, and that is the subject of open banking, the U.K.’s 

payment services directive, which is also termed informally as open 

banking. And I would like to get, if not your thoughts today, get 

your thoughts in writing about the promise of open banking as benefits for more competition. 

And this is where consumers have access to all their data, brokerage banking that they get to control. It is a way to have better 

data security and more consumer security. It has been required 

now of the major banks in the U.K. Are you familiar at all with 

that and— 

Mr. POWELL. I am not familiar with the U.K. aspect of it. I am 

familiar with the fact that it is a very interesting and important 

issue here. 

Mr. HILL. I think as we look at FinTech in our markets and as 

we look at ways to level the competitive playing field between the 

G-SIFIs and everybody else, this will be an emerging issue, and I 

would invite your comments in the future about that. Thank you. 

Mr. POWELL. Great. Thank you. 

Mr. HILL. I yield back. 

Chairwoman WATERS. Thank you. 

The gentleman from New York, Mr. Zeldin, is recognized for 5 

minutes. 

Mr. ZELDIN. Thank you, Madam Chairwoman. 

And thank you to Chairman Powell. You have been a great resource for—and very open and transparent for my inquiries recently, in my office, just a couple weeks back. And I just want to 

thank you for how available you are for concerns of this committee 

and Members of Congress. You have been great. 

I wanted to follow up on the 2016 heist of $81 million from Bangladesh’s central bank, which exploited vulnerabilities in the New 

York Fed’s fraud detection process. According to a 2016 investigation, Reuters concluded that, ‘‘inertia and clumsiness at the New 

York Fed was a key factor in the theft of these funds.’’ 

I understand that the New York Fed established a hotline for 

global banks following the heist, but could you provide us with an 

update on additional measures the Fed has taken to rectify the 

problems identified in the Bangladesh case? And are you confident 

that the Fed would prevent any payments if a similar hack was attempted in the future? 

Mr. POWELL. I think the Fed—the New York Fed and central 

banks all over the world frankly were very struck by that event 

and have—and there have been actions at the international level 

to look at principles and things we can do. 

And so I think we have tried to harden our systems to that kind 

of a fraud, where someone actually gets control of another central 

bank and starts to—and is able to in effect pretend to be that central bank and try to withdraw dollars or—so I think we have 

worked hard on that problem. We have also tried to imagine other 

ways that the system can be invaded in that way. So it is something we have put a lot of resources in. 

Mr. ZELDIN. Over the course of today’s hearing you have received 

a lot of questions, a lot of comments. Is there anything—I have 

46 

some available time left. Is there anything that you are looking to 

clear up with any available time or no? 

Mr. POWELL. I don’t think clear up, no— 

Mr. ZELDIN. Great. Well, thank you for— 

Mr. POWELL. I have an open microphone, you know, but— 

Chairwoman WATERS. Will the gentleman yield? 

Mr. ZELDIN. Madam Chairwoman? 

Chairwoman WATERS. Yes. If the gentleman will yield— 

Mr. ZELDIN. Yes, ma’am. 

Chairwoman WATERS. —I will help you to post more questions to 

the chairman. Would you ask him—well, I will ask him if you are 

yielding to me, if you will expound more on the stress test. It has 

come up and I alluded to it when I opened. 

And I am worried that what you are recommending will basically 

create the kind of transparency where you are giving banks the answers ahead of time. And that is not what was intended in DoddFrank. Would you help us with that? 

Mr. POWELL. Sure. We think stress testing is probably the most 

successful post-crisis regulatory innovation, and we absolutely intend to preserve stress testing as a key pillar of post-crisis regulation, especially for the very large financial institutions. 

I think we—the idea that we would give them our actual models 

is not a good idea for a couple of reasons: One, that really would 

be showing, in effect, giving away the test; but, in addition, I think 

it would create real incentives for banks to kind of stop thinking 

about the way—about risk on their own and kind of relying on our 

thinking about risk and our loss rate estimates. 

We want them to model their own risks and not use our models. 

And, of course, we want to check it with our models. So we have 

stopped way short of that. But we have provided more transparency and I think appropriately so. I think in—you know, in our 

system of government we owe a level of transparency to the public, 

and I think we have tried to strike the right balance. 

Mr. ZELDIN. Madam Chairwoman, kindly, if I could reclaim my 

time, I would like to yield to the ranking member, Mr. McHenry. 

Chairwoman WATERS. Thank you. 

Mr. MCHENRY. Thank you. 

Along the same lines, the living will process and the stress test 

process, I agree have had a beneficial impact. The complaint I have 

heard from those who have to submit to the stress test is they don’t 

get any feedback. It is pass or fail, everything is on the line, and 

they hear when the public hears, and they pass or don’t and that 

is all they hear. 

So what is the feedback you are giving them on this measure, to 

the chairwoman’s similar question? And in her view, you are lessening the burden; in my view, you are better communicating with 

those people you are seeking to get information from. So how do 

you see that? 

Mr. POWELL. So, I guess, my sense was and I will go back to the 

office and look into this, but my sense was there is actually quite 

a lot of feedback, for example, at the staff level and also above the 

staff level. 

For example, if you have one particular business that is important to you, then we are going to look at the risk models and we 

47 

are going to be evaluating them and see that they are capturing 

evolving risks and that kind of thing. And a lot of that kind of 

thing comes out in the stress test and in our feedback. 

Mr. ZELDIN. I yield back. 

Chairwoman WATERS. Thank you. The gentleman’s time has expired. 

The gentleman from Guam, Mr. San Nicolas, is recognized for 5 

minutes. 

Mr. SAN NICOLAS. Thank you, Madam Chairwoman. 

And thank you, Chairman Powell, for being with us today. 

In a prior setting, I posited a question with respect to interest 

rate policy and how it can be applied to various size companies. 

And I want to, I guess, reinitiate the inquiry, but first begin by 

kind of laying the foundation for why I am posing the question. 

The Fed has a dual mandate to stabilize prices and provide for 

maximum employment. But when we pursue interest rate policy 

that applies across the board to all institutions equally, sometimes 

we may be carving into one at the expense of the other. For example, community banks and smaller financial institutions don’t have 

the same employment figures necessarily as those areas that are 

more commonly served by the ‘‘big banks.’’ 

In the more rural areas that are serviced by community banks, 

you will find that the unemployment figures are higher than they 

are when factored against the national average. On the other hand, 

when it comes to price stability and using interest rates to try and 

reduce the amount of capital in the economy, the big banks are the 

ones that are more pervasive in terms of the consumer credit that 

they issue on a net basis. 

And so if we were to, for example, raise rates to try and stabilize 

prices, that rate increase would apply to both community banks 

and big banks, thereby reducing the lendability of the community 

banks the same way that they would impact the bigger banks. But 

what that would do is it would exacerbate the employment circumstances in the rural areas while also containing the prices on 

the big bank areas. 

And so my question that I posited in a prior setting that I would 

like to put on the record here today is whether or not the Fed 

would consider bifurcating interest rate policy to consider a different interest rate policy with respect to community banks or 

smaller institutions and the areas they serve versus the larger institutions and the more broad stroke that they have on the overall 

financial system? 

And just to kind of tie up my question, again, in our previous setting I mentioned that the contagion risks, the systemic risks that 

community banks pose are more diluted versus the systemic risk 

that our big banks present. And so that also just kind of puts into 

my mind the fact that an interest rate policy that looks at both 

service areas a little differently might actually help to not only improve employment numbers but to do so in rural areas that are 

dragging down the overall average and to do so in a way that may 

not necessarily impact pricing pressures because it is not an acrossthe-board rate policy. 

48 

So could you please share your thoughts on the idea of perhaps 

bifurcating interest rate policy between larger institutions and 

smaller institutions? 

Mr. POWELL. That is an interesting question. I think it would 

not, of course, be in keeping with the tradition of interest rates, 

which is our policy rate is, you know, it applies to the whole economy, and we don’t get into distinguishing between different borrowers and that kind of thing. I wouldn’t want to see us going 

down that road. That is more for you to distinguish between different entities under the law. 

But I think, again, I wouldn’t want to see us going down the road 

of raising rates, different amounts on different people and different 

sectors. I think the interest rate is a blunt tool. Remember that we 

are not elected. We are, you know, we have—we are not supposed 

to be—we are supposed to be with interest rates just operating at 

the national level and I think that is probably a healthy thing. 

Mr. SAN NICOLAS. I appreciate your feedback. But, when we get 

back to the question of the mandates of the Fed—and the mandates are very clear: stabilize prices; and maximize employment. 

But if the variables that are impacting both are different with respect to the institution sizes and the interest rates as they apply 

to them, we may be unnecessarily impacting employment in pockets of the country by taking a broad stroke approach on interest 

rates with respect to the pursuit of price stability, for example. 

And so while I don’t encourage the Fed to necessarily pick and 

choose, if we were to have the Fed consider growing and evolving 

its mandate in a way that is using the available data that is out 

there to be able to target the employment areas that are typically 

more exacerbated in the community or rural bank places while also 

pursuing an interest rate policy of price stability that is more so 

impacted by the bigger banks, I think that that is something that 

will be worthy of consideration. So I just wanted to put it on the 

record. 

Thank you, Madam Chairwoman. And I yield back. 

Chairwoman WATERS. The gentleman from Georgia, Mr. 

Loudermilk, is recognized for 5 minutes. 

Mr. LOUDERMILK. Thank you, Madam Chairwoman. 

And thank you, Chairman Powell, for sitting through this again. 

I have several issues I want to touch on, but first of all, something 

you and I have spoken about privately and something that Mr. 

Luetkemeyer brought up, being CECL. I have emphasized my concern. He has expressed his concerns about the potential impact it 

would have on our economy. First of all, I appreciate the numbers 

that you brought forward to us, the strength of our economy, the 

incredible economic expansion and the long-term expansion we 

have seen. This is good news, good news for everybody in the country in all demographics. We don’t want to do anything to suppress 

that at all. 

One of the grave concerns that the manufacturers have in my 

district, which was surprising to me as I met with them, and I 

asked their concerns, of course, trade is always a concern with 

them. But the number one concern was the lack of single-family 

homes, entry-level homes so that the large number of employees 

49 

they are bringing in have a place to buy, to enter into the housing 

market. 

So I would just reemphasize the concern that we have had as we 

would love to see an offset in capital requirements with CECL to 

make sure it doesn’t suppress this great economic gain that we 

have made. 

But to move onto some issues, as you and I have spoken, I have 

an IT background and I also represent Georgia, which contains 

about two-thirds of the payment processors across the nation. And 

so I know that the Fed is exploring the possibility of getting into 

the payment business and especially with the realtime payment 

network. 

My question, and I haven’t fully developed an opinion on this, 

but I am very hesitant whenever the Federal Government engages 

in any practice that competes with the private sector, my first 

question would be, if you do establish a realtime payments network, is it appropriate for you to continue serving as the regulator 

for the private sector with which you would be competing? 

Mr. POWELL. We do have some instances where we operate, for 

example, ACH and there is another ACH operator. I think though 

it is a fair question, and we do hold ourselves to a big standard in 

that. It is not a—by the way, it is not a payments network really. 

It is a settlement system. Really only the central bank can provide 

real, final settlement in immediately available funds. The private 

sector can provide that too to some, but it is actually on its own 

books. It is a little bit different approach. 

Mr. LOUDERMILK. Okay. And one of the things that you have indicated with the request for comment is that if you do implement 

the system, it would be fully compatible with the private sector 

networks. 

Mr. POWELL. Yes. 

Mr. LOUDERMILK. What have you done to ensure that this would 

be the case, that it would be fully compatible? 

Mr. POWELL. Well, we just will have to do that. That is an undertaking that we have made. And we haven’t decided to do this yet, 

so, but if we do it, it will absolutely be fully compatible. 

Mr. LOUDERMILK. Is there any thought, once you establish this, 

of eventually privatizing? 

Mr. POWELL. I hadn’t thought of that. 

Mr. LOUDERMILK. Okay. I am a big fan of privatization, and as 

Mr. Williams pointed out, you are a capitalist. I am a strong proponent of the free market and competition, but also I am very hesitant when the government which regulates a certain area competes 

in it as well. 

One of the other areas I would like to ask you a question about, 

is first of all, I appreciate all the work that you have done in tailoring the proposal for reasonable banks under S.2155. When will 

the Fed produce a rule on tailoring prudential regulations for U.S. 

subsidiaries of foreign-owned banks? 

Mr. POWELL. We are working on that, and I do think that is 

something we, I believe, expect to get done pretty shortly here. 

Mr. LOUDERMILK. Is there a reason why it has taken so long? 

50 

Mr. POWELL. It is just complicated, and we have—I think we 

have done a dozen rulemakings under S.2155. It is—there are just 

a lot of things in the law, but we are working on that one. 

Mr. LOUDERMILK. Okay. The end result, do you think it will be 

similar to the proposal for domestic regional banks? 

Mr. POWELL. Conceptually, we are trying to treat them similarly, 

yes. 

Mr. LOUDERMILK. Okay. Well, I encourage you to move forward 

as quickly as possible, but not to the point that we don’t have a 

good end product but also to keep our domestic banks in mind. 

The last question, just a little bit off the cuff, regarding 

cryptocurrency, I know the Securities and Exchange Commission is 

currently regulating it. Do you have any position or thoughts from 

a monetary policy standpoint on the impact of cryptocurrency? 

Mr. POWELL. From a monetary policy standpoint, the implications are not large, certainly in the near term. People are not using 

cryptocurrencies in large size for payments, for example. It has 

really been more of a store of value for some, and you can see that 

it is highly volatile, so I think it is not attracting a lot of success 

there. We can talk about it more offline. 

Mr. LOUDERMILK. Okay. Thank you. 

Chairwoman WATERS. The gentleman’s time has expired. 

The gentleman from North Carolina, Mr. Budd, is recognized for 

5 minutes. 

Mr. BUDD. Thank you, Madam Chairwoman. 

And, Chairman Powell, I appreciate you being here today, for 

your steady hand and your continued service, so, again, thank you. 

Back in 2017 the Treasury Department issued a series of reports. 

They had recommendations for streamlining and improving the 

regulation of the financial systems so that it creates maximum 

value for American businesses and consumers. While progress has 

been made on some of those recommendations, there are still some 

that even 18 months later, haven’t been implemented. 

An example of that would be a requirement that banks exchange 

margin on transactions between their own affiliates or the inter-affiliate margin, I think it is called. It is a requirement that is not 

imposed over at the CFTC or by international regulators. 

According to a recent survey, this ties up about $40 billion in 

capital with no known benefit and it actually prevents banks from 

most efficiently managing risk in this area. 

Last November, Vice Chairman Quarles agreed that the regulators should prioritize this issue and that the agencies had the 

ability to move into compliance with the rest of the world on this. 

Can you describe the Fed’s plans to implement the Treasury’s recommendation with this initial margin requirement, when it would 

be exempted and when we might expect to get some progress on 

this? 

Mr. POWELL. I know it is something we are working on, and I 

don’t have a date for you or really a result, but I can get back to 

you on that. 

Mr. BUDD. Do you have the sense that it is actually a priority? 

Mr. POWELL. Yes. But remember, with S.2155 we have a lot of 

priorities right now, and that is one which is certainly under active—it is being worked on actively, I know that. 

51 

Mr. BUDD. Thank you. I appreciate that. 

I want to switch over to CECL or the current expected credit loss 

rule, and ask a couple of questions on that. As currently structured, a lot of us on both sides of the aisle think that CECL prevents or presents a major capital volatility risk affecting pricing 

and ability of lending for 30-year mortgages and to borrowers of 

lower quality credit, especially during downturns. Personally, I feel 

that it is pro-cyclical. 

There have been proposals made that before implementing this 

major accounting change, there should be a quantitative impact 

study conducted to look at these concerns. So I worry that this 3- 

year phase-in that the Federal Reserve recently finalized does not 

address this underlying pro-cyclicality issue. Do you see any harm 

in conducting such a study, this QIS? 

Mr. POWELL. You know what, I think we have—I can go back 

and look at that, but I think we don’t think it will have that effect 

but we are going to be watching very carefully— 

Mr. BUDD. So to do a study on it, would it be reasonable even 

to do a QIS? There are varying opinions among very respected people on this. So a QIS would be reasonable? 

Mr. POWELL. I would have to go back and talk to the group on 

this, but this is something we have been working on for 10 years. 

I think there has been a lot of thought that has gone into it. And 

I don’t have an answer for you on QIS but I can get that. 

Mr. BUDD. But as you stand right now, you don’t have any 

known harms that a study would do? 

Mr. POWELL. Well, I don’t sitting here today, but I don’t know 

how long it would take, and I am not sure what we have done on 

that front. I can check. 

Mr. BUDD. Sure. I would encourage us to do our homework as 

much as possible, including a QIS. Thank you. 

I want to go back briefly to international insurance regulation 

and your conversation with Congressman Duffy. You told Mr. Duffy 

that you wanted to negotiate something that ‘‘works for the U.S.’’ 

Thank you for that, by the way. 

This is still just a little bit ambiguous for a lot of us, but there 

are really only two possible outcomes that you could try to achieve, 

either we are trying to reach an agreement that will require the 

U.S. to adopt some specific changes to our system or we are trying 

to have the U.S. system achieve a formal mutual recognition that 

would require no changes to our system of insurance regulation. 

So do you have a preference which way are you headed, either 

we get mutually recognized as is, or are we going to force changes 

on the system? 

Mr. POWELL. I think, you know, we are not looking to change the 

fundamental nature of our insurance system. We think it works 

well. We are also looking to have an international agreement that 

works with our system. 

So I am not sure that exactly responds to your question, but we 

are certainly not looking to say, okay, we have negotiated this deal 

with this group abroad and we are going to come back and it substantially changes our insurance regulation system. That is not 

going to happen. 

Mr. BUDD. So more of a mutual recognition, this is how it works? 

52 

Mr. POWELL. Yes, I don’t say that—there may be some things 

that we take on board which sound like good ideas. I don’t really 

know much about the details. But I know that we are in very, very 

close contact all the time with the State supervisors on this. We 

have had quite a lot of consult on this and— 

Chairwoman WATERS. The gentleman’s time has expired. 

Mr. BUDD. Chairman Powell, thank you. I yield back, Madam 

Chairwoman. 

Chairwoman WATERS. The gentlewoman from Ohio, Mrs. Beatty, 

is recognized for 5 minutes. 

Mrs. BEATTY. Thank you, Chairwoman Waters, and Ranking 

Member McHenry. 

And thank you, Chairman Powell, for being here today. 

You have had a lot of questions thrown at you from monetary 

and policy and banking and a whole host of things, so I am going 

to shift and talk about people for a little bit. 

I have two questions. The first question is going to be centered 

around the Federal Reserve’s bank board’s diversity, and the second is going to be about income equality and the wealth gap. 

So let me start by saying I want to draw your attention to a report from the Center for Popular Democracy’s Fed Up Campaign, 

which conducts an annual analysis of gender, racial, and occupational diversity of the Federal Reserve. 

And, Madam Chairwoman, I would like to submit this for the 

record. 

Chairwoman WATERS. Without objection, it is so ordered. 

Mrs. BEATTY. The Federal Reserve Act, as you know, of 1913 in 

12 USC 302 that class B and class C directors are to be selected 

to represent the public with, quote, due but not exclusively consideration to the interest of agriculture, commerce, industry, service, 

labor, and consumers, and without discrimination. 

However, the analysis done by this report suggests that the Federal Reserve Banks around the country are not representative of 

the public at all. The report found, quote, that in 2019, among the 

108 current Federal board directors, 70 percent—76 percent come 

from the banking or business sector, 74 percent are white, and 62 

percent are male. 

Additionally, the report found that an overwhelming number of 

Federal Reserve Bank presidents are overwhelmingly white at 83 

percent. The most troubling aspect of the report was what happened just last year. In 2018, the incoming board of directors was 

comprised of 50 percent people of color, and 43 percent women. But 

in 2019 we backslid with incoming directors who were from 82 percent banking or business sectors, 75 percent white and 61 percent 

male. 

You have consistently committed to this committee that you are 

committed to diversity, of which I am very appreciative. And let me 

remind you of a quote that you gave: ‘‘We make better decisions 

when we have diverse voices around the tables, and that is something we are very committed to at the Federal Reserve.’’ You probably remember saying that. 

So do you have any thoughts on this report? Because I am concerned that we are losing momentum on this issue that was started 

by Janet Yellen, your predecessor. And I am thinking that I may 

53 

need to expand my legislation to include the ‘‘Beatty Rule’’ with the 

Federal Reserve, patterned after the Rooney Rule, which I am sure 

you are also familiar with, because we have had dialogues about 

it. Do you have any thoughts on that? 

And because my time is probably going to run out, I want you 

to also address, when asked about the challenges—you did a townhall with regular people. I think it was teachers. And you cited 

widely shared prosperity and mobility, the opportunity to move 

from being born into a low quintal of wealth spectrum to the highest. 

And so as Chair of the Subcommittee on Diversity and Inclusion, 

I am certainly interested in this and would like to know if you can 

elaborate on what you believe to be one of the top challenges this 

economy faces over the next decade as related to diversity and inclusion? 

Mr. POWELL. Okay. Thank you. 

I think that my experience over my private sector career and 

public sector career has been that successful organizations value 

diversity, value inclusion, value freedom to speak, and those sorts 

of things. And that is certainly true at the Fed. I really do believe 

that we get better results to the extent we have diverse perspectives around the table. 

I feel strongly about that. I have also been involved in the selection of Reserve Bank directors now really since I joined the Board 

in 2012, and I think that we have made very substantial progress 

there. And I am proud of the progress that we have made. I think 

if you look at the numbers over the last 5, 6, 7 years, the number 

of the diversity among B and C directors is actually higher than 

the numbers that you read from that report. 

Mrs. BEATTY. Let me interrupt you for one second. That is very 

true of Chicago, but then when you look at Dallas, it is the direct 

opposite. 

Mr. POWELL. I know the numbers at the aggregate level, I think, 

of the B and C directors that we currently have, 70 percent are diverse in one dimension or another and 25 percent are African 

American. And these numbers have come way up from where they 

were 7 or 8 years ago. 

If I could just say a second on the Rooney Rule, we are way past 

the Rooney Rule. I have been involved in eight selection processes 

for Reserve Bank presidents and in every case we have had multiple diverse candidates, racially diverse, gender diverse, all kinds 

of diversity. We—and Reserve Banks, you know, hire a national 

search firm and they go into that. Anyway, sorry. 

Mrs. BEATTY. We can talk later. My time is up. 

Chairwoman WATERS. The gentlelady’s time has expired. 

Chairman Powell has a hard stop at 1:00. We are going to get 

our last Member in, Mr. Davidson from Ohio. You are recognized 

for 5 minutes. 

Mr. DAVIDSON. Thank you, Madam Chairwoman. 

Chairman Powell, thank you for your testimony. And I know it 

has been a long stretch there at the microphone, so it is an honor 

to be able to get this question in and several hopefully. 

Really with great foresight, Congress has acted at times and 

sometimes not so much. One of the things Congress got right was 

54 

the Telecommunications Act of 1996. And the reality is, our economy is so vibrant because it is fostered in an amazing amount of 

innovation. 

Incredibly with the internet, Congress had the foresight to say it 

is the policy of the United States to preserve the vibrant and competitive free market that presently exists for the internet and other 

interactive computer services unfettered by Federal or State regulation. Now, it wasn’t zero regulation. There was a framework for 

it, but it was fairly light touch. 

As we look at the token economy, tokenized assets and the crypto 

market, inherently people think of Bitcoin. They think of Bitcoin as 

the first website that you came across. You might like it, you might 

hate it, but it certainly didn’t represent the internet because it was 

a website. 

And Bitcoin doesn’t represent blockchain anymore than a website 

represents the internet. It is one use. But as our country has kind 

of been reluctant to provide any regulatory certainty, capital has 

fled the United States where this innovation initially was off to a 

good start for other pastures. Do you believe that regulatory certainty could foster increased innovation in this market in the token 

economy? 

Mr. POWELL. I would want to understand that better, but, yes, 

that makes sense on its face to me. 

Mr. DAVIDSON. And when you look at consumer protection, for 

example, the SEC is focused on protecting the securities market. 

And the concern is, if everything looks like a security, there is a 

lack of certainty for investors. And so the Token Taxonomy Act, a 

bipartisan legislation, that would provide that certainty to say if it 

meets these criteria then it is not a security is one that we are currently working on and hope to move through this committee in 

short order. 

Beyond that, obviously the scope of the Federal Reserve has a 

charter. And earlier in your testimony, you talked about 2 percent 

inflation as a target. Here in Congress, and around the country in 

certain sectors, people hear 2 percent plus or minus zero deviation, 

certainly no long-term deviation. Can you state that or confirm 

that it is a policy to target precisely 2 percent or to what extent 

is there some level of variance for higher or lower inflation? 

Mr. POWELL. Yes. We say that inflation—that our objective is 2 

percent but it is a symmetric objective. Because, of course, in the 

nature of an economy, it is never—it will rarely be exactly 2.000 

percent. It is going to be a little bit higher. It is going to be a little 

bit lower as economic activity fluctuates, as oil prices fluctuate and 

that sort of thing. 

Mr. DAVIDSON. Right. No, but what sort of time horizon do you 

look at that? 

Mr. POWELL. Well, one, it is symmetric in a sense that we are 

always going to be trying to get back to that. And these things 

don’t move super quickly, so we will be conducting monetary policy 

in a way that achieves both of our objectives. We also have our 

maximum employment objective, so— 

Mr. DAVIDSON. Right. And so in balance and maybe over a longer 

period than a quarter, for example? 

Mr. POWELL. Yes. Definitely over a longer period. 

55 

Mr. DAVIDSON. Okay. And the last time we spoke, we finished 

talking about trade. And I think it is fitting we finish talking about 

trade today. Obviously, the United States has become really the 

world’s land of opportunity. We are a great destination for good 

services, capital, intellectual property, labor, and including people. 

But trade has definitely been a high point for this current Administration. We have strengthened our trade deals. We are working to strengthen our trade deal with China as we speak, but there 

has been a lot of consternation about tariffs. 

Historically, Congress has overall authority for trade and they 

have delegated that to the presidency. My concern is, as we look 

at 232 tariffs on steel and aluminum, for example, while U.S. steel 

companies have benefited from higher tariffs with greater profits, 

their share prices have been destroyed. And part of that is there 

is no certainty as to how long this tariff is going to last. 

If we passed a law, whether it was a 25 percent tariff or a 200 

percent tariff or a zero tariff, would the certainty provide better 

outcomes for the market? 

Mr. POWELL. I think certainty in these matters would be helpful. 

Mr. DAVIDSON. So toward that end, we are working on the Global 

Trade Accountability Act. My hope is that it can be bipartisan and 

Congress can eventually lock in our rates and the trade deals that 

do make trade great again. 

Thank you, and my time has expired. I yield back. I appreciate 

your testimony. 

Chairwoman WATERS. Thank you very much, Chairman Powell. 

I would like to thank you for your testimony today. 

The Chair notes that some Members may have additional questions for this witness, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to this witness 

and to place his responses in the record. Also, without objection, 

Members will have 5 legislative days to submit extraneous materials to the Chair for inclusion in the record. 

I will ask our witness to please respond as promptly as you are 

able. 

And with that, this hearing is adjourned. 

[Whereupon, at 1:05 p.m., the hearing was adjourned.] 

(57) 

A P P E N D I X 

February 27, 2019 

58 


Insert offset folio 1 here 35694.001

For release at 

8:30 a.m. EST 

February 27, 2019 

Statement by 

Jerome H. Powell 

Chainnan 

Board of Governors of the Federal Reserve System 

before the 

Committee on Financial Services 

U.S. House of Representatives 

February 27. 2019 
59 


Insert offset folio 2 here 35694.002

Good morning. Chairwoman Waters. Ranking Member McHenry, 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 tor monetary policy--maximum employment and price stability. We arc 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 accountabi I ity. 

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. 

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 lollowing 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, 
60 


Insert offset folio 3 here 35694.003

-2-

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 intlation, as measured by the 12-month change in the price index 

for personal consumption expenditures (PCE), is estimated to have been I. 7 percent in 

December, held down by recent declines in energy prices. Core PCE intlation. which excludes 
61 


Insert offset folio 4 here 35694.004

- 3 -

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 of2 percent for a time, but aside 

from those transitory effects, we expect that in nation will run close to 2 percent. 

While we view cutTent 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 impot1ant 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 f(,rce 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. 
62 


Insert offset folio 5 here 35694.005

-4-

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 nonnal for a bealthy 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 cun·ent range at 2-1/4 to 2-l/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 inf(lrmation as economic conditions and the outlook evolve. 

For guideposts on appropriate policy, the FOMC routinely looks at monetary policy rules 

that recommend a level f(lr the federal funds rate based on measures of inflation and the cyclical 

position of the U.S. economy. The February lvfonetmy PoliCJ' 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. 
63 


Insert offset folio 6 here 35694.006

- 5 -

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 in2014. 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 cun·ent 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 arc 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 dctennined by the demand for Federal Reserve liabilities such as currency and bank 

reserves. The February 1\Ionetary 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 Ref!:ulation 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 
64 


Insert offset folio 7 here 35694.007

-6-

comprehensive review of the strategies, tools, and communications practices we usc 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. 
65 


Insert offset folio 8 here 35694.008

FEBRUARY 2019 

DATA BRIEF 

MORE PUBLICLY 

REPRESENTATIVE 

FED: 

', I fCfJNOMy 

CENJi: b~~~t~~CY FJiP 
66 


Insert offset folio 9 here 35694.009

ACKNOWLEDGMENTS 

Th1s report was wntten and researched by Maggie Corser. It was edited by Emily Gordon, and Jordan Haedtler, 

Ruben Lucio, and Shawn Sebastian. 

