U.S. GOVERNMENT PUBLISHING OFFICE

30–197 PDF WASHINGTON : 2019

S. HRG. 115–242 

THE SEMIANNUAL MONETARY POLICY REPORT 

TO THE CONGRESS 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED FIFTEENTH CONGRESS 

SECOND SESSION 

ON 

EXAMINING THE FEDERAL RESERVE’S SEMIANNUAL REPORT TO 

CONGRESS ON MONETARY POLICY AND THE STATE OF THE ECONOMY 

MARCH 1, 2018 

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

( 

Available at: http://www.govinfo.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

MIKE CRAPO, Idaho, Chairman 

RICHARD C. SHELBY, Alabama 

BOB CORKER, Tennessee 

PATRICK J. TOOMEY, Pennsylvania 

DEAN HELLER, Nevada 

TIM SCOTT, South Carolina 

BEN SASSE, Nebraska 

TOM COTTON, Arkansas 

MIKE ROUNDS, South Dakota 

DAVID PERDUE, Georgia 

THOM TILLIS, North Carolina 

JOHN KENNEDY, Louisiana 

JERRY MORAN, Kansas 

SHERROD BROWN, Ohio 

JACK REED, Rhode Island 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

JOE DONNELLY, Indiana 

BRIAN SCHATZ, Hawaii 

CHRIS VAN HOLLEN, Maryland 

CATHERINE CORTEZ MASTO, Nevada 

DOUG JONES, Alabama 

GREGG RICHARD, Staff Director 

MARK POWDEN, Democratic Staff Director 

ELAD ROISMAN, Chief Counsel 

JOE CARAPIET, Senior Counsel 

TRAVIS HILL, Senior Counsel 

ELISHA TUKU, Democratic Chief Counsel 

COREY FRAYER, Democratic Professional Staff Member 

AMANDA FISCHER, Democratic Professional Staff Member 

DAWN RATLIFF, Chief Clerk 

CAMERON RICKER, Deputy Clerk 

JAMES GUILIANO, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

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C O N T E N T S 

THURSDAY, MARCH 1, 2018 

Page 

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

Prepared statement .......................................................................................... 41 

Opening statements, comments, or prepared statements of: 

Senator Brown .................................................................................................. 2 

Prepared statement ................................................................................... 41 

WITNESS 

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

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

Prepared statement .......................................................................................... 42 

Responses to written questions of: 

Senator Scott ............................................................................................. 45 

Senator Sasse ............................................................................................ 47 

Senator Schatz ........................................................................................... 49 

Senator Cortez Masto ................................................................................ 51 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

The February 2018 semiannual Monetary Policy Report ..................................... 66 

American Banker article, ‘‘SIFI Hike Could Kick-Start Bank M&A,’’ submitted by Senator Brown .................................................................................... 124 

(III)

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THE SEMIANNUAL MONETARY POLICY 

REPORT TO THE CONGRESS 

THURSDAY, MARCH 1, 2018 

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

The Committee met at 10:01 a.m. in room SD–538, Dirksen Senate Office Building, Hon. Mike Crapo, Chairman of the Committee, 

presiding. 

OPENING STATEMENT OF CHAIRMAN MIKE CRAPO 

Chairman CRAPO. The hearing will now come to order. 

Welcome, Chairman Powell, for your first appearance before this 

Committee as Chairman of the Federal Reserve Board of Governors. Congratulations on your confirmation. 

Today’s hearing is an important opportunity to examine the current state of monetary and regulatory policy. 

Over the past few years, the Humphrey-Hawkins hearing has 

often served as an opportunity for Members of this Committee to 

review the new regulations imposed in the wake of the financial 

crisis. 

While I did not always agree with former Chairman Bernanke 

and former Chair Yellen, I appreciated their willingness to engage 

with the Committee and to discuss possible improvements to the 

regulatory regime. 

These discussions were helpful in building common ground for 

our banking bill, Senate bill 2155, particularly for provisions like 

the threshold for enhanced standards under Section 165 of DoddFrank. 

This bipartisan bill now has 13 Republican and 13 Democratic 

and Independent co-sponsors. The bill was the result of a thoughtful, deliberative process over several years that included hearings, 

briefings, meetings, and written submissions from hundreds of 

commentators and stakeholders. 

The primary purpose of the bill is to make targeted changes to 

simplify and improve the regulatory regime for community banks, 

credit unions, mid-size banks, and regional banks to promote economic growth. 

Economic growth has been a key priority for this Committee and 

this Administration and for this Congress. 

The U.S. economy has failed to grow by more than 3 percent annually for more than a decade, by far the longest stretch since GDP 

has been officially calculated. But now there are widespread expectations that growth is finally picking up. 

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According to the January FOMC meeting minutes, the Federal 

Reserve increased its expectations for real GDP growth going forward after fourth quarter growth exceeded expectations. 

The Fed cited the recently enacted tax reform legislation as 

among the reasons economic growth is expected to rise. 

In addition to tax reform, President Trump’s recently released 

Budget and Economic Report both emphasize that regulatory reform is a key component of rising productivity, wages, and economic growth. 

By right-sizing regulation, the Committee’s economic growth bill 

will improve access to capital for consumers and small businesses 

that help drive our economy. 

Now that many are predicting a pickup in growth, a number of 

commentators have expressed sudden concerns about the economy 

overheating. 

While the Federal Reserve should remain vigilant in monitoring 

inflation risks, we must also continue to pursue common-sense, 

pro-growth policies that will lead to increased innovation, productivity, and wages. 

With respect to monetary policy, I am encouraged that the Federal Reserve is continuing on its gradual path to monetary policy 

normalization. 

The Fed has begun to reduce its balance sheet by steadily decreasing the amount of principal it reinvests as assets as its portfolio matures. 

I look forward to hearing more about the Fed’s monetary policy 

outlook as part of Chairman Powell’s testimony today. 

I also look forward to hearing about the Federal Reserve’s ongoing efforts to review, improve, and tailor existing regulations. 

I know that you are working with Vice Chairman for Supervision 

Randy Quarles on all those issues, Mr. Chairman. 

Vice Chairman Quarles has done an excellent job so far, and I 

urge Congress to confirm him for his full term on the Board as 

soon as possible. 

With that, Senator Brown. 

STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. Thank you, Mr. Chairman. And welcome to your 

first one of these, Mr. Chair. Nice to see you. 

Welcome back to the Committee. You are leading the Federal Reserve at a crucial time in our Nation’s history as the Fed normalizes interest rates and shrinks the balance sheet. 

The country is in its ninth year of economic recovery, though, as 

we know, 2017 marked the worst year for job creation since 2010. 

And the recovery has not reached everyone. Wage growth has been 

slow and labor force participation has barely improved since 2014. 

Nine years of job growth have still not done much to narrow income inequality or address employment disparities. 

Nationwide, the unemployment rate for African American workers is double that for whites workers—equal to the gap at the start 

of the civil rights movement. Looking more broadly, labor force participation is down for all minorities. 

Statistics show that large pockets of people are waiting to share 

in the benefits from the recovery. Instead of addressing their 

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problems, Republicans are working hard to make sure that Wall 

Street banks rake in even bigger profits. 

Despite the fact that we are 9 years removed from the recession, 

the Administration has embarked on a substantial fiscal stimulus, 

permanently slashing the corporate tax rate, and providing the 

largest benefits to the wealthiest Americans. Over time, 81 percent 

of the benefits of that tax cut goes to the wealthiest 1 percent. 

Of course, Wall Street, which is making record profits, will do 

well. 

Instead of fighting for workers and making sure labor market opportunities are shared among those who have been struggling, Republicans push for tax cuts for corporations and the wealthy. 

Those tax cuts are not free. As you know, Mr. Chairman, they will add over $1 trillion dollars to the deficit. The once and future 

deficit hawks on the other side of the aisle were more like marshmallow Peeps when confronted with tax cuts for the wealthy. 

The ink was barely dry when we began to hear calls for spending 

cuts that will hurt families across the country. Eighty-one percent 

of the benefits going to the wealthiest 1 percent, then, alas, there 

is a budget deficit we have to address. Let us look at ‘‘entitlement 

reform’’ that everyone should understand means cuts to Medicare, 

Medicaid, and Social Security. It is the same playbook we have 

seen for years. 

The claim was that it would all be worth it because workers 

would benefit. 

I am happy for any Ohioan who gets a bonus or a raise, but we 

have seen how banks and corporations have responded to the tax 

cuts, and the numbers are staggering. In January, Wells Fargo— 

they have been in front of this Committee a number of times, and 

we have spent lots of time talking about their illegal behavior. 

Wells Fargo in January announced a $22 billion stock buyback— 

288 times what it will spend on pay raises for workers. A lot of discussion, a lot of news coverage on the benefits to workers on the 

bonuses or the pay raises, but 288 times that number went to stock 

buybacks for executives. 

Companies this year will start disclosing CEO-to-worker pay ratios, as required under the Wall Street Reform Act. Honeywell announced an $8 billion stock buyback in December and just disclosed 

that its CEO is getting a 61-percent pay raise and makes 333 times 

the average worker’s pay. 

It is pretty simple: For each pay raise or bonus for workers, companies are spending 100, 150, 200 times as much on stock 

buybacks and executive compensation. 

And it gets worse. 

While the biggest banks lavish pay raises and stock giveaways 

on their executives, they continue to violate the law and abuse 

their customers. The Federal Reserve recently imposed an unprecedented—if belated—penalty on Wells Fargo following several scandals, including the opening of millions of fake accounts and improperly charging borrowers—even after that scandal was disclosed, 

charging borrowers for auto insurance they did not need. 

The Fed told Wells Fargo it cannot grow until it has demonstrated that it has improved board oversight and risk management. It sounds like the Fed has come to the conclusion many of 

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us on this Committee reached a year and half ago: Wells Fargo, 

simply put, is ‘‘too big to manage.’’ I will be closely watching to 

make sure the new team at the Fed does not lift these penalties, 

as the Consumer Bureau did, without the bank making real 

changes. 

It is not just Wells Fargo. Last week, Citigroup announced it illegally overcharged 2 million credit card accounts for over 5 years; 

it will refund $335 million to consumers. 

Though Wall Street cannot seem to go a month without a new 

scandal, the Senate is set to take up a bill that would roll back critical financial stability protections and limit watchdogs’ ability to 

police the largest banks. 