ABOUT THE CO.ccNc:.TccR:ciB:oU:.:.T_cOccR"'S------------

Fed Up is a coalition of community organizat1ons and labor unions across the country, calling 

on the Federal Reserve to reform its governance and adopt policies that build a strong 

economy for the American public. The Fed can keep interest rates low, give the economy a 

fair chance to recover, and pnorit1ze genuine full employment and rising wages. 

www.ThePeop!esFed.org 

The Center for Popular Democracy (CPO! works to create equity, opportunity and a 

dynamic democracy in partnership with high-impact base-building organizations, organizing 

alliances, and progressive unions. CPO strengthens our collective capacity to envis1on and 

win an innovative pro-worker, pro~immigrant. racial and economic justice agenda. 

www.populardemocracy.org 
67 


Insert offset folio 10 here 35694.010

2019 Diversity Analysis of 

Federal Reserve Bank Directors 

2019 Data Brief 

The Center for Popular Democracy's Fed Up Campaign conducts an annual analysis of the gender, 

racial, and occupational diversity of the Federal Reserve system's leadership. This is designed to 

gauge progress on the Federal Reserve's public commitments to diversity and highlight areas for 

continued growth in the coming year. 

The 2019 analysis reveals a shocking lack of progress in diversity among the nation's most powerful 

monetary pollcymakers. While some Federal Reserve Banks have made modest progress in gender 

and racial diversity, board members from the business and banking sectors continue to dominate 

leadership positions. In 2019, among the 108 current Fed Board Directors: 76% come from the 

banking or business sectors. 74% are white, and 62% are male. These diversity issues also extend 

to Federal Reserve Bank Presidents who are overwhelmingly (83%1 white and are most commonly 

recruited from with the Federal Reserve's existing leadership or the finance sector. 

Without diverse perspectives, the Federal Reserve's failure to represent the interests of the American 

people will persist. In 2019, policymakers and advocates continue to call on the Federal Reserve to 

actively pursue greater diversity at all levels of its leadership. 

Despite the Federal Reserve Act's requirement that the Federal Reserve system leadership 

"represent the public," and draw from the interests of "agriculture, commerce, industry, services, 

labor, and consumers," the Federal Reserve (the Fed) has consistently failed to ensure that Reserve 

Bank directors reflect the rich diversity of our economy.' In 2016 the Fed Up campaign published "To 

Represent the Public: The Federal Reserve's Continued Failure to Represent the American People." 

The report's diversity findings sparked a public outcry and led to a coordinated campaign among 

community groups, and allied think tanks, calling on the Federal Reserve to diversify its leadership.' 

In the face of sustained public pressure, and repeated calls from Congress and advocates to appoint 

a leadership reflecting the Amencan people, the Fed leadership signaled it would take steps to 

improve. At the time; Fed Chair Janet Yellen publicly stated: "I am committed to improving diversity 

throughout our organization. Improving diversity requires effort and constant focus. We will continue 
68 


Insert offset folio 11 here 35694.011

The Urgent Need for a More Pub!idy Representative Fed 

working hard to achieve this goal."' In 2017 the incoming Fed Chair Jerome Powell pledged to carry 

on Yellen's commitment: "We make better decisions when we have diverse voices around the table, 

and that's something we're very committed to at the Federal Reserve."' 

The Fed's public commitment to develop a more diverse leadership was tested in 2018 when the 

New York Federal Reserve Bank appointed a new president The New York Fed plays an especially 

critical role given its close proximity to Wall Street and central role in formulating the Fed's response 

to the financial crisis. When asked by Representative Maxine Waters what Jerome Powell would do 

to ensure the New York Fed considered diverse candidates In its President search process, he said 

"We will always have diverse candidates. They will always have a fair shot I cannot in any individual 

case guarantee that we will have a diverse outcome.''' Ultimately, John C. Williams, a white man 

who spent his career at the Fed was appointed President of the New York Federal Reserve Bank.' 

Immediately before his appointment to the New York Fed, Williams was the San Francisco Reserve 

Bank President. This left a presidential vacancy at the San Francisco Fed which was ultimately filled 

by Mary Daly, a white woman who spent her career at the Fed. 7 

When the search committees in New York and San Francisco invited Fed Up to discuss presidential 

vacancies in 2018, Fed Up presented them with a diverse and qualified list of candidates. These 

candidates: reflected gender, racial, and occupational diversity; had demonstrated independence 

from the financial sector; and had a proven commitment to the Fed's full employment mandate.' 

In addition, each candidate put forward by Fed Up was qualified by the standards laid out by the 

search committee. In New York, none of Fed Up's proposed candidates were ever contacted. In San 

Francisco, these candidates were not seriously considered, and the search committee ultimately 

chose longtime Fed insiders for both positions. 
69 


Insert offset folio 12 here 35694.012

Data shows the Federal Reserve is 

progress it made on in 2018. 

The Federal Reserve Banks appointed 28 new 

directors to the boards of the twelve Reserve 

Banks in 2019. Indisputably, the Federal Reserve 

Banks failed to appoint a diverse group of incoming 

directors, This year's incoming Fed directors are: 

82% Banking/Business 

75% White 

61% Male 

In contrast the 2018 incoming directors were 50% 

people of color and 43% women.' There is deeply 

inadequate gender or racial diversity among these 

2019 incoming directors which indicates the Fed 

is backsliding on its diversity commitments. As 

in previous years, directors from the banking and 

business sectors continue to dominate. 

The federal Reserve 

Overall, the composition of the 2019 board of 

directors of the twelve Federal Reserve Banks 

remains disproportionately white, male, and 

from banking and business backgrounds. 

The 108 current board directors are: 

76% Banking or Business 

74% White 

62% Male 

These numbers stand in stark contrast to the 

American public. Far from the 76% of Fed directors 

in banking of business, only 18% of our economy 

is comprised of people w1th business and financial 

services jobs. 10 Despite men making up 49% of 

the US population, they are overrepresented in Fed 

leadership as 62% of all directors.11 

2019 Diversity Analysis of Federal Reserve Bank Directors 

on the incremental 

281ncoming Fed Directors in 2019 

Total lOS Fed Directors 
70 


Insert offset folio 13 here 35694.013

The Urgent Need for a More Publicly Representative Fed 

While this change is wholly inadequate, it is worth noting that public demands for a more diverse 

leadership have yielded some incremental progress since 2013. In 2016, Fed Up recommended 

that each Reserve Bank board include at least one director from a labor background, one from an 

academic background, and one from a non-profit/civic organization background. Although the twelve 

Reserve Banks are still a long way from implementing that recommendation, the number of Reserve 

Banks with a director from the labor sector has increased from JUSt two in 2016 to five {or nearly halt 

of the Reserve Banks) in 2019. The most diverse Reserve Bank board in the country, the Chicago 

Fed, has fulfilled Fed Up's recommendation. The Chicago Fed currently has a d~rector from labor 

(Jorge Ramirez), an academic !Susan Collins), and a director from a community organization (Helene 

Gayle) all serving on the board." 

When comparing diversity data from 2013 (the first year Fed Up began tracking these numbers), it's 

clear that the Fed's pace of change is entirely too slow. In 2013, 85% of Fed directors came from 

banking and business sectors. The last six years saw a 10% increase in directors from non-profit, 

academia, and labor sectors, but even with this change, financial and business sectors continue to 

dominate leadership positions at 76%. In 2013, only 12 of the 105 directors were African American-" 

Today that number has increased to 22 African American directors out of 108. 

Sector 

Financial 

Business 

Non-Profit 

Academia 

Public Service 

labor 

37% 

38% 

111111111111 48% 

38% 

!I 2013 
71 


Insert offset folio 14 here 35694.014

Gender 

Men 

Women 

Race 

2019 Diversity Analysis of Federal Reserve Bank Directors 

62% 

74% 

1112013 

2019 

70 80 

83% 

2013 

2019 

100 
72 


Insert offset folio 15 here 35694.015

The Urgent Need for a More Publicly Representative Fed 

The diversity data for each Reserve Bank's board of directors highlights that some Reserve Banks 

have farther to go than others. Progress is uneven with many Reserve Banks improving in one area of 

diversity but not improving in others. 

Chicago currently has the most diverse Federal Reserve Bank board of directors: 

45% of directors come from labor, academic, 

or non-profit sectors. 

44% of directors are African American or Latino. 

Even as the most diverse Reserve Bank, Chicago still must improve its gender 

diversity. Women make up only 33% of directors in 2019, despite women 

making up more than 50% of the population in the Chicago Fed's region-" 

Dallas is the least diverse Bank in the Federal Reserve system. 

The Dallas Fed's board of directors are: 

89% Banking/Business 

78% White 

78% Male 

In 2019 the Dallas Fed added another director from the business sector 

which further decreased its diversity.1!l 

Philadelphia and Saint louis are tied for least progress in 2019. 

Both the Philadelphia and St. Louis Federal 

Reserve Banks made no improvements in gender, 

racial, or occupational diversity this year. 
73 


Insert offset folio 16 here 35694.016

2018 

55% Banking/Business 

67% White 

78% Male 

2019 Diversity Analysis of Federal Reserve Bank Directors 

2019 

66% Banking/Business 

67% White 

67% Male 

Boston added one female director but made no improvements in racial diversity. The Reserve Bank 

increased its number of directors from the banking and business sectors. 

2018 

66% Banking/Business 

67% White 

78% Male 

2019 

66% Banking/Business 

56% White 

67% Male 

New York added one director of color but made no improvements to gender or occupational diversity. 

2018 

66% Banking/Business 

78% White 

56% Male 

2019 

66% Banking/Business 

78% White 

56% Male 

Philadelphia made no improvements in gender, racial, or occupational diversity. 

2018 

89% Banking/Business 

67% White 

78% Male 

2019 

89% Banking/Business 

67% White 

67% Male 

Cleveland added one female director but made no improvements in racial or occupational diversity, 

2018 

77% Banking/Business 

89% White 

56% Male 

2019 

66% Banking/Business 

89% White 

56% Male 

Richmond added one director from the non-profit sector but made no improvements in racial or 

gender diversity, 
74 


Insert offset folio 17 here 35694.017

The Urgent Need for a More Publicly Representative Fed 

2018 

100% Banking/Business 

89% White 

78% Male 

2019 

89% Banking/Business 

78% White 

56% Male 

Atlanta made modest improvements in racial diversity and solid progress on gender diversity. 

2018 

66% Banking/Business 

56% White 

'$ 78% Male 

2019 

55% Banking/Business 

*'56% White 

67% Male 

Chicago made progress on gender and occupational diversity. 

2018 

88% Banking/Business 

78% White 

44% Male 

2019 

88% Banking/Business 

89% White 

44% Male 

St. Louis made no improvements in racial, gender, or occupational diversity. 

2018 

76% Banking/Business 

88% White 

50% Male 

2019 

77% Banking/Business 

89% White 

44% Male 

Minneapolis added two female directors but made no progress on racial or occupational diversity.16 

2018 

77% Banking/Business 

78% White 

67% Male 

2019 

66% Banking/Business 

67% White 

67% Male 

Kansas City made improvements in racial and occupational diversity but no improvements in 

gender diversity. 
75 


Insert offset folio 18 here 35694.018

2018 

77% Banking/Business 

"78% White 

78% Male 

2019 Diversity Analysis of Federal Reserve Bank Director<.> 

2019 

89% Banking/Business 

78% White 

78% Male 

Dallas added another director from the business sector and made no improvements in racial and 

gender diversity. 

2018 

100% Banking/Business 

78% White 

78% Male 

2019 

89% Banking/Business 

78% White 

78% Male 

San Francisco added one director from the labor sector but made no improvements in racial or 

gender diversity. 

The data demonstrates that progress has been slow and uneven. As with previous years, the Federal 

Reserve Banks also missed a key opportunity to improve diversity by renewing directors' terms. 

Every year, each of the twelve Regional Reserve Banks have directors whose terms are set to 

expireY In 2019, the 19 directors whose terms were renewed are 68% white, 53% male, and 52% 

come from the banking or business sectors. Given the current diversity challenges at the Federal 

Reserve, when Banks choose to renew directors' terms it often maintains the status quo at each 

Bank. Moving forward, the Federal Reserve must take advantage of terms ending in order to appoint 

new directors and ensure a more diverse leadership. 
76 


Insert offset folio 19 here 35694.019

The Urgent Need for a More Pub!ic!y Representative Fed 

The Presidents of the twelve federal Reserve Banks are 

white and male. 

In 2019 the twelve Fed Bank Presidents are: 

83% White 

75% Male 

In 2017 the Federal Reserve made history when it appointed Dr. Raphael W. Bostic, a prominent 

African American economist and academic, to lead the Atlanta Federal Reserve. In the history of the 

Federal Reserve System there had been 134 Federal Reserve Bank Presidents. Previously, not one of 

those Presidents was African American or Latino.18 

Three newly appointed Federal Reserve Presidents started their terms in 2018: John C. Williams, 

New York Fed President; Tom Barkin, Richmond Fed President; and Mary Daly, San Francisco Fed 

President. All three of these Presidents are white and two are male. Barkin comes from the business 

sector while Daly and Williams both had 20+ year tenures at the Fed prior to their appointments. 

54% of current Presidents are Fed insiders who spent their careers at the Federal Reserve. 

In fact, these seven individuals spent a combined 158 years at the Fed before 

their appointments as Fed Presidents. 

23% of Presidents come from the financ1al or business sectors 

In fact, 3 of the 12 current Fed Presidents have strong ties to Goldman Sachs. 

23% of Presidents come from academia 
77 


Insert offset folio 20 here 35694.020

2019 Diversity Analysis of Federal Reserve Bank Directors 

In light of the fact that the Federal Reserve has made minimal progress towards their diversity 

goals, Fed Up's recommendations from 2018 continue to apply. The Federal Reserve Chair, Board of 

Governors, and leadership at the twelve Reserve Banks must take proactive steps to: 

Appoint new directors who improve the gender and racial diversity of the board of directors 

at the twelve Federal Reserve Banks. 

Fnd the outsized representation and influence of the bankmg and business sectors among 

the twelve Reserve Bank boards of directors. 

Improve the occupational diversity of the boards by promoting directors with non-profit, 

academic, and labor backgrounds. 

Ensure a transparent and publicly inclusive Federal Reserve Bank presidential selection 

process. This includes releasing: a public time!ine, list of criteria, list of candidates, and 

opportunities for public input via town halls or forums. 

When people of color, women, labor representatives, consumer advocates, non-profit professionals, 

community activists, and academics are underrepresented within the Fed's leadership, policymaking 

at the Federal Reserve skews towards the interests of bankers and businesspeople. Moving forward, 

the Fed must be led by a diverse leadership that includes people of color, women, and people from a 

range of sectors and backgrounds. This will help ensure that the Fed's policies are maximally inclusive 

and truly take into consideration economic conditions of all regions and communities. 

Methodology: This report draws on publicly available information to determine sector and 

demographic backgrounds of each incoming Federal Reserve board of director and President. 

The Federal Reserve Board of Governors and the twelve Federal Reserve Banks are welcome to 

provide the Fed Up Campaign with full diversity disclosures, in the event these data require any 

updates or additions. 
78 


Insert offset folio 21 here 35694.021

The Urgent Need for a More Publidy Representative Fed 

"The f·ederal Reserve Act of 1913," https://www 

federalreserve.gov/oboutthefed/fract.htm 

Center for Populilr Democr<Jcy "'To Represent the Public' 

The Federal Reserve's Contmued Failure to Represent the 

Amencan People" February 2016, https//popu!ardemocracy. 

org/sltes/dcf<lult/fi!es/Fed%20Up.pdf 

Remarks by Janet L. Yellen, Chair Board of Governors of the 

Federal Reserve System, at "Banking and the Econorny: A 

Forum for Minonty Bankers" Federal Rt'Serve Bank of Kansas 

City, September 29,2016, https://www_federwlrescrve_ gov/ 

newseve nts/ speech/ velle n 2 016 09 29a. pd f 

"Jerome Powell: I'm a big supporter of diversity," 

CNBC, November 28, 2017, https://www.cnbc.com/ 

v1deo/ 2017/11/ 28/Jerome· powell-1m -a-big-supporter -of· 

diversity.html 

Joshua Zumbrun, "Dtversity at the Fed," WaH Street Journal, 

r ebruary 27. 2018, https //www.wsj.com/livecoverage/fedjefOme· powell-february-2018-testimony/card/151971) 60511-. 

Federal Reserve Bank of New York, "John C. Williams Named 

President und CEO of New York Fed," Press Release, Apn! 

3, )018, https·;;www.newyorkfed.org/newsevents/news/ 

about thefed/ 2 018/ oa 18 04 0 3 

Federal Reserve Bank of San Francisco, "Mary C. Daly 

Named Federal Reserve Bank of San Francisco Prestdent 

and Chief Executive Officer," Press Release, Septernber 14, 

2018, https.//www.frbsf.org/our-districtjpress/news 

releases/2018/mary ·c ·daly· named-leder al-reserve- bank-ofsart-lr anclsco-rn'Sidt'nl-and-chief-c'xcnJ!ivc-officer /. 

"Fed Ur Coa!it1on Advocates for Candidates from Diverse 

Backgrounds for San Franc1sco Pres1dent," Center lor Porular 

Democracy, July 18,2018, https//populardemocracy_org/ 

news· and· publications/fed- coal1t1on, advoc atE>s·candidate<;· 

"New York 

Backlash Aga1nst New York 

F0d Pre<;idpntitll Selection Process," C0nter for Popular 

Democracy. March 28, 2018, https.//populardemocracy.org/ 

news"and-publications/new-ymk-elec-teds"fcd·adv!sers~ 

Join· bJcklash ·against- new-york-fed· pres1dent1al 

"Working People Still Need a VoiCe at the Fed 2018 

Diversity Analysis of Federal Reserve Bank Directors," 

Center for Popubr Democracy, ~ebruary 2018. http.// 

populardemocrary org/SI Lt:esjdef ault/files/f edUp- D:vNsity~ 

Dvta·Brief WEB-Output 3 pd!, 3 

10 U.S. Bureau of Labor Statistics, "Employment by mujor 

indusby sectOI" Table ?.1 Employment by maJOr 1ndustry 

sector, 2006,2016, and projected 2026," October 2il, 2017. 

httrs:/,/www.bls.gov/emp/lables/employment,by-major· 

industry-sector.htm 

11 U.S. Census Bureau, "QuickFacts: United States," July 1, 

2017, https.//www.census.gov/quick!acts/factjtab!e/US/ 

PST04:)2r! 

12 Center for Popular Democracv. "The Federal Reserve: Real 

a'ld Pl'rCC'Ived Conflicts nf !ntrrbt and a f)ath r orward," June 

20,2016, https//populardemocracy.org/ncws/publlcations/ 

fede"al-reserve-real-and-percelved-conflicts-intcrest-andpath-forward 

l3 in 2013 there were three vacant red dtrector positions 

bringing the total number to 105 

1:1 U.S. Census Bureau, "QuiCkFacts: !l!ino1s," July l. 2018. 

https://www.census.gov/quickfacts/il. Note: the ChiCago 

Fed's 7th District covers iowa and most of Illinois, 

Indiana, Michigan and Wisconsm. For the purpose of this 

report, Illinois (v,·hlch is the lootion of the Chicago fed's 

headquarters) was used to determine the overall percent of 

women m the region 

15 While San Francisco, like Dallas. is 89% banking/busmess, 

78% white, and 78% male, m 2019 the San Francisco fed 

added one D1rector w1th a labor background which shghtly 

Improved tts diversity numbers. Dallas, on the other hand, 

becamr less diverse after 1ts 2019 appointments. 

16 Note: Mmneapolis had one vacant director position in 2018 

which acc-ounts lor the 1 percentage rumt dlfiPrcntc betwt~en 

2018 and 2019 

17 Federal Reserve Bank directors serve three-year terms, 

renewable once for a maximum of SIX years of service 

18 Aaron Klein" fhe f ~·d's striking lacK of cilvcr~1ty and why Jt 

matters" Brooking<; lnst1tute, August 1. 2016, https://www 

brookJngs.rdu/opinions/the·fcds"sfrik!n;•~-lack-of-diversityand-why- it-matters/ 
79 


Insert offset folio 22 here 35694.022

So much for the Rcpuhlican tax cut as a game changer- the inu-stment hnom i>; liuJing fas.t- Market Watch 

Opinion: So much for the Republican tax cut as 

a game changer- the investment boom is 

fading fast 

Published Jan 19, 2019 9:45a.m. ET 

The price of oil has a bigger impact on capital expenditures than the corporate tax rate 

Spot oil price, '!f>/barref (purple, left axis) 

change (green, right axis) 

EfAIBEA!Haver Analyt!CS 

With oil pnces softening. will business mvestment weaken as well? 

The inveStment boom that began in 2016 is fading faSt, quashing the never~reallstic hopes of Republicans that the corporate tax 

cut had permanently transformed the economy for the better. 

There's good reason to believe that the tax cut had almost no impact on business investment Rather, it was Slrong demand. 

especially for oil. that encouraged businesses to expand capacity. Now investment is softening along \Nith aggregate demand. 

A year ago, .FS.ero~A.Yif'd:~_d_&.tl!J.g_that their big tax cut for businesses would create a virtuous cycle of higher fixed 

investment, leading to higher growth rates lasting for years. 

A month ago. \M1ite House economist Kevin 

companies were investmg more in equipment, software and facilities, enough to propel U.S. potential gro\lllth from an anemic 2% 

to a steHar 3% or more. 

https://www.markctwatch.comi ... o-mnch-f(lr-thc-rcpuh!ican-tax-cut-as-a-game-changcr-lhc-im cstmcnt-hoom-is.-filding.-fast-20 19-0 l-18/pr!ntf2/27/20 19 2:15:30 PM! 
80 


Insert offset folio 23 here 35694.023

So much fN the Republican tax cut as a game changer the investment bnom is fading fast- Markt.:t\Vatch 

,0,;U!Q_QfisLrus.._ Hassett was too cheery. 

Now, hopes that the inveStment boom would continue into 2019 are in tatters, victim to four factors that are dragging on the 

economy: reduced fiscal stimulus (inc!ud1ng the shutdown), a weakening global economy. the uncertainty of Donald Trump's 

trade policy and soft oil prices. 

Capex plans scaled back 

Those four interrelated trends are weighing on aggregate demand in the U.S. and global economies, forcing companies to scale 

back their investment plans. It's already visible in the data and in surveys of business expectations. 

It's important to define terms from the start. V'vhen economists talk about uinveSlment," they aren't talking about putting money 

into the stock market They are talking about hWII.9JD&1.9Jill DJa!D1Q]JiUJQJJLQ::l~Jr.1LY.P'.Sl~$~E1:? that will continue to create value for 

years 

There are three broad dasses of fixed inves1rnent structures, such as factories, oil wells and housing; equipment. such as 

machinery. airplanes and computers; and intellectual property, such as softvvare, new drugs. and blockbuster Hollywood movies. 

Businesses inveSt when they believe demand for their products will rise. Right now, fewer companies are confident of that future 

revenue. MOS! of the leading indicators of demand are slumping as the new year begins. 

Surveys of manufacturing executives show that the giddy optimism of early 2018 has turned to caution. The new orders 

component of the ISM manufacturing index, for instance, Qi&.LQg.e.d..1.1_QQiD1$_in December. Company guidance, U.S. regional 

surveys and global purchasing managers surveys are telling the same story: Companies are scaling back their plans for capital 

spending. 

Economists at Morgan Stanley say their capex plans index (which is based on the regional Fed surveys of capital~spending 

expectations} has fallen in eight of the paSt n1ne months to the lowest level in a year. 

'The continued softening in the index indicates restrained capita! spending activity in 2019 as the shine of tax Stimulus fades, and 

slower global growth, uncertainty around trade policy, and tighter financial conditions weigh on inveSlment plans," said Morgan 

Stanley economist Molly \t\klarton in a note to clients. 

Hard data also show that capital spending is softening. Real business investment surged at a 10% annual pace in the firSt half of 

the year, but slowed to 2.5% in the third quarter. Core capital equipment orders and shipments slowed through November, and 

pnvate nonresidential construction spending has also weakened. 

Unfortunately, the government shutdo\Nll means this key data isn't being reported or collected. It's never a good time to fly blind. 

doubly so now. 

Impact of oil prices 

There's something else going on besides weak aggregate demand: The impact of oil prices on U.S. inveStment is 

underappreciated. 

https:l/www.markctwatch.com/ ... o-much-for-thc-repuh!ican-fax-cut-as-a-gamc-cllangcr-thc-invcstment-bnom-is-Hlding-fast-20!9-0l-18!print[2!27/2019 2:15:30 PMJ 
81 


Insert offset folio 24 here 35694.024

So much !Or the Republican tax cut as a game changer.,_ the investment boom is fading fast- Market Watch 

lt used to be that changes in oil prices mainly affected consumption -lower prices boosted the economy by making energy 

consumers richer. while higher prices frequently led to recessions But since the fracking revolution earlier in this decade, 

changes in oil prices have become highly correlated Wlth changes in investment 

Traditional oil production is based on long-fasting projects requiring huge inveStments of hundreds of millions of dollars< The 

analysis of the profitability of, say, an offshore drilling project doesn't depend on spot crude oil prices ~CJ,.GB but on prices 

expected for the duration of the project's llfe. Temporary fluctuations in oil prices won't affect this kind of investment 

But produclng oil from shale is different in an important way: The investments are much smaller (less than $10 ml!!ion per well), 

prcx:luction can ramp up quick1y, and the productive life of any well is much shorter. This means the profitability of inveSting in a 

shale-fracking project depends on expected oil prices over the next few years. 

That creates a lot of volatillty in oil-field investment High prices attract a lot of investment, but \\!hen prices fall, as they did in 

2014 and 2015, inveStment collapses. The dip in U.S. growth rates in 2015 and 2016 was largely due to the impact of lower oil 

prices on business investment 

Oil accounted for all growth 

After a study of county-level economic data, Seth Carpenter, chief U.S. economist at UBS Securities, concluded that the increase 

in oil prices vvas responsible for much of the rebound in fixed inveStment in 2017, including inveStments in drilling equipment, 

Storage tanks, pipes, machinery, vehicles. worker housing, and the equipment needed to supply the required sand and water. 

Alexander Amon of the Penn Vvharton Budget Model eStimated in a blog poSt title!t~:Ille...2rLc.e..p.f.QiLLs.l:lo.Yx..a1S.e.:LD!iY.eLQf 

'"~~""=s.c"~"'·""JlL that firmer oil prices accounted for a!moSl an of the growth in investment in 2018. 

Most oil investments aren't profitable 1f the price falls muct1 

below $50 a barrel. 

lowered their capital spending plans for 2019. 

Unfortunately, oil prices have fallen again. OH prices, which were 

near $70 in October, fell to $43 in mid-December and are now 

around $52. That's right at the midpoint of profitability for most 

fracking projects, according to tba_D.allf:ls_Eacfii.EnQ.rgy_Sl.LGLe.Y& 

"The current !eve! of oil prices puts energy investment on a cusp," 

vvrote carpenter of UBS. "Further declines in the price of 'v\lest 

Texas Intermediate are likely to have a subStantively negative effect 

on energy's contribution to U.S. GOP. 

Manufacturers in the Dallas and Kansas City Federal Reserve 

districts have noticed, Morgan Stanley's \fvharton points out. 

"Declining oil prices are a concern going into the f1rst quarter of 

2019," one fabricated metal product manufacturer told the Dallas 

Fed in December. About half of energy firms in the district have 

Likewise, oil and gas dri!lmg activity in the Minneapolis Fed dtSlrict "slowed notably recently in response to a rapid decline in the 

pnce of crude oil." ''An industry contact reported that expectations for capital expenditures in 

the Bakken oil patch have shifted downward dramatically " 

The incentives Jn the 2017 tax cut had almoSt nothing to do With the investment boom we saw in 2017 and 201R which helps 

https:ih>\W.mnrkctwatch.com/ ... o-much-i()r~the-rcpublican-tax-cut-ns-a-gamc-chnnger-!hc-invc;;tment-boom-is·l'ading-fa;;I-2019-01-1R/print[2/27/20l9 2:15:30 PMJ 
82 


Insert offset folio 25 here 35694.025

So much f()f the Republican tax cut as a game changer- the imcstJncnt boom is fading fast- Market Watch 

explain Vv'hy many corporate executives and macro-economists don't think the tax cut transformed the economy at at! 

For instance, IHS Markit is predicting that U.S. gross domestic product\Nl!l fade from 2.9% in 2018 to 1.4% in 2023. The Federal 

Reserve. the Congressional Budget Office, the !MF and other forecasters agree that the tax cut was a temporary jolt, not a gamechanger. 

The U.S. economy needs a higher rate of productivity if we want living Standards to improve. The tax cut didn't change the weak 

trend in business inveStment. Maybe it's time to invest more public money into transportation, alternative energy, education and 

health care to increase the nation's capital stock and boost our grov.A:h rate. 

Related commentary: 

RexNutting 

Rex Nutting is a columnist and Marketwatch's international commentary editor, based in Washington. Follow him on Twitter 

@RexNutting 

We Want to Hear from You 

Join the conversation 

https://w,Yw.markctwatch.com/ ... o-much-for-thc-rep1Jblican~tax-cut-as-a-gamc-changcr-thc-invcstmcnt-boom-is-fading-fast-2019-0l~l8/nrintl2/27/2019 2:15:30 l'Ml 
83 


Insert offset folio 26 here 35694.026

MoNETARY Poucv REPORT 

February 22, 2019 

Board of Governors of the Federal Reserve System 

For us<~ at 11:00 a.m., EST 

February 11,2019 
84 


Insert offset folio 27 here 35694.027

OF TRANSMITTAL 

BOARD OF GOVERNORS OF THE 

FEDERAL RESERVE SYSTEM 

Washington, D.C., February 22, 2019 

TI!E PRESIDENT OF THE SENATE 

TilE SPEAKER OF THE HOUSE OF REPRESENTATIVES 

The Board of Governors is pleased to submit its Monetary Policv Report pursuant to 

section 2B of the Federal Reserve Act. 