We can expect the banks to spend any savings from less oversight the way they spent their tax cuts: more dividends, share 

buybacks, and mergers. 

Many of us in this body are concerned about this deregulation 

bill that I mentioned a moment ago, especially when it comes to 

foreign banks, those banks that are huge, but their assets in this 

country are under $250 billion. They are both troubled and troubling banks in their international operations, yet Secretary 

Mnuchin sat at that table and said he plans to deregulate some of 

these banks, like Deutsche Bank and Santander. And we know the 

fines that they have paid and the problems that they have caused 

internationally. 

Chair Powell, Wall Street may be focused on whether there are 

three or four rate hikes this year. I think your focus needs to be 

on ensuring the Fed does not once again permit the buildup of risk 

in the market and hubris at the Fed. The Great Moderation turned 

out to be not so great. We forget that lesson at our peril. 

The Fed needs to take the side of consumers, making sure the 

financial system stays strong and regulations are enforced. 

I look forward to your testimony. 

Chairman CRAPO. Thank you very much. 

Chairman Powell, once again we appreciate you being here. We 

look forward to your opening statement, and you may proceed. 

STATEMENT OF JEROME H. POWELL, CHAIRMAN, BOARD OF 

GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. POWELL. Thank you very much, Chairman Crapo, Ranking 

Member Brown, Members of the Committee. I am pleased to 

present the Federal Reserve’s semiannual Monetary Policy Report 

to Congress today. 

On the occasion of my first appearance before this Committee as 

Chairman of the Federal Reserve, I want to express my appreciation for my predecessor, Janet Yellen, and her important contributions. During her term as Chair, the economy continued to 

strengthen, and Federal Reserve policymakers began to normalize 

both the level of interest rates and the size of the balance sheet. 

Together, Chair Yellen and I have worked to ensure a smooth leadership transition and provide for continuity in monetary policy. 

I also want to express my appreciation for my colleagues on the 

Federal Open Market Committee. And, finally, I want to affirm my 

continued support for the objectives assigned to us by the 

Congress—maximum employment and price stability—and for 

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transparency about the Federal Reserve’s policies and programs. 

Transparency is the foundation of our accountability, and I am 

committed to clearly explaining what we are doing and why we are 

doing it. Today I will briefly discuss the current economic situation 

and outlook before turning to monetary policy. 

The U.S. economy grew at a solid pace over the second half of 

2017 and into this year. Monthly job gains averaged 179,000 from 

July through December, and payrolls rose an additional 200,000 in 

January. This pace of job growth was sufficient to push the unemployment rate down to 4.1 percent, about three-quarters of a percentage point lower than a year earlier and the lowest level since 

December of 2000. In addition, the labor force participation rate remained roughly unchanged, on net, as it has for the past several 

years, and that is a sign of job market strength, given that retiring 

baby boomers are putting downward pressure on the participation 

rate. 

Strong job gains in recent years have led to widespread reductions in unemployment across the income spectrum and for all 

major demographic groups. For example, the unemployment rate 

for adults without a high school education has fallen from about 15 

percent in 2009 to 5 1⁄2 percent in January of this year, while the 

jobless rate for those with a college degree has moved down from 

5 percent to 2 percent over the same period. In addition, unemployment rates for African Americans and Hispanics are now at or 

below rates seen before the recession, although they are still significantly above the rate for whites. Wages have continued to grow 

moderately, with a modest acceleration in some measures, although 

the extent of the pickup likely has been held back in part by the 

weak pace of productivity growth in recent years. 

Turning from the labor market to production, inflation-adjusted 

GDP rose at an annual rate of 2.8 percent in the second half of 

2017, nearly a full percentage point faster than its pace in the first 

half of the year. Economic growth in the second half was led by 

solid gains in consumer spending, supported by rising household 

incomes and wealth and upbeat sentiment. In addition, growth in 

business investment stepped up sharply last year, which should 

support higher productivity growth in time. The housing market 

has continued to improve slowly. Economic activity abroad has also 

been solid in recent quarters, and the associated strengthening in 

the demand for U.S. exports has provided considerable support to 

our manufacturing industry. 

Against this backdrop of solid growth and a strong labor market, 

inflation has been low and stable. In fact, inflation has continued 

to run below the 2 percent rate that the FOMC judges to be most 

consistent over the longer run with our congressional mandate. 

Overall consumer prices, as measured by the price index for personal consumption expenditures, or ‘‘PCE,’’ as we call it, increased 

1.7 percent in the 12 months ending in December, about the same 

as 2016. The core PCE price index, which excludes the prices of energy and food items and is a better indicator of future inflation, 

rose 1.5 percent over the same period, somewhat less than in the 

previous year. And we continue to view that some of the shortfall 

in inflation last year was likely reflecting transitory influences that 

we do not expect will repeat. And consistent with this view, the 

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monthly readings were a little bit higher at the end of the year 

than in earlier months. 

After easing substantially in 2017, financial conditions in the 

United States have reversed a bit of that easing, and at this point 

we do not see these developments as weighing heavily on the outlook for economic activity, the labor markets, and inflation. Indeed, 

the economic outlook remains strong. The robust job market should 

continue to support growth in household incomes and consumer 

spending, solid economic growth among our trading partners 

should lead to further gains in U.S. exports, and upbeat business 

sentiment and strong sales will likely continue to boost business investment. Moreover, fiscal policy has become more stimulative. In 

this environment, we anticipate that inflation on a 12-month basis 

will move up this year and stabilize around the FOMC’s 2 percent 

objective over the medium term. Wages should increase at a faster 

pace as well. The Committee views the near-term risks to the economic outlook as roughly balanced but will continue to monitor inflation developments closely. 

I will turn now to monetary policy. The Congress has assigned 

us the goals of promoting maximum employment and stable prices. 

Over the second half of 2017, the FOMC continued to gradually reduce monetary policy accommodation. Specifically, we raised the 

target range for the Federal funds rate by a quarter percentage 

point at our December meeting, bringing that target rate to a 

range of 1 1⁄4 percent to 1 1⁄2 percent. In addition, in October we initiated a balance sheet normalization program to gradually reduce 

our securities holdings. That program has been proceeding smoothly. These interest rate and balance sheet actions reflect the 

Committee’s view that gradually reducing monetary policy accommodation will sustain a strong labor market while fostering a return of inflation to 2 percent. 

In gauging the appropriate path for monetary policy over the 

next few years, the FOMC will continue to try to strike a balance 

between avoiding an overheated economy and bringing PCE price 

inflation to 2 percent on a sustained basis. While many factors 

shape the economic outlook, some of the headwinds the U.S. economy faced in previous years have turned into tailwinds. In particular, fiscal policy has become more stimulative and foreign demand for U.S. exports is on a firmer trajectory. Despite the recent 

volatility, financial conditions remain accommodative. At the same 

time, inflation remains below our 2 percent longer-run objective. In 

the FOMC’s view, further gradual increases in the Federal funds 

rate will best promote attainment of both of our objectives. As always, the path of monetary policy will depend on the economic outlook as informed by incoming data. 

In evaluating the stance of monetary policy, the FOMC routinely 

consults monetary policy rules that connect prescriptions for the 

policy rate with variables associated with our mandated objectives. 

Personally, I find these prescriptions helpful. Careful judgments 

are required about the measurement of the variables used, as well 

as about the implications of the many issues these rules do not 

take into account. And I would note that this Monetary Policy Report provides further discussion of monetary policy rules and their 

7 

role in our policy process, extending the analysis we introduced in 

July. 

Thank you again. I look forward to our discussion. 

Chairman CRAPO. Thank you, Mr. Chairman. 

I am going to focus my questions on Senate bill 2155, which I 

referenced in my introductory remarks, but first, Mr. Chairman, 

you are familiar with that legislation, correct? 

Mr. POWELL. Yes, I am. 

Chairman CRAPO. In past hearings former Chair Yellen, former 

Federal Reserve Governor Tarullo, and former Comptroller of the 

Currency, among others, have all expressed support for changing 

the $50 billion threshold for enhanced prudential standards. Building on that feedback, Senate bill 2155 raises the threshold from 

$50 billion to $250 billion and requires the Fed to tailor regulations 

to a bank’s business model and risk profile. 

I would like to ask you some questions about this bill if it does 

become law, and there are five or six of them, so I would like to 

have you respond as briefly as you can, but fully answer the questions. 

Is it accurate that the Federal Reserve would still be required to 

conduct a supervisory stress test for any bank with total assets between $100 billion and $250 billion to ensure that it has enough 

capital to weather economic downturns? 

Mr. POWELL. Yes, it is. 

Chairman CRAPO. And is it accurate that the Federal Reserve 

would still have sufficient authority to apply prudential standard 

to a bank with between $100 billion and $250 billion in total assets 

if the Fed determined that was appropriate? 

Mr. POWELL. Yes, that is true. 

Chairman CRAPO. Is it accurate that this provision does not 

weaken oversight of the largest globally systemic banks? 

Mr. POWELL. That is correct. 

Chairman CRAPO. Is it accurate that the Federal Reserve applies 

enhanced standards to international banks based on their global 

total consolidated assets, meaning this provision would not exempt 

banks such as Deutsche Bank and Santander from Section 165 of 

Dodd-Frank? 

Mr. POWELL. That is correct. 

Chairman CRAPO. Is it accurate that this provision does not in 

any way restrict the Fed’s supervisory, regulatory, and enforcement 

authorities to ensure the safety and soundness of financial institutions? 

Mr. POWELL. Yes. 

Chairman CRAPO. And, finally, is it accurate that nothing in this 

provision would restrict the Fed’s ability to ensure that large financial institutions are well capitalized? 

Mr. POWELL. Yes. 

Chairman CRAPO. Thank you. And to go on a little bit, as you 

know, the Dodd-Frank Act included a provision known as the 

Volcker rule, which placed restrictions on banks that trade for their 

own profit, otherwise known as ‘‘proprietary trading,’’ and on certain relationships with certain private funds. As you also know, financial companies have incurred significant costs attempting to 

comply with the rule. Do you support addressing this confusion by 

8 

exempting community banks with less than $10 billion in total assets and who are engaged in a small amount of trading activity? 

Mr. POWELL. I think that is a sensible thing to do, yes. 

Chairman CRAPO. All right. Thank you. And some have expressed concerns that this exemption would allow a community 

bank to purchase a hedge fund. Is it accurate that the Federal Reserve could use its existing authority to address any safety and 

soundness concerns arising from such an action? 

Mr. POWELL. We would still apply all of our safety and soundness 

supervisory activities to that bank, and we would be looking for 

things like that and find them. 

Chairman CRAPO. All right. Thank you. Finally—and I am shifting gears away from the legislation right now—I also mentioned in 

my opening statement that Randy Quarles has been confirmed as 

Vice Chairman for Supervision of the Federal Reserve but has not 

been confirmed for his full term as a Governor yet. I believe it is 

very critical that we do that confirmation and confirm Governor 

Quarles for his full term. Do you agree? And if you do, why is it 

critical for the Senate to confirm Vice Chairman Quarles as soon 

as possible? 

Mr. POWELL. Thank you for raising this, Mr. Chairman. I absolutely agree. It is very important that Vice Chair Quarles get his 

full term. At this point he is working on an expired underlying 

Governor term, but he has a 4-year Chair term, and I think to have 

him fully installed, it is very important that he have this underlying Governor term. 

Chairman CRAPO. All right. Thank you. I appreciate your emphasis on that, and hopefully that will help to encourage the full Senate to move more expeditiously on that nomination. 

Senator Brown. 

Senator BROWN. Thank you. I appreciate my friend and colleague 

Chairman Crapo’s skillful, narrow, and leading questions about his 

legislation. I think it is important to point out that the question 

particularly about foreign banks, Deutsche Bank and Santander 

and those banks that have been both troubled and troubling, will 

be mostly deregulated under this bill because they are under 250. 

That is not really my question. I want to get to questions. But I 

also want to point out, in spite of this Chair of the Federal Reserve’s general satisfaction with this bill, there have been serious, 

serious, serious questions raised against it, raised about it by 

former Fed Chair Volcker, by former Fed Governor and Deputy 

Treasury Secretary Sarah Bloom Raskin, but Bush appointee 

former FDIC Chair Sheila Bair, by former Counselor to the Treasury Secretary Antonio Weiss, and by the former Deputy Governor 

of the Bank of England Paul Tucker. And I think it is important 

to note that it is not all candy and roses here. 

Let me talk about a couple other things. The unemployment rate 

has been steady at 4 percent, 4.1 percent; wage growth, as you 

know, Mr. Chair, has been slow to improve. At your confirmation 

hearing in November, you mentioned that labor force participation 

for prime-age workers was also lagging. I would like to see improvement across the board, as I know you would. 

Two questions related to that. Do you think it is possible to 

achieve further improvement in wages and employment among 

9 

workers that have been left behind without causing higher inflation? And will you commit to looking at all the data and considering the workers who have struggled the most so as to avoid 

raising rates preemptively and cutting off the chances for broader 

economic gains? 

Mr. POWELL. Thank you, Senator. As you mentioned, there are 

a couple places where it looks like there may be additional slack 

in the labor force, and the biggest of those is that participation by 

prime-age workers is a full percentage point below where it was before the crisis. We do not see any strong evidence yet of a decisive 

move up in wages. We see wages by a couple of measures trending 

up a little bit, but most of them continuing to grow at about 2 1⁄2

percent. So nothing in that suggests to me that wage inflation is 

at a point of acceleration, and so I would expect that some continued strengthening in the labor market can take place without causing inflation. We will, of course, be monitoring that, and I think the 

risks are much more two-sided than they were 2 or 3 years ago 

when there was a great deal of slack in the labor market. 

Senator BROWN. I appreciate, as I told you in person, your interest and commitment to both mandates of inflation and employment. One Fed nominee that is still in abeyance, may or may not 

have the votes on the floor, does not take that position. Your position there is crucial, as Chair Yellen understood, as Chairman 

Bernanke understood. 

Second question: Morgan Stanley and other Wall Street analysts 

have said that only 13 percent of the reduced taxes under the tax 

bill being paid by companies will go to workers’ pay; 18 percent will 

go to mergers. If that ratio holds up for banks—18 percent will go 

to mergers, 13 percent for worker pay. If that ratio holds up for 

banks, whether it is the tax bill or the Chairman’s bill he talked 

about, shouldn’t we expect even more bank consolidation? 

Mr. POWELL. First, I would say we do not really know yet how 

that will shake out, but taking your hypothetical, would it add to 

more consolidation among the banks? You know, bank consolidation has been going on for 30-plus years. It has got a lot to do with 

smaller banks and economic activity moving out of the rural areas 

into the city and interstate banking and things like that. I am not 

sure this would tend to change the trend. 

Senator BROWN. I appreciate what you just said because I certainly heard the deregulators in this body, those that suffer this 

collective amnesia about what happened a decade ago, always 

blaming bank consolidation on Dodd-Frank when, as you point out, 

it has been going on for years. 

Mr. Chairman, here is an American Banker article from November that discusses your bill. The title is ‘‘SIFI hike could kick-start 

bank M&A,’’ and I ask to enter that in the record. 

Chairman CRAPO. Without objection. 

Senator BROWN. Thank you. 

Senator BROWN. Last question. Most of the Wall Street—the big 

Wall Street bank offenders have—most of the Wall Street banks 

have been repeat offenders since the crisis. The Fed and other regulators have fined them. You were part of this, $243 billion in combined penalties, money laundering, market manipulation, deceiving 

customers, you name it. The Chairman’s bank deregulation bill 

10 

would mandate that the Fed further tailor rules for the largest 

banks. Meanwhile, Vice Chair Quarles is talking about the Fed’s 

plans to make living wills less frequent, to reduce leverage rules 

to weaken the Volcker rule. 

Why should big banks that have consistently failed to follow the 

rules benefit from statutory or regulatory rollbacks? 

Mr. POWELL. I would just say that our focus is very much on the 

smaller and medium-size banks. We want the post-crisis regulatory 

initiatives like higher capital, higher liquidity, stress testing, resolution, we want those to apply in their strongest form to the largest 

institutions. We want to make sure we are doing that efficiently. 

And there are some changes we can make in that regard, but most 

of what we are doing really applies to banks—— 

Senator BROWN. Well, I hear you, but I sat with Senator Crapo 

and a number of others that are in this room on the Finance Committee, and I heard Republican after Republican say the tax cut 

was all about the middle class, yet 81 percent of the benefits went 

to the wealthiest 1 percent. I heard you and I hear the push for 

this S. 2155 being all about the community banks, but we know 

much of it is driven by what happens for the larger banks, the 

weaker stress tests, the periodic stress tests, what we are doing, 

instead of annual, what we are doing for the foreign banks. So I 

hear your talk about your interest primarily is the smaller banks, 

but I guess the question still stands. Why should anything in this 

bill—why should we do anything for the largest banks? As this bill 

does, why should we do anything for banks that have consistently 

failed to follow the rules? Why should they benefit from statutory 

and regulatory rules rollback? 

Mr. POWELL. As I see the parts of the bill that I am familiar 

with, they really apply to banks 250 and under. And when you say 

‘‘largest banks,’’ I think you are talking about either the eight 

SIFIs—by the way, one of which is below $250 billion in assets, so 

we are very capable of reaching below 250 to apply enhanced prudential standards when it is appropriate. But it is really those institutions that I would call the large and complex institutions, and 

the focus there, again, is on sustaining the four pillars that I mentioned of post-crisis regulation and maybe looking at making them 

more efficient. They do not need to be—they should not be more 

burdensome than they need to be, but—— 

Senator BROWN. I agree with that. 

Mr. POWELL.——we are looking to strengthen and hold onto 

those. 

Senator BROWN. Well, I hope in your conversations with the 

Chair of Supervision, Mr. Quarles, that you will insist that this is 

about the banks under 250 and insist on that, that it is not about 

the banks over 250, as some on this podium have suggested. 

Thank you. 

Chairman CRAPO. Thank you. 

Senator Shelby. And I do remind our colleagues that we need to 

stick to the 5-minute rule. 

Senator SHELBY. That is prospective, isn’t it, Mr. Chairman? 

[Laughter.] 

Senator SHELBY. Chairman Powell, you referred to price stability 

just a few minutes ago as one of the mandates for the Fed in your 

11 

job. Let us talk a little about price stability and unemployment 

being real low. Prices, you mentioned earlier that inflation is, I assume, under control, whatever that is. You have got your eyes and 

you have got your hands on it, so to speak. But a lot of people believe that you will continue to raise interest rates at incremental 

levels in the future. Is that because of your concern about the specter of inflation, that being full employment, so to speak, you know, 

mostly, pressure on wages? Or where is it coming from, in other 

words? Or is it all of it? 

Mr. POWELL. Senator, where we are now is we have got unemployment, as you know, at 4.1 percent, which is sort of at or near 

or even below most estimates of the natural rate of unemployment. 

But we have inflation that is still a little bit below, so by continuing to gradually raise interest rates over time, we are trying 

to balance those two things and, you know, achieve inflation moving up to target, but also make sure that the economy does not 

overheat. 

Now, there is not a lot of evidence that—there is no evidence 

that the economy is currently overheating, but that is really the 

path that we have been on, and my expectation is that that will 

continue to be the appropriate path as long as the economy performs this way. 

Senator SHELBY. Well, I think that is a substantive path, too. I 

agree with you. 

Do you believe that there is going to be a push for higher wages? 

You know, you see a little of it now. The economy is good. People 

seem to be doing well. The tax cuts come in, which is probably 

going to help. We see that it is going to help at least confidence 

and everything in the economy. What do you see there? 

Mr. POWELL. It is interesting. Unemployment has declined from 

10 percent at the worst part of the crisis—and, actually, well after 

the crisis—down to 4.1 percent now, and wages have only really 

gradually started to track up. The increases are now up at about 

2 1⁄2 percent if you blend the various measures we look at, and we 

look at a bunch of them. And I will be honest. I would have 

thought that you would see more wage increases by this point, and 

I do expect that we will see more wage increases. We have got an 

economy with strong momentum. We have got strong job creation 

as a result of it. We have got low unemployment. And I do think 

you will begin to see wages coming up, but we have been feeling 

that way, and that is kind of what we are waiting to see. I hope 

we see it soon, expect to see it. 

Senator SHELBY. How important to the economy and to the monetary policy is price stability? 