Sincerely, 

Jerome H. Powell, Chairman 
85 


Insert offset folio 28 here 35694.028

ON GoALS AND Poucv 

20 

The Federal Open Market Committee (FOMC) is llrmly committed to fulfllling its statutory 

mandate from the Congress of promoting maximum employment, stable prices, and moderate 

long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public 

as clearly as possible. Such clarity facilitates well-informed decisionmaking by households and 

businesses, reduces economic and l1nancial uncertainty, increases the cllcctiveness of monetary 

policy, and enhances transparency and accountability, which are essential in a democratic society. 

lnllation, employment, and long-term interest rates fluctuate over time in response to economic and 

financial disturbances. Moreover, monetary policy actions tend to influence economic activity and 

prices with a lag. 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 linancial system that 

could impede the attainment of the Committee's goals. 

The inflation rate over 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 Committee rcatlirms its 

judgment that inflation at the rate of 2 percent, as measured by the annnal change in the price 

index for personal consumption expenditures, is most consistent over the longer run with the 

Federal Reserve's statutory mandate. The Committee would be concerned if inflation were running 

persistently above or below this objective. Communicating this symmetric inllation goal dearly to the 

public helps keep longer-term inflation expectations l1rmly 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. The maximum level of employment 

is largely determined by nonmonetary factors that affect the structure and dynamics of the labor 

market. These factors may change over time and may not be directly measurable. Consequently, 

it would not be appropriate to specify a lixcd goal lor employment; rather, the Committee's policy 

decisions must be informed by assessments of the maximum level 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 

recent projections. the median of FOMC participants' estimates of the longer-run normal rate of 

unemployment was 4.4 percent. 

[n setting monetary policy, the Commil!ec seeks to mitigate deviations of inflation from its 

longer-run goal and deviations of employment from the Committee's assessments of its maximum 

level. These objectives are generally complementary. However, nnder circumstances in which the 

Committee judges that the objectives are not complementary. it follows a balanced approach in 

promoting them, taking into account the magnitude of the deviations and the potentially different 

time horizons over which employment and inflation arc projected to return to levels judged 

consistent with its mandate. 

The Committee intends to realllrm these principles and to make adjustments as appropriate at its 

annual organizational meeting each January. 
86 


Insert offset folio 29 here 35694.029

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 Risks ...................................................... 51 

Abbreviations ......................•....................... 65 

List of Boxes 

Employment Disparities between Rural and Urban Areas ........................... 10 

Developments Related to Financial Stability ..................................... 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 

NoTE: This report reflects information that was publicly available as of noon EST on February 21, 2019. 

Unless othrrwise statf'd, the timP Sf'ries in thP figurE's: f'xtend through, for daily rlat<J, Febru<1ry 20, 201 9; for 

data, January 20 i 9; and, for quarterly data, 20 I B:Q4. In b;1r charts, ,15 notf'd, the changE' for a given pf'riod 

measurerl to its fin;d quarter from tlw final quarter of the prt:'ceding 

For iigures 1 h ,md 34, note that the ~,«.P ')00 Indo; ,1nd tfw I )ow !nne~ B.mk !nckx ,llf' pmdun<; of S&!' Dow Jom'~ !ndin'"!! C ;md/m ib d11i!i;:l1P<; .and 

hav{' h('Pn 1in'n-.f><i !or use hy the Board and/or its aitili,1lC'<.. All 

R('di~lrihution, reproduction, 
87 


Insert offset folio 30 here 35694.030

Economic activity in the United States 

appears to have increased at a solid pace, on 

balance, over the second half of 2018, and the 

labor market strengthened further. Inflation 

has been near the Federal Open Market 

Committee's (FOMC) longer-run objective 

of 2 percent, aside from the transitory effects 

of recent energy price movements. 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 raised the target range for the federal 

funds rate twice in the second half of 2018, 

pulling its level at 2'14 to 2'h percent following 

the December meeting. In 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 federal funds rate may 

be appropriate to support the Committee's 

congressionally mandated objectives of 

maximum employment and price stability. 

Economic and Financial 

The lahor market, The labor market has 

continued 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, 

averaging a little under 4 percent a low level 

by historical standards----while the labor force 

participation rate has moved up despite the 

ongoing downward influence from an aging 

population. Wage growth has also picked 

up recently. 

Inflation. Consumer price inflation, as 

measured by the 12-month change in the price 

index for personal consumption expenditures, 

moved down from a little above the FOMCs 

objective of 2 percent in the middle of last 

year to an estimated I. 7 percent in Decem her, 

restrained by receut declines in consumer 

energy prices. The 12-month measure of 

inflation that excludes food and energy items 

(so-called core inflation), which historically 

has been a better indicator of where overall 

inflation will be in the future than the headline 

measure that includes those items, is estimated 

to have been 1.9 percent in December-up 

'!. percentage point from a year ago. Surveybased measures of longer-run inflation 

expectations have generally been stable, 

though market-based measures of inflation 

compensation have moved down some since 

the first half of 2018. 

Economic growth. Available indicators suggest 

that real gross domestic product (GDP) 

increased at a solid rate, on balance, in the 

second half of last year and rose a little under 

3 percent for the year as a whole--a noticeable 

pickup from the pace in recent years. 

Consumer spending expanded at a strong 

rate for most of the second half, supported by 

robust job gains, past increases in household 

wealth, and higher disposable income due in 

part to the Tax Cuts and Jobs Act, though 

spending appears to have weakened toward 

year-end. Business investment grew as well, 

though growth seems to have slowed somewhat 

from a sizable gain in the t\rst hal[ However, 

housing market activity declined last year 

amid rising mortgage interest rates and higher 

material and labor costs. Indicators of both 

consumer and business sentiment remain 

at favorable levels, but some measures have 

softened since the fall, likely a reflection of 

financial market volatility and increased 

concerns about the global outlook. 

Financial conditions. Domestic financial 

conditions for businesses and households have 

become less supportive of economic growth 

since July. Financial market participants' 

appetite for risk deteriorated markedly in the 

latter part of last year amid investor concerns 
88 


Insert offset folio 31 here 35694.031

2 SUMMARY 

about downside risks to the growth outlook 

and rising trade tensions between the United 

States and China. As a result, Treasury yields 

and risky asset prices declined substantially 

between early October and late Decem bcr 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 

shifted down, long-term Treasury yields and 

mortgage rates moved 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 20 18; 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 linancing 

conditions for consumers largely remain 

supportive of growth in household spending. 

The foreign exchange value of the U.S. dollar 

strengthened slightly against the currencies of 

the US. economy's trading partners. 

~Financial stability. The US. financial system 

remains substantially more resilient than 

in the decade preceding the linancial crisis. 

Pressures associated with asset valuations 

eased compared with July 201R, particularly 

in the equity, corporate bond, and leveraged 

loan markets. Regulatory capital and liquidity 

ratios of key financial institutions, inducting 

large banks, are at historically high levels. 

Funding risks in the financial system arc 

low relative to the period leading up to the 

crisis. 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 standards---especially 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 Developments, Foreign economic 

growth stepped down significantly last year 

from the brisk pace in 2017. Aggregate growth 

in the advanced foreign economies slowed 

markedly, especially in the euro area, and 

several Latin American economics continued 

to underperform. The pace of economic 

activity in China slowed noticeably in the 

second half of 201R. Inflation 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 part reflecting 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 improved in recent 

weeks, alongside those in the United States, on 

balance since July 2018, global equity prices 

were lower, sovereign yields in many economics 

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 advanced foreign economies generally 

edged down. 

Interest rate policy. As the labor market 

continued to strengthen and economic 

activity expanded at a strong rate, the FOMC 

increased the target range for the federal 

funds rate gradually over the second half of 

20 IS. Specifically, the FOMC decided to raise 

the federal funds rate in September and in 

December, bringing it to the current range of 

2:,-:; to 2\f, percent. 

ln 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 

developments and assess their implications for 
89 


Insert offset folio 32 here 35694.032

the economic outlook. In January, the FOMC 

stated that it continued to view sustained 

expansion of economic activity, strong labor 

market conditions. and inflation ncar the 

Committee's 2 percent objective as the most 

likely outcomes. Nonetheless, in light of 

global economic and financial developments 

and muted inflation pressures, the Committee 

noted that it will be patient as it determines 

what 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 size of future adjustments to the target 

range for the federal funds rate will depend 

on the Committee's assessment of realized 

and expected economic conditions relative to 

its maximum-employment objective and its 

symmetric 2 percent inHation objective. 

Balance sheet policy. The FOMC continued 

to implement the balance sheet normalization 

program that has been under way since 

October 2017. Specifically, the FOMC 

reduced its holdings of Treasury and agency 

securities in a gradual and predictable manner 

by reinvesting only principal payments it 

received from these securities that exceeded 

gradually rising caps. Consequently, the 

Federal Reserve's total assets declined by about 

$260 billion since the middle of last year, 

ending the period close to $4 trillion. 

Together with the January postmeeting 

statement, the Committee released an 

updated Statement Regarding Monetary 

Policy Implementation and Balance Sheet 

Normalization to provide additional 

information about its plans to implement 

monetary policy over the longer run. In 

particular. the FOMC stated that it intends 

to continue to implement monetary policy 

in a regime with an ample supply of reserves 

so that active management of reserves is not 

MONETARY POLICY RFPORT: FEBRUARY 2019 J 

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 tlnancial developments. 

Labor markets in urban versus rural areas. 

The recovery in the U.S. labor market since 

the end of the recession has been uneven 

across the country, with rural areas showing 

markedly less improvement than cities and 

their surrounding metropolitan areas. In 

particular, the employment-to-population 

ratio and labor force participation rate in rural 

areas remain well below their pre-recession 

levels. while the recovery in urban areas has 

been more complete. Di1Terences in the mix of 

industries in rural and urban areas~.,a larger 

share of manufacturing in rural areas and a 

greater concentration of fast-growing services 

industries in urban areas.,-have contributed to 

the stronger rebound in urban areas. (See the 

box "Employment Disparities between Rural 

and Urban Areas" in Part 1.) 

Monetary policy roles. Jn evaluating the 

stance of monetary policy, policymakers 

consider a wide range of information on the 

current economic conditions and the outlook. 

Policymakcrs also consult prescriptions for the 

policy interest rate derived from a variety of 

policy rules for guidance, without mechanically 

following the prescriptions of any spccilic 

rule. The FOMC's approach for conducting 

systematic monetary policy provides sufficient 

flexibility to address the intrinsic complexities 

and uncertainties in the economy while 

keeping monetary policy predictable and 

transparent. (See the box "Monetary Policy 

Rules and Systematic Monetary Policy" in 

Part 2.) 

Balance sheet normalization and monetary 

policy implementation. Since the financial 

crisis, the size of the Federal Reserve's balance 

sheet has been determined in large part 

hy its decisions about asset purchases for 
90 


Insert offset folio 33 here 35694.033

4 SUMMARY 

economic stimulus, with growth in total assets 

primarily matched by higher reserve balances 

of depository institutions. However, liabilities 

other than reserves have grown significantly 

over the past decade. In the longer run, the 

size of the balance sheet will be importantly 

determined by the various 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 Reserve transparency and 

accountability. For central banks, transparency 

provides an essential basis for accountability. 

Transparency also enhances the effectiveness 

of monetary policy and a central bank's 

efforts to promote financial stability. For 

these reasons, the Federal Reserve uses a 

wide variety of communications to explain 

its policymaking approach and decisions 

as clearly as possible. Through several new 

initiatives. including a review of its monetary 

policy framework that will include outreach 

to a broad range of stakeholders. the Federal 

Reserve seeks to enhance transparency and 

accountability regarding how it pnrsues 

its statutory responsibilities. (See the box 

"Federal Reserve Transparency: Rationale 

and New Initiatives" in Part 2.) 
91 


Insert offset folio 34 here 35694.034

AND 

Domestic 

The labor market"'"'''"'""' 

during !he second 

Payroll employment gains have remained 

strong, averaging 224,000 per month since 

June 2018 (figure 1 ). This pace is similar to the 

pace in the 1lrst half of last year, and it is faster 

than the average pace of job gains in 2016 

and 2017. 

The strong pace of job gains over this period 

has primarily been manifest in a rising labor 

force participation rate (LFPR)· · the share 

of the population that is either working 

or actively looking for work--rather than 

a declining unemployment rate.' Since 

June 2018, the LFPR has moved up about 

V. percentage point and was 63.2 percent in 

January----a hit higher than the narrow range it 

has maintained in recent years (figure 2). The 

improvement is especially notable because the 

aging of the population-and. in particular, 

the movement of members of the babyboom cohort into their retirement years-- -has 

otherwise imparted a downward influence on 

the LFPR. Indeed, the LFPR for individuals 

he tween 25 and 54 years old· which is much 

less sensitive to population aging--- has 

1. The observed pace of payroll job gains would have 

been sulficient to push the unemployment rate lower had 

the LFPR not risen. Indeed, monthly payroll gains in 

the range of 115.000 to 145,000 appear consistent with 

an unchanged unemployment rate around 4.0 percent 

and an unchanged LFPR around 62.9 percent (which 

arc the June 2018 values of these rates). If instead 

the LFPR were dedining 0.2 percentage point per 

year- ···wughly the influence of population aging~-·thc 

range of job gains needed to maintain an unchanged 

unemployment rate would be about 40.000 per month 

lower. There is considerable uncertainty around these 

estimates, as the difference between m(mthly payroll gains 

and employment changes from the Current Population 

Survey (the source of the unemployment rate and LFPR) 

can be quite volatile over short periods. 

I. Net change in payroll employment 

M(>nth!y 

2. Labor force pai1icipation rates and 

employment-to-population ratio 

5 

400 

:wo 

200 

400 

600 

ROO 

Percent 
92 


Insert offset folio 35 here 35694.035

6 PART 1: RFCENT FCONOMIC ANIJ FINANCIAL OI:VIIOPMINTS 

3. Measures of labor underutilization 

improved considerably more than the overall 

LFPR, including a '/, percentage point rise 

since June 20 I R2 

18 

14 

12. 

10 

At the same time, the unemployment rate has 

remained little changed and has generally 

been running a little under 4 percent.' 

Nevertheless, the unemployment rate remains 

at a historically low level and is '/,percentage 

point below the median of the Federal Open 

Market Committee (FOMC) participants' 

estimates of its longer-run normal level 

(figure 3)4 Combining the movements in both 

unemployment and labor f()rce participation, 

2. Since 2015. the increase in the prime-age LFPR for 

\Vorncn was nearly 2 percentage points, while the increase 

for men was only about l percentage ln January. 

the LFPR for prime-age women was above 

where it stood in 2007, whereas for men it was still about 

2 percentage points below. 

3. The unemployment rate in January was 4.0 percent, 

boosted somewhat by the partial government shutdown, 

as some furloughed federal workers and temporarily laidoff federal (;on tractors are treated as uncmpJc,yed in the 

household employment survey. 

4. Sec the Summary of Economic Projections in Part 3 

of this report . 
93 


Insert offset folio 36 here 35694.036

the employment-to-population ratio for 

individuals 16 and over---the share of that 

segment of the population who are working---

was 60.7 percent in January and has been 

gradually increasing since 20 ll_ 

Other indicators are also consistent with 

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 level 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 layoiT rate has remained low, and 

the number of people filing initial claims for 

unemployment insurance benefits has also 

remained low. Survey evidence indicates that 

households perceive jobs as plentiful and that 

businesses sec vacancies as hard to fill. 

groups over 

the past several years 

The ilattening in unemployment since mid2018 has been evident across racial and ethnic 

groups (figure 4). Even so. over the past 

several years, the decline in the unemployment 

rates for blacks or African Americans and 

for Hispanics has been particularly notable, 

and the unemployment rates tor these groups 

are near their lowest readings since these 

series began in the early 1970s. Differences in 

unemployment rates across ethnic and racial 

groups have narrowed in recent years, 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, with differentials 

generally a bit below pre-recession levels. 

The rise in LFPRs for prime-age individuals 

over the past few years has also been apparent 

in each of these racial and ethnic groups. 

Nonetheless, the LFPR for whites remains 

MONETARY POLICY REPORT: HcBRUARY 2019 7 
94 


Insert offset folio 37 here 35694.037

B PART 1: RECENT ECONOMIC AND riNANCIAI DFVELOPMFNTS 

4. Unemployment rate by race and ethnicity 

Monthly 

Blackm Afriran.'\nH"Jtcan 

5. Prime-age labor force parlicip<~tion rJle by rare and 

ctlmicity 

Monthly 

--~-------

81 

83 

82 

81 

80 

79 

78 

I'PfU'nl 

18 

16 

--- 14 

higher than that for other groups (figure 5). 

Important diifcrcnccs in economic outcomes 

persist across other characteristics as well 

12 

10 

(see. for example, the box "Employment 

Disparities between Rural and Urban Areas," 

which highlights that there has been less 

improvement since 2010 in the LFPR and 

employment-to-population ratio for prime-age 

individuals in rural areas compared with 

urban areas). 

Most available indicators suggest that growth 

of hourly compensation has stepped up further 

since June 2018 after having firmed somewhat 

over the past few years; however, growth rates 

remain moderate compared with those that 

prevailed in the decade before the recession. 

Compensation per hour in the business 

sector- -a broad-based measure of wages and 

benefits, but one that is quite volatile-rose 

2V. percent over the four quarters ending 

in 20 18:Q3, about the same as the average 

annual increase over the past seven years or so 

(figure 6). The employment cost index, a less 

volatile measure of both wages and the cost 
95 


Insert offset folio 38 here 35694.038

to employers of providing bcnclits, increased 

3 percent over the same period, while average 

hourly earnings-which do not take account 

of bencflts--incrcascd 3.2 percent over the 

12 months ending in January of this year; the 

annual increases in both of these measures 

were the strongest in nearly lO years. The 

measure of wage growth computed by the 

Federal Reserve Bank of Atlanta that tracks 

median 12-month wage growth of individuals 

reporting to the Current Population Survey 

showed an increase of 3.7 percent in January, 

near the upper end of its readings in the past 

three years and well above the average increase 

in the preceding few years5 

... and have likely been restrained by 

slow growth of labor productivity over 

much of the expansion 

These moderate rates of compensation 

gains likely reflect the offsetting influences 

of a strong labor market and productivity 

growth that has been weak through much 

of the expansion. From 2008 to 2017, labor 

productivity increased a little more than 

I percent per year, on average, well below 

the average pace from 1996 to 2007 of nearly 

3 percent and also below the average gain 

in the 1974-~95 period (ligure 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 recovery that followed. 

More recently, however, labor productivity is 

estimated to have increased almost 2 percent 

at an annual rate in the lirst three quarters of 

2018 still moderate relative to earlier periods, 

but its fastest three-quarter gain since 20 I 0. 

While it is uncertain whether this faster rate 

of growth will persist, a sustained pickup in 

productivity growth, as well as additional labor 

market strengthening, would likely support 

stronger gains in labor compensation. 

5. The Atlanta Fed's measure di1fcrs from others in 

that it measures the wage growth (lnly of workers \vho 

were employed both in the current survey month and 

1:2 months earlier. 

MONHARY POLICY REPORT: FEBRUARY 2019 9 

6. Measures of change in hourly compensation 

7. Change in business-sector output per hour 

l't'fC('!lt,annualrdtc 
96 


Insert offset folio 39 here 35694.039

10 PART L RECENT FC:ONOMIC AND FINANCIAL DIVEIOPMENTS 

Employment Disparities between Rural and Urban Areas 

The U.S. labor market has recoverf'd substantially 

since 2010. For people in their prime working years 

25 to 54), the unemployment rate has moved 

steadily to levels below the previous business 

cycle peak in 2007, the labor force p.1rticipation rate 

(LFPR) has retraced much of its decline, and the share 

of the population who are employed-known as the 

employment-to-population ratio, or EPOP ratio-·-

hJs returned to about its level before the recession. 

However, the labor market recovery has been uneven 

across the country, with "rural" (or nonmetro) areas 

showing markedly less improvement than cities and 

their surroundings (metro areas). 1 

The extent of the initial decline and subsequent 

improvement in the EPOP ratio varied by metropolitan 

status. The gap between the EPOP ratios in rural and 

larger urban areas is now noticeably wider than it was 

before the recession, and the cyclical started 

later in rural ;uee~s. Specifically, <1s shown in A, 

the prime-age EPOP is now slightly ahovf' its prerecession level in larger urban areas, whereas it is just 

below its pre-recession average in smaller urban areas 

and much below its pre-recession level in rural areJs. 1 

The EPOP ratio can usefully be viewed as 

summarizing both the L~PR ··that is, the share of 

the popula!ion that eithE'r has a job or is actively 

looking for work~and the unemployment rate, which 

measures the share of the labor force without a job and 

actively searching. 1 The divergen\e "in rural and urban 

EPOP ratios during the economic expansion almost 

entirely reflects divHgencf's in U·PRs rather than in 

unC'mploymrnt rate.:; {iigurf'~ R and C). In pcu!ic.u!Jr, thf' 

rural and urban unemployment rates have tracked each 

(ronUnued) 

1 l·or convf'nicnce, we refer to nwtropo!itan countie.:; with 

ties to an urbanized center as "urban" ,md 

thdt lack such ties ~'s "rural." 

A. Employment-to-population ratios 

82 

so 

78 

76 

71 

72 

B. Um~rnploymcnt rates 

10 

'SmaH<·r MSAs 

popuLHion" anrl the unC'mployme>n! rate is. defined as "persons 

unemployerl/!abor forcf'." The'>t"' numbers are multiplied by 

1 on for pn><,entation purpo"C'" in the figurrs 
97 


Insert offset folio 40 here 35694.040

other fairly closely in this expansion, though they have 

divergE-d a littlE' in the past few In contrast, the 

difference between rural and LFPRs has widened 

significantly over the past decade. 

On average, people in rural areas tE'nd to have 

fewer years of schooling than pC'ople in urban areas, 

and because the EPOP ratio tends to be lower for 

individuals with less education, this demographic 

difference has contributed to the persistent rural--urban 

divide. However, these educational differences do not 

appear responsible for the fact that the gap between 

rural and urban EPOP ratios have widened. D 

shows that, in recent 

ratios diverged '"'"'"""''"Y 

CJtegories, similar to the 

generally. The left panel of figure D shows that the 

EPOP ratio of non-college-educated adults 25 to 

54 has been much lower in rural areas than urban 

ones beginning in 2012. ThP right pane! of figure D 

shows that the EPOP ratio of college-educated adults 

used to be higher in rural areas than in urban ones, 

but that is no longer so. Thus, the recent widening of 

the rural-urban disparity in EPOP ratios has not been 

primarily driven diffprences in years of education. 

Nevertheless, the in the tPOP 

ratio for non-college-educJted adults rural areas 

(continued on next page) 

D. Employment to-population ratios 

Nonroltege odults 

iG 

MONETARY POLICY RFPORTo FEBRUARY 2019 11 

C. Labor force participation rates 

Momhly 

85 

8·1 

82 

81 

80 

79 

78 

College adults 
98 


Insert offset folio 41 here 35694.041

12 PART 1: RECFNT ECONOMIC AND fiNANCIAl. DFVELOPMENTS 

Employment Disparities (continued) 

has been particularly weak, it is likely that broader 

mJcroeconomic trends-·-inc!uding the ongoing shift in 

labor demand that has favored individuals with more 

education--··have had more adverse conspquencf's 

for the populations in rural areas than in urbdn areas. 

for example, manufJcturing, where employment has 

stagnated, accounts for a larger share of employment 

in rural areas than in urban while fast-growing 

services industries, such as and professional 

services that tend to employ workers with more 

education, are more concentr~tted in urban areas. 

Indeed, employment in manufacturing has not yet 

fully recovered from the recession. And, despite> 

the strength in the past two the share of total 

employment in 

post-recession low. 

The fact that most of the EPOP divergence is seen 

in labor force participation rather than unemployment 

rates suggests th<1t many rural workers who experienced 

a permanent job loss, perhaps due to a factory closing, 

decided to eventually exit the labor force rather than 

<:-ontinue their job search. Some individuals who had 

been working, despite ongoing health problems, may 

have responded to job loss and poor reemployrmmt 

opportunities by applying for Social Security Disdbility 

Insurance (SSDI) benefits, and, in hct, take-up 

increased a little more in rural areas than it did in urban 

ones over thP past decade.4 

Wht"'n regions are faced with adverse changes 

in labor demand, some residents respond by 

migrating to more prosperous areas. more out~ 

migration that occurs from areas with relatively fewer 

labor market opportunities, the smaller should be the 

observed decline in local-area EPOPs. 5 However, some 

research that the average migration response 

to adverse shocks has decreased in recent 

decJdes, which could amplify the !Jbor market Pifects 

of local shocks and lead to persistent disparities in 

EPOP ratios across J.reas.6 

4. -!his could health 

problems expands the pool of qualify 

for SSDI} and sluggish labor dr•mand in rural areas (which 

increases the propensity of individuals to apply for SSDI 

!wncfits). 

5. Although J higher fJte of rur,ll out,mlgralaon 

close the EPOP gap, depopulation exacert>al<e e<:onomiC 

difficultif''> for thmf' who rC'rnain in rural areas. 

6. See, for MJi Dao, Davide Furceri, and Prakash 

Loungani (2017), L<1bor in the 

United St.:ltes: Trend 0nd Cvcle," 

Statistics. voL ryq {May), pp'. 243-57. 
99 


Insert offset folio 42 here 35694.042

Consumer price inflation has fluctuated 

around the FOMC's objective of 2 percent, 

largely reflecting movements in energy prices. 

As measured by the 12-month change in 

the price index for personal consumption 

expenditures (PCE), inflation is estimated 

to have been l. 7 percent in December after 

being above 2 percent for much of 2018 

(figure 8)-'' Core PCE inflation--that is, 

inflation excluding consumer food and energy 

prices-is estimated to have been 1.9 percent 

in December. Because food and energy prices 

arc often quite volatile, core inflation typically 

provides a better indication than the total 

measure of where overall 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 

relatively low. 

Core inflation has moved up since 2017. when 

inflation was held down by some unusually 

large price declines in a few relatively small 

categories of spending, such as mobile phone 

services. The trimmed mean PCE price index, 

produced by the Federal Reserve Bank of 

Dallas, provides an alternative way to purge 

inflation of transitory influences, and il 

may be less sensitive 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 Novcmber7 lnllation likely has 

been increasingly supported by the strong 

labor market in an environment of stable 

inflation expectations; inflation last year was 

6. The partial government shutdown has delayed 

publication of the Bureau of Economic Analysis's 

estimate fiJr PCE price inflation in December, and 

the numbers reported here arc estimates based on the 

December consumer and producer price indexes. 

7. The trimmed mean index excludes whichever prices 

showed the largest increases or decreases in a given 

month. Note that over the past 20 years, changes in the 

trimmed mean index have averaged about :14 percentage 

core PCE inflation and 0.1 percentage point 

total PCE inflation. 

MONETARY POLICY RFPORT: FfBRUARY 2019 1 3 

8. Change in the price index for personal consumption 

expenditures 

30 
100 


Insert offset folio 43 here 35694.043

14 PART 1, RECENT ECONOMIC AND FINANCIAl DEVElOPMENTS 

9. Spot and futures prices for rrude.oil 

130 

120 

IJO 

100 

90 

80 

70 

(-i(l 

50 

40 

30 

20 

10. Nonfuel import prices and industrial metals indexes 

!00 -~-~---- --~ ------~--

120 lnduwia!metals 

110 102 

100 !00 

90 YR 

HO 

96 

70 

60 94 

also boosted slightly by the tariffs that were 

imposed throughout2018. 

Oil have 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 subsequently fell sharply 

and has averaged around $60 per barrel this 

year (figure 9). The recent 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 

declines, but concerns about weaker global 

growth likely also played a role . 

. . . while of other !han 

energy have also fiP<rliriNI 

After climbing steadily since their early 

2016lows. nonfuel import prices peaked in 

May 2018 and declined tor much of the rest 

of 2018 in response to dollar appreciation. 

lower foreign inflation, and declines in 

commodity prices. In particular. metal prices 

fell markedly in the second half of 2018. partly 

reflecting concerns about prospects for the 

global economy (figure 1 0). Nonfucl import 

prices, before accounting for the effects of 

tariffs on the price of imported goods, had 

roughly a neutral influence on U.S. price 

inflation in 2018. 

Expectations of inflation likely influence 

actual inllation by affecting wage- and pricesetting decisions. Survey-based measures of 

inflation expectations at medium- and longerterm horizons have remained generally stable 

over the second half of 2018. In the Survey 

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 over the 
101 


Insert offset folio 44 here 35694.044

next 10 years has been very close to 2 percent 

for the past several years (figure 11 ). In 

the University of Michigan Surveys of 

Consumers, the median value for inflation 

expectations over the next 5 to 10 years has 

been around 2V2 percent since the end of 

2016, though this level is about '/. percentage 

point lower than had prevailed through 

2014. In contrast, in the Survey of Consumer 

Expectations. conducted by the Federal 

Reserve Bank of New York, the median of 

respondents' expected inflation rate three years 

hence-while relatively stable around 3 percent 

since early 2018~~·is nonetheless at the top of 

the range it has occupied over the past couple 

of years . 

. . . while market-based measures of 

Inflation expectations can also be gauged 

by market~bascd measures of inflation 

compensation. However. the inference 

is not straightforward, because marketbased measures can be importantly affected 

by changes in premiums that provide 

compensation for bearing inflation and 

liquidity risks. Measures of longer~tcrm 

inflation compensation--derived either from 

differences bet ween yields on nominal Treasury 

securities and those on comparable-maturity 

Treasury Innation-Protccted Securities (TIPS) 

or from inflation swaps~- moved down in 

the fall and are below levels that prevailed 

earlier in 201 R (figure 12)-' The TIPS-based 

measure of 5-to-lO-ycar-forward inllation 

compensation and the analogous measure 

from inflation swaps are now about 1% percent 

R. Inflation compensation implied by the TIPS 

hreakeven inflation rate is based on the difference, at 

comparable maturities, between yields on nominal 

Treasury securities and yields on TIPS. which arc indexed 

to the total consumer price index (CPl). Inflation swaps 

arc contra...:ts in which one party makes payments of 

certain fixed nominal amounts in exchange for cash llows 

that arc indexed to cumulative CPT inflation over some 

horizon. Inflation compensation derived from inflation 

swaps typically exceeds TIPS-based compensation. but 

week-to-week movements in the two measures arc highly 

correlated. 

MONfTARY POI.ICY REPORTo FEBRUARY 2019 15 

11. Median inflation expectations 

Pt>f(C!lt 

12. S·to-10-year-forward inflation rompl'nsation 

3.0 

25 

20 

LJ 

10 
102 


Insert offset folio 45 here 35694.045

1 6 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS 

13. Change in real gross domestic product and gross 

dmnestic income 

I'Prn'nt.annualrm•• 

03 

Sm•RG: Bureau nf Economic Analysis via I lavN Aual)1its. 

14. Change in real personal consumption expenditures 

and disposable personal income 

lilf Pt•rsnna! con~umption l'xpenditures 

<\ Disposable JWr>ona! income 

S\llJRCF.: Bureau of Economic Analy~i5 via !laver Analytlrs 

and 2:14 percent, respectively, with both 

measures below their respective ranges that 

persisted for most of the 10 years before the 

start of the notable declines in mid-20149 

Rca! gross domestic product growth 

was solid, on balance, in the second 

half of 2018 

Real gross domestic product (GDP) rose at an 

annual rate of 3'/, percent in the third quarter, 

and available indicators point to a moderate 

gain in the fourth quarterw For the year, GDP 

growth appears to have been a little less than 

3 percent, up from the 2Y, percent pace in 2017 

and the 2 percent pace in the preceding two 

years (figure 13). Last year's growth reflects, in 

part, solid growth in household and business 

spending, on balance, as well as an increase 

in government purchases of goods and 

services; by contrast, housing-sector activity 

turned down last year. Private domestic 

final purchases--that is, final purchases by 

households and businesses, which tend to 

provide a better indication of future GDP 

growth than most other components of overall 

spending-likely posted a strong gain for 

the year. 

Some measures of consumer and business 

sentiment have recently softened~ --likely 

reflecting concerns about financial market 

volatility, the global economic outlook, 

trade policy tensions, and the government 

shutdown--and consumer spending appears 

to have weakened at the end of the year. 

Nevertheless, the economic expansion 

continues to be supported by steady job 

gains, past increases in household wealth, 

expansionary flscal policy, and still-favorable 

domestic financial conditions, including 

9. As these measures arc based on CPI inflation, one 

should probably subtract about 1;4 percentage point~~thc 

average differential with PCE inflation over the past two 

decades -~~to infer inflation compensation on a PCE basis. 

10. The initial estimate of GDP by the Bureau of 

Economic Analysis for the fourth quarter was delayed 

because of the partial government shutdown and will 

now be released on february 2R. 
103 


Insert offset folio 46 here 35694.046

moderate 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 31

h percent 

in the third quarter and increasing robustly 

through November (figure 14). However, 

despite anecdotal reports of favorable holiday 

sales. retail sales were reported to have 

declined sharply in December. 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 by 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 2018 through the third 

quarter (the latest data available). the personal 

saving rate was roughly unchanged, on net, 

over this period (figure 15). 

recently softened 

While increases in household wealth have likely 

continued to support consumer spending, 

gains in net worth slowed last year. House 

prices continued to move up in 2018, boosting 

the wealth of homeowners. but the pace of 

growth moderated (figure 16). U.S. equity 

prices arc, on net. similar to their levels at 

the end of 2017. Still, the level of equity and 

housing wealth relative to income remains very 

high hy historical standards (figure 17). 11 

I 1. Indeed. in the third quarter of 2018 the most 

recent period for which data arc available household net 

worth was seven times the value of disposable income. 

the highest-ever reading for that ratio, which dates back 

to 1947. However. following the decline in stock prices 

since the summer, this ratio has likely fallen somc\vhaL 

MONETARY POLICY REPORT: FEBRUARY 2019 1 7 

15. Personal saving rate 

PrlH'!ll 

12 

lO 

16. Prices of existing single-family houses 

Pf'i<eiU(hangefromycarrarlirr -- -----· ..... ____ --· --- "" --··--·-----·-··----·--

15 

10 

10 

--- !5 

--- 20 

17. Wealth-to-income ratio 

Ratio 

7.0 

G.5 

6.0 

5.3 
104 


Insert offset folio 47 here 35694.047

18 PART lc REGNT ECONOMIC AND FINANCIAL f)[VflOPMEN!S 

18. Jndl'Xes of consumer sentiment 

Index 

1'10 

1~0 

130 

110 

90 

70 

50 

19. Changes in household debt 

Conft>rence Board !20 

1\0 

!00 

90 

80 

70 

60 

\,000 

800 

600 

400 

200 

20. Change in real private nonresidential fixed investment 

Stru\""ture.~ 

!ill Fquipmf'nt and intangible capital 20 

Ill !5 

Consumer sentiment as measured by the 

Michigan survey flattened out at a high level 

through much of 2018, and the sentiment 

measure from the Conference Board survey 

climbed through most of the year, with both 

measures posting their highest annual averages 

since 2000 (figure 18). However, consumer 

sentiment has turned down since around 

year-end. on net, with the declines primarily 

reflecting consumers' expectations for future 

conditions rather than their assessment of 

current conditions. Consumer attitudes about 

car buying have also weakened. Nevertheless. 

these indicators of consumers' outlook remain 

at generally favorable levels, likely reflecting 

rising income, job gains, and low inflation. 

Knrr<>WIIn<~ 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 standards, financing 

conditions for consumers largely remain 

supportive of growth in household spending. 

and consumer credit growth in 2018 expanded 

further at a solid pace (figure 19). Mortgage 

credit has continued to be readily available 

for households with solid credit profiles. For 

borrowers with low credit scores, mortgage 

underwriting standards have eased somewhat 

since the first half of 2018 but remain 

noticeably tighter than before the recession. 

Financing conditions in the student loan 

market remain stable, with over 90 percent 

of such credit being extended by the federal 

government. Delinquencies on such loans, 

though staying elevated, continued to improve 

gradually on net. 

Business investment 

moderated after strong 

in 2018 ... 

Investment spending by businesses rose 

rapidly in the first half of last year, and the 

available data are consistent with growth 

having slowed in the second half (lignrc 20). 
105 


Insert offset folio 48 here 35694.048

The apparent slowdown rcnccts, 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 spending----

such as business sentiment, capital spending 

plans, and pro11t expectations from industry 

analysts-have softened recently but remain 

positive overall. And while new orders of 

capital goods llattened out toward the end of 

last year, the backlog of unfilled orders for this 

equipment has continued to rise. 

Spreads of yields on nonfinancial corporate 

bonds over those on comparable-maturity 

Treasury securities widened modestly, on 

balance. since the middle of 2018 as investors' 

risk appetite appeared to recede some. 

Nonetheless, a net decrease in Treasury 

yields over the past several months has left 

interest rates on corporate bonds still low by 

historical standards, and financing conditions 

appear to have remained accommodative 

overall. Aggregate netllows of credit to large 

nonfinancial firms remained solid in the third 

quarter (figure 21). The gross issuance of 

corporate bonds and new issuance of leveraged 

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 

OHiccr Opinion Survey on Bank Lending 

Practices, or SLOOS, reported that lending 

standards for commercial and industrial (C&I) 

loans remained basically unchanged in the 

fourth quarter after having reported easing 

standards over the past several 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 Cor 

small businesses have remained generally 

MONFTARY POliCY RfPOn FEBRUARY 201'! 19 

21. Selected components of net debt financing for 

nonft11ancial businesses 

iii! Commerdal paper 

Bonds 

II loan" 

8() 

60 

40 

20 

20 

40 
106 


Insert offset folio 49 here 35694.049

20 PART L RfCENT [C:ONOMIC AND FINANCIAL DEVELOPMENT'> 

22. Privale housing starts and permits 

Monthlv Mi!lion\o!umN anmMlmw 

!.2 

1.0 

.8 

.4 

.2 

23. New and existing home salf's 

Milli<>H'•, ,mnual ratf' Million~. ammal r~w 

24. Mortgage rates and housing afTordabilHy 

lnd~x 

l lousing affordabi!ity index 

205 

--- 190 

175 

160 

145 

130 

!15 

accommodative. Lending volumes to small 

businesses rebounded a bit in recent months, 

and indicators of recent loan performance 

stayed strong. 

in the housing sector has been 

Residential investment declined in 2018. as 

housing starts held about flat and sales of 

existing homes moved 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 

over 2018, consistent with the decline in the 

affordability of housing associated with both 

higher mortgage rates and still-rising house 

prices (figure 24). 

likely subtracted from GOP 

in 2018 · 

After a strong performance in the first half 

of last year supported by robust exports of 

agricultural products, real exports declined 

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 GOP growth 

during the first half of 20 I 3- -appear to have 

subtracted from growth in the second hal[ 

For the year as a whole, net exports likely 

subtracted a little from real GOP growth, 

similar to 2016 and 2017. The nominal trade 

dcticit and the current account deficit in 2018 

were little changed as a percent of GOP from 

2017 (figure 26). 

Fiscal policy at the federal level boosted 

GDP growth in 2018, both because of lower 

income and business taxes from the TCJA and 
107 


Insert offset folio 50 here 35694.050

because federal purchases appear to have risen 

signilicanlly faster than in 2017 as a result of 

the Bipartisan Budget Act of 2018 (figure 27)." 

The partial government shmdown, which 

was in effect from December 22 through 

January 25, likely held down GOP growth in 

the first quarter of this year somewhat, largely 

because of the lost work of furloughed federal 

government workers and temporarily affected 

federal contractors. 

The federal unified deficit widened in fiscal 

year 2018 to 3% percent of nominal GOP 

because receipts moved lower, to roughly 

16'/, percent of GOP (tlgure 28). Expenditures 

edged down, to 20'1i percent of GDP, but 

remain above the levels that prevailed in 

the decade before the start of the 2007··09 

recession. The ratio of federal debt held by the 

public to nominal GOP equaled 78 percent 

at the end of fiscal2018 and remains quite 

elevated relative to historical norms (figure 29). 

The Congressional Budget Office projects that 

this ratio will rise over the next several years. 

and local governments is stable 

The fiscal position of most state and local 

governments is stable, although there is a range 

of experiences across these governments. After 

several years of slow growth, revenue gains 

of state governments strengthened notably as 

sales and income tax collections have picked 

up over the past few quarters. At the local 

level, property tax collections continue to rise 

at a solid clip, pushed higher by past house 

price gains. After declining a bit in 2017, real 

state and local government purchases grew 

moderately last year, driven largely by a boost 

in construction but also reflecting modest 

growth in employment at these governments. 

12. The Joint Committee on Taxation estimated that 

the TCJA would reduce average annual tax revenue by a 

little more than 1 percent of GDP starting in 20lX and 

for several years thereafter. This revenue estimate docs 

not account for the potcmial macroeconomic effects of 

the legislation. 

MONFTARY POLICY REPORT: I·EBRUARY 2019 21 

25. Change in real imports and exports of goods 

and services 

26. U.S. trade and current account balances 

27. Change i11 real government expenditures on 

cmtsumption and investment 

1-"edPral 
108 


Insert offset folio 51 here 35694.051

22 PART 1: RECENT ECONOMIC AND EINANCIAIDEVELOPMLNTS 

28. Federal receipts and expenditures 

Armual l'ert'Pntofnmnirw!CDI' 

26 

24 

22 

20 

18 

16 

14 

29. Federal government debt held by the public 

Quaner!v l'cw1.'ntofnmnina!GDP 

so 

60 

50 

40 

30 

financial 

The exr1ectea of the federal funds 

rate over the next several years has 

moved down 

Despite the further strengthening in the 

labor market and continued expansion in the 

U.S. economy, market-based measures of 

the expected path for the federal funds rate 

over the next several years have declined, on 

net, since the middle of last year (figure 30). 

Various factors contributed to this shift, 

including increased investor concerns about 

downside risks to the global economic 

outlook and rising trade tensions, as well as 

FOMC communications that were viewed as 

signaling patience and greater flexibility in the 

conduct of monetary policy in response to 

adverse macroeconomic or financial market 

developments. 

Survey-based measures of the expected path 

of the policy rate through 2020 also shifted 

down, on net, relative to the levels 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 Reserve 

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 additional 25 basis 

point rate increases in 2019. Relative to 

the December survey, these inaeases arc 

expected to occur later in 2019. Looking 

further ahead. respondents to the January 

survey forecast no rate increases in 2020 

and in 2021. 13 Meanwhile, market-based 

measures of uncertainty ahout the policy rate 

approximately one to two years ahead were 

little changed, on balance, from their levels at 

the end of last June. 

13. The results of' the Survey of Primary Dealers 

and the Survey of Market Participants arc available 

on the Federal Reserve Bank of New York's website at 

http<.:://\\ \V\\ .lll'\Vj \lrk fcd.org/markct:Jprimar~ dealer_ 

:-:unc;, ... que:>ti,om.html and http;-,Jiwww.llt'\\YOrkfcd.ort:l 

markcbi:;un ~~:. m<HL'l __ p,micipanb, respectively. 
109 


Insert offset folio 52 here 35694.052

The nominal Treasury yield curve 

The nominal Treasury yield curve flattened 

somewhat further since the lirst half of 2018, 

with the 2-year nominal Treasury yield little 

changed and the 5- and I 0-year nominal 

Treasury yields declining about 25 basis points 

on net (ligure 31 ). At the same time, yields 

on inllation-protcctcd Treasury securities 

edged up, leaving market-based measures of 

inflation compensation moderately lower. 

In explaining movements in Treasury yields 

since mid-2018. market participants have 

pointed to developments related to the global 

economic outlook and trade tensions. FOMC 

communications, and fluctuations in oil prices. 

Option-implied volatility on swap rates--an 

indicator of uncertainty about Treasury 

yields---declined slightly on net. 

Consistent with changes in yields on nominal 

Treasury securities, yields on 30-year agency 

mortgage-backed securities (MBS)--· an 

important determinant of mortgage interest 

rates----decreased about 20 basis points. on 

balance, since the middle of last year and 

remain low by historical standards (figure 32). 

Meanwhile, yields on both investment-grade 

and high-yield corporate debt declined a 

bit (ligure 33). As a result. the spreads on 

corporate bond yields over comparablematurity Treasury yields are modestly wider 

than at the end of June. The cumulative 

increases over the past year have left spreads 

for high-yield and investment-grade corporate 

bonds close to their historical medians, with 

both spreads notably above the very low levels 

that prevailed a year ago. 

Broad U.S. stock market indexes increased 

somewhat since the middle of last year. on 

net, amid substantial volatility (figure 34). 

Concerns over the sustainability of corporate 

earnings growth. the global growth outlook. 

international trade tensions. and some Federal 

MONfTARY POliCY RfPORT: FfBRUARY 2019 23 

30. Market-implied federal funds rate path 

Qwutrrly 

~ 2.50 

2.25 

-- 2.00 

31. Yields on nominal Treasury srcurities 

Daily f't•ln'IU 

Sot'r<:n. Departnwnt of th(' Tr('a~my via ! lawr Analytic~ 

32. Yield and spread on agency mortgage-hacked securities 

J'Pff('Bl 

:mo 

250 

200 

150 

!(}() 

50 
110 


Insert offset folio 53 here 35694.053

24 PART lo RECENT ECONOMIC AND FINANCIAl DEVELOPMENTS 

33, Corporate bond yields, by securities rating 

permission 

34. Equity prices 

35. S&P 500 volatility 

f),uly 

------------------------

\'JX 

16 

14 

--- 12 

10 

8 

200 

175 

100 

125 

100 

'/5 

so 

25 

Dow 

80 

"10 

60 

50 

Reserve communications that were perceived 

as less accommodative than expected weighed 

on investor sentiment for a time. There were 

considerable differences in stock returns across 

sectors, reflecting their varying degrees 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-and in the health-care sector 

outperf(mned 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 sensitive to 

concerns about the global growth outlook 

and trade tensions also underperformed. 

Bank stock prices declined slightly, on net, 

as the yield curve Jlattencd 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 volatility-· 

increased sharply in the fourth quarter of 

last year to near the high levels observed 

in early Fchruary 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 distrihution 

and with realized volatility ending the period 

close to the 70th percentile of its historical 

range (flgurc 35). (For a discussion of financial 

stability issues, see the box "Developments 

Related to Financial Stability.'') 

Markels securities, mor't";"'''-

backed securities, and 

have functioned well 

Availahle indicators of Treasury market 

functioning have generally remained stable 

since the first half of 2018, with a variety of 

liquidity metrics--including bid-ask spreads, 

bid sizes, and estimates of transaction costs-· 

displaying few signs of liquidity pressures. 

Liquidity conditions in the agency MBS 

market were also generally stable. Overall, 

the functioning of Treasury and agency MBS 

markets has not been materially affected by 
111 


Insert offset folio 54 here 35694.054

the implementation of the Federal Reserve's 

balance sheet normalization program over 

the past year and a hal[ Credit conditions 

in municipal bond markets have remained 

stable since the middle of last year, though 

yield spreads on 20-year general obligation 

municipal bonds over comparable-maturity 

Treasury securities were modestly higher 

on net. 

market rates have moved up in 

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 FOMC's target range were transmitted 

effectively through money markets, with yields 

on a broad set of money market instruments 

moving higher in response to the FOMC's 

policy actions in September and December. 

The effective federal funds rate moved to parity 

with the interest rate paid on reserves and was 

closely tracked by the overnight Eurodollar 

rate. Other short-term interest rates, including 

those on commercial paper and negotiable 

certificates of deposits, also moved up in light 

of increases in the policy rate. 

and 

Aggregate credit provided by commercial 

banks expanded through the second half of 

2018 at a stronger pace than the one observed 

in the Jirst half of last year. as the strength 

in C&lloan growth more than oiTsct the 

moderation in the growth in CRE loans and 

loans to households. In the fourth quarter of 

last year, the pace of hank credit expansion 

was about in line with that of nominal GDP, 

leaving the ratio of total commercial bank 

credit to current-dollar GDP little changed 

relative to last June (Jigurc 36). Overall, 

measures of bank profitability improved 

further in the third quarter despite a flattening 

yield curve, but they remain below their precrisis levels (Jigurc 37). 

MONETARY POLICY REPORT FEBRUARY 2019 2 5 

36. Ratio of total commercial bank credit to nominal gross 

domestic product 

75 

70 

65 

60 

37. Profitability of bank holding companies 

J-'>j'ltrnL annual r~\<' 

2.0 30 

zo 

10 

Ill 

20 
112 


Insert offset folio 55 here 35694.055

2 6 PART 1: RfCFNT f:CONOMIC AND FINANCIAL DfVflOPMENTS 

Developments Related to Financial Stability 

The Federal Reserve Board's financial 

stability monitoring framework 

The framework US('d by the Federal Reserve Board to 

monitor financial stability distinguishes between shocks 

to <1nd vu!nerJbi!ities of the financial system. Shocks, 

such as sudden changes to financial or economic 

conditions, are typically surprises and are inherently 

difficult to predict, whereas vulnerabilities tend to 

build up over timp zmd 11re the aspects of the financial 

system that are most expected to cause widespread 

problems in times of stress. Some vulnerabilities are 

cyclical in nature, rising and falling over time, whilt~ 

others are structural, stemming from longer-term 

forces shaping the nature of credit intermediation. As a 

result, the framework focuses primarily on monitoring 

vulnerabilities and emphasizes four broad categories 

based on academic research. 1 

1. Elevated valuation pressures are signaled by asset 

prices that are high relative to economic fundamentals 

or historical norms and are often driven by an increased 

willingness of investors to take on risk. As such, 

elevated valuation pressures imply a greater possibility 

of outsized drops in asset prices. 

2. Excessive borrowing by businesses and 

households leavf's them vulnerable to distress if their 

incomes decline or the as<;ets they own fall in value. 

3. Excessive leverage within the financial sector 

increases the risk that finJncial institutions will not have 

the ability to absorb losses when hit adverse shocks. 

4. Funding risks expos<-~ the to the 

possibility 1hat investors will "run" by 

their funds from a particular institution or sector. 

L1ring ,1 run, financial imtitutions m.1y need to sell 

asse-ts rtuickly at "fire sale" prices, therPby incurring 

substantial losses and potentially even becoming 

insolvent Historians and economists often refer to 

widesprr<:~d invf:'stor nms as "financial panics." 

While this fr,1mework provides a systcm,ltic way 

to assess financial stJhi!ity, some potentia! risks do 

not fit neatly into it because they an' novr! or diffi\u!t 

to quantify, such as cybersecurity or devPiopments 

in ln addition, some vu!nerabilitif's <1re 

to measure with currently dvadab!P datJ, and 

the set of vulnerabilities may evolve over time. Civen 

these limitations, we continually rely on ongoing 

l For ,1 review of the resf',m:h literaturt> in this ,1rea 

and. further Daniel Covitz, 

and Nt>llie Monitoring," 

(fkrcmb('r), 

research by the Federal Rese-rve staff, academics, and 

other 

Since publication of the Federal Reserve Board's 

first Financia/Stahility Report on November 28, 2018, 

some areas where valuation pressures were a concern 

have cooled, particularly those related to belowinvestment-grade corporate debt/ Regulatory capital 

and !iquiclity ratios of kPy financial institutions, 

especially banks, are at historically high levels. 

funding risks the financial system arc !ow relative 

to the period leading up to the crisis. Borrowing by 

households has risen roughly in line with household 

incomes and has been concentrated among prime 

borrowers. Nonetheless, debt owed by businesses is 

high, and credit stJndards, especially within segments 

of the loan market focused on lower-rated or unrated 

firms, deteriorated in the second half of 2018. 

Asset valuations increased to the high end of their 

historical ranges in many markets over 2017 and the 

first half of 2018, supported by the solid economic 

expansion and an apparent increase in investors' 

appetite for risk. HowPver, compared with July 2018, 

Jround the time of the previous Monetary Policy 

valuation pressures have eased somewh<lt 

in equity, corportlte bond, ZJnd !everJged loan 

markets. Over the same period, amid substantial markf't 

volatility} the forward equity price-to-earnings ratio of 

S&f) 500 firms, a metric of valuations in equity markets, 

declined a touch, on net, and it currently stands just 

below the top qudrtile of its historicJ! distribution 

A). Spreads on both investment- and speculative~ 

corporate bonds over comparable-maturity 

securities widerwd modestly to h:vels dose 

to the medians of their historical since 1997 

(figure B). on newly issued 

widened in the fourth quarter 

real estate m<wkcts, comrnerciJI real estatf:' prices have 

bet>n growing faster than rents for several years, leaving 

valuations stretchf'd. 

Since the 2007-09 r('{~cssion, household debt and 

C). Over the 

past st>veral households has stayPd 

in line with growth has heen concentratf'd among borrowers with strong credit histories. 

( continuf'd) 
113 


Insert offset folio 56 here 35694.056

MONETARY POLICY REPORT: FEBRUARY 2019 27 

A. Forward prin:'~to-earnings ratio of S&P 500 firms C. Businrss- and household-st~ctor crediHo··GDP ratio 

Rmio 

11 75 

26 l.O 

B. Corporate bond spreads to similar-maturity 

Treasury securities 

23 

contrast, borrowing by businesses, including riskier 

has exp,1ndf'd significantly. For""" UldUVPand unraterl firms, the r<ltio to ,bsrts has 

steadily since 2010 and remains IW<H its 

historical peak. t-=urthf~r, growth in debt to businessE.'S 

with lower credit ratings and with l'levated 

levels of borrowing, such as high-yield and 

levt'ragf'd loans, has been subst;:mtial over the past 

70 

65 

.60 

{figure 0). Issuance of these instruments 

significantly in November and December 2018 

because of the sharply higher spreads demanded by 

investors to hold them, but issuance has rebounded 

somewhdt in 2019. 

Credit for new leveraged loans 

deteriorated over the SPCond half of 2018. The share 

of npwly issued large loans to corporations with high 

leverdgt'-<iPlllneri as thosP with ratios of rleht to 

(earnings before interest, taxes, depreciation, 

Jnd amortization) above 6-increased through 

201 B to levels exceE~ding prPvious peaks observPrl 

in 2007 and 2014, when underwriting quality was 

notc1bly poor. In addition, issuance of covenant-lite 

!oans~~lodns with few or no traditional maintenance 

covenants--~rem.:lined high during the second half 

of 2018, although this e!pvatNi level may reflect, in 

p,1rt, J greater prevalence of investors who do not 

traditionally monitor and exercise loan covenants. 1 

Nonetheless, the strong economy has helped sustain 

solid credit performance of leveraged loans in 2018, 

with the default rdte on such loans near the low end of 

its historical rangP. 

(continued on nPxt page) 

which are predominantly 

rapidly over the past 

ahout 60 perr('n! of 

mutual funds holrl 
114 


Insert offset folio 57 here 35694.057

28 PART 1: RfCFNT FCONOMIC AND FINANCIAL DEVELOPMENTS 

Financial Stability (continued) 

D. Net issuance of risky business debt 

TI1e credit quality of nonfinancial high-yield 

corporJte bonds was roughly stable over the past 

several years, with the share of high-yield bonds 

outstJnding that are ratE'd B3/B- or below staying 

f!at and below the fin;mcia! crisis peak. In contrast, 

40 

the distribution of ratings among investment-grade 

corporate bonds deteriorated. The share of bonds rated 

Jt the lowest investment-grade level (for example, an 

S&P rating of triple-B) reached ne<H-record levels. As of 

December 2018, around 42 percent of bonds 

outstanding were at the lowest end of the 

grade segment, amounting to about $3 trillion. 

Vulnerabiliti('S from flnanciJI-soctor 

continue to be low rC'Iutive to historic.JI in 

part because of reguiJtory reforms enacted sinn' the 

financial crisis. Core financial interrm:diaries, including 

large banks, insurann-' companies, and broker-dealers, 

appear well positioned to we-ather economic ~tress. As 

of the third quarter of 2018, rPgulatory capital ratios for 

the US globdl systemie<J!!y important banks rC>rnained 

well above regulatory requirements dnd were close 

to historical highs. Those banks \Viii he subj~·ct to the 

2019 Dodd-Frank Act stress tests and Comprehensive 

Capital Assessment and Review. Consistent with the 

Federal Reserve Board's public framPwork, this year's 

scenarios feature a largc'r increJse in unemployment 

and a deepf'r recession than in 2018 as well as 

typically largp declines in financial asset prices. 

Capita! levels at insurance companies and brokerdealers also remJined relatively robust by historical 

standards. A range of indicators suggest that hedge fund 

levE'rage was roughly unchanged over 2018; however, 

comprehensive data, available with a significant time 

from early 2018 showed that leverage remained at 

upper end of its range over the past eight years. 

Vulnerabilities associated with funding risk-~-that 

is, the financing of illiquid assets or long-maturity 

assets with short-1naturity debt-continue to be low, 

in pJrt because of the post-crisis implementation of 

liquidity regulations for banks and the 2016 money 

market reforms. 4 Banks are holding higher levels of 

liquid assets, while their use of short-tern1 wholesale 

funding as a share of liabilities is near historical lows. 

Assets under management at prime funds, institutions 

that proved vulnerable to runs in the past, have risc>n 

somewhat in recent months but remained f<:H below 

pre-reform levels. 

Potential downside risks to international financial 

stability include a downturn in global growth, 

political and policy uncertainty, an intensification 

of trade tensions, and broadening stress in 

market economies (EMEs). In many advanced 

economies, financial conditions tightened 

in the second half of 2018, p.Jrtly reflecting a 

deterioration in the fiscal outlook of Italy and Br€'xit 

uncertainty. The United Kingdom and the European 

Union (EU) have not yet ratified the terms for the 

United Kingdom's March 201 g withdrawal from the EU 

(Brexit). Without such a withdrawal agreement, there 

will be no transition period for important trade and 

fin;mcia! interaction~ between U.K. and lU residents, 

and, despite for a "no-deal Brexit" a wide 

rang(' of ,md financial activities could b0 

disrupted. LMFs also Pxpcricnced heightened financial 

~tress in the ~ccond half of 2018. Although that stress 

has receded somewhat more recently, many f:MEs 

continue to hclrbor important vulnerabilities, reflecting 

one or more of substdntia! corporate fisc1l 

concerns, or excessive reliance on foreign 
115 


Insert offset folio 58 here 35694.058

International 

Economic activity in most ioreign 

economies weakened in the second half 

of 2018 

After expanding briskly in 2017, foreign GOP 

growth moderated in 2018. While part of this 

slowdown is likely due to temporary factors, 

it also appears to rctlect weaker underlying 

momentum against the backdrop of somewhat 

tighter financial conditions, increased policy 

uncertainty, and ongoing debt deleveraging. 