Mr. POWELL. Price stability is one of our two mandates, at the 

very heart of what we do. 

Senator SHELBY. It is key, isn’t it? One of the keys. 

Mr. POWELL. Absolutely at the very heart of what we do. 

Senator SHELBY. OK. I would like to switch over to your other 

job, and that is, dealing with regulatory issues. Cost-benefit analysis unit, it is my understanding that the Fed has announced 

recently its intention to create what they call a ‘‘Policy Effectiveness and Assessment Unit’’ to conduct cost-benefit analysis on regulations. If that is so, I applaud that effort. A lot of us on this 

12 

Committee have pushed that for years, believing that there should 

be an analysis, a real cost-benefit analysis to every regulation. 

What is the status of this group’s development, Mr. Chairman? 

And what do you hope will come out of this? 

Mr. POWELL. As you know, Senator, we always try to implement 

regulations in the way that is least burdensome and also faithful 

to the intent of Congress. In this particular case, we are trying to 

raise our game here by having a specific group of, you know, quantitatively oriented people who are focusing just on that. We have 

lately published cost-benefit analysis on specific regulations like 

the SIFI surcharge, the long-term debt, and things like that. So, 

you know, we are trying to raise our game here. 

By the way, whenever we go out for comment on a reg, we also 

ask for the public’s view on costs and benefits. So it is really important to us, and as I said, as you pointed out, we are trying to raise 

our game. 

Senator SHELBY. A lot of it, though, is letting the public know 

what all of this is about and what the costs will be to them as well 

as to the economy, is it not? 

Mr. POWELL. It is, and that is our obligation, is to be transparent 

about those things. 

Senator SHELBY. Thank you. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you. 

Senator Tester. 

Senator TESTER. Yes, thank you, Mr. Chairman and Ranking 

Member Brown. I appreciate you having this hearing. And welcome, Governor Powell. It is great to have you here. 

There has been a perception being floated by some that the largest foreign banking organizations, such as Barclays, UBS—Deutsche Bank has been talked about today already—will be released 

from enhanced prudential standards under the economic package 

brought forward called S. 2155. I fundamentally disagree with that. 

I think those views are a myth, and certainly not the text that is 

in S. 2155. But I am a dirt farmer, OK? I just kind of read things 

as they are and do not read a lot of extra stuff into it. You are the 

man on the Fed, and so I need to know your opinion. Does S. 2155 

require the Federal Reserve to weaken any of the Dodd-Frank enhanced prudential standards for the FBO such as Deutsche Bank, 

UBS, or Barclays? 

Mr. POWELL. It does not, according to my reading of the text. 

Senator TESTER. Can you elaborate, briefly if possible, on how 

those standards are applied to the largest FBOs? 

Mr. POWELL. Well, currently what the bill does is it moves up to 

250 for these institutions, but it looks at their global consolidated 

capital. We now have intermediate holding company requirements 

for these companies, and none of those would be affected by this. 

And what that means is that they are required to keep capital and 

liquidity here in the United States that is commensurate with their 

activities. They are also subject to living wills and things like that. 

So, it is a range of enhanced prudential standards. The intermediate holding company thing is an extra one that we gave them. 

Senator TESTER. OK. Thank you. 

13 

I am also frustrated that some are jumping to conclusions about 

how or what might happen regarding international holding company requirements. So just to clarify, from your perspective, the 

creation of the IHS was not included in Dodd-Frank, correct? 

Mr. POWELL. That is right. That was something that we added 

on independent of Dodd-Frank. 

Senator TESTER. And the legislative language in S. 2155, the bill 

that we have been talking about this morning a lot, does not require any change to the IHC, correct? 

Mr. POWELL. It does not. 

Senator TESTER. OK. Thank you for clearing that up. 

Now, I asked you this question during your confirmation right 

around the time that S. 2155 was released, and it has been nearly 

3 month, and that bill has made its way through this Committee 

and has overwhelming bipartisan support and hopefully will see 

the floor next week. What I asked you at that juncture was: Do you 

believe S. 2155 puts our financial system at risk? At that moment 

in time you said no. So now you have had a little more time to get 

your feet on the ground. Do you continue to believe that? 

Mr. POWELL. I do. 

Senator TESTER. OK. Last—go ahead, go ahead. 

Mr. POWELL. I can elaborate if you want. 

Senator TESTER. Sure. Have at it. 

Mr. POWELL. OK. The essence, probably the most significant 

piece of it is that you raise the threshold for enhanced prudential 

standards to 250, but you give us the ability to look below 250. We 

will publish a framework that addresses—and we will put it out for 

comment—that addresses how we will think about that. We have 

not been shy about reaching below 250. One of the eight SIFIs, in 

fact, is below $250 billion in assets. So I think it gives us the tools 

that we need to continue to protect financial stability. 

Senator TESTER. Thank you. Last, I think it is important that 

folks remember that the Federal Reserve and Chairman Powell 

have a number of tools in their toolbox when it comes to regulating 

our financial institutions well beyond that we even created in 

Dodd-Frank. I think it is important to remember that things like 

advanced approaches, CCAR, and Basel were not created by DoddFrank, and if I am not mistaken, advanced approaches and CCAR 

were put in place during a Republican administration. 

So I guess my question for you, Chairman Powell, is this: Can 

you remind folks what your safety and soundness authority means 

to the Federal Reserve and what authority it gives to you? 

Mr. POWELL. Except in places where Congress has addressed 

particular areas, we have broad safety and soundness authority to 

do capital requirements of various kinds, liquidity requirements 

and things like that, and look after the safety and soundness of all 

depository institutions. 

Senator TESTER. Thank you. I just want to close by saying that 

I do not for a second think that Dodd-Frank was the only reason 

we are seeing consolidation in banking. I think technology plays a 

big role in that, and population shifting plays a big role in that. 

On this Committee I can deal with Dodd-Frank. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you. 

14 

Senator Corker. 

Senator CORKER. Thank you. Welcome, Mr. Chairman. It is good 

to have you here, and congratulations on your confirmation. 

You have talked about the accommodative fiscal policy that is in 

place right now, and just out of curiosity—I know people predict 

you all are going to raise rates four times this year. You are definitely going to raise rates some. How much of the tax bill that was 

put in place, how much of that is affecting your desire or your likelihood of raising rates over this year? 

Mr. POWELL. I would not single it out, Senator. I would say—— 

Senator CORKER. No, no. I am not trying to single it out. But just 

out of curiosity, it is, in fact, something that is going to be stimulative, so how much of a factor is it in looking at raising rates? 

Mr. POWELL. Fiscal policy is one of many, many factors. As you 

know, we are looking at stable prices and maximum employment. 

That is what we are looking at. And everything that happens in 

the economy and financial conditions and fiscal policy affects that. 

We cannot really isolate one thing, you know, like fiscal policy. But 

I think, you know, I would expect that fiscal policy this year is 

going to add meaningfully to demand, and that is going to put upward pressure on inflation and downward pressure on unemployment. It is hard to quantify, but it would not be the main factor. 

The economy is strong, and it is even stronger now. 

Senator CORKER. So then as it relates to growth, you said it was 

going to increase demand. How much of a factor is it in your 

growth projections, the passage of the tax legislation? 

Mr. POWELL. As I mentioned, I think it will add meaningfully to 

growth for at least the next couple of years. The real question is: 

How much will it add to—and the amount of that is subject to very 

different estimates by different approaches, but I guess the bigger 

question is: How much will it add to longer-run growth? There are 

a couple channels through which that might happen. Higher investment should lead to higher productivity, which would raise potential growth. Lower tax rates on individuals should increase 

labor supply. These are highly, highly uncertain, but we hope the 

effects are meaningful there as well. 

Senator CORKER. You know, we have been through a decade now, 

I guess, since the crisis, and many of us were here during that 

time. It was a pretty heady time trying to resolve those issues. And 

yet we went through periods of time when we were worried about 

deflation. Obviously, we had really accommodative monetary policy 

during that time. And here we are again at 4.1 percent unemployment, down from 10, as you mentioned, the economy is strong, and 

yet still, let us face it, 2 percent inflation—I know you all are combating anything getting out of control. Elaborate on the factors that 

in this day and age—in this economy in this world situation, what 

is it that is keeping inflation at such a low rate? 

Mr. POWELL. It is a global phenomenon, and we do not perfectly 

understand it, but I would say since the crisis, a big factor that has 

been weighing down inflation has been just the weakness in the 

economy. You have had a lot of slack, and the economy has not 

been tight, and so it makes sense that that would press downward 

on inflation. We also had, you know, the strong dollar and lower 

oil prices in 2014 and 2015. That pushed down. So more lately, we 

15 

would have expected inflation to come up by a few more tenths 

than it has, and we see identifiable idiosyncratic factors. There are 

other stories, though. There is the Amazon effect story. There is 

global slack, the idea that slack around the world is affecting, you 

know, the tightness of the U.S. labor market. It is really hard to 

tie those down from an empirical standpoint, but that may be having some sort of an effect on inflation as well. It is a global phenomenon, though, so it is not just tied to domestic factors. 

Senator CORKER. I know that my friends on the other side tend 

to focus a lot on the tax bill, and there is hope that growth is going 

to overcome any kind of deficits there. It may or may not occur. 

But we are, in fact, getting ready to spend $2 trillion more that we 

do not have by passing the bill we just passed. We have got an omnibus coming up. Over the next 10 years, it is a minimum of $2 

trillion in additional spending, almost twice what the President requested, and we have $21 trillion in debt today. 

How much does the deficit picture for our country come into play 

relative to the Federal Reserve? And how concerning is it to you 

that we continue just to party like there is no time ending here in 

Congress? 

Mr. POWELL. We are not on a sustainable fiscal path. We need 

to get on one. This is a good time to be doing that when the economy is strong. But that is a longer-run problem. It is not really— 

it is not a problem for today’s monetary policy or economy. It becomes a problem gradually over time as we spend more and more 

of our expenditures on serving—on interest rate, on debt service, 

and we have less and less to do the things that we really need to 

do and as we pass along bills to future generations. But the 

unsustainability of our fiscal path is not something that has too 

much of an effect in the near term on our policies. 

Senator CORKER. Thank you. 

Mr. Chairman, thank you. 

Chairman CRAPO. Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman. Welcome, Chairman Powell. Good to see you. 