The growth slowdown was 

pronounced in advanced 

economies 

Real GOP growth in several advanced 

foreign economics (AFEs) slowed markedly 

in the second half of the year (figure 38). 

This slowdown was concentrated in the 

manufacturing sector against the backdrop 

of softening global trade tlows. In Japan, real 

GOP contracted in the second half of 2018, 

as economic activity, which was disrupted by a 

series of natural disasters in the third quarter, 

rebounded only partly in the fourth quarter. 

Growth in the euro area slowed in the second 

half of the year: Transportation bottlenecks 

and complications in meeting tighter emissions 

standards lor new motor vehicles weighed 

on German economic activity, while output 

contracted in Italy. Although some of these 

headwinds appear to be fading. recent 

indicators--especially for the manufacturing 

sector· ·point to only a limited recovery of 

activity in the euro area at the start of 20!9. 

In recent months, headline inflation 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 intlation rates have 

been close to 2 percent. 

MONfTARY POliCY REPORT FEBRUARY 2019 29 

38. Real gross domestic product growth in selected 

advanced foreign economies 

Pt'ITf'n!,annualrJIC 

!IIIII Uniti'd Kingdom 

39. Consumer price inOation in selected advanced foreign 

economics 

!2monthper(('n\thangt-

·····--·--·--
116 


Insert offset folio 59 here 35694.059

30 PART lc RECENT ECONOMIC ANO riNANCIAl DEVELOPMENTS 

40. Equity indexes for selected foreign economies 

<11. Nominal 10-year government bond yields iH 

seiPcted advant:ed ecm1omies 

I (Ill 

140 

130 

120 

110 

100 

90 

80 

l't•rn•nt 

3S 

3,0 

... 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 negative levels. Although the ECB 

concluded its asset purchase program in 

December, it signaled 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 elevated uncertainty 

around the United Kingdom's exit from 

the European Union (EU) weighed on the 

country's economic outlook. 

Political uncertainty and slower 

economic growth \~eighed on AFE 

asset 

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 of 201 R (figure 40). Broad 

stock price indexes in the AFEs fell, interest 

rates on sovereign bonds in several countries 

in the European periphery remained elevated, 

and European bank shares underperformed. 

although these moves have partially retraced in 

recent weeks. 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 <>rr"'''''in<> market 

economies 

Chinese GDP growth slowed in the second 

half of 2018 as an earlier tightening of credit 

policy, aimed at restraining the buildup of 

debt, caused infrastructure investment to fall 

sharply and squeezed household spending 

(figure 42). However, increased concerns 

about a sharper-than-expected slowdown in 
117 


Insert offset folio 60 here 35694.060

growth, as well as prospective clTccts of trade 

policies, prompted Chinese authorities to 

case monetary and fiscal policy somewhat. 

Elsewhere in emerging Asia, growth remained 

well below its 2017 pace amid headwinds from 

moderating global growth. Tighter financial 

conditions also weighed on growth in other 

EMEs--notably, Argentina and Turkey. 

Economic activitv ct.· .. n•nth., ... ...,.<~ 

somewhat in Me~ico Brazil, but 

uncertainty about policy developments 

remains elevated 

In Mexico, economic activity increased 

at a more rapid rate in the third quarter 

after modest advances earlier in the year. 

However, growth weakened again in the fourth 

quarter, as perceptions that the newly elected 

government would pursue less market-friendly 

policies led to a sharp tightening in financial 

conditions. Amid a sharp peso depreciation 

and above-target inflation, the Bank of 

Mexico raised its policy rate to 8.25 percent 

in December. Brazilian real GDP growth 

rebounded in the third quarter after being 

held down by a nationwide trucker's strike 

in May, and financial markets have rallied on 

expectations that Brazil's new government 

will pursue economic policies that support 

growth. However, investors continued to focus 

on whether the new administration would pass 

significant fiscal reforms. 

Financial conditions in 

market economies we1·e 

on net, little since july 

Financial conditions in the EM Es generally 

tightened in the second half of 2018, as 

investor concerns about vulnerabilities in 

several EMEs intensified against the backdrop 

of higher policy uncertainty, slowing global 

growth, 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 EME sovereign bond spreads 

over U.S. Treasury yields rose, and benchmark 

EME equity indexes declined. However. 

MONFTARY POLICY REPORT: FEBRUARY 2019 31 

42. Real gross dmnestic product growth in selected 

emerging market economics 
118 


Insert offset folio 61 here 35694.061

32 PART L RECENT ECONOMIC AND FINANCIAL DEVElOPMENTS 

43. Emerging market mutual fund flows and spreads 

44. U.S. dollar exchange rate indexes 

w~~kly Wt'i.'k~'ndingJanuMy!l. 2015- 100 -~-----------... . .. ···----------~----

!50 

140 

130 

120 

110 

100 

Euro 90 

financial conditions improved significantly 

in recent months, supported in part by more 

positive policy developments--including the 

U.S.-Mexico-Canada Agreement and progress 

on U.S.-China trade negotiations----and 

FOMC communications indicating a more 

gradual normalization of U.S. interest rates. 

EME mutual fund inflows resumed in recent 

months after experiencing outflows in the 

middle of 2018 (figure 43). While movements 

in asset prices and capital flows have been 

sizable for a number of economies, broad 

indicators of t1nancial stress in EMEs arc 

below those seen during other periods of stress 

in recent years. 

The foreign exchange value of the U.S. 

dollar is bit a higher than in July (figure 44 ). 

Concerns about the global outlook, 

uncertainty about trade policy, and monetary 

policy normalization in the United States 

contributed to the appreciation of the dollar. 

The Chinese renminbi depreciated against the 

dollar slightly, on net, amid ongoing trade 

negotiations and increased concerns about 

growth prospects in China. The Mexican 

peso has heen volatile amid ongoing political 

developments and trade negotiations but has, 

on net, declined only modestly against the 

dollar. Sharp declines in oil prices also weighed 

on the currencies of some energy-exporting 

economies. 
119 


Insert offset folio 62 here 35694.062

2 

MONETARY POLICY 

The federal Open Market Committ<•e 

continued to gradually increase the 

federal funds rate in the second half of 

last year 

From late 2015 through the first half of last 

year, the Federal Open Market Committee 

(FOMC) gradually increased its target range 

for the federal funds rate as the economy 

continued to make progress toward the 

Committee's congressionally mandated 

objectives 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 21

/. to 2\12 percent (figure 45)_1 4 The FOMC's 

decisions to increase the federal funds rate 

14. Sec Board of Governors of the Federal Reserve 

System (2018), "Federal Reserve Issues FOMC 

Statement.'' 

mtT!l'lar~ .:ill XtN.:::6a.htm: and Board of Governors of 

the Federal Reserve System (201R}, "Federal Reserve 

Issues FOMC' Statement," press release, December 19, 

http<..:,-/\\\\\\ .!Cd.:r~dr.:~cnc.:;:o\ news..;\ ~.:nt..:ipr.:S\IYk'a"-.:"' 

mo;1::-ttr: .20 l S! 219a.htrn. 

45. Selected interest rates 

33 

reflected the solid performance of the us_ 

economy, the continued strengthening of the 

labor market, and the fact that inflation had 

moved ncar the Committee's 2 percent longerrun objective. 

looking ahead, the FOMC will be 

as it determines what future ; .. cfmnn'k 

to the target range for the federal funds 

rate may be ;m,nron•n:'t" 

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 level-' 

that is, the level of the federal funds rate that is 

neither expansionary nor contractionary. 

Developments at the time of the December 

FOMC meeting, including volatility in 

tlnancial markets and increased concerns 

about global growth, made the appropriate 

extent and timing of future rate increases 

more uncertain than earlier. Against that 

backdrop, the Committee indicated it would 

monitor global economic and financial 

developments and assess their implications 

for the economic outlook_ In the Summary 

Perren! 

_ __[__J_.LJ__j__L__l__L~____L__L__J_Lj 

2017 2018 201!) 

maturity yields based on !!w mos! artive!y tradt•d :-txurities. 
120 


Insert offset folio 63 here 35694.063

34 PARl2: MONETARY POliCY 

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. 11 

In January, the Committee stated that it 

continued to view sustained expansion 

of economic activity, strong labor market 

conditions, and inflation ncar the Committee's 

symmetric 2 percent objective as the most 

likely outcomes. Nonetheless, in light of 

global economic and financial developments 

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 the federal funds 

rate, the Committee will assess realized and 

expected economic conditions relative to its 

objectives of maximum employment and 

2 percent inflation. This assessment will take 

into account a wide range of information, 

including measures of labor market conditions, 

indicators of inflation pressures and inflation 

expectations. and readings on tlnancial and 

international developments. 

In addition to evaluating a wide range 

of economic and financial data and 

information gathered from business contacts 

and other informed parties around the 

country, policymakers routinely consult 

15. See the December Summary of Economic 

Projections, which appeared as an addendum to the 

minutes of the December 18 19, 2018, meeting of the 

FOMC and is presented in Part 3 of this report. 

prescriptions for the policy interest rate 

from a variety of rules, which can serve as 

useful guidance to 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 to address many of the 

limitations of these policy rules (see the box 

"Monetary Policy Rules and Systematic 

Monetary Policy"). 

The FOMC has continued to •mniP•m•'nt 

to gradually reduce 

Reserve's balance sheet 

The Committee has continued to implement 

the balance sheet normalization program that 

has been under way since October 2017. 16 

Under this program, the FOMC has been 

reducing its holdings of Treasury and agency 

securities in a gradual and predictable manner 

by decreasing its reinvestment of the principal 

payments it received from these securities. 

Specilkally, such payments have been 

reinvested 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 (MBS) the amount 

of principal payments from its holdings of 

agency debt and agency M BS received during 

each calendar month in excess of $16 billion. 

In the f(mrth quarter, the FO M C increased 

the caps for Treasury securities and for agency 

securities to their respective maximums 

of $:10 billion and $20 billion. Of note, 

16. h1r more information, sec the Addendum to 

the Policy Normalization Principles and Plans, which 

is available on the Board's website at https:i/\\ W\\'. 
121 


Insert offset folio 64 here 35694.064

46. Principal payments on SOMA securities 

Treasury securities 

Monthly 

Ill Redemptions 

l~einwstnwnts 

- Monthly rap 

80 

70 

MONETARY POLICY REPORT: FEBRUARY 2019 35 

Agency debt and mortgage-backed securities 

Mollthly 

II Rt•demptions 

Reinvt•.stnwnts 

- Monthly cap 

BJ!!ionsoldolla~ 

80 

70 

SotrRn: Federal Rc,;crvc Bank of "Jew York; l·'cdcral Rc;-;crw Hoard ~ta!Tcakulati(>ns 

47. Federal Reserve assets and liabilities 

reinvestments of agency debt and agency MBS 

ceased in October as principal payments fell 

below the maximum redemption caps. 

The Federal Reserve's total assets have 

continued to decline from about $4.3 trillion 

last July to about $4.0 trillion at present, 

with holdings of Treasury securities at 

approximately $2.2 trillion and holdings of 

agency debt and agency MBS at approximately 

$1.6 trillion (figure 47). 

As the Federal Reserve has continued to 

gradually rednce its securities holdings. the 

level of reserve balances in the banking 

system has declined. In particular. the level 

of reserve balances has decreased by about 

$350 billion since the middle of last year. and 
122 


Insert offset folio 65 here 35694.065

36 PART 2: MONFTARY POLICY 

Monetary Policy Rules and Systematic Monetary Policy 

Monetary policy rules are mathematical formulas 

that relate a policy interest rate, such as the federal 

funds rate, to a smJ!I number of other economic 

variables-, typically including the deviation of inflation 

from its target value and a me.Jsure of resource slack in 

the economy. The prescriptions for the policy interest 

rate from these rules can providE' helpful guidzmce for 

the Federal Open Market Committee ('OM(). This 

discussion provides information on how policy rules 

inform the FOMC's systematic conduct of 

policy, as well as practical considerdtions that 

it undesirable for the FOMC to mechanically follow 

thf' prescription.:; of any specific rule. Th<" r:OMC's 

approach for conducting monetary policy provides 

suificient flexibility to address the intrinsic complexities 

and uncertainties in the economy while keeping 

monetary policy predictable and transpdrent 

Policy Rules and Historical Prescriptions 

fhe effectiveness of monetary policy is enhanced 

when it is well understood by the pub!ic. 1 In simple 

rnodels of the economy, good economic performance 

can be achieved by following a 

policy rule that fosters public and 

that incorporates key principles of good monetary 

policy. 1 One such principle is that monetary policy 

should respond in a predictablf' way to changes in 

economic conditions and the economic outlook. A 

S('Cond principle is that monetary policy should he 

accommorbtive when infl.ltion is helmv policym<tkNs' 

longer-run inflation and employment is below 

its maximum level; conversely, monetary 

policy ~hould be restrictive when the opposite holds. 

A third principle is that, to stabilize mf!at!on, the policy 

rate should be adjusted by more than one-for-onP in 

to persistent increases or dt<c:rt'ases 

Economists have analyzed m.my monetary policy 

rules, including the well-known Taylor (1993) rule. 

Other rules include the "balanced approach" rule, the 

"odjusted Taylor (1993)" rule, the "price level" rule, and 

the "first difference" rule (figure A). J These policy rules 

embody the three key principle.:; of good monetary 

policy and take into account estimates of how far the 

economy is from the Federal Reserve's dual-mandate 

goals of maximum employment and price stability. Four 

of the five rules inc!udr. the diUcrcncc between the rate 

of unemployment that is sustainable in the longer run 

and the current unemployment rate (the unemployment 

ratC' gap); the first-difference rule includes the change 

in the unemployment rather than its leveL4 In 

addition, four of the rules include the difference 

(continued) 
123 


Insert offset folio 66 here 35694.066

MONETARY POLICY REPORT: FEBRUARY 2019 37 

A. Monewry policy rules 

Taylor (1993) rule 

Balanced-approach rule 

Taylor (1993) rule, adjusted 

Price-Jevd rule 

First-difference rule 

the values of the nominal federal funds rate prescribed by the Taylor (1993), 

and first-difference rules, 

for 411artcr t, u, is the 

""''""'lm•menl rate in quarter t, and r,u~. is the level of the neutral real federal the lon}!er run that, on is 

to be consistent with sustaining maximum employment and inflation at the FOMC's 2 percent longer-run 

ln addition, u,UI is the rate of unemployment in the longer run. Z, is the cumulative sum of past deviations of the 

funds rate from the prescriptions of the Taylor (1993) rule when that rule prescribes setting the federal funds rate below zero. 

PLgap, is the percent deviation of the actual level of prices from a price level that rises 2 percent per year from its level in a 

spcci(lcd starting period. 

The Taylor{ t 993) rule and other policy rules arc generally written in terms of the deviation of real output from its full 

capacity leveL In these equations. the output gap has been replaced with the gap between the rate of unemployment in the 

longer run and its aetuallevel (using a relationship known as Okun's law) in order to represent the rules in terms of the 

FOMC's statutory goals. Historicatly. rnovemcms in the output and unemployment gaps have been highly correlated. Box 

note 3 provides references for the policy rules. 

between recent infl<1tion and the FOMC's longerrun objective (2 pNcE'nt as measured hy the ;mnual 

change in the price index for personal consumption 

expenditures, or PCFl, whitt> the price-level rule 

includes the gap betwpen the !(•vel of prices today and 

thf' levf'l of prices that would bt> observPd if inflation 

had bN'n con<>tant at 2 from a SfWCifird starting 

year (PLgap,).~The rule then-~by takt~s 

account of the of inflation from the 

long-run objective In edr!ier periods as we!! as the 

current period. 

The adjusted T,1ylor (1993) rule that 

the federal funds rate cannot be 

below zero, and that following the nrc•scrintinns 

of the (1 993) rulE' 

funds rate has fallen to its 

lower bound may therefore not provide enough policy 

accommodation. To make up for the cumulatiVE-~ shortfall 

in accommodation (Z), the adjusted rule 

only a gradual return of the policy rate to (positive) 

levels prPscrilwd by the standard Taylor (1993) rule after 

the economy begins to recover. The version of the pricelevPl rule sprcificd in figurf' ;\also recognizes that the 

federal funds ratP cannot he n•ducPd rnateridlly below 

.1cro. lf inflation runs below the 1 objective 

during pt>rlods when the rule prescribes 

sc•tting the federal funds rate well below zero, the rule 

will, ovf-'r time, c.J!! for more Jccommoddtion to m.Jke 

up for the past inflation ':>hortfdll. 

As shown in B, the different monetdry policy 

rules oiten diffpr their prescriptions for the federal 

funds ratc. 6 Although almost all of the simple policy 

(continued on next page) 

are calculated (1) published 

data for unemployment ;md (2) surveyb.1SPd estimate<> of the longer-run value of' the nf•utral 

reo! rate and the longer-run value of the 

ratP. 
124 


Insert offset folio 67 here 35694.067

38 PART 2c MONFTARY POLICY 

Monetary Policy Rules (continued! 

B. Historical federal funds rate prescriptions from simple policy mJes 

(,luariPdy 

~---~--~-~--~~---~~~ 

\. /.... '/ Hdl,mi •il ,li'J'Wdch n;k 

rules would have ca!lt"'<1 for values for the fedPral funds 

rate that were increasing ovE>r time in recent yeMs, the 

prescribed values vary widely across rules. In genf'ral, 

there is no unique criterion for favoring one rulp 

over another. 

Systematic Monetary Policy in Practice 

Although monetary policy rules seem appealing 

for obtaining and communicating current and future 

policy rate prescriptions, the usefulness of these rules 

for policymakers is limiterl by a of practical 

considerations. According to monetary 

rules, the policy intC>rcst ratE' must respond 

nY•ch,,m;,·"llc to a small number of v.1riables. However, 

these rnay not reflect import<Jnt infonnJtion 

available to ro!icymakers at the time they make 

decisions. ror Pxample, none of the inputs into the 

Taylor (1993) rule includf' fin<mCJa! rlnd cn'rlit market 

conditions or indicators of consumN and business 

s(~ntiment; these factors are often w~ry informativp for 

the future f'ourse of the economy. Similarly, monetary 

policy rules tend to indue!£.:~ only the current values of 

the selected variables in the rule. But thE' rplationship 

lwtween the current values of these variables .md 

the outlook for the economy changes over time for a 

number of reasons. For example, the structure of the 

Pconomy is evolving over time and is not known with 

certainty at any given point in time. 7 To complicate 

of Monetary Policy Rules" in 111(' 

discus5es how 5hifts in the 

mJtters further, monetary policy affects the Federal 

RPserve's goal vMiables of inflation and employment 

with long and variable lags. For these reasons, 

good monPtary policy must tah-~ into account the 

inforrnJtion contairwd in the redl-timt~ forecast of the 

economy. Finally, simple policy rules do not take into 

account that the risks to the economic outlook may 

be asymmetric, such as during thC' periorl when the 

fedPral funds rJte was still close to zero. At that time, 

the FOMC took into considerJtion th<Jt it would have 

limited scope to respond to an unexpected weakening 

in the economy by cutting the federal funds rate, but 

that it would have ample scope to increase the policy 

to an uncxpE>cted strengtht>ning in the 

dsymmt>tric risk provided a rational{·) for 

the federal funds rate more gradually than 

by some policy rules shown in figure 8. 11 

(continued) 
125 


Insert offset folio 68 here 35694.068

The FOMC conducts systematic monetary policy in 

a framework that respects the key principles of good 

monetary policy whilf' provirling suffici<'nt fl<:xibility 

to address many of the practical concerns described 

Parlier. At the core of this framework lies the FOMC's 

firm commitment to the Federal Reserve's statutory 

mandate of promoting maximum employment and 

price stability, a commitmt-~nt that the Committee 

reaffirms on a regular basis.'1 To explain its monetary 

policy decisions to the public Js dearly as possible, 

the FOMC communicates about the econon1ic data 

that are relevant to its policy decisions. As part of this 

communication strategy, the Federal Reserve 

describes the economic and financial data 

inform its policy decisions in the Monetary Policy 

Report and the FOMC meeting minutes. These datJ 

include, but are not limited to, measures of labor 

market conditions, inflation, household spPnding 

and business investment, asset prices, ,1nd the global 

economic environment. The FOMC postmeeting 

statements and the meeting minutes detail how 

the data inform the Committee's overall economic 

outlook, the risks to this outlook, and, in turn, the 

Committee's assessment about the appropriate stance 

of monetary policy. This appropriate stance depends 

on !he FOMC's longer-run goals, the economic outlook 

and the risks to the outlook, and the channels through 

which monetary policy actions influence economic 

activity and prices. The FOMC combines Jll of these 

elements in determining the timing and size of 

adjustments of the policy interest rates. The quc:~rterly 

Summary of fconomic Projections additional 

information about each fOMC forecasts 

for the economy and the longer-run assessments of thf' 

economy, under her or his indivirlual views concerning 

,1ppropriate policy. 

These policy communications hc>lp the public 

understand the FOMC's approach to 

po!kymaking and the principles that under!i(' 

Consequently, in response to incoming inform.Jtion, 

market pMticipants tend to adjust their expectations 

regarding rnonPtary policy in thP direction consisf(>nt 

with achieving the maximum-employment and prin~­

stability goals of the FOMC. Hl Evidence that market 

!ldf. 

New Pconomic information can be compost>d of data 

or of factors thilt risks to future economic 

but M<' not yet in tlw data. 

M0Nl1ARY POLICY REPOH FEBRUARY 2019 39 

C. Change in 1 0-year yield in response to Employment 

Situation report 

particip<mts adjust their ()xpectations for policy in 

this manner is shown in figure C. The figure plots the 

change in the H)-year yield on Trc'asury securities in a 

one-hour window around th(~ release of employment 

reports on the vertical .1xis against the difference in 

the actual value of nonfarm payroll job gJins and the 

(-'xpectations of privJte-sector analysts immediJtely 

before the release of the dat,) on th0 horizontal axis--" 

thJt is, a proxy for "surprisps" in nonfarm payroll job 

gains. Whf'n actual nonfarm job gains turn out 

to !w higher than markc~t expect, the yield 

on to increase. The 

risf' in 1 O··yf'ar yield rd!Pcts markf't pJrticipants' 

expectdtion that, as a result of stronger-than-expected 

labor market data, the path of short-term interest rates 

will be higher in the future. Conversely, the 1 0-year 

yield tends to decline after negative in 

nonfarm payroll data, the 

interest rates will be somewhat in the future. 

These adjustments in the 1 0-year yield help stabilize 

the Pconorny even befor0 the FOMC changes the level 

of the federal funds r<1te in the dirc>ction consistf:'nt with 

achieving its goals, as higher long-term interest rates 

tend to slow the IJbor mrtrkPt while lower rates tend to 

strengthen it. 
126 


Insert offset folio 69 here 35694.069

40 PART 2: MONETARY POliCY 

by about $1.2 trillion since its peak in 2014. 17 

At the January meeting, the Committee 

released an updated Statement Regarding 

Monetary Policy Implementation and Balance 

Sheet Normalization to provide additional 

information regarding its plans to implement 

monetary policy over the longer run. 18 ln this 

statement, the Committee indicated that it 

intends to continue to implement monetary 

policy in a regime in which an ample supply 

of reserves ensures that control over the level 

of the federal funds rate and other short-term 

interest rates is exercised primarily through the 

setting of the Federal Reserve's administered 

rates, and in which active management of 

the supply of reserves is not required. This 

operating procedure is often called a "!loor 

system." The FO M C judges that this approach 

provides good control of short-term money 

market rates in a variety of market conditions 

and effective transmission of those rates to 

broader financial conditions. In addition, the 

FOMC stated that it is prepared to adjust 

any of the details for completing balance 

sheet normalization in light of economic and 

financial developments. ~ 

Although reserve balances play a central role 

in the ongoing balance sheet normalization 

process. in the longer run, the size of the 

balance sheet will also be importantly 

determined by trend growth in nonreserve 

liabilities. The box ''The Role of Liabilities in 

Determining the Size of the Federal Reserve's 

Balance Sheet" discusses various factors that 

influence the size of reserve and nonrescrvc 

liabilities. 

Meanwhile, interest income on the Federal 

Reserve's securities holdings has continued to 

support substantial remittances to the U.S. 

17. Since the start of the normalization program. 

reserve balances have dropped by approximately 

$600 billion. 

18. Sec the Statement Regarding Monetary Policy 

Implementation and Balance Sheet Normalization 

which is available on the Board's website at ' 

Treasury. Preliminary linancial statement 

results indicate that the Federal Reserve 

remitted about $65 billion in 2018. 

The federal Reserve's implementation of 

monetary has continued smoothly 

As with the previous federal funds rate 

increases since late 2015, the Federal Reserve 

successfully raised the eflcctivc federal funds 

rate in September and December by increasing 

the interest rate paid on reserve balances 

and the interest rate offered on overnight 

reverse repurchase agreements (ON RRPs). 

Specifically, the Federal Reserve raised the 

interest rate paid on required and excess 

reserve balances to 2.20 percent in September 

and to 2.40 percent in December. In addition, 

the Federal Reserve increased the ON RRP 

offering rate to 2.00 percent in September 

and to 2.25 percent in December. The Federal 

Reserve also approved a '/.i percentage point 

increase in the discount rate (the primary 

credit rate) in both September and December. 

Yields on a broad set of money market 

instruments moved higher, ronghly in line 

with the federal funds rate, in response to the 

FOMC's policy decisions in September and 

December. Usage of the ON RRP facility has 

remained low, excluding quarter-ends. 

The cllcctivc federal funds rate moved to parity 

with the interest rate paid on reserve balances 

in the months before the December meeting. 

At 1ts December meeting, the Committee made 

a second small technical adjustment by setting 

the 111 teres\ on excess reserves rate 1 0 basis 

points below the top of the target range for 

the federal funds rate; this adjustment was 

intended to foster trading in the federal funds 

market at rates well within the FOMC's 

target range. 

The federal Reserve will conduct a 

review of its strategic framework for 

monetary policy in 2019 

With labor market conditions close to 

maximum employment and inflation ncar the 

Committee's 2 percent objective, the FOMC 
127 


Insert offset folio 70 here 35694.070

MONETARY POliCY REPORTc FEBRUARY 2019 41 

The Role of Liabilities in Determining the Size of the 

Federal Reserve's Balance Sheet 

The size of the Federal Reserve's balance sheet 

increased from $900 billion at the end of 2006 to Jbout 

$4.5 trillion at thP end of 2014-or from 6 

of gross domestic product (GOP) to about pern'nl 

of GDP--rnainly as a result of the large-sGlie asst>t 

purchase (LSAP) programs conducted in response to 

persistent economic weakness following the financial 

crisis. The expansion of total assets that stemmed from 

the LSAPs was primarily matched by higher reservE' 

balances of depository institutions, which peaked in 

the fall of 2014 at $2.8 trillion, or almost 16 percent 

of COP, rising from about $10 billion at the end of 

2006. Liabilities other than reserves have also grown 

significantly and played a role in the expansion of 

the balance sheet The magnitude of these nonreserve 

liabilities as well as the flows their variability 

are not closely related to 

Since October 2017, the Federal 

gradually reducing its securities holdings resulting 

from crisis-era purchases. Once these holdings have 

unwound to the point at which reserve balances 

have declined to their longer-run level, the size of 

the balance sheet will be determined by factors 

uffecting the demand for Federal Reserve liabilities. 

This discussion describes the Federal Reserve's most 

significant li<1bilities and reviews the factors that 

A Liabilities as a share (f nonlnal gross domestic product 

Reserve balance~ 

Other!i<lhilities 

Treasury (Jenera! Account 

Ct1rrcncy 

influenced their size since the financial crisis. Many 

of the Federal Reserve's liabilities arise from statutory 

resporlStl>IIHies, such as supplying and serving 

Department's fiscal agent. liability 

provides benefits to the economy and plays an 

important role as a safe and liquid asset for the public, 

the banking system, the U.S. government, or other 

institutions. 

Figure A plots the evolution of the Federal Reserve's 

main liabilities relative to nominal GDP over the post-· 

World War II period. Federal Reserve notes outstanding 

have traditionally been the largest Federal Reserve 

liability and, over the past three decades, have been 

slowly growing as a share of U.S. nominal GDP. U.S. 

currenq is an important medium of exchange and 

store of value, both domestically and abroad. Despite 

the inneasing use of electronic means of payment, 

currency remains widely used in retail transactions 

in the United States. Demand for currency tends 

to incrt.~ase with the si?e of the economy because 

households and businPsses need more currency to 

use in exchange for a growing volume of economic 

transJctions. In addition, with heavy usage of U.S. 

currency ovt.>rseas, changes in global growth as well 

as in financial ;md geopolitical stability f'f'ln also 

(continuf'd on next page) 

15 

20 

!5 
128 


Insert offset folio 71 here 35694.071

42 PART 2c MONETARY POliCY 

The Role of liabilities wo/11/nlwu, 

materially affect the rate of currency growth. Since the 

start of the Global Financi<JI Crisis, notes in circulation 

have more than doubled and, as of the end of 2018, 

stood at dbout $1.67 trillion, equivalent to about 

8 percent of U.S. CDP, implying that accommodating 

dPm<md for alone requires a larger balance 

sheet than before crisis. 

Reserve balances Jre currently the secondlargest liability in the federal Reserve's balance 

sheet, totaling $1.66 trillion at the end of 2018, or 

nearly 8 percent of nomina! GDP. This liability item 

consists of deposits held at Federal Reserve Banks by 

depository institutions, including commercial banks, 

savings banks, rredit unions, thrift institutions, and 

most U.S. branches and agencies of foreign banks. 

These babnc('s indurl<.' resNves held to fulfill rpservc 

requirements as well as reserves held in excess of 

these wquirements. Reserve balances Jllow banks to 

facilitate daily payment flows, both in ordinary times 

and in stress scenarios, without borrowing funds or 

selling assets. Reserve balances have been declining 

for several years, in part as a result of the ongoing 

balance sheet normalization program initiated in 

October 2017, and now stand about $1.2 trillion below 

their peak in 2014. At its January 2019 meeting, the 

FedPrdl Open Market Committee decided that it would 

continue to implemPnt monetary policy in a regime 

with an ample ~upply of reserves, which is often called 

a "floor system" or an "abundant reserves " 1 

Going forward, the banking system's 

for reserve bal.lnces and the Committee's judgment 

0bout t!w quantity thilt is appropri"tc for the f'ffici('nt 

and effe\tive implementation of will 

determine the longer-run /eve! of reserve 

Although the level of reserve balances I hat banks will 

eventually demand is not yet known with certainty, it 

is likP!y to be appreci;>b!y higher than before thP crisis. 

1. SeP footnok' 1 gin the mel in text. 

Banks' higher demand for reserves appears to reflect in 

part an increased focus on liquidity risk management in 

the context of regulatory changes. 

Liabilities other than currency and reserves 

include the Treasury General Account (TGA), reverse 

H'purchase agreements conducted with foreign officbl 

account holders, and deposits held by designated 

financial market utilities (DFMUs). By statute, the 

Federal Reserve serves a special role JS fiscal <:~gent 

or banker for the federal government. Consequently, 

the U.S. Treasury holds cash balances at the Federal 

Reserve in the TGA, using this account to receive 

taxes and proceeds of securities sales and to pay the 

government's bills, including interest and principal on 

maturing securities. Before 2008, the Treasury targeted 

a steady, !ow balance of $5 billion in the TGA on 

most days, Jnd it used privJte accounts at commercial 

banks to managt' the variability in its cash flows. Since 

2008, the Treasury has used the TGA as the primary 

account for managing cash flows. !n May 2015, the 

Treasury announced its intention to hold in the TGA a 

level of cash generally sufficient to cover one week of 

outflows, subject to a minimum balance objective of 

roughly $150 billion. Since this policy change, the TGA 

balance has gPnerally been vvell above this minimum; 

at the end of 2018, it was about $370 billion, or nearly 

2 percent of CDP. The current policy helps protect 

against the risk that extreme weather or other technical 

or operJtional events might cause an interruption in 

access to debt markets Jnd leave the Treasury unable 

to fund U.S. government operations-- ·a scenario that 

could have serious consequences for financial 

Reverse repurchase agreements with 

accounts, also known as the foreign 

rose recent years. The Federal 

long this service as part of ,1 suite of banking 

and custody services to foreign cpntral hanks, foreign 

governments, and international official ins1itutions. 

(continllf>d) 
129 


Insert offset folio 72 here 35694.072

Accounts at the Federal Reserve provide foreign official 

institutions with access to immediate dollar liquidity to 

support operational needs, to dear and settle securities 

in their accounts, and to address unexpected dollar 

shortages or rate volatility. The foreign 

repo pool has grown an average level of around 

$30 billion before the crisis to J current average 

of about $250 billion, to a little more 

than 1 percent of GOP. rise in foreign f('po pool 

balances has reflected in part CE-'ntral bJnks' preference 

lo maintain robust doiiJr liquidity buffers. 

Finally, "other deposits" with the Federal ResE'rve 

H~1nks have also risen steadily over recent years, from 

less than $1 billion before the crisis to about $80 billion 

at the end of 2018. Allhough "other deposits" include 

balances held by international and multilateral 

organizations, government-sponsored enterprises, 

and other miscellaneous items, the increase has 

!Jrgely been driven by the establishments of accounts 

for DFMUs. DFMUs provide the infrastructure for 

transferring, clearing, and settling payments, securities, 

and olhf'r transactions among financial institutions. 

The Dodd-Frank Wall Street Reform and Consumer 

ProtPction Act providPs th;lt DFMUs-thosc financial 

market utilitif's designated as systemically important by 

the Financial Stability Oversight Council-can maintain 

accounts at the Fcderd! Reserve and edrn interest on 

bakmces maintained in those <1ccounts. 

Putting togethPr all of the-se e-lements-that is, 

proj('Cted trPnd growth for currency in circubtion, 

the Committee's decision to continue operating with 

ample reserves, Jnd the higher levels for thf' TGA, the 

fon~ign repo pool, and Di-=MU b~llances--~expldins why 

the longer-run size of !he Fedt'ra/ Reserve's balance 

sheet will be considerably larger than before the crisis. 

At the end of 201 a, the federal Reserve's balance 

sheC't totaled $4.1 trillion, or about 20 of 

GDP. Figure B considers the size of thE' shPet 

in ,\n internatiorhll context. In response to the Clobal 

MONETARY POLICY REPORT FfBRUARY 2019 43 

Financial Crisis, central bank balance sheets increased 

in jurisdictions. Relative to GDP, the Federal 

babnce sheet remains smaller than those of 

other reserve-currency central banks in major advanced 

foreign economies thal currently operate with abundant 

reserves-such as the European Central Bank, the 

Bank of japan, and the Bank of England---although this 

difference is partly due to the Federal Reserve being 

much further along in the policy normalization process 

after the crisis. In addition, the Federal Reserve's 

balance sheet relative to GDP is only modestly larger 

than those of central banks, such as the Norges Bank 

and the Reserve Bank of New Zealand, that aim to 

operate at a relatively low level of abundant reserves. 

Of course, differences in central bank balance sheets 

also reflect differences in financial systems across 

countries. 

B. Central bank balance sheets relative to gross domestic 

product 

• Res.l'fV('Bankof 

New Zealand 

Pf'rumofGDP 

100 

80 

60 
130 


Insert offset folio 73 here 35694.073

44 PART 2' MONETARY POLICY 

judges it is an opportune time for the Federal 

Reserve to conduct a review of its strategic 

framework for monetary policy--including 

the policy strategy, tools, and communication 

practices. The goal of this assessment is 

to identify possible ways to improve the 

Committee's current policy framework in 

order to ensure that the Federal Reserve is 

best positioned going forward to achieve its 

statutory mandate of maximum employment 

and price stability. 

Spccitic to the communications practices, the 

Federal Reserve judges that transparency is 

essential to accountability and the effectiveness 

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 

Initiatives" discusses the steps and new 

initiatives the Federal Reserve has taken to 

improve transparency. 
131 


Insert offset folio 74 here 35694.074

MONETARY POLICY REPORT: Fr:BRLI!\RY 2019 45 

Federal Reserve Transparency: Rationale and New Initiatives 

Over the past 25 years, the Federal Reserve 

Jnd other major central banks have taken steps to 

improve transparency, which provides three import<:mt 

benefits. First, transparency hP!ps ensure that \Pntrzd 

hanks are held accountJble to the public Jnd its 

elected representatives. Accountability is ess(~ntial to 

democratic legitimacy and is particularly important 

for central banks that have been granted extensive 

operational independence, as is lhe case for the 

Federal Reserve. Second, transparency enha11Ces 

the effc>ctiveness of monetary policy. If the public 

understands the central bank's views on the economy 

and monetary policy, then households .1nd businesses 

will take those views into account in making their 

spending and investment plans. Third, transparency 

supports a central bank's efforts to promote the s.1fety 

and soundness of fin<:mcial institutions and the overall 

financial system, including by helping financial 

institutions know what is expected of them. Thus, for 

each of these reasons, the Federal Reserve seeks to 

explain its policymJking approach and decisions to the 

Congress and the public as clearly as possible. 

To foster transparency and accountability, the 

Federal Reserve uses a widE' variety of communications, 

including semi.mnual testimony by the ChJirman 

in conjunction with this report, the 

Policy Report. In addition, the Federal Open 

Committee (FOMC) has released a statement after every 

reguldfly scheduled meeting for almost 20 ye,lfs, and 

det<1iled minutes of FOMC meetings have been released 

since 1993. 1 ln 2007, the r.eder.1l Reserve pxpanded 

the economic projections th.Jt have Jccompanlf'd the 

Monetary Policy Report since 1979 into the Summary 

of Economic Projections, which FOMC participants 

submit cvpry quarter. And in 2012, the F'OMC first 

rPieased its Statement nn Longer-Run Goals and 

Monetary Po! icy Strntegy, which it n?Jffirms annua!!y.I 

The Federal Reserve continues to mdke 

improvem('nts to its communications. In JanuJry, the 

ChairmJn bC'gan holding a press conference after 

C'ach FOMC meeting, doubling the frequency of the 

press conferences that were introduced in 2011. 

These press conferences are held 30 minutes after 

the release of the postmeeting statement and provide 

additional information about the economic outlook, 

the Committet-'s policy decision, and policy tools. 

Press conferences .1lso allow the Chairmrtn to answer 

questions on monetary policy Jnd other issues in a 

timely fashion. 

In November 2018, the Federal Reserve announced 

that it would conduct a broad rE>view of its monetary 

policy framework-·-specifically, of the policy strategy, 

tools, and communication practices that the FOMC 

uses in the pursuit of its dual-mandate goals of 

maximum employment and price stability. The Federal 

Reserve's existing policy framework is the result of 

decades of learning and refinements and has allowed 

the FOMC to pursue effectively its dual-mandate 

goals. Centra! banks in a number of other advanced 

economies have also found it useful, at times, to 

conduct reviews of their monetary policy frameworks. 

Such a review seems particularly appropriate when the 

economy appears to have changed in ways that matter 

for the conduct of monetary policy. For example, the 

neutral level of the policy interest rate appears to have 

fallen in the United States and abroad, increasing the 

risk thJt a centr;:d hank's policy rate will be constrained 

its effective lowPr bound in future economic 

The review will consider ways to t~nsure 

that the Federal Reserve's monetary policy strategy, 

tools, and communications going forward provide the 

best means to dchieve and maintain thE' dual-mJndatC' 

objpctives. 

Thr review will include outreach to and consultation 

with a broad range of stJkehnlders in the U.S. economy 

through a series of "Fed Listens" events. The Reserve 

BJnks will hold forums around the countrv, in a town 

hall format, allowing the Federal Reserve to gather 

per<>pectives from the pub!ic1 including representatives 

of business and industry, !dbor lc~aders, community Jnrl 

economic df'vf'lopmC'nt officials, acrtdernics, nonprofit 

oro.miz.ttinrls. community bankers, local government 

ant.! rcpresenlatives of congressional offices in 

Reserve Bank Districts,' In addition1 the Federal Reserve 

(continued on next pdge) 

L ''Fed listens" f.'Vents will be held at the Federal Reserve> 

Bank of Oalbs this and .11 the Feder.1l Reserve Bank 

oi Minneapolis this ApriL "Fed listens" Pvents will be 

announced in 
132 


Insert offset folio 75 here 35694.075

46 PART MONETARY POLICY 

Federal Reserve Transparency 'cuntinueci; 

System will sponsor a resparch conference this june at 

the Ft>derJ! Reserve Bank with academic 

speakers and non-academic from outside the 

Federal Reserve System. 

Beginning Jround the middle of 2019, as part of 

their review of how to best pursue the Fed's stJtutory 

mandate, Federal Reserve policymakers will discuss 

relpvant economic research as well as the perspectives 

offered during the outreach events. At the end of the 

process, policymakers will assess the information and 

perspectives gdthered and will report their findings and 

conclusions to the public. 

This review comp!emt•nts other recent chJnges 

to the Ferleral Reserve's communication practices. 

!n November 2018, the Board inaugurated two 

reports, the Supervision and Regulation Report and 

the Financial Stability Report. 4 These reports provide 

information about the Board's responsibility, shJred 

with other government agencies, to foster the safety 

and soundness of the U.S. banking system and to 

promote financial stability. Transparency is key to these 

efforts, JS it enhances public confidence, allows for the 

considPration of outside ideas, and makes it easier for 

regulated entities to know whJt is expecterl of thpm 

and how best to comply. 

or,oerv/S,,on and Regulation Report provides 

an of banking conditions and the current 

areJs of focus of the Federal Reserve's regulatory 

policy framework, including pending rules, and key 

themes, trends, and priorities regarding supervisory 

programs. The report distinguishes between large 

financial institutions and regional and community 

banking organizations because supervisory approaches 

and prioritk•s for these institutions frequently differ. 

The report provides information to the public in 

conjunction with sC'miJnnual testimony before the 

by the Vice Chairman for Supervision. 

Financial Stdbility Report summarizes the 

Hoard's monitoring of vulnerJbilities in the financial 

system. The Board monitors four broad categories of 

vulnerabilities, including elevated valuation pressures 

(as signaled by asset prices that are high rel<llive to 

economic fundamentals or historical norms), excessive 

borrowing by businesses and households, excessive 

within the financial sector, ~md funding 

associated with a withdrawal of funds 

from a particular financial institution or sector, for 

exdmp!e as pJ.rt of a "financial panic"). Assessments 

of these vulnerabilities inform Federal Reserve actions 

to promote the resilience of the financial system, 

including through its ~upervision and regulation of 

financial institutions. 

Through all of these efforts to improve its 

communications, the Federal Reserve seeks to enhance 

transparency and accountability regarding how it 

pursues its statutory responsibilities. 
133 


Insert offset folio 76 here 35694.076

47 

3 

SuMMARY or- EcoNOMIC 

The following material appeared as an addendum to the minutes of the December 78-79,2078, 

meeting of the Federal Open Market Committee. 

In conjunction with the Federal Open 

Market Committee (FOMC) meeting held on 

December 18 19. 2018. meeting participants 

submitted their projections of the most likely 

outcomes for real gross domestic product 

(GDP) growth. the unemployment rate, and 

inflation for each year from 2018 to 2021 

and over the longer run. 19 Each participant's 

projections were based on information 

available at the time of the meeting, together 

with his or her assessment of appropriate 

monetary policy-including a path for the 

federal funds rate and its longer-run value--

and assumptions about other factors likely 

to affect economic outcomes. The longerrun projections represent each participant's 

assessment of the value 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 participant 

deems most likely to foster outcomes tor 

economic activity and inflation that best 

satisfy his or her individual interpretation of 

the statutory mandate to promote maximum 

employment and price stability. 

All participants who submitted longer-run 

projections expected that. under appropriate 

monetary policy, growth in real GDP in 2019 

would run somewhat above their individual 

estimate of its longer-run rate. Most 

19. Five members of the Bonrd of Governors, one 

more than in September 2018, were in office at the time 

of the December 2018 meeting and submitted economic 

projections. 

20. One participant did not submit longer-run 

projcctlons for real GDP growth, the unemployment rate, 

or the federal funds rate. 

participants continued to expect real GDP 

growth to slow throughout the projection 

horizon, with a majority of participants 

projecting growth in 2021 to be a little 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 level through 

2021. Most participants projected that 

inflation, as measured by the four-quarter 

percentage change in the price index for 

personal consumption expenditures (PCE), 

would increase slightly over the next two 

years, and nearly all participants expected 

that it wonld be at or slightly above the 

Committee's 2 percent objective in 2020 

and 2021. Compared with the Summary of 

Economic Projections (SEP) from September, 

many participants marked down slightly their 

projections for real GDP growth and inflation 

in 2019. Table I and figure I provide summary 

statistics for the projections. 

As shown in figure 2, participants generally 

continued to expect that the evolution of 

the economy. relative to their objectives of 

maximum 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 the 

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 level 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 

projections. 
134 


Insert offset folio 77 here 35694.077

48 PART 3o SUMMARY OF FCONOMIC PROifCTIONS 

Table I. Economic projections of 1-'Cdcral Reserve Board members and Federal Reserve Bank presidents, under their 

individual assessments of projected appropriate monetary policy, December 201 R 

Percent 

Vanablc 

~OJR 

Change in real GDP 3.0 2.:'1 2.0 LR 1.9 3.0 :u 

September projection 3.1 2.5 2.0 1.8 LB 3.0-3.2 

Unemployment rate 3.7 3.5 3.6 3.t:: 4.4 3.7 

September projection 3.7 3.5 3.5 3.7 4.5 3.7 

PCE inflati(l[j 1.9 1.9 :u 2.1 2.0 Ul-L9 

September projeclion 2J 2,1) 2.1 2.1 2.0 2.0-2.1 

Con: P('E inll<:~tlnn" 1.9 2.0 2.0 2,0 1K1.9 

2.0 2.1 2.1 2.1 1.9 20 

path 

On balance, participants continued to view 

the uncertainty around their projections as 

broadly similar to the average 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 growth as weighted to the 

downside, and one less participant viewed the 

risks to inflation as weighted to the upside. 

The median of participants' projections for the 

growth rate of real GDP for 2019, conditional 

on their individual assessment of appropriate 

monetary policy, was 2.3 percent, slower than 

the 3.0 percent pace expected for 2018. Most 

participants continued to expect GDP growth 

to slow throughout the projection horizon, 

with the median projection at 2.0 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 tor real GDP 

:.u 2.5 

2.4--2.7 

:u-3.7 

Ul 2.1 

2.0-2.1 

2.0<!.1 

2.0 2.1 

2021 Longer 20\R 2021 Longer 

1.8 2.0 1.5-2.0 LR- 2.0 3.0 " :UJ-2.7 1.5-2.2 1.4 2.1 1.7-2.2 

U<!J 1.6 2.0 UI<!.O 2.9-3.2 2.1 2.1\ 1.7- 2.4 L5 2.1 1.7 ::u 

3.5 3.B J.7 3.4-A.O 

3.4--38 3.7-.18 3.4-3.8 

2.0-2.1 LR 1.9 1.8-2.2 

2.1 2.2 1.9 2.2 2.0--2.3 

2_0-2.1 LS- 1.9 1.9 2.2 

2.1-2.2 1.9 2.0 2.0-2.3 

growth for 2018 and 2019 were slightly lower, 

while the median for the longer-run rate of 

growth was a bit higher. Several participants 

mentioned tighter financial conditions or a 

softer global economic outlook as factors 

behind the downward revisions to their nearterm growth estimates. 

The median of projections for the 

unemployment rate in the fourth quarter of 

2019 was 3.5 percent, unchanged from the 

September SEP and almost I percentage point 

below the median assessment of its longerrun 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, respectively. 

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 unemployment was 

slightly lower than in September. 
135 


Insert offset folio 78 here 35694.078

MONETARY POLICY REPORT: FFBRUARY 2019 49 

Figure I. Medians, ct~ntral tendencies. and ranges of economic projections, 2018--21 and over the longer run 

Change in real GDP 

- Median of projections 

0 Central tendency of pro_jtttions 

I Rang:e of projections 

tJncmploymcnt rate 

201.\ 2014 2015 

::!01:1 2014 2015 

2016 

2016 

__ __j__ __ _L _____ l_ 

2017 2018 2019 2020 

i':E ~ 

= 

2017 2018 2019 2020 

202! 

;;±; 

2021 Longer 

run 

Non::: Ddlnitions of variables and other explanations arc in the notes to tah!c J. The data for the actual values of the 

variables arc annual. 

Percent 

- 3 

Percent 

Percent 

- 3 
136 


Insert offset folio 79 here 35694.079

50 PART Jo SUMMARY OF ECONOMIC PROJECTIONS 

Figure 2. FOMC participants' assessments of appropriate monetary policy: Midpoint of target range or target 

level for the federal funds rate 

Percent 

5.0 

4.5 

4.0 

3.5 

3.0 

2.5 

2.0 

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - . . ! . . 

. ···········- 1.5 

'''i"'''''''' .. '''''''''-

1.0 

................................... , .... ·················- 0.5 

0.0 

2018 2019 2020 2021 Longer run 

Non:: Each shaded circle mdicatcs the value (rounded to the nearest l/l': 

of the target range for the federal funds rate or 

rate at the longer run. 

for the fCderal funds rate. 

Figures 3.A and 3.B show the distributions of 

participants' projections for real GDP growth 

and the unemployment rate from 2018 to 2021 

and in the longer run. The distributions of 

individual projections for real GDP growth for 

2019 and 2020 shifted down relative 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 more dispersed 

relative to the distribution of the September 

projections; the distribution moved slightly 

higher for 2020, while the distribution for the 

longer-run normal rate shifted toward the 

lower end of its range. 

The median of projections for total PCE price 

inflation was 1.9 percent in 2019, a bit lower 

than in the September SEP, while the medians 

for 2020 and 2021 were 2. l percent, the same 

as in the previous projections. The medians of 

projections lor core PCE price inflation over 

the 2019-21 period were 2.0 percent, a touch 

lower than in September. Some participants 

pointed to softer incoming data or recent 

declines in oil prices as reasons for shaving 

their projections for inflation. 

Figures 3.C and 3.D provide information on 

the distributions of participants' views about 
137 


Insert offset folio 80 here 35694.080

the outlook for inflation. On the whole, the 

distributions of projections for total PCE price 

inflation and core PCE price inllation beyond 

this year either shified slightly to the left or 

were unchanged relative to the September 

SEP. Most participants revised down slightly 

their projections of total PCE price inflation 

for 2019. All participants expected that total 

PCE price inflation would be in a range from 

2.0 to 2.3 percent in 2020 and 2021. Most 

participants projected that core PCE inflation 

would run at 2.0 to 2.1 percent throughout the 

projection horizon. 

Figure 3.E shows distributions of participants' 

judgments regarding the appropriate target---· 

or midpoint of the target range--···for the 

federal funds rate at the end of each year 

from 2018 to 2021 and over the longer run. 

The distributions tor 2019 through 2021 were 

Jess dispersed and shifted slightly toward 

lower values. Compared with the projections 

prepared for the September SEP. the median 

federal funds rate was 25 basis points lower 

over the 2019--21 period. for the end of 2019, 

the median of federal funds rate projections 

was 2.88 percent, consistent 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 

participants expected that the federal funds 

rate at the end of 2020 and 202 I would be 

modestly higher than their estimate of its level 

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 projections. The median of the 

longer-run projections of the federal funds rate 

was 2. 75 percent, 25 basis points lower than in 

September. 

In discussing their projections, many 

participants 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 

MONHA~Y POLICY RFPORTc FEBRUARY 2019 51 

real interest rate that is currently low and 

an inflation rate that has been rising only 

gradually to the Committee's 2 percent 

objective. Some participants cited a weaker 

near-term trajectory tor economic growth or 

a muted response of inflation to tight labor 

market conditions as factors contributing to 

the downward revisions in their assessments of 

the appropriate path for the policy rate. 

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 occnr. 

As a reference, table 2 provides measures of 

forecast uncertainty--based on the forecast 

errors of various private and government 

forecasts over the past20 years---for real GDP 

growth. the unemployment rate, and total PCE 

price inflation. Those measures arc 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 tor the three variables surrounded 

by symmetric confidence intervals derived 

from the forecast errors reported in table 2. 

If the degree of uncertainty attending these 

projections is similar to the typical magnitude 

Table 2. Average historical projection error ranges 
138 


Insert offset folio 81 here 35694.081

52 PART 3: SUMMARY OF ECONOMIC PROJECTIONS 

NumOCr ofparllc!pauts 

1.2 1.4 1.6 I.R~ 2.0- 2.2-- 2.4 L6 2~8 3.0 3.2-· 

1.3 1.5 1.7 L9 2.1 23 2.5 2.7 2.9 3.1 3.3 

Percent range Number of participants 

2019 -JR 

-16 

-14 

-12 

-10 g 

6 

4 

2 

1.2 1.4 1.6 I.R 2.0·- 2.2 2.4 2.6 2.8- 3.0 3.2 

1.3 !.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 

Percent range Number of participants 

2020 -18 

-16 

-14 

-!2 

-10 

8 

6 

4 

2.6·- 2.8 3.0 3.2~ 

1.5 L9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 

Percent range Number of participants 

2021 lR -16 

-14 

12 

10 

g 

6 

~ 

L2 1.4- 1.6 1.8- 2.0 2.2 2.4 2_6 2.8 3.0 3.2 

1.3 1.5 1.7 1.9 2.1 2.3 2.7 2.9 3.1 3.3 

Percent range Numhcr of participants 

Longer run 18 -16 

-14 

12 

10 

8 

6 

4 

' 

1.2. 1.4 1.6 1.8 2.0~ 2.2 2.4 2.6 2.X 3.0 3.2 

1.3 1.5 1.7 1.9 2.! 2.3 2.5 2.7 2.9 3.1 3.3 Percent range 

NoTE: Definitions nf\'arlah!c:s and other explanations arc in the notes tn !ahlc 1. 
139 


Insert offset folio 82 here 35694.082

MONETARY POLICY REPORT: FEBRUARY 2019 53 

Figure 3. B. Distribution of participants' projections for the unemployment rate, 2018 · 21 and over the longer run 

c 

2018 

0 December pwjectJ~m~ 

September projectwns 

3.0 

3.1 

2019 

3.0 

3.1 

2020 

3.0 

3.1 

2021 

3.0 

3.1 

Longer run 

3.0 

3.1 

3.2 

33 

3.2 

3.3 

3.2-

3.3 

3.2 

3.3 

3.2 

3.3 

3.4 

3.5 

3.4 

3.5 

3.4 

3.5 

3.4 

3.5 

m I 

I . .. ····.-.· ... ... · · 

.. ~ 

... 

-.·.· .. I_ 

I 

~ 3.6 

3.7 

3.6· 

3.7 

3.6 

3.7 

3.6 

3.7 

u 

3.9 

3.8 

3.9 

3.8 

3.9 

3.8 

3.9 

4.0 

4.1 

Percent range 

4.0 

4.1 

Percent range 

4.0 

4.1 

Percent range 

Pcrccllt range 

4.0 

4.1 

Percent range 

4.2 

4.3 

4.2 

4.3 

4.2· 

4.3 

4.4 

4.5 

4.4 

4.5 

4.4 

4.5 

4.4 

4.5 

NoTE: Detlnitions nfvanablcs and other ex plana! ions art' in the notes tc'~ table I. 

4.6 

4.7 

4.6 

4.7 

4.6 

4.7 

4.0 

4.7 

4.6· 

4.7 

4.8 

4.9 

4.8 

4.9 

48 

4.9 

4.8 

4.9 

Number of participants 

5.0 

5.1 

-18 

-16 

-14 

-12 

-10 R 

6 

4 

~2 

Number of participant'> 

5.0 

5.1 

Number of participants 

5.0. 

5.1 

-18 

16 -14 

-12 

-10 

8 

" 4 

Numbe-r pf participants 

5.0-

5.1 

18 

16 -14 

-12 1() 

R 

6 

i 

Number of participants 

5.0 

5.1 

-18 

16 -14 

-12 

10 

8 

6 

4 

2 
140 


Insert offset folio 83 here 35694.083

54 P.~RT 3: SUMMARY OF FCONOMIC PROJFCTIONS 

Figun~ 3.C. Distribution of participants' projections for PCE inflation, 2018~ 21 and over the longer run 

20!9 

2020 

J.7, 

1.8 

1.8 

1.9 

2.0 

Percent range 

Percent range 

2.1 

2.2 

Number of participants 

23 

2.4 

1g -16 

-14 

-12 10 

8 

6 

4 

' 

Number of participants 

2.4 

-18 16 

14 -!2. 

-10 8 

6 

4 

' 

:Kumbcr of participants 

18 -16 

-14 

12 

J() 

8 

6 

4 

L_ __________ _JJ_ __ ~~--L-J-----~--~------------~ ' 

202! 

1.7 

1.8 

1.9 

2.1) 

Percent mngc 

2.1 

2.2 

2.3 

2.4 

Number of participants 

-18 

-16 

-14 

-12 

10 

8 

6 

4 

L_--------~~~~~~_L~~~~~========~' 

Longer nm 

1.7 

1.8 

1.7 

1.8 

1.9 

2.0 

1.9 

2.0 

Percent range 

Percent range 

2.1 

2.2 

2.1 

2.2 

NorE: Definitions ofvariahlcs and other explanations are in the notes w table I. 

2.3 

2.4 

Number of participants 

2.3 

2.4 

18 

16 

14 

12 

10 

8 

6 

4 

' 
141 


Insert offset folio 84 here 35694.084

MONETARY POLICY REPORT: FEBRUARY 2019 55 

Figure 3.0. Distribution of participants' projections for core PCE inflation, 2018.,·21 

201R 

0 

2019 

2020 

2021 

1.7 

l.S 

1.7 

1.8 

1.7 

I.S 

1.9 

2.0 

1.9 

2.0 

Pcn:ent range 

Percent range 

Pcrcen1 range 

Pcrcl'n1 range 

2.! 