I want to follow up on some questions that my colleagues Senators Brown and Shelby asked you about. Inflation is continuing to 

run below the Fed’s 2 percent target, which has prompted a majority of the regional Federal Reserve Bank Presidents to urge a study 

of the current inflation framework. And while we have seen significant economic gains since the worst days of the recession, most 

hardworking families are still waiting to see their paychecks rise. 

Real median wages increased by only 14 percent from 1979 to 

2017, and any recent acceleration in wages is accruing to high-paid 

executives and managers with production and nonsupervisory 

workers simply not seeing those gains. 

The Fed is projecting a minimum of three interest rate increases 

in 2018, and after your testimony on Tuesday, the markets are now 

anticipating as many as four hikes. 

Do you agree that the achievement of full employment should be 

associated with strong and broad-based wage growth for average 

workers, not just increases for executives and managerial pay? 

Mr. POWELL. I do, Senator. 

16 

Senator MENENDEZ. And if so, doesn’t that argue for consideration of a monetary policy path that would allow wages to continue 

to grow prior to the Fed’s pumping the brakes? 

Mr. POWELL. I agree that it does, and I believe that is, in fact, 

the path we are on. These are gradual rate increases, and we do 

expect wages to move up. 

Senator MENENDEZ. What would the cost to the economy of overshooting inflation in the 2 to 3 percent range versus the cost to the 

economy of choking off growth if the Fed continues to tighten without a clear indication that inflation is going to exceed its target be? 

Mr. POWELL. The risk, one of the risk we are trying to avoid, I 

think as I mentioned earlier, the risks are more balanced than they 

used to be. For many years, it was clear there was a lot of slack 

in the economy, and, you know, I for one supported accommodative 

policy. At this point we have 4.1 percent unemployment, and the 

thing we do not want to avoid—that we do not want to have happen is to get behind the curve, have inflation move up, and have 

to raise rates too quickly, cause a recession. And recessions, they 

hit the most vulnerable groups, you know, the hardest, and so that 

is where unemployment goes up the fastest and that kind of thing. 

So to prolong the recovery, the Committee’s view is that we should 

continue on this gradual path of rate increases which balances 

lower inflation and low wages against the need to make sure that 

we do not run too far past the natural rate of unemployment. 

Senator MENENDEZ. Well, I hope you will continue to look at 

wage growth as part of your calibrations. 

Let me ask you this: During the confirmation hearing—and I was 

pleased to vote for you—I asked you about the economic risks of 

adding an additional $1.5 trillion to the deficit, and I just heard 

your responses to my colleague from Tennessee that we are not on 

a sustainable path, we need to get one. Obviously, we were not on 

a sustainable path before we added $1.5 trillion to the debt in the 

tax cuts that were generated. And you then said in response, and 

I quote, ‘‘I think we need to be concerned with fiscal sustainability 

over the long term.’’ And in the same hearing, you agreed with 

Senator Van Hollen when he asked you—you said adding $1.5 trillion to the deficit would make a bad situation worse. 

Now, your predecessor previously testified before this Committee 

when she said, ‘‘I am personally concerned about the U.S. debt situation. Taking what is already a significant problem and making 

it worse is a concern to me.’’ 

Do you agree with former Chairman Yellen that there is reason 

to be concerned about mounting deficits and growing national debt? 

Mr. POWELL. I do, and I will follow what my predecessors have 

done and not get too much into the details of fiscal policy, but I 

will say a couple things. 

One is that, as I mentioned, we need to get on a sustainable fiscal path in the longer run. We know that we are not in the longer 

run. 

The second thing is when we do fiscal policy, when you do fiscal 

policy, I think it is important to keep in mind measures that would 

increase the productive capacity of the United States of the economy, things that would increase productivity, that foster investment in people, in education and training, in R&D, and in plant 

17 

and equipment as well. Those kinds of policies can help the whole 

economy grow faster on a sustainable basis. 

Senator MENENDEZ. I agree with you. I would suggest that stock 

buybacks do not quite do that. 

Let me ask you a last question. In January, the New York Federal Reserve Bank president said that tax legislation is likely to 

generate frictional costs that will mitigate its effects on growth, 

namely disparate impacts regionally. In particular, president Dudley was pointing out the gutting of the State and local income and 

property tax deduction, which would raise the cost of ownership 

and adversely affect prices and construction activity in States like 

New Jersey. 

Do you agree with president Dudley’s analysis that States like 

New Jersey will see regional economic disparities as a result of the 

tax bill? 

Mr. POWELL. Senator, I hope you will allow me to say that I 

would rather not get into the particular details of any particular 

fiscal bill as Chairman, and I think that is—I am happy to talk 

about things at a high level, but getting into commenting on particular sections in a fiscal bill which is not our responsibility for me 

is probably not a good idea. 

Senator MENENDEZ. Your president of the New York Reserve 

made that observation, so I would hope that we would look at the 

consequences to regional growth as part of your overall growth 

path. The region that I am from generates nearly 20 to 25 percent 

of GDP for the entire Nation. If we are going to have policies that 

ultimately affect the ability to be that engine for part of economic 

growth of the country, we should be considering that as well. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Senator Cotton. 

Senator COTTON. Thank you, Mr. Chairman. And, Mr. Powell, 

welcome in your first appearance as Chairman, first of many. I am 

sure you have them all circled on your calendar and look forward 

to them with eagerness, as a child does to Christmas, right? 

Mr. POWELL. Indeed. 

Senator COTTON. I want to talk about the labor market, in particular wage growth for America’s workers. An article in the Harvard Business Review last October discussed wage trends since the 

1970s and found that wage gains have mostly accrued to top earners while wages have declined or been stagnant for the bottom half 

of the income distribution. The bottom half of the income distribution is comprised of many Americans who do not have a 4-year degree, many who do not even have a high school diploma. Research 

from the Economic Policy Institute shows that American workers 

without a high school education have seen their wages decline by 

17 percent since 1979 adjusted for inflation, and for workers with 

a high school education but no college, wages have declined by 2 

percent. 

The chart to my left displays this, shows what I am talking 

about. You can see the massive wage growth for those with a college degree or an advanced degree and wage declines in real terms 

for those with a high school degree or less. One of my top priorities 

is to ensure that hardworking Arkansans can share in the 

18 

economic prosperity that we see in our country in ways that they 

have not over the course of my lifetime. 

Mr. Chairman, you write—or I should say the entire Board 

writes on page 2 and 3 of the Monetary Policy Report, ‘‘Although 

there is no way to know with precision, the labor market appears 

to be near or a little beyond full employment at present.’’ What is 

your personal assessment of this matter? Is the economy at full employment today? 

Mr. POWELL. As we say in our statement of longer-run goals and 

policy strategy, we look at a number of—there is no place you can 

directly observe. We look at a range of indicators, and I would say 

most of those indicators say that we are either at or beyond full 

employment. There are a couple that suggest maybe we are not. I 

would point to wages and I would point to labor force participation 

by prime-age males. This is a long answer. It is hard to give a really clear answer, but we do not actually know precisely where full 

employment is. Put it all in the blender, it seems to me we are very 

close to full employment. 

I would add that is not the case in every region. 

Senator COTTON. To pick up on your point about labor force participation, while our unemployment rate is a bit of good news at 

4.1 percent and jobless claims seem to be continuing to trend downward, it is somewhat surprising, given those economic conditions, 

that over the last year labor force participation continued to decline 

from 62.9 percent in January of 2017 to 62.7 percent in January 

of 2018. Even if you account for demographic change, for the aging 

of the baby-boom generation, many estimates say that 2 million 

workers are still missing from our economy. 

I also would note that job growth continues to outpace population 

growth, which suggests that there is still slack in the labor market. 

And a lot of the slack appears to be in part on the lower end of 

the economic scale of those workers who have a high school degree 

or less than that. 

Would you agree with that assessment? 

Mr. POWELL. Generally, yes. Labor force participation has been 

essentially flat since the back half of 2013, so a little more than 

4 years, and the downward trend might be 25 basis points a year. 

So I look at us as having made up probably the slack that 

emerged—probably fully made up the slack that emerged as part 

of the crisis. 

Senator COTTON. And the wage growth we have seen over the 

last year, while good, I would suggest is still not good enough, especially as long as we have those missing workers. So I would hate 

to see—putting aside all the other reasons why you might see rate 

increases in the coming months ahead, rate increases because of 

continued increases in wages, especially for working-class Americans. And the labor market, like any other market, is a market 

that is driven by supply and demand, correct? 

Mr. POWELL. Yes. 

Senator COTTON. So if the supply of labor exceeds the demand 

of labor, then you would see downward pressure on wages. That is 

one reason why I and some other Senators, like Senator Perdue, 

have been so focused on our immigration system. You know, if you 

could magically convert a million high school graduates in this 

19 

country to a million Stanford graduates that could go to work in 

our high-tech industry, then presumably that would be good for the 

wages of working-class Americans. Well, that is essentially what 

we do every single year in reverse as we bring in a million unskilled and low-skilled workers that are competing against the very 

people who have not shared in prosperity and, for that matter, 

competing against the previous generation of immigrants. I do not 

think that is good for American citizens. I do not think that is good 

for our economy, and I will continue to work hard to make sure 

that those workers share in the prosperity that all Americans in 

the upper-income brackets, college educated and more, have shared 

in the past. 

Thank you. 

Chairman CRAPO. Senator Schatz. 

Senator SCHATZ. Thank you. Chairman, thank you for being 

here, and thank you for being willing to serve. 

I want to talk about student loan debt. There is currently $1.4 

trillion in outstanding student loan debt, the highest category of 

consumer debt behind mortgages. It is also the most delinquent, 

with 11 percent of borrowers seriously delinquent or in default. The 

Fed estimates that this number is likely closer to 22 percent once 

you take into account the number of borrowers who are in forbearance. 

In contrast, at the height of the financial crisis, mortgage delinquency was just under 5 percent, and currently that rate is around 

1 percent. According to the Federal Reserve’s data, high levels of 

student debt have contributed to lower rates of home ownership 

and new business starts. 

So, in your view, does the high level of student debt create a drag 

on the economy? 

Mr. POWELL. On student loan debt, I think it is important that 

people be able to borrow to make what may be the most important 

investment of their lives, which is in their education. So, overall, 

I think borrowing to invest in yourself is something we should foster, subject to a couple of important caveats. 

First, it is very important that people understand the nature of 

the borrowing and the risk that they are taking and the possible 

payoffs and that sort of thing so that they make informed decisions. 

The second thing is I think alone among all kinds of debt, we do 

not allow student loan debt to be discharged in bankruptcy. 

Senator SCHATZ. Right. 

Mr. POWELL. I would be at a loss to explain why that should be 

the case. So it is something—and this is fiscal policy. This is something for you, not something for the Fed. But we do see and Fed 

research shows and other research shows you do start to see 

longer-term negative effects on people who cannot pay off their student loans. It hurts their credit rating. It impacts the entire path 

of their economic life. 

Senator SCHATZ. So that is the public policy argument for us to 

do something about student loan debt and the way we structure 

higher education financing. My question for you is: Do you see this 

as a macroeconomic risk? 

20 

Mr. POWELL. It will over time. It is not something you can pick 

up in the data right now, but as this goes on and as student loan 

continues to grow and becomes larger and larger, then it absolutely 

could hold back growth. 

Senator SCHATZ. OK. Thank you. And I want to thank you for 

your willingness to have an open mind on the question of the economic impacts of climate change. I appreciated your answers in the 

questions for the record, and so I am glad you are willing to talk 

about it. Your position is that the Fed is only concerned with, and 

I will quote, ‘‘short- and medium-term developments that may 

change materially over quarters in a relatively small number of 

years rather than decades associated with the pace of climate 

change.’’ 

Now, there are experts within the Government that would 

strongly disagree that the problem of climate change is measured 

in decades. They would say we are seeing the economic impacts 

now. NOAA reported 16 separate billion-dollar climate events in 

2017. Combined, these events cost the United States economy $300 

billion, 1.5 percent of GDP. Two-thousand seventeen was a recordbreaking year, but according to NOAA’s science, it will get worse. 

The number and cost of these events has more than doubled over 

the last decade, and it has increased eightfold in the last 30 years. 

So I understand that your aperture is short- and medium-term. 

That is sort of a premise of how you operate. What I am not accepting as a premise of how you operate is the assumption that climate 

change belongs in the long-term category because I think you are— 

you are analysts. You believe in data. And what I would like for 

you to do is challenge that assumption that climate only belongs 

in the long-term category, because the Federal Government scientists are starting to indicate that that is not the case. 

So the question is: Are you willing to relook at that basic assumption that climate is just outside of your window, to sit down 

with our office and with Federal Government researchers to at 

least examine the question of whether or not as you do your planning, it continues to belong in this long-term category which is outside of your aperture? 

Mr. POWELL. Senator, as we discussed in your office, I guess last 

fall, you know, climate change is something that is entrusted to 

other agencies. We have particular responsibilities and particular 

tools: interest rate supervision, looking out for the financial system. 

It is just not clear that it is really in our ambit as opposed to in 

the ambit of other parts of the Government. But we are obviously 

always going to be willing to discuss it with you, but I do not know 

exactly how it would fit into what we do with our tools. 

Senator SCHATZ. I guess the question—I mean, I understand 

what you are saying, but I am trying to figure out why a 1.5 percent hit to GDP last year and the agency that knows about such 

things is telling us to expect more and more of it, why that 

wouldn’t be in your ambit? That is the first time I have ever used 

that word. 

[Laughter.] 

Mr. POWELL. Well, our ambit involves, you know, moving interest 

rates up and down and supervising financial institutions, so I do 

not know—I am not sure how it would enter into that. 

21 

Senator SCHATZ. OK. I look forward to continuing the discussion. 

Thank you. 

Mr. POWELL. As do I. Thanks. 

Chairman CRAPO. Senator Perdue. 

Senator PERDUE. Thank you, Mr. Chairman. I am Googling 

‘‘ambit’’ over here in the meantime. Sorry. 

[Laughter.] 

Senator PERDUE. Chairman, thank you for being here again. I 

have a question. You mentioned in your opening comments that 

foreign demand for U.S. exports is up, and I happen to believe that 

if we are going to be north of 3 percent GDP growth, we have got 

to grow our exports. And I think you have made those comments 

publicly as well. 

But the low interest rate environment over the last decade has 

shown a proliferation of new lending, really a binge of new debt 

issuance in the Third World, or developing world, let me say that. 

And just this year—and a lot of that is short term, so this year 

alone, there is some almost $2 trillion of that developing world debt 

coming due this year, and about 15 percent of that is denominated 

in U.S. dollars. 

Do you see that as we normalize rates here in the United States, 

with the U.S. dynamics that we are talking about between inflation 

and unemployment, that the impact that that could have on the developing world could in effect have some systemic risk on not only 

the global economy but on our own recovery? 

Mr. POWELL. Senator, what we can do is we can be transparent, 

we can be predictable, and the markets can, therefore, understand 

what we are doing and be ready for it. And I think if we do that, 

we use our tools to achieve stable prices and maximum employment here in the United States, and financial stability, and so 

what we try to do for the world financial markets is be really clear 

about what we are doing, predictable, transparent. 

As I look at the state of the emerging market countries and their 

financial markets and financial regulation, they are in a much better place than they were 10, 15 years ago, even 5 years ago. There 

is not as much dollar-denominated debt, foreign currency-denominated debt. They have better institutions—not everywhere, but it 

is a much better picture than it was 20 years ago, let us say. 

Senator PERDUE. So following up on that, you talked earlier 

about reducing the size of your balance sheet, and that has been 

an ongoing effort even before you took office, as I understand it. So 

the question is: The four big central bank—China, Japan, United 

States, and the European Union—all have similar sized balance 

sheets, somewhere between $4 and $5 trillion. As you normalize or 

as you begin to consider taking our balance sheet down to a more 

normal level, what actions do you monitor of these other central 

banks? Or is it totally independent when you make those decisions? 

Mr. POWELL. Well, we monitor all financial conditions and economic conditions in what we do. The normalization plan that we 

adopted through the summer and then put into place in the fall 

has been accepted very well by the markets. There is no obvious 

reaction at all. It is a gradual decline. We have said we are not interested in deviating from that unless, you know, unusual circumstances arise. And I think that should be the path, and I think 

22 

we get to a more normal balance sheet size within about 4 years, 

give or take a year, let us say. 

The other large central banks that are talking about normalizing 

their balance sheets, they are behind that schedule. Our economy 

recovered sooner. We are raising rates sooner. So, you know, there 

is going to be some—it is not going to be a synchronized thing. It 

is going to be something that is happening more seriatim. But we 

will be watching that very carefully. We are very mindful of the 

issue that you raise. 

Senator PERDUE. Good. Thank you. One last question. It is a 

technical question, but it has to do with the leverage capital ratio 

that requires banks to hold capital against all assets, regardless of 

the risk of those individual assets, an operation that has created 

kind of a risk-blind rule. And I understand the overall rationale behind creating this risk-blind rule. But the question I have is ultimately I have a hard time understanding why assets like Treasury 

securities and funds on deposit in the Federal Reserve are also in 

that calculation. Can you defend that and answer the question if 

you are reviewing that practice? 

Mr. POWELL. Sure. My view is that the binding capital requirement should be the risk-based capital requirement, and that would 

take into account Treasurys and reserves and how risky they are. 

The issue is that over time banks have figured out ways to game 

risk-based capital, so we want a hard backstop, and that hard 

backstop should be high and hard. It should be the leverage ratio. 

We do not want the leverage ratio to be the binding constraint 

most of the time because that, frankly, encourages people to take 

more risk. If you are bound by the leverage ratio, it is really saying 

you could probably use some riskier assets. So we like leverage— 

particularly risk-based capital has been vastly improved since the 

crisis. So that is how we think about it. 

Senator PERDUE. So how would you view right now, in the few 

seconds we have got left, just very quickly, what is your view of the 

general health of the entire banking industry in the United States, 

the capital formation arm of our economic effort in a free enterprise 

system? What is your assessment of the health of that industry 

today? 

Mr. POWELL. I think our banking system is quite healthy. I think 

we have high capital, high liquidity. We have banks that are much 

more aware of and capable of managing the risks that they face. 

They are much more ready to face failure if they do because they 

have living wills, and I think we are seeing profitability. We are 

seeing returns on capital. And I think it is a good time in our system. 

Senator PERDUE. Thank you, sir. 

Thank you, Mr. Chairman. 

Senator BROWN. [Presiding.] Senator Cortez Masto. 

Senator CORTEZ MASTO. Thank you, Ranking Member and Chair 

for this Committee. And welcome, Chairman Powell. It is good to 

see you again. 

I want to follow up on the conversation that you had with one 

of my colleagues, Senator Shelby, on the Policy Effectiveness and 

Asset Unit that you have created. Can you speak to how many 

23 

people will work in the unit and how the importance of data will 

inform the decisions you make? 

Mr. POWELL. I think it is five or six people now. I do not know 

how big it will be, but it is going to be something in that range, 

maybe a little bigger. But the idea is that we will have, you know, 

a strong quantitative approach that is tightly focused on cost-benefit analysis. I would stress we already do cost-benefit analysis in 

everything we do, but we hear outside that there is interest in 

doing more of that, and we are actively pursuing it. 

Senator CORTEZ MASTO. And the reason why you are doing this 

is so that it can inform your enforcement and policy decisions, correct? 

Mr. POWELL. Well, yes. And the calibration of our regulations, 

you know, we want to be able to implement regulations in the least 

burdensome way we can, consistent with, you know, safety and 

soundness. 

Senator CORTEZ MASTO. And the data is key for your ability to 

do so, correct? 

Mr. POWELL. Very much so. 

Senator CORTEZ MASTO. And so I am glad to hear you speak 

about the importance of data collection. I always support that, and 

that is critical to the work of the Federal Reserve. As I am sure 

you are aware, the legislation that we have been talking about that 

is pending in the Senate, it would exempt 85 percent of depository 

institutions from full reporting of loan data under the Home Mortgage Disclosure Act. Can you speak to how this might impact the 

ability of the Federal Reserve to properly conduct its obligations 

under the Community Reinvestment Act and whether the loss of 

this data might hinder CRA supervisory exams? 