2.1 

2.2 

2.1 

2.2 

NoTE: Ddinitions nfvariahh.:s and l)thrr cxplanatinns are in the notes to table I 

Number of participants 

IR 

-16 

14 

12 

10 

Numlx:r of participants 

2.3 

2A 

-JR 

-!6 

-14 

12 

10 

Number of participants 

-18 

16 

-14 

Numher of parti~ipants 

2.3 

2.4 

-IX 

lh 

14 
142 


Insert offset folio 85 here 35694.085

56 PART .·l: SUMMARY OF FCONOMIC PROIECTIONS 

figure 3.E. Distribution of partlclpants' judgments of the midpoint of the appropriate target range for the 

federal funds rate or the appropriate target level for the federal funds rate, 2018··2l and over the longer run 

Number of participants 

2018 -JH 

16 

14 

12 

10 

8 

" 4 

2 

1.88 2.13 2.38 2.63-- 2.88 3.!3. 3.38 3.63 U8 4.13 4.38 4.63 4.88 

2.12 2.37 2.62 2.87 3.12 3.37 3.62 .1.R7 4.12 4.37 4.62 4.87 5.12 

Percent range Number of participants 

-IR 

-16 

-14 

-12 

-10 

8 

" i 1.88 2.D 2.38 2.63 2.88 3.13. 3.38· 3.63· 3.88· 4.13 4.38 4.63 4.88 

2.12 2.37 2.62 2.87 3.12 J.:n 3.62 3.87 4.12 4.37 4.62 4.87 5.12 

Percent range Number of participants 

2020 IB -16 

-14 12 

10 

8 

6 

4 

1.88 2.13 2.38 2.63 2.88 3.13 3.38 3.63 3.88 4.13· 4.38 4.63 4.88 

2.12 2.37 2.62 2.R7 3.12 3.37 3.62 3.87 4.12 4.37 4.62 4.87 5.12 

Percent range Number of participants 

2021 -!K 

-!6 

-14 

12 -10 8 

6 

4 

' 1.88 2.13· 2.38 2.63 2.88 3.13 3.38 3.63 3.88 4.13 4.38 4.63 4.88 

2.12 .2 .. 17 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62 4.87 5.12 

Percent range Numher of participants 

Longer run -lR 

-16 

14 -12 

-10 

8 

6 

4 

2 

3.13 ,.3S 3.63 3.RR 4.13 4.3S 4.63 4.8S . 

2.37 .2.61 2.87 J.:n 3.62 3.X7 4.12 4.37 4.62 4.87 5.12 

Pen:cnt range 

NOTE: Ddlnitions of variables and other explanations arc in the note:-> to tahk 1. 
143 


Insert offset folio 86 here 35694.086

of past forecast errors and the risks around the 

projections are broadly balanced, then future 

outcomes of these variables would have about 

a 70 percent probability of being within these 

confidence intervals. hx all three variables, 

this measure of uncertainty is substantial and 

generally increases as the forecast horizon 

lengthens. 

Participants' assessments of the level of 

uncertainty surrounding their individual 

economic projections are shown in the 

bottom-left panels of ligures 4.A, 4.B. and 4.C. 

Participants generally continued to view 

the degree of uncertainty attached to their 

economic projections for real GOP growth and 

inflation as broadly similar to the average of 

the past 20 years." A couple more participants 

than in September viewed the nncertainty 

around the unemployment rate as higher 

than average. 

Because the fan charts are constructed to be 

symmetric around the median projections, 

they do not reflect any asymmetries in the 

balance of risks that participants may see 

in their economic projections. Participants' 

assessments of the balance of risks to their 

economic projections arc shown in the 

bottom-right panels of figures 4.A, 4.B, 

and 4.C. Most participants generally judged 

the risks to the outlook for real GOP growth, 

the unemployment rate, headline inflation, 

and core inflation as broadly balanced--in 

other words, as broadly consistent with a 

symmetric fan chart. Two more participants 

than in September saw the risks to real GOP 

growth as weighted to the downside, and 

one Jess judged the risks as weighted to the 

upside. The halance of risks to the projection 

for the unemployment rate was unchanged, 

2L At the end of this summary, the box ''Forecast 

Uncertainty" discusses the sources and interpretation 

or uncertainty surrounding the economic forecasts and 

explains the approach used to assess the uncertain tv and 

risks attending the participants' projections. ~ 

MONETARY POliCY RIPORT: FEBRUARY 2019 57 

with three participants judging the risks to 

the unemployment rate as weighted to the 

downside and two participants viewing the 

risks as weighted to the upside. In addition, 

the balauce of risks to the inflation projections 

shifted down slightly relative to September, as 

one Jess participant judged the risks to both 

total and core inflation as weighted to the 

upside and one more participant viewed the 

risks as weighted to the downside. 

In discussing the uncertainty and risks 

surrounding their economic projections, 

participants mentioned trade tensions as 

well as financial and foreign economic 

developments as sources of uncertainty or 

downside risk to the growth outlook. For 

the inflation outlook, the effects of trade 

restrictions were cited as upside risks and 

lower energy prices and the stronger dollar as 

downside risks. Those who commented on U.S. 

fiscal policy viewed it as an additional source 

of uncertainty and noted that it might present 

two-sided risks to the outlook, as its effects 

could be waning faster than expected· or turn 

out to be more stimulative than anticipated. 

Participants' assessments of the appropriate 

future path of the federal funds rate were also 

subject to considerable uncertainty. Because 

the Committee adjusts the federal funds 

rate in response to actual and prospective 

developments over time in real GOP growth, 

the unemployment rate, and intlation, 

uncertainty surrounding the projected path 

for the federal funds rate importantly reflects 

the uncertainties about the paths for those key 

economic variables along with other factors. 

Figure 5 provides a graphical representation 

of this uncertainly, plotting the median 

SEP projection for the federal funds rate 

surrounded by contidcncc intervals derived 

from the results presented in table 2. As with 

the macroeconomic variables, the forecast 

uncertainty surrounding the appropriate path 

of the federal funds rate is substantial and 

increases for longer horizons. 
144 


Insert offset folio 87 here 35694.087

.58 PART 3: SUMMARY OF ECONOMIC PROIECTIONS 

Figure 4.;\, Uncertainty and risks in projections of GDP growth 

Median projection and confidence interval based on historical forecast errors Pcr,;;ent 

-0 

2013 2014 2015 2016 2017 2018 20!9 2020 2021 

FOMC participants· assessments of uncertainty and risks around their economic projections 

Uncertainty about GDP growth 

0 

Lower Broadly 

similar 

Number of participants 

liighcr 

-!8 

12 

10 

8 

Weighted to dowm;ide 

NoTE: The hlue and red lines in the top pane! show actual values and median 

change in real gross domestic product (GDP) from the fourth 

indicated. The Clmfidcncc interval around the median 

squared errors of various 

data is available in 

20 years. the width and shape of the conndence 

Broadly 

balanced 

Number of participants 

Wcie:hted to 

nP:'iidc 

values, respectively, ()f the percent 

the four!h 

FOMC partit::ipants' current assessments of the uncertainty and risks around their proj<..'l.:tions: these current assessments arc 

summarized in the lower panels. Generally speaking. participants who judge the uncertainty about their projections as ''broadly 

similar" to the kw!s of the past 20 years would view the width of the confidence interval shown in the historic..'ll fan 

chart as with their assessments of the uncertainty about their projections. Likewise. participants who judge 

.. broadly ba!anc~d" would view the c0nfidencc interval around their projections as approximately 

and risks in economic prnjections. see the box .. Forecast Uncertainty.·· 
145 


Insert offset folio 88 here 35694.088

MONETARY POLICY REPORT: FEBRUARY 201'1 59 

Figure 4.B. Uncertainty and risks in projections of the unemployment rate 

Median projection and confidence interval hascd on historical forecast errors 

2013 2014 2015 20!6 2017 2019 202() 

FOMC participants' assessments of uncertainty and risks around their economic projections 

~umber of participants 

Uncertainty about the unemployment rate 

0 

Pcrttnt 

-10 

2021 

Numhcr of participants 

- IR 

-16 

-14 

12 

10 

g 
146 


Insert offset folio 89 here 35694.089

60 PART 3: SUMMARY Of FCONOMIC: PROjfCTIONS 

Figure 4.C. Uncertainty and risks in projections of PCE inflation 

Median projection and confidence interval bascJ on historical forecast crrnrs 

Actual 

2015 2014 2015 2016 2017 20lk 2019 1020 

FOMC participants.' assessments of uncertainty and risks around their economic projections 

Number or participants 

Uncertainty ahnm PCE intlation 

D 

Lnwcr Brnad!v 

similar· Higher 

-18 

16 

14 

11 

10 

8 

Weighted tn 

downside Broadly 

balanced 

2021 

Weighted tn 

upside 

Percent 

- 3 

-I 

12 

10 

8 

Number of participants 

-18 

Lower 

NOTE 

pr~vious yeilf 

values is assumcd to he symmetric 

government fnrccast<> made over the prcvinll':; 20 years; more 

infonnation about these data i<; availahlc ill tahlc 2. from those that prevailed. on 

average, \lVer the previous 20 years_ the wldth and shape t\f the contldence interval estimated on the basis of the historical 

forc-.:ast errors may nN rctkct FOMC participants' current assessments of the uncertainty and risks around their 

these current assessmt•nts arc summarized in the lower panels. Generally speaking. participants who judge the about 

similar" to the average levels of the past20 years \Voukl view the width of the confidence interval 

with their assessments of the uncertainty about their projections. 

view the confidence interval 

risks in economic projections, sec the 
147 


Insert offset folio 90 here 35694.090

MONfTARY POliCY REPORT: FEBRUARY 2019 61 

of the federal funds rate 

Median projection and confidence interval hascd on historical forecast crwrs Pe-rcent 

2()!3 2014 2015 2016 2017 20!8 2019 2020 202! 

of short-term interest rates in the fnurth quarter of 

table 2. The shaded area encompasses less than a 

70 percent coni\Jcncc interval irthc confiJcm:c im..::rva! has hl'cn truncated at Icro. 
148 


Insert offset folio 91 here 35694.091

62 PART SUMMARY Of ECONOMIC PROJECTIONS 

Forecast Uncertainty 

The economic projections provided by the members 

of the Board of Governors and the presidents of 

the Federal Reserve Banks inform discussions of 

monetary policy among policymakers and can aid 

public understanding of the basis for policy actions. 

Considerable uncertainty attends these projections, 

however. The economic and statistical models and 

relationships used to help produce economic forecasts 

are necessarily imperfect descriptions of the real world, 

and the future path of the economy can be affected 

by myriad unforeseen developments and events. Thus1 

in setting the stance of monetary particip<mts 

consider not only what appears to most likely 

economic outcome as embodied in their projections, 

but also the range of alternJtive possibi!itiE's, the 

likelihood of their occurring, and the potential costs to 

the economy should they occur. 

Tdble 2 summarizes the average historical accuracy 

of a range of forecasts, including those reported in 

past Monetary Policy Reports and those prepdred 

by the Federal Reserve Board's staff in advance of 

meetings of thE' Federal Open Market Committee 

(FOMC). The projection error ranges shown in the 

table illustrate the considerable uncertainty associated 

with economic forecasts. For 

participant projects that real 

{GOP) and total consumer 

annu<1! rates of, cP<nN-t<v'-''v 

If the uncertainty attending 

to that experienced in the 

the projections are broadly 

similar 

in table 2 would imply a probability of about 

percent that actual COP would exp;md within J 

of 2.2 to 3.8 pPrcent in the current 1.4 to 

percrnt in the second year, and OJ) to percent 

in the third and fourth years. The corresponding 

70 confidf'nCe intervals for overall inflation 

be LB to L2 in the current year and 

1.0 to 3.0 pPrccnt in sC'cond, third, and fourth years. 

Figures 4.A through 4.C illustrate these confidence 

bounds in "fan charts" that are symmetric and centered 

on the medians of FOMC participants' projections for 

COP growth, the unemployment rate, and inflation. 

However, in some instances, the risks around the 

projections may not be symmetric. In particulnr, the 

unemployment rnte cannot be negative; furthermore, 

the risks around a particular projection might be tilted 

to either the upside• or the downside, in which case 

the corresponding fan chart would be asymmetrically 

positioned around the median projection. 

Because current conditions may differ from those 

that prevailed, on average, ovN history, particip;:mts 

provide judgments as to whether the uncertainty 

attached to their projections of each economic variable 

is greater than, smaller than, or broadly similar to 

typical levels of forecast uncertainty seen in the past 

20 years, as presented in table 2 and reflected in 

the widths of the confidence intervals shown in the 

top panels of figures 4.A through 4.C. ParticipantS1 

current assessments of the uncertainty surrounding 

their projections dr~ summarizc~d in the bottom~left 
149 


Insert offset folio 92 here 35694.092

panels of those figures. ParticipdrHs J!so 

judgments as to whether the risks to projections 

are weighted to the upside, are weighted to the 

downside, or are broadly balanced. That is, while 

the symmetric historical fan charts shown in the top 

panels of figures 4.A through 4.C imply that the risks to 

participants' projections are babnced, participants may 

judge that there is a greater risk that a given variable 

will be above rather than below their projections. These 

judgments are summarized in the lower-right pa.ne!s of 

iigures 4.A through 4.C. 

As with n'r.d JCtivity and inflation, the outlook 

for the future path of the federal funds rate is subject 

to considerable uncertainty. This uncertainty aris(~S 

primarily because each p~u1icipant's Jssessnwnt of 

the appropriate stance of monetary policy depends 

importantly on the evolution of r<:>al activity and 

inflation over time. If economic conditions evolve 

in an unexpected manner, then assessments of the 

setting of the f~::~deral funds rate would 

from that point forward. The final line in 

shows the error ranges for forecasts of shortterm interest rates. They that the historical 

confidence intervals with projections of 

the federal funds rate are quite wide. It should be 

noted, however, that these confidence intervals are not 

strictly consistent with the projections for the federal 

funds rate, as these projections are not forecasts of 

the most quarterly outcomes but r,lt!wr are 

"·"~"""'"" individual assessments of 

MONETARY POLICY REPORT: fERRUARY 2019 63 

appropriate monetary policy and are on an end-ofyear basis. However, the forecast errors should provide 

a sense of the uncertainty around the future path of 

the federal funds rate generated by the uncertainty 

about the rnacropconomic variables as well as 

additional adjustments to monetJry policy thJt would 

be appropriate to offset the effects of shorks to the 

Pconomv. 

!fat s~me point in thE: future the confidence intervd! 

around the federal funds rate were to extend below 

1ero, it would be truncated at zero for purposes of 

the fan chart shown in figure 5; zero is the bottom of 

the lowest target range for the feder.1l funds rate that 

has been adopted by the Committee in the past. This 

approach to the construction of the federal funds rate 

fan chart would be merely a convention; it would 

not have any implications for possible future policy 

decisions regarding the use of negative interest rates to 

provide additional monetary policy accommodation 

if doing so Wt~re appropriate. !n such situations, the 

Committee could also employ other tools, including 

forward guidance and asset purchases, to provide 

additional accommocbtion. 

While figures 4.A through 4.C provide information 

on the uncertainty around the economic projections, 

figure 1 providf•s informa!ion on the range of views 

across FOMC participants. A comparison of figure- 1 

with figures 4.A through 4.C shows that the dispersion 

of the projections Jcross participants is much smaller 

than thf' average forecast errors over the past 20 years. 
150 


Insert offset folio 93 here 35694.093

ABBREVIATIONS 

AFE 

BOE 

C&l 

CRE 

DFMU 

EBITDA 

ECB 

EME 

EPOP 

EU 

FOMC 

GOP 

JOLTS 

LFPR 

LSAP 

MBS 

Michigan survey 

ONRRP 

PCE 

SEP 

SLOOS 

SSDI 

TCJA 

TGA 

TIPS 

VIX 

advanced foreign economy 

Bank of England 

commercial and industrial 

commercial real estate 

designated financial market utility 

earnings before interest, taxes, depreciation, and amortization 

European Central Bank 

emerging market economy 

employment-to-population 

European Union 

Federal Open Market Committee; also, the Committee 

gross domestic product 

Job Openings and Labor Turnover Survey 

labor force participation rate 

large-scale asset purchase 

mortgage-backed securities 

University of Michigan Surveys of Consumers 

overnight reverse repurchase agreement 

personal consumption expenditures 

Summary of Economic Projections 

Senior Loan Ollkcr Opinion Survey on Bank Lending Practices 

Social Security Disability Insurance 

Tax Cuts and Jobs Act 

Treasury General Account 

Treasury Inflation-Protected Securities 

implied volatility for the S&P 500 index 

65 
151 


Insert offset folio 94 here 35694.094
152 


Insert offset folio 95 here 35694.095

Questions for The Honorable Jerome H. Powell, Chail', Board of Governors of the Federal 

Reserve System from Representative Barr: 

As you know, the GSIB surcharge was adopted in July 2015, based on the FRB's 

assessment of the GSIBs' resiliency and resolvability. The FRB has since acknowledged 

significant improvements in resiliency and resolvability. In fact, Vice Chait'man Quarles 

said in April 2018 before the House Financial Services Committee that "a process of 

thinking about" recalibrating the GSIB surcharge is appropriate now in light of those 

improvements. Further, in adopting the GSIB surcharge, the :FRB committed to 

periodically reevaluating the surcharge methodology to ensure that economic growth does 

not unduly affect fi•·ms' risk scores or hinder their ability to provide credit and other 

essential financial services. However, in identical letters to Congress last year, both you 

and Vice Chairman Quarles cited two unrelated factors-the profitability of U.S. GSIBs 

and their higher stock valuations relative to foreign banks peers-as justification for not 

recalibrating the GSIB surcharge. You repeated this answer in response to my question 

about the GSIB surcharge on February 27, 2019 and stated that capital was "about right." 

While I have full confidence in your leadership, I ask that you please explain your 

justification further as to why the GSIB surcharge shouldn't be recalibrated right now. In 

particular, I would lil;:e you to explain why you believe bank profitability and stock 

valuations have any beadng on the appropriate calibration for financial regulation. 

Additionally, I would like to know if there is a formal internal process for reviewing the 

GSIB surcharge and how frequently that will be exercised. 

As Vice Chair Quarles indicated in April 2018, the Federal Reserve Board (Board) is cunently 

reviewing and revising aspects of its regulatory fl-amework. In the regulatory capital space, there 

are several inteiTelated projects underway, certain of which have statutory deadlines and are 

therefore being prioritized by the Board. For example, the Board approved proposals to tailor 

the prudential standards that apply to large banks and depository institution holding companies 

(October 2018)1 and to foreign banking organizations (April 2019),2 and the Board intends to 

complete these tulemakings ahead of the November 2019 statutory deadline. 

With respect to the GSIB surcharge, the Board indicated when it issued the rule that it would 

reassess the regime at regular intervals to review whether the surcharge was calibrated 

appropriately.3 Although 1 continue to believe that the levels of capital in the U.S. banking 

system are about right, I do snppmt regular reviews of all the Board's rules, including the GSIB 

surcharge rule. I cannot give you a timeline for the review ofthe GSIB surcharge rule, but I note 

that the Board currently has outstanding a proposal that would calibrate the GSIB leverage 

surcharges and a proposal that would simplify capital requirements for large banking firms by 

integrating a banking lirm's supervisory stress test results into its regulatory capital 

requirements. 

-~-~-~~---·------ ·--- 1 See 83 FR 61408 (Nov. 29, 2018); 83 FR 66024 (Dec. 21, 2018). 2 See https://www.federalreserve.gov/newsevents/pressreleaseslbcreg20 1 90408a.htm. 3 See 80 FR 49082, 49085 (Aug. 14, 2015). 
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Questions for The Honorable .Jerome H. Powell, Board of Governors of the .Federal 

Reserve System from Representative Budd: 

1. For regulatory consistency domestically, as well as presenting a united front 

internationally, I believe it is important that the Federal Reserve and state insurance 

commissioners coordinate their development of insurance capital standards. As the :Fed 

develops its "building blocks approach" (BBA) for an insurance capital standard, how do 

you intend to ensure that the BBA and the group capital calculation (GCC) from the states 

are not significantly divergent'? 

As stated in the Board ofGovemors of the Federal Reserve System's (Board) insurance capital 

Advanced Notice of Proposed Rulemaking, our goal is to develop a capital standard for 

insurance savings and loan holding companies that efficiently uses existing legal-entity-level 

regulatory capital frameworks, including those of state insurance supervisors. In developing the 

Building Block Approach, the Board has been mindful of the potential interaction with the 

development by the National Association ofinsurance Commissioners (NAIC) of the group 

capital calculation. The primary functional supervisor for insurance companies for which the 

Board is consolidated supervisor is a state insurance regulator. It is just good policy for the 

authorities that mutually supervise firms to coordinate efforts in order to streamline, seek 

hannony, and minimize inconsistencies. 

To that end, in August of2017, the Federal Reserve initiated contact with the NATC and state 

insurance supervisors to engage in dialogue with the aim of achieving consistency, wherever 

possible, between the two capital frameworks under development. We meet frequently and 

engage substantively with representatives of the NAIC and the states. Input fi:om the NAIC and 

the states has helped identify areas of commonality while remaining respectful of the somewhat 

different objectives of the relevant supervisory bodies and legal environments. Some differences 

may arise because of the Board's mandate to protect the safety and soundness offcdcrally 

insured depository institutions. As to a firm's insurance subsidiaries, the state supervisors' 

focus is on policyholder protection, while the Board serves as consolidated supervisor of the 

organization. The Board's capital standard also must comport with federal law, while the 

NAIC's group capital calculation interfaces with states' laws. 

2. Does the Federal Reserve intend to neate the "Public Option" for payments via its realtime payment proposal? If so, wouldn't you need congressional authority before creating 

such a system? If you intend to pmceed without congressional approval, is it your goal to 

compete with the same private entities you regulate? And is that appropriate in your view'! 

The potential actions outlined in the Board's October 2018 Federal Register Notice request for 

comment, 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 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 Federal Register Notice seeking 
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-2-

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 (MCA), and longstanding Federal Reserve 

policies and processes created to avoid conflicts of interest across the various roles played by the 

Federal Reserve. 

In particular, the Congress, in part motivated to encourage and ensure fair competition between 

the Federal Reserve and private sector, passed the MCA in 1980, which requires the 

Federal Reserve to 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 has also 

established additional criteria for the provision of new or enhanced payment services that specify 

the Federal Reserve must expect to (I) achieve full cost recovery over the long run, (2) provide 

services that yield a public benefit, and (3) provide services that other providers alone cmmot be 

expected to provide with reasonable effectiveness, scope, and equity. In addition to these 

criteria, for new services or service enhm1cemcnts, 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.2 

3. During your testimony before the House Financial Services Committee on February 

27th, 2019, l asked you about the "Federal Reserve's work at the International Association 

of Insurance Supervisors (IAIS) and the ongoing development of an International Capital 

Standard (ICS). You stated:· 

"We're not looking to change tltefundamentalnature of our insurance system, we think it 

works well ... We're also looking to have an international agreement that works with our 

.1ystem ... We're certainly not looking to say, O.J(., we've negotiated this deal witlt this group 

abroad and we're going to come back and substantial(y change our insurance regulation 

system, that's not going to lwppen ... Titere may be some things that we take on board which 

sow1d like good ideas ... " 

Thank you for your commitment to not seek to fundamentally change the nature of our 

insurance regulatory system through these international negotiations. I agree with you 

that our cun·ent state-based approach to insurance regulation works well and strongly 

protects U.S policyholders. 

One of the main pillars of the current draft of the ICS is the requirement of a consolidated 

group capital requirement for insurance companies. The consolidated group capital 

requirement is similar to what is used under European Insurance solvency regulation. As 

you lmow, in the U.S., insurance companies operate under a legal entity capital 

requirement. 

2 See The Federal Reserve in the Payments System (issued 1984; revised 1990), Federal Reserve Regulatory 

Service 9-1558. 
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- 3 -

Do you agree with me that changing the structure of US solvency regulation from a 

legal entity capital requirement to a consolidated g1·oup capital requirement would 

be considered a "change (to) the fundamental nature of our insurance system?" 

We remain film supporters of the U.S. state-based insurance supervisory system, which has 

proven its strength and resilience for well over a century and provides an invaluable service in 

protecting policyholders. The state-based insurance supervisory system utilizes legal entity 

capital requirements, and the NAIC is currently engaged in the development of a group capital 

calculation that is based on an aggregation oflegal entity capital requirements. The Board's 

consolidated supervision, deriving from its statutory authorities, complements the existing work 

of state insurance supervisors with a perspective that considers risk across the entire firm. In 

order for any form of an insurance capital standard (leS) to be implementable globally, it needs 

to be suitable for the U.S. insurance market. We continue to advocate for an aggregation 

alternative in the res. Among other tl1ings, this approach would utilize and build on state 

insurance capital requirements. Together with the other U.S. members of the Intemational 

Association oflnsurance Supervisors (IAIS), we will continue to advocate for international 

insurance standards that promote a global level playing field and work well for the U.S. 

insurance market. 

4. Given that the current draft of the ICS is expected to be finalized for field testing in 

November 2019 at the IAIS " .... "in Abu Dhabi, what steps have you taken during the past 

negotiations and what steps will you be taking over the next several critical months of 

future negotiations to ensure that the final version of the IeS either does not contain a 

consolidated group capitaii·equirement or to ensure the U.S. system of insurance 

regulation formally deemed as outcome equivalent (or mutually recognized)? 

Together with the Federal Insurance Office, the NATC, and state insurance regulators, the 

Federal Reserve continues its advocacy of an aggregation method that can be deemed 

comparable to the IeS. As noted, in order for any form of an res to be implementable globally, 

it needs to be suitable for the U.S. insurance market. The current core reference method in the 

res would face implementation challenges in the United States. For example, such a framework 

may fail to adequately account for U.S. accounting ti·an1eworks, both Generally Accepted 

Accounting Principles (GAAP) and the NATC's Statutory Accounting Principles, introduce 

excessive volatility, and involve excessive reliance on supervised Jinns' internal models. 

Among other things, this motivates our advocacy of an aggregation alternative, and the usc of an 

altcmative valuation method that derives from U.S. GAAP, in the TCS. 

Furthermore, we suppmt the collection of information about an aggregation-based approach that 

would reside within the IeS, and actively patticipate, together with other jurisdictions that 

espouse aggregation-based approaches, in the development of such an approach for the res. 

It is also important to recall that the intemational standard-setting bodies like the TAIS do not 

have the ability to impose requirements on any national jurisdiction, and any standards 

developed through these fora arc not self-executing or binding on the United States unless 

adopted by the appropriate U.S. lawmakers or regulators in accordm1ce with applicable domestic 

laws and rulemaking procedures. 
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4 

5. When the FRB adopted margin requit·ements for covered swap entities, it recognized 

that its cost estimate was imprecise. Today, we know that the regulation ties up capital 

unnecessarily for inter-affiliate transactions. The inter-affiliate margin requirements, 

contrary to the rule's intent, has made risk management less efficient without attendant 

benefits to the financial system. You stated that updating this requi1·ement is a priority and 

that the FRB is working actively on it. When can we expect action from the FRB to address 

this important issue? 

As T noted in my testimony and consistent with the Treasury Department's recommendations, 

Board staff is actively reviewing the application of margin requirements to inter-affiliate 

transactions. These efforts include ongoing discussions with the Office of the Comptroller of the 

Currency, Federal Deposit Insurance Corporation, Farm Credit Administration, and Federal 

Housing Finance Agency (the agencies); an assessment of how the current requirements help to 

protect the safety and soundness of covered swap entities; an assessment of whether any changes 

to this aspect of the swap margin rule would be consistent with the Dodd-Frank Wall Street 

Reform and Consumer Protection Act; and a review of the interaction of this aspect of the rule 

with other regulations. Because the swap margin rule was adopted jointly with the agencies, any 

change to the rule would also need to be adopted jointly with the agencies. 
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Questions for The Honorable Jerome H. I' ow ell, Chail-, Board of Governors of the Fedct·al 

Reserve System from Representative Chuy Garcia: 

1. I would like to follow up on our conversation regarding merger applications during your 

testimony. 

Accm·ding to the Federal Reserve's semiannualt·eport on banking applications activity, 

only one application for a merger has been rejected out of over 6,000 applications since 

2014. The report also mentions that 5-8% of applications are withdrawn each year, and 

cites banl<s' "Community Reinvestment Act (CRA) or consumer compliance record" as one 

key reason why an application might be withdrawn. 

In recent years, advocates have argued for strengthening the CRA, arguing that the fact 

that 98% of banks receive outstanding or satisfactory ratings suggests enforcement is not 

rigorous enough. Since a positive CRA exam performance is one of the few existing 

obstacles to merger approval, it follows that the high percentage of banks that receive 

positive CRA assessments is one reason why so many applications arc approved. 

Of the 388 applications that have been withdrawn since 2014, how many application 

withdrawals have occurred because the applicants were informed that their CRA 

performance records were not adequate? Can you project how a weakening of CRA 

exams might affect the annual application approval rate, which is typically 90% or 

higher? 

The Board of Govemors (Board) has made publicly available its approach to applications that 

may not satisfy statutory requirements for approval or that otherwise raise supervisory or 

regulatory concems. 1 Applications can be withdrawn by the applicant for any number of 

reasons. For example, an applicant may withdraw for technical or procedural reasons; for 

reasons regarding the statutory factors that must be considered by the Board, including 

supervisory issues; or because the applicant has decided not to pursue the application for 

business or strategic reasons. Applicants also may have multiple reasons for withdrawing filings 

and, in many cases, applicants do not provide specific reasons for withdrawing filings. 

Therefore, the Board is not able to provide the number of applications withdrawn due primarily 

to Community Reinvestment Act (CRA) considerations. 

The Board's goal in any future rulemaking is to strengthen CRA regulations and the examination 

process supporting them in order to support the CRA 's goal of encouraging access to credit, 

particularly in low- and moderate-income communities. To this end, we will seek public 

comment on any potential changes to the Board's CRA regulations. However, at this time, we 

are not able to project how m1y potential revisions to the current CRA regulations would affect 

the application approval rate. 

1 This is reflected SR !4-2/CA !4-l: Enhancing Tmnsparency in the Federal Reserve's Applications Process, 

https:l/www. fed era lreserve.gov/supcrvisionrcglsrletterslsr 1402.htm. 
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2-

2. One of Congress' responses to the 2008 financial crisis was to authorize the Fed to create 

a so-called conntercyclical capital buffer. Out of recognition that the banking sector 

experiences "boom and bust cycles," Fed regulators were granted the authority to invoke 

highet· capital requirements when they assess the risk of losses among large banlG as 

higher than normal. With your predecessor as Fed chair now warning about high levels of 

corporate debt, and numerous other risks emerging on Wall Street and in the commercial 

real estate market, a range of Federal Rese~-ve officials, including Governor Brainard and 

several Reserve Bank presidents, have called on the Board of Governors to institute the 

countercyclical capital buffer. 