Mr. POWELL. I will be glad to. As I understand it, the CFPB 

writes the HMDA rules and regulations, and we use that data in 

what we do, in supervising the banks we supervise, which is a 

smaller group. In addition to that, we—sorry. I lost my train of 

thought. 

What Dodd-Frank did was that it took the base of historical data 

collection and it significantly increased that. So my understanding 

is that what is being looked at in a bill is to create a broader exemption just from the Dodd-Frank additions. And so, you know, I 

think we traditionally get almost everything we need from the historical data, and I think we can continue to work on that basis. 

Senator CORTEZ MASTO. Right, and that is my concern. The more 

data, the better. I mean, you are creating a data unit because data 

is key to your decisionmaking, and my understanding is that the 

data that is used in the CRA supervisory exams seems to exclude 

relevant data points. Loans under $1 million are designated small 

business loans, even if they were not loans administered to small 

businesses. There is no analysis made whatsoever of whether lending is occurring in communities of color, despite easing accessible 

data via the Home Mortgage Disclosure Act. 

And so my question is: Has the Fed considered broadening that 

criteria in its CRA supervisory exams? And what factors do you 

think would be helpful in determining whether small businesses, 

communities of color, and low-income areas are truly receiving the 

support that the law intended? 

24 

Mr. POWELL. Are we still talking about HMDA data? 

Senator CORTEZ MASTO. Correct. 

Mr. POWELL. Again, HMDA data is really an issue for the CFPB. 

They were given authority under Dodd-Frank to write the HMDA 

regulations, and we generally defer to them in terms of what their 

view is on that. 

Senator CORTEZ MASTO. So you do not think that data is going 

to be informative in what you do with the Community Reinvestment Act and the oversight of that to ensure that that Act is being 

enforced under the law to protect communities of color, to make 

sure there is no discrimination, to make sure that the loans are 

being sent to small businesses, and ensure that the money gets 

where it needs to go? That data is not going to be helpful for you? 

Mr. POWELL. I do not say that it would not be helpful. What I 

would say is that, first of all, that is an issue that the CFPB actually has the lead authority on. In addition, we will still have—my 

understanding is that we will still have under this bill the information that we have traditionally relied upon for just about everything we do under HMDA. So we may not have the additional data 

from some institutions, but we think we will be able to function. 

Senator CORTEZ MASTO. Well, let me just tell you—and my time 

is running out, so I do not have enough time to ask the additional 

questions that I want to ask you. But let me just say this: As a 

former Attorney General in the State of Nevada, my concern was 

discrimination against certain communities of color, and the reason 

why we increased that data criteria is to ensure there was no discrimination and ensure that the money was going to where it was 

supposed to be going under the Act and Federal authorities. And 

so I do not understand why we are rolling back that data and those 

data criteria if we need—you have said it yourself—to be better informed. You are creating a data unit for analytical purposes to create and collect data. It informs us in everything we do. And so my 

concern is just that. How can we say we do not want the data when 

we know it informs every decision that we are making, particularly 

to ensure the money is going where it is going and there is no discrimination? 

Mr. POWELL. We have been talking about data. Let me take a 

step back and say that any kind of discrimination by race or gender 

or any other unfair basis in lending is completely unacceptable, 

and we are committed as an institution to finding it and using all 

of our tools to stop it. 

Senator CORTEZ MASTO. Thank you. I know my time has run out. 

Thank you very much. 

Senator BROWN. Senator Kennedy. 

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

Chairman. 

Mr. POWELL. Good morning. 

Senator KENNEDY. Do stock buybacks contribute to economic 

growth? 

Mr. POWELL. Well, if I can trace that out, when you buy back 

your stock, the money goes to the shareholder. They lose their 

stock. They could take that money, and they do with it what they 

will. They can spend it. They can reinvest it. It does not disappear. 

So there should be some effect. I have asked this question. It is 

25 

essentially impossible to really track that on a micro basis, but I 

would think intuitively it would go back into the economy and either be spent or reinvested. 

Senator KENNEDY. Well, if a company buys back its stock and the 

value of the stock goes up, then somebody has extra money, right? 

Mr. POWELL. That is right. There would be a wealth effect as 

well, as you point out. 

Senator KENNEDY. And they could invest that money? 

Mr. POWELL. They could. They could spend it, invest it, and you 

are right, there would be a wealth effect from higher stock prices, 

too. 

Senator KENNEDY. And the stock going up is better than the 

stock going down in terms of economic growth. 

Mr. POWELL. It is, although I am a little hesitant to—you know, 

I would want to say that it is not our job, as you know, to stop people from losing money or making money in the stock market. 

Senator KENNEDY. Right. In the last 60 days, the bond market 

has been going down a little bit. What is that telling you? 

Mr. POWELL. Well, I think longer-term interest rates have been 

going up, and, you know, there are probably many reasons behind 

that, and I would just offer a couple in my thinking. It is the expectation of higher growth. It is probably the expectation of inflation 

moving up a little bit closer to our target. It is probably also a realization that growth around the world is quite strong. So we have 

strong recovery in continental Europe and in Asia, and so, you 

know, we are not the only game in town now. If money goes to 

other kinds of safe assets, that will tend to mean higher rates here. 

But these are all generally positive signs. 

Senator KENNEDY. Could it be a sign of inflation? 

Mr. POWELL. It could be a sign of slightly higher inflation, and 

we seek slightly higher inflation. Inflation has been below our target since I joined the Fed almost 6 years ago. 

Senator KENNEDY. You talked about us being at or near full employment. We are not at or near the optimum labor participation 

rate, though, are we? 

Mr. POWELL. The truth is we are not far from the longer-run 

trend. We have models that—papers published 8 or 10 years ago, 

and they pretty much tell you that the labor force participation 

rate will be right about here. That is not really the answer to your 

question. Labor force participation by prime-age males, for example, has been declining for 60 years. And there may be some good 

reasons for that, but there are a significant number of reasons that 

are not good reasons for that. So we as a country—— 

Senator KENNEDY. What are good reasons for that? 

Mr. POWELL. So we may be on our longer-run trend, but the 

trend is not a great trend. You know, there are many prime-age 

males, and women, out of the labor force whose lives would be better if they were in the labor force. And, you know, these are not— 

we do not have the tools to really address that, but it would be—— 

Senator KENNEDY. In 2008, the labor force participation rate was 

a tad over 66 percent. Today it is a tad over 62 percent. That is 

not good for the economy, right? 

Mr. POWELL. It would be great to have labor force participation 

at a higher level, as most advanced economy countries do. Our 

26 

labor force participation rate is now, you know, not even at the median of comparably wealthy countries. 

Senator KENNEDY. Right. And why is that? 

Mr. POWELL. It really is this trend of prime-age workers leaving 

the labor force. A lot of that burden has been borne, as Senator 

Cotton was pointing out, by people with high school educations and 

below, the less skilled and lower-wage jobs. And it has been going 

on a long, long time. It is, as I said, a 60-year decline. 

Senator KENNEDY. But why, in your opinion? 

Mr. POWELL. I think it probably has to do with, you know, the 

evolution of technology. It certainly has to do with the flattening 

out in the U.S. educational attainment. U.S. educational attainment went up for many, many years, and then it started flattening 

out in the 1970s. And right about that time, U.S. wages flattened 

out, and labor force participation starts to get weak. So we kind of 

reached a point as a country where we could not increase educational attainment, and really many things started happening 

right about then, the stagnation of median incomes, for example. 

Senator KENNEDY. If we could jack the rate up to pre-2008 levels, 

that would be an enormous stimulus to the economy, would it not? 

Mr. POWELL. It would. And, of course, there is an underlying 

trend, too, of the aging of the population. So even though older people work more than they used to after the crisis, older people still 

work less than younger people. So as the population ages, that is 

going—that is why labor force participation goes down 25 basis 

points each year. 

Senator KENNEDY. Thank you, Mr. Chairman. Thank you, sir. 

Chairman CRAPO. [Presiding.] Senator Warren. 

Senator WARREN. Thank you, Mr. Chairman. And it is good to 

see you again, Chairman Powell. 

As you know, a few weeks ago, on Chair Yellen’s last day in 

charge, the Fed issued a consent order against Wells Fargo prohibiting the bank from growing any larger until it made certain improvements. Now, the Fed also effectively forced Wells to remove 

an additional four board members this year. I have pushed the Fed 

for real accountability on Wells Fargo and its board for repeatedly 

cheating its customers, and I was glad to see the Fed take action. 

But I want to understand how the Fed intends to enforce the consent order now that you are in charge. 

The Fed requires Wells to submit two plans for approval by early 

April: one on improving the effectiveness of the board and one on 

improving the board’s risk management practices. This is not clear 

from the order. Will the Fed Board of Governors vote on whether 

to accept these plans? 

Mr. POWELL. So we have delegated that approval, I believe, to 

the head of Supervision, but, of course, that will—— 

Senator WARREN. Your staff? 

Mr. POWELL. But that will take place—I assure you that will 

take place in serious consultation with the Board. 

Senator WARREN. Consultation, but the Board is not going to 

vote on this? 

Mr. POWELL. That is not the plan. 

Senator WARREN. Well, you know, I do not understand this. The 

Fed has issued a major unprecedented consent order against one 

27 

of the biggest banks in the world, and the Fed Board, the people 

who are actually appointed by the President and confirmed by the 

Senate, are not going to vote on whether the order is actually being 

followed? 

Mr. POWELL. Well, of course, we did vote unanimously on the 

measures themselves. 

Senator WARREN. No. Whether or not the order is actually being 

followed, because that is the big question here. In my view, staff 

is not good enough, Chairman Powell. Fed Board members are supposed to make the big decisions, and Fed Board members are supposed to be accountable for these decisions. Will you consider requiring a vote of the Fed Board before these plans are approved? 

Mr. POWELL. Yes. 

Senator WARREN. Good. Thank you. I appreciate it. 

The next steps it that an independent third party must review 

Wells’ implementation of these plans by the end of September. Will 

you commit to making that independent review public, redacting 

any confidential supervisory information that is necessary? I think 

the public deserves a chance to understand how Wells is working 

to fix the mistakes that it has committed. 

Mr. POWELL. I cannot make that commitment to you without discussing it with my colleagues and with staff who are implementing 

this thing. 

Senator WARREN. Will you—— 

Mr. POWELL. I will look into it, yes. 

Senator WARREN. Will you look into it? Will you urge your colleagues to consider making this public? 

Mr. POWELL. If it can be made public—— 

Senator WARREN. I am fine about redacting confidential supervisory information. But my view here is that the American public, 

given all that Wells has done, the American public has a right to 

see it, and all of those Wells customers who were cheated have a 

right to see whether or not Wells is actually following through on 

its promises. You can see why some people might lack a little confidence in that? 

Mr. POWELL. Right, so we will—I will look at that, and if there 

is a way to do it that is faithful to our obligations and our practices, then—— 

Senator WARREN. Thank you. Good. And, last, the consent order 

says that the growth restriction remains in effect until Wells Fargo 

‘‘adopts and implements’’ the plans that were approved by the Fed. 

So I want to be really clear on this. To lift the growth restriction, 

the Fed needs to see that the plans have been fully implemented, 

right? It is not enough that Wells has taken some preliminary 

steps toward implementing the plans. Is that right? 

Mr. POWELL. No. I do not think that is right. I think the thought 

was that once we have approved the plans and they begin to implement them, we see them on track, the growth restriction could then 

be addressed. No guarantee there, but we would then be prepared 

to look at it. 

Senator WARREN. You know, I am actually—then tell me, how 

much progress along that line is enough to remove the growth restriction? 

28 

Mr. POWELL. Well, I think, again, we will have to be happy with 

the plan itself. We will have to be assured that the company has 

made these really significant measures and suffered, you know, a 

significant period of growth cap. And, you know, we will not lightly 

lift it, but I think that is our understanding of how we are going 

to do it. 

Senator WARREN. You know, the growth restriction is your really 

big stick here, and I hope that you will not consider lifting it just 

because Wells makes some marginal progress. Wells should fix its 

problems before it is permitted to grow any bigger. The consent 

order sent a powerful message to big banks that there could be real 

consequences, including consequences for senior officials if they 

break the law. But that message will be lost if the Fed does not 

enforce the order strictly and show the public and the banking industry that they mean business. Thank you. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Senator Tillis. 

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

welcome. Thank you, and our congratulations on your confirmation. 

Can you just explain—because I was watching a lot of the hearing in my office before I came up here, and you talked about global 

slack a couple of times. Can you explain to me what that really 

means? 

Mr. POWELL. The thought is that it has become over the last 30, 

40 years during our adult lifetime possible to make just about anything just about anywhere. Technology has enabled that, and rising 

living standards and capabilities in emerging market countries has 

created that opportunity. And the thought is that that capacity outside the United States is in a sense a form of slack so that if you 

are, for example, a worker bargaining for higher wages, you are 

held back by this overhang of knowing that, you know, you can lose 

your job in that kind of thing. 

The issue is that, you know, globalization, most measures of 

globalization sort of plateaued out at about the time of the crisis, 

and yet it does not—that story makes a lot of intuitive sense, but 

it does not actually link up very well with the path of wages over 

the past few years. So it is something we have looked at, and it 

gets written about a lot. 

Senator TILLIS. Actually, I think that is a very important point 

because there is a lot of latent productivity that could be globally 

deployed that, as we talk about wages and we want to do a good 

job of moving wages in the right direction, they reach a certain 

point to where we could plateau again because that capability to 

deliver could go outside of our jurisdiction. I think that is a very 

important point. 

On productivity, a couple of years ago I met with former Chair 

Greenspan, and he was talking about—the one thing that he was 

most concerned with at this time was the kind of static growth in 

capital investment, and he was saying, you know, a healthy percentage of GDP is somewhere around 8 percent, and we were 

trending down in the 4 percent range. Do you view that as a key 

indicator that we have to increase? And what, if any, trends are 

you seeing that give you some sense that we are getting to a 

healthy percentage of capital investment as a percentage of GDP? 

29 

Mr. POWELL. We do not know how to predict productivity growth 

very well, but we do think it links up over time with things like 

investment, investment in people but also investment in plant and 

equipment, R&D, and that kind of thing. 

Unfortunately, what the financial crisis did was it generated very 

weak demand conditions for a long time, and that created weak investment, and that itself then furthers weak demand. So it is kind 

of a bad, self-reinforcing cycle that we had there for a while. That 

is why it is so heartening to see investment, business investment, 

moving up last year and perhaps continuing a strong performance 

this year, is our expectation. It is ultimately only productivity that 

raises living standards, and investment is one of the keys, not just 

investment in plant and equipment, but certainly in the skills and 

aptitudes of our people as well. 

Senator TILLIS. Do you get a sense that what we have done with 

tax reform is a potential positive contributor to seeing that investment move up? 

Mr. POWELL. I do think it is a potential positive contributor in 

the sense that when you lower the corporate tax rate, you lower 

the user cost of capital. You know, like you, I have spent a lot of 

time working with private sector companies, and that is one of the 

factors they consider. It is not the only factor. But lower user cost 

of capital is something that should spur more investment over 

time, and that should add to productivity. Hard to quantify, but I 

think it is there. 

Senator TILLIS. You and I talked about this once or twice in my 

office, and in my remaining time, I would like for you to talk a little bit about the job that Mr. Quarles has and post-crisis regulatory 

right-sizing, I would be interested in your thoughts on Basel IV 

and regulatory tailoring. I know people asked you—I was watching 

in my office. On the Committee I think some asked you about the 

banking regulatory reform bill that passed out of here, which provides some regulatory and I think responsible regulatory relief for 

a portion of our banking sector. But what more can we expect to 

see that are within your lanes and within your authorities on rightsizing regulations? 

The other thing I remember with Mr. Greenspan, he said the 

most troubling job creation growth that he saw at that time—this 

was 2 or 3 years ago, post-crisis, about 300,000 jobs that had been 

created under the tide of regulatory reform, which in my world that 

is by definition a nonproductive job. So I am kind of curious to see 

what kind of—how are we going to get to a more tailored—I think 

Senator Perdue asked this question. How are we going to get to a 

more tailored, more reasonable regulatory burden on this industry 

that still manages the risks that you have to be concerned with? 

Mr. POWELL. I think our concern is to maintain and strengthen 

but make more efficient the big improvements we think we made 

after the crisis—that is, higher capital, higher liquidity, stress 

testing, and resolution planning—and those are going to apply and 

continue to apply to the largest, most complex institutions in the 

strongest form. Our effort then is to tailor that at every level as 

we move down and make sure—and we did a lot of tailoring along 

the way, but we are now going back through each level to make 

sure that we have got that tailoring just about right. Not 

30 

everything that we need the eight systemically important institutions to do needs to be done by every bank, and many of them have 

much simpler business models that are much more traditional 

banking, and different regulatory strictures should apply to those 

companies. So it is something we are working on. 

Senator TILLIS. Mr. Chairman, the only thing I would say, as 

somebody who worked in a firm that helped prepare CCAR and 

stress tests results, it still is unimaginable to me how a properly 

tailored environment could result in 60,000- and 100,000-page submissions. There has got to be a better way to do it, even at the high 

end of the spectrum, and I just look forward to you all continuing 

to look at it and manage the risk but right-size it. 

Chairman CRAPO. Senator Jones. 

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

thank you for being here and welcome. 

I would like to go back to a couple questions. I think it is pretty 

obvious that folks on the Committee are concerned about wage 

growth in addition to unemployment. You said in your testimony 

that with the economy growing the way it is, you expect to see 

wage growth continue, but that has been on a fairly modest trend 

over the last few years. So you see that wage growth increasing 

over the next couple of years as opposed to the very modest trend 

that we have seen? 

Mr. POWELL. That is my expectation, Senator. As we have moved 

from 10 percent unemployment down to 4.1 percent, we have seen 

some gradual increase in wages, but, frankly, not what I would 

have seen. I think as you look back over the last 3 or 4 years, you 

can kind of tell the story about why that was the case. Now we are 

at 4.1 percent unemployment, labor force participation is higher 

relative to trend than it was, and I guess I would have expected 

to see higher wages now. And I do continue to expect them to rise 

as the labor market continues to tighten. 

Senator JONES. Well, assuming the economy continues to grow as 

you expect, are there factors that we need to be on the lookout for 

that could prevent the wage growth that you would anticipate as 

opposed to the very kind of—not flat but very, very modest wage 

growth? Are there factors that we need to be concerned about or 

looking about in the future? 

Mr. POWELL. I think ultimately sustainable wage growth is a 

function of productivity. Wages should equal, you know, inflation 

plus productivity. And so to get wages to go up sustainably over a 

long period of time, we need higher productivity. That is a function 

of investment in people, investment in plant and equipment, R&D, 

all those things that drive us to be more productive. That is really 

the only way to have sustainable wage growth. 

Senator JONES. OK. Well, that kind of leads me to another area, 

and I do not want to misrepresent your testimony of the other day, 

so if I characterize something wrong, just please tell me. It will not 

be the first time I have been told I am wrong about things. But 

I think you said on Tuesday to some extent that limiting immigration could limit our productivity growth in the coming years. Chairman Yellen, your predecessor, also told this Committee in the past 

that limits on immigration could limit GDP growth. And so without 

putting you on the spot to try to get you to wade into very specific 

31 

hot-button issues that we have got here, can you talk a little bit 

about why immigration may boost productivity and GDP growth? 

Mr. POWELL. So to go back to what I was saying, you can think 

of growth being a function of growth in the labor force plus productivity. Those are really the only two ways the economy can grow— 

more hours worked and more output per hour. 

Now, if you look at our labor force growth, it used to be 2, 2 1⁄2

percent, you know, 25 years ago, 30 years ago. Now it is about 0.5 

percent as the population ages, and some part of that 0.5 percent 

is immigration. So I think those of you who have the decision 

rights around immigration, this is a factor that you ought to consider. It does not directly affect productivity, but it affects potential 

growth through the labor force. 

Senator JONES. All right. And I do not know if this would be an 

appropriate question, but is our current immigration policy in any 

way contributing to the lack of wage growth, as you see it today? 

Mr. POWELL. You know, immigration is one of those issues that 

we do not really have authority over, and, you know, I can speak 

to it as it relates to things like potential growth, but I am loath 

to get into current policy and things like that. I think I will follow 

my predecessors in sticking to our knitting on that. 

Senator JONES. All right. I kind of thought that would be the answer, but I was going to ask anyway. 

Going back to wage growth, what can we do, as wage growth continues