What factors arc you weighing when deciding whether to follow your colleagues' 

recommendation to activate the countercyclical capital buffer? 

The Board finalized its policy statement on the cotmtercyclical capital buffer (CCyB) in 2016, in 

which we laid out a comprehensive framework for setting its level. As indicated in the policy 

statement, the CCyB is intended to address elevated risks from activity that is not well supported 

by underlying economic fundamentals. As such, the Board expects the CCyB to be nonzero if 

overall vulnerabilities were judged to have risen to a level that was "meaningfully above 

nonnaL" The overall assessment incorporates the Board's judgment of those vulnerabilities that, 

as you noted, have arisen in the business sector, as well as the level of other key financial 

vulnerabilities that tend to vary with the economic cycle, such as household leverage, financial 

sector leverage, asset valuation pressures and investor risk appetite, and maturity and liquidity 

transformation, and how all of those vulnerabilities interact. 

In coming to its assessment of the broad set of vulnerabilities, the Boaxd considers a wide array 

of economic and financial indicators, as well as a number of statistical models developed by 

staff. The financial system overall appears to be quite resilient. Our f01ward-looking stress tests 

indicate that the institutions at the core of the financial system tbe nation's largest banks- are 

well positioned to support lending and economic activity during severe macroeconomic and 

market scenarios. Taking all ofthis together, I continue to view overall vulnerabilities as 

moderate. 

3. In the year you've been Fed Chair, you've talked a lot about the uncertainty facing the 

Federal Rcse1-ve. It is hard to predict where inflation is going and it hard to know how 

many Jobs the economy can produce. I commend you for acknowledging and highlighting 

the uncertainty in Fed predictions and estimates. That said, it seems like over the past 

decade the Fed's predictions and estimates have always missed in one direction. The Fed 

has consistently overestimated the natural rate of unemployment and future inflation. 

How have these models been updated given the misses? In light of your own 

acknowledgement that estimates of the natural rate of unemployment are "very 

uncertain," are you reexamining the Fed's models and framework for full 

employment? Would you consider putting confidence intervals around the NAIRU 

in future Fed pro.iection materials? 

The Board relies on a host of different models and types of analysis to estimate the natural rate of 

unemployment and inflation. Because the structure of the economy is constantly changing, we 
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3 

regularly update these models and search for new models and frameworks that can better explain 

developments in the labor market and the U.S. economy more generally. 

We also periodically assess the materials we use to communicate our outlook to the public. The 

Summary of Economic Projections, published quarterly, presents projections conditioned upon 

individual Federal Open Market Committee patticipants' individual assessments of projected 

appropriate monetary policy. There is well-developed literature on the statistical confidence 

intervals sutTounding estimates of the longer-run unemployment rate. As a result, policymakers 

are well aware of the unee1tainty surrounding these estimates when they make their policy 

decisions. 
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Questions for The Honorable Jerome H. Powell, Chair, Board of Governors of the Federal 

Reserve System from Representative Anthonv Gonzalez: 

Chairman Powell, can you discuss bow the Federal Reserve's goals of a achieving its Dual 

Mandate has impacted real wage growth in recent yea1·s and how you take into 

consideration the impact on lower income worl,ers when setting policy? 

Nominal wage growth has picked up over the past few years, with most measures now running at 

or above 3 percent on an annualized basis. This increase in nominal wage growth has also 

translated into faster real wage growth relative to a few years ago, which I take as a good sign 

that the strong economy is helping workers. Moreover, recent wage gains have been fastest for 

low-wage workers and workers with less educational attainment, which is also a welcome 

development. With regard to monetary policy, our actions affect the economy as a whole and 

thus we cannot target particular groups of workers. However, by fulfilling the maximum 

employment component of our dual mandate, the Federal Reserve can ensure that the conditions 

are in place to keep labor demand high and stable for as many workers as possible, which in tum 

allows workers to more easily find jobs that best match their abilities and that provide them with 

the greatest opportunity to increase their skills, productivity, and earnings. 

The US National Debt exceeded 22 trillion dollars in recent weeks and the US is projected 

to exceed trillion dollar deficits annually over the ten year budget window. I am concerned 

about the long term impact of these projected deficits. However, some of my colleagues 

have stated that deficits do not matter since we bon·ow our own currency. 

Chairman Powell, can you comment on your view of the mounting debt that our 

country is taking on? 

I am concerned about high and rising federal government debt. The large and growing federal 

debt, relative to the size of the economy, projected to occur over the coming decades would have 

negative effects on the economy. In particular, a rising federal debt burden would reduce 

national saving, all else equal, and put upward pressure on longer-term interest rates, raising 

borrowing costs for households and businesses. Those effects would likely restrain private 

investment, which, in turn, would tend to reduce productivity and overall economic growth. Tn 

addition, a large and rising debt burden can potentially restrict the capacity of fiscal 

policymakers to respond to future economic and financial shocks, as well as to other adverse 

events. These negative effects remain a concem even though the federal government bmTows in 

our own currency. 

Some commentators have noted that the negative effects of high debt levels on the federal budget 

and the economy may be less pernicious than in earlier decades because real interest rates are 

cunently lower. Ifreal interest rates and inflation remained low then interest payments on the 

debt would be a smaller share of gross domestic product than they would be otherwise. 

However, a low interest rate enviromnent does not mean that federal budget deficits and debt do 

not matter, but instead would imply that the burden of servicing a given amount of federal debt 

would be a little less onerous. 
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Questions for The Hono.-able Jerome H. Powell, Hoard of Governors of the .Federal 

Reserve System from Representative Lynch: 

Dodd-Frank required that most derivatives be centrally cleared, bringing greater 

transparency and stability to the derivatives market. However, this shifted considerable 

risk to the Central Counter Parties. 

• Is the Fed concerned about the level of l"isk systemic risk that now exists in 

clearinghouses? If so, what regulatory steps could Congress take to examine and 

alleviate this risk? 

The Board of Governors (Board) noted in its Financial Stability Report that central clearing 

activities have grown over the past several decades and offer many financial stability benefits but 

such increased activity warrants and receives our continual attention.2 Since the financial crisis, 

global regulatory efforts have contributed to this growth by encouraging and, in some cases, 

mandating central clearing of over-the-counter derivatives. Central clearing strengthens 

financial stability by addressing many of the weaknesses exposed during the crisis. In particular, 

central clearing reduces risk exposures through multilateral netting and daily margin 

requirements. Central clearing also provides greater transparency through enhanced reporting 

requirements. Finally, central clearing may reduce the cost of counterparty default by 

facilitating the orderly liquidation of a defaulting member's positions and allocating any resulting 

losses among members of the central counterpmiies (CCPs) through loss-mutualization rules. 

Central clearing, however, only offers such benefits to the extent the CCPs themselves m·e 

managed safely. The regulatory community has worked collectively in the years since the crisis 

to set heightened risk management expectations for financial market utilities (FMUs), including 

CCPs. Federal Reserve staff participated in the development of these international standards for 

the governance, risk management, and operation ofFMUs. These standards, the Principles for 

Financial Market Infrastructures (PFMI), were published in 2012.3 

Since the publication of the PFMI, regulators have implemented these standards into national 

regulation, as appropriate. In the United States, for example, the Commodity Futures Trading 

Commission (CFTC), the Securities and Exchange Commission (SEC), and the Board have 

promulgated regulations based on the PFMI that apply to FMUs that have been designated as 

systemically important by the Financial Stability Oversight Council (FSOC), pursuant to the 

authority in Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 

2010 (Dodd-Frank Act). The Dodd-Frank Act provided the CFTC, SEC, and the Board with 

important authorities that enable these agencies to supervise designated FMUs commensurate 

with the risk they introduce into financial markets, including prescribing risk management 

2 See, Federal Reserve Board, Financial Stability Report at: 

https://www .federalrcserve.gov/publications/fileslfinancial·stability-rcport-20 18ll.pdf (November 20 18). 3 The Committee on Payments and Market Infrastructures (CPMI) is a global standard setting body comprised of 

cenn·al banks focused on promoting the safety and efficiency of payment, clearing, and settlement arrangements to 

support broader financial stability, The International Organization of Securities Commissions (IOSCO) is the 

international body of securities regulators that promulgates global standards for the securities sector. Together, 

CPMI-IOSCO developed and published the PFMI in 2012. 
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2 

standards for these entities. The CFTC and the SEC are the supervisory agencies with direct 

responsibility for the CCPs that have been designated by FSOC. The Federal Reserve has the 

authority to participate in exams of the designated FMUs and review changes proposed by a 

designated FMU to its rules, procedures, and operations. Tln·ough this activity, the Federal 

Reserve has gained a broader perspective across multiple systems. Board staff continues to 

monitor CCI's consistent with the authmities granted to the Board under the Dodd-Frank Act 

with the perspective that these FMUs act as important components in the financial system more 

broadly. 

Section 402(b) of S. 2155 exempted the cash deposits of custody banks held at central banks 

from the denominator of the supplemental leverage ratio. 

Please provide an update on when Section 402(b) will be implemented. Also, how 

docs the Fed see Section 402(b) interacting with proposed changes to the Enhanced 

Supplemental Leverage Ratio the Fed announced in April2018? 

The Board, the OfJice of the Comptroller of the Cunency (OCC) and Federal Deposit Insurance 

Corporation, intend to issue a joint proposal in April2019, to implement Section 402(b) of the 

Economic Growth, Regulatory Relief, and Consumer Protection Act. The comment period on 

the proposal would end 60 days after publication in the Federal Register. 

The April2018 proposal issued by the Board and the OCC to recalibratethe enhanced 

supplementary leverage ratio standards was calibrated based on the definition ofthc existing 

denominator of that ratio. At that time, the denominator included central bank deposits for all 

finns. The April2018 proposal noted that significant changes to the supplementary leverage 

ratio would likely necessitate reconsideration ofthe proposed recalibration, as Board and the 

OCC did not intend 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 supplementary leverage ratio, which would 

meaningfully modify the supplementary leverage ratio as applied to these firms. Accordingly, as 

the Board weighs any re-calibration of the enhanced supplementary leverage ratio, 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. 
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Questions for The Honorable .Jerome H. Powell, Chair, Board of Governors of the Federal 

Reserve System from Representative Posey: 

1. Chairman l'owell, one of the gr·cat themes in your testimony in the Senate Ranking 

Committee was the role of the labor force participation rate in our cmTent macroeconomic outlook I'm particularly interested in your emphasis on how a higher labor 

force participation rate can boost economic growth and more widely distribute the benefits 

of prosperity- getting at some of the concerns about economic equality. In the Q&A at the 

Senate Banking Committee hearing, yon and others identified some things that might 

improve the rate both nationally and regionally like education and training, health of the 

population, child care, etc. One of the fascinating effects that you discussed was how 

government pr·ogr·ams often create an incentive to stay out of the labor force because for a 

prospective employee, working may mean giving up more in benefits than the income from 

working. 

Could you recount those examples and suggest how Congress might adjust 

prog1·ams to improve incentives to participate in the labor force'? 

Economic growth over the long term is determined by the growth in om labor force and the 

increase of the amount of output derived fi·om each hour of work, or labor productivity. Labor 

force growth, in tum, reflects lhe rate of participation in the labor market. Household decisions 

on whether to participate in the labor market and seek work are affected by many factors 

including wage rates, taxes, and government benefits. In general, safely net programs arc 

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 progran1s 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 tum, 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. 

As you know, it is up to Congress to determine how best to ensure satcty-nct programs provide 

the lowest work disincentives as possible while still achieving the social goals ofthc pmgrams. 

For our part, the Federal Reserve is focused on pursuing our congressionally mandated goals 

maximum employment and price stability, and making the best decisions we can in the interest 

of the public. 

2. The economy was in tough shape about this time ten years ago. Aftc1· the crisis, Congress 

also prescribed some tough medicine for bank capital and liquidity. We called it "enhanced 

prudential standards." Last year in the Economic Growth Act, S. 2155, we authorized the 

Fed to fine-tune some of those standards based on the asset size of hanks. This is of great 

interest to community banks in my distl'ict. I certainly support moving away from one-sizefits-all regulation, hut I'm concerned that about whether we might he making our 

regulatory appn>llcb more complicated by putting out Earnings Per Shar·e and then 

putting out Tailored Earnings Per Share. 
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-2-

Could you give us a conceptual description of your tailoring of capital and liquidity 

requirements, tell us when you expect to complete the new rules, and comment on 

whether these ongoing efforts tell us that the enhanced standards (like Basel III) 

make sense if we must tailor them? Is there something simple we can do? 

The principle of tailoring regulatory requirements to a firm's specific risks is a long-standing 

practice of the Board of Governors (Board). Recently, the Board has taken several steps towards 

substantial additional tailoring of its regulations. For example, the Board issued proposals that 

would prescribe materially less stringent requirements for firms that pose less risk, while 

maintaining the most stringent requirements for finns that pose the greatest risks to the financial 

system. 

One. set of proposals would revise the regulatory capital and liquidity requirements that apply to 

U.S. banking organizations based on their risk profiles. To determine the appropriate set of 

standards for a given firm, the proposals would usc thresholds based on size, cross-jurisdictional 

activity, reliance on short-term wholesale funding, nonbank assets, and off-balance sheet 

exposure. These proposals build on the Board's existing efforts to tailor its rules and experience 

implementing those rules, and account for changes to the enhanced prudential standards made by 

the Economic Growth, Regulatory Relief; and Consnmcr Protection Act (EGRRCPA). The 

comment period on proposals closed on January 22, 2019, and the Board is currently considering 

comments on the proposals1 

In addition, the Board, together with the Office of the Comptroller of the Currency and the 

Federal Deposit Insurance Corporation, recently proposed a rnle, pursuant to section 201 of 

EGRRCPA that would provide a simple, leverage-based capital requirement for community 

banking organizations with less than $1 0 billion in assets. The proposed rule would provide an 

alternative to the current capital rule, as banking organizations that qualify for and opt into the 

proposed rule's framework would not he subject to other risk-based or leverage capital 

requirements. The comment period on the proposed rule closed on April 9, 2019. 

3. Chairman Powell, your recent statements have outlined how the Federal Reserve plans 

to reduce its balance sheet from the "dealer of last resort" levels of the crisis. In some of 

those statements you mention the role of hank reserves at the Fed and said that the 

expected level of bank reserves deposited with the Feder:! I Rcser\'e would be somewhere 

around $1 trillion. That's a significantly higher level- ahout 23 times higher- than the 

figure for bank reserves of $43 billion in early 2008. \Vc have a lot of bank assets parked in 

reserves instead of loans to businesses. That apparent huge increase is due to the liquidity 

requirements of Dodd-Frank 

Mr. Chairman, are our post-recession prudential standards possibly just too 

conservative to provide the kind of innovative financial system we need to sustain 

the kind of innovation and ,job gn1wth we need in the overall economy that is 

changing so rapidly? 

1 Similar proposals were issued in April 2019 for fbrcign banking organizations operating in the U.S. 
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3 -

The capital and liquidity requirements adopted alicr the financial crisis have made the Jlnancial 

system far safer and much better positioned to meet the credit needs of households and 

businesses throughout the business cycle. As a result of these reforms and of improvements in 

risk management in the banking sector, banks hold greater quantities of high-quality liquid 

assets, including reserves. At the same time, bank lending to businesses has been growing at a 

healthy pace, and the Federal Reserve's Senior Loan Officer Opinion Survey shows that credit 

terms for commercial and industrial loans have generally cased each year since the crisis. We 

believe that sound bank balance sheets have been supportive of! ending to households and 

businesses. 

4. Chairman Powell, you've been discussing your new cost-benefit analysis unit at the Fed 

and the role of cost-benefit analysis in improving regulatory efficiency. I !mow that it came 

up yesterday at your Senate hearing. I applaud your efforts. Here in the government, we 

sec an ongoing wave of proposals for regulation and for changes and investments in our 

energy, tt·ansportation, and other sectors. I wonder if the lessons you're learning about 

cost- benefit analysis would apply to these activities outside the Fed because we need some 

way- some evidence-based help- to sort through this avalanche of ideas and pick the best 

ones to spend our time and money on. 

Can you please comment on this notion? 

The Board takes seriously the importance of assessing the costs and benefits of its rulcmaking 

eHorts. Under the Board's current practice, consideration of costs and benefits occurs at each 

stage of the regulatory or policymaking process within the context of the Board's mission and 

applicable statutory intent. While the Board has always valued regulatory efficiency, 

establishing a unit dedicated to analyzing the costs and benefits associated with regulatory or 

policymaking processes has increased the capacity of the Board to conduct such analyses and 

enabled the Board to enhance its expe1tise in cost-benefit analysis. 

Cost-benefit analysis that considers both direct and indirect costs and benefits and qualitative 

considerations suppmis the effective implementation of the Board's statutory responsibilities. 

The early work of the unit has highlighted that, while some economic impacts can be quantified, 

others require qualitative discussion. 

With regard to activities outside of the Federal Reserve, many other agencies conduct 

cost-benefit analysis as part of their rulemaking processes that are more tailored to the nature of 

their responsibilities. It would be inappropriate for us to recommend an approach for areas in 

which we do not have expertise. 

5. Chairman Powell, will the rate at which ynu'1·c reducing your holdings of mortgage 

backed secm·itics acquired during the crisis have :my impacts on the mortgage market or 

the market prices of those assets, or do you expect your market operations to have very 

little effect on prices? 
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- 4-

Experience suggests that Federal Reserve actions that alter the quantity of a financial asset held 

by the public can affect the price of that asset, as well as broadly similar assets.2 Indeed, the 

Federal Reserve's purchases of longer-term securities were an important tool for reducing 

long-term interest rates and promoting recovery from the crisis. The quantity of agency 

mo1tgage-backed securities (lVIBS) that the Federal Reserve holds or is anticipated to hold at a 

point in time is factored into market prices. Because the Federal Reserve has been reducing its 

holdings of agency MBS in a gradual and predictable manner, and because it has maintained a 

policy of communicating its plans for nom1alizing the size of its securities holdings well in 

advance, the reduction in our holdings should have only a modest cf!ect on the prices of these 

assets. 

2 https:l/www. fedcralrcscrvc.gov/newsevents/speech/bernankc20 I 2083 I a.htm. 
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Question for The Honorable Jerome H. Powell, Board of Governm·s of the F'ederal Reserve 

System from Representative Steil: 

Chair Powell, S.2155 directed the Office of the Comptroller of the Currency (OCC) to 

write regulations giving federal savings associations flexibility to elect national bank 

lending authorities without having to change charters. The intent is to give these 

institutions opportunities to better serve evolving community needs without unnecessary 

cost and disruption. I understand that the OCC is poised to issue a final rule, and bankers 

considering the election are waiting for a signal regarding whether the same flexibility will 

be permitted for savings associations in holding company structures. 

Can you tell me when clarification is expected? I hope the Federal Reserve can act 

with timely and parallel purpose. 

Thank you for your question regarding section 206 of the Economic Growth, Regulatory Relief: 

and Consumer Protection Act. Federal Reserve Board (Board) staff is working diligently to 

analyze and address treatment of such federal savings associations under various laws within the 

Board's jurisdiction. Our staff is consulting with the Office of the Comptroller of the Currency 

and working to provide clarity consistent with the statute and congressional intent in a timely 

manner. 
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Questions for The Honorable Jerome H. Powell, Chair, Boa1·d of Governors of the Federal 

Reserve Svstcm from Representative Stivers: 

l. Despite China's ambitions fot· its currency, central banks around the world currently 

prefu to hold Canadian dollars more than the rcnminbi (RMB). As recently as last year, 

t·eservcs of the Australian dollar also exceeded RMB holdings. 

Do you believe central banks should hold significant HMB reserves, or increase 

existing t·escrvcs, as long as China is a state-controlled economy with limited 

transparency and no rule of law? 

In general, countries choose the currencies they hold as foreign exchange reserves for a number 

of reasons, including the stability of the currency, the safety and soundness oftbe country's 

economic and financial systems, the depth and liquidity of the conntry's financial markets, and 

exposures of individual countries to other economies through trade and financial linkages. Some 

countries have chosen to include renminbi in their reserve holdings, but according to data fl·om 

the International Monetary Fund, to date these holdings are very small in aggregate, amounting 

to less lhan2 percent of global reserves. The U.S. dollar is still the most widely held reserve 

currency, in large part because oft he safety and soundness of the U.S. economy and the depth 

and liquidity of U.S. financial markets. 

2. You have clearly stated that the Federal Reserve is not considering an in11ation target 

higher than two percent. Understandably, numy interpret this statement as being 

consistent with current Jled policy. Others, however, propose allowing the Fed to 

significantly overshoot or undershoot two percent in11ation, provided that price growth 

averages two percent over a certain timeframe. 

Please respond to the following: Can you confirm that the two percent inflation 

target you endorsed before the Committee is identical to the }led's current policy'? 

And given the Fed's recent chalknges in reaching two percent inflation, do yon view 

proposals in which the Fed must reliably ovet·shoot or undershoot an in11ation 

target as credible alternatives to existing policy? If so, what is the empirical basis 

that lead you to consider such alternatives as both achievable and easily explainable 

to the public? 

The Federal Open Market Committee (FOMC) is firmly committed to fiJlfilling its statutory· 

mandate of promoting maximum employment, stable prices, and moderate long-term interest 

rates. The FOMC describes its current approach for achieving this mandate in the "Statement on 

Longer-Rnn Goals and Monetary Policy Strategy"1 and specifics in this statement that the 

FOMC's longer-tun goal for inflation is 2 percent, as measured by the annual change in the price 

index for personal consumption expenditures. The existing approach, as articulated in the 

statement, has served the public welL Nevertheless, the FOMC is open to considering ways to 

strengthen its li·amework, and it has initiated a broad review of its monetary policy strategy, 

tools, and communication practices. 

1 https://www.fcdcralrescrvc.gov/monelarypolicy/filcs/FOMC LongcrRunGoals.pdC 
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-2-

While the FOMC does not seek fundamental changes to its framework from this review, the 

FOMC wants to engage broadly with the public to strengthen the existing framework. Evidence 

in the United States and around the world suggests that episodes at the effeetive lower bound 

(ELB) could occur more frequently than in the past and could impose high economic costs. 

3. Tn the minutes to the January 2019 J?OMC meeting, the Fed describes the federal funds 

rate as "the primary tool for ad,justing the stance of policy." However, you made note of the 

significance of interest on excess I'esel-ves (IOEH) in your testimony, and IOEH is 

purportedly meant as a floor for the fed ern! funds rate. 

If the federal funds rate is dependent on IOEH, is IOEH, de facto, the Fed's primary 

tool for ad,justing interest mtes, notwithstanding the use of the federal funds rate to 

communicate monetary policy'? 

The FOMC communicates the stance of monetary policy by announcing the target range for the 

federal fhnds rate. The effective federal funds rate is the median rate on federal fund trades by 

private entities, and hence is not directly determined by the Federal Reserve. The Interest on 

Excess Reserves (IOER) rate, along with the oH'ering rate on the overnight reverse repurchase 

facility, are set by the Federal Reserve to support the trading of the federal funds rate within the 

target range specified by the FOMC. The IOER rate has been an effective tool in supporting the 

FOMC's policy stance. 

4. The Fed has communicated that the balance sheet's size will largely be determined by 

banks' demand for reserves. Prior to the financial crisis, reserves amounted to less than 

$20 billion, and at the end of 2018, they totaled $1.66 trillion. In other words, reserve 

balances are now more than 80 times greater than before the crisis, and a postnormalization balance sheet with $1 trillion in reserves would still represent resc1-vc 

balances more than 50 times higher than pre-crisis levels. 

Do you believe a 50-fold inc1·ease in demand is plausible, and if so, why do yon 

believe banks' demand has inCI·eascd by that magnitude'? 

A key outcome of post-crisis regulation is that, banks hold more high-quality liquid assets on 

their balance sheets. Part of the reason that bank holdings of high-quality liquid assets are such 

large multiples of pre-crisis levels is that those initial levels were quite low. Both regulators and 

internal risk managers at banks now realize that banks must hold sufficient stocks of high-quality 

liquid assets to meet unexpected outflows. 

5. In your January press conference, you indicated that an elevated balance sheet of $4 

trillion o1· above would still allow for the Fed to use balance sheet policy during a 

downturn. As the February 2019 Monetary Policy Report illustrates, .Japan began with a 

large balance sheet relative to GDP prior to the financial crisis, and its balance sheet went 

on to experience significant growth. 

How does the Bank of .Japan's experience inform the views you expressed at the 

January press conference regarding the effectiveness of balance sheet policy in 

combatting a future recession'? 
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- 3 -

The size of the Bank of Japan's balance sheet has increased significantly, as assets rose from 

aboul25 percent of gross domestic product (GDP) to around I 00 percent over the past decade. 

That increase reflects the Bank of Japan's large-scale asset purchases aimed at curbing 

disini1ationary pressures and supporting its 2 percent inflation target. Evidence suggests that the 

Bank ofJapan's balance sheet policies helped lower longer-term yields and support asset prices, 

thereby providing stimulus to economic activity. This stimulus has helped to bring Japanese 

inf1ation out of negative territory, though inflation remains well below the Bank of Japan's 

objective. On balance, evidence fi·om Japan is consistent with balance sheet policy being an 

impm1ant tool in providing accommodation when the policy rate is at the ELB. 

Notably, the size of the Federal Reserve's balance sheet is much smaller than the Bank of 

Japan's, as assets have fallen from about 25 percent of GDP in 2014 to about 20 percent of GDP 

at the end of2018. Moreover, assets arc expected to shrink somewhat further this year. As the 

FOMC a11irmcd in January, in the event that future economic conditions call for a more 

accommodative policy than can be achieved solely by reducing the federal funds rate, our 

primary means of adjusting the stance of monetary policy, the FOMC would be prepared to use 

the full range of onr tools including the balance sheet. 

Many empirical studies in the United States find that the Federal Reserve's asset purchase and 

maturity extension programs used to support the economy during the recovery from the financial 

crisis were effective in lowering longer-term yields and improving overall financial conditions. 

Accordingly, adjusting both the size and composition ofthe balance sheet, along with forward 

guidance for the federal funds rate, remain important tools to use in the event of a future 

recession in which the federal funds rate reaches the ELB. 
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Questions for The Honorable Jet·omc H. Powell, Chair, lloar.d of Governors of the Federal 

Reserve System from Representative Tipton: 

The GSIB surcharge was adopted in .July 2015, based on the FRB's assessment of the 

GSIBs' resiliency and rcsolvability. The FRB has since acknowledged significant 

improvements in resiliency and rcsolvability. In fact, Vice Chairman Quarles said in April 

2018 before the House Financial Services Committee that "a process of thinking about" 

rccalibrating the GSIB surcharge is appropriate now in light of those improvements. 

Further, in adopting the GSIB surchat·ge, the l<'RB committed to periodically reevaluating 

the surcharge methodology to ensure that economic growth docs not unduly affect firms' 

risk scores or binder their ability to provide credit and other essential financial services. 

However, in identical letters to Congress last year, both you and Vice Chairman Quarles 

cited two factors that some have suggested a1·e unrelated to the surcharge--the profitability 

of U.S. GSIBs and their higher stock valuations relative to foreign banks peers-as 

justification for the FHB's inaction in fulfilling its commitment to recalibratc the GSIB 

surcharge. These factors were again cited in your response to questions about the GSIB 

surcharge on February 27, 2019. 

Could you please explain the actions the FRB is taking to fulfill its commitment 

to reevaluate the GSIB surcharge's calibration, including a specific timeline for 

this review, and whether (and, if so, why) it's your understanding that bank 

profitability and stock valuations have a bearing on the appropriate calibration 

for financial regulation. 

As you are aware, the bulk of post-crisis regulation is largely complete, with the important 

exception of the U.S. implementation of the recently concluded Basel Committee agreement on 

bank capital standards. It is therefore a natural and appropriate time to step back and assess 

those e±Torts. The Board of Governors (Board) is conducting a comprehensive review of the 

regulations in the core areas of post-crisis 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. 

The Board's capital rules have been designed to significantly reduce the likelihood and severity 

of future financial crises by reducing both the probability of failure of a large banking 

organization and the consequences of such a failure, were it to occur. Capital rules and other 

prudential requirements for large banking organizations should be set at a level that protects 

financial stability and maximizes long-tctm, through-the-cycle, credit availability and economic 

growth. 

Consistent with these principles, the Board originally calibrated the globally systemically 

imp01tant banking (GSIB) organizations surcharge so that~ -given the circumstances of the 

financial system- each GSJB would hold enough capital to lower its probability of failure so that 

the expected impact of its failure on the financial system would be approximately equal to that of 

a large non-GSJB. 
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-2-

In general, I believe overall capital for our largest banking organizations is at about the right 

level. Critical elements of our capital structure for these organizations include stress testing, the 

stress capital buffer, and the enhanced supplementary ratio. Work is underway to finalize the 

calibration of these fundamental building blocks, all of which form part of the system in which 

the GSIB surcharge has an effect. 

The sustained profitability of U.S. GSIBs since the financial crisis indicates that holding higher 

levels of capital has not reduced the ability of GSIBs to extend loans to creditworthy households 

and businesses. Stock valuations indicate the market's expectations for a fi1m. The GSIBs have 

generally experienced increases in the value of their respective stock prices as their required 

regulatory capital levels have increased. This movement indicates that the market also believes 

that the increased levels of capital of GSIBs are not inconsistent with strong performance. 

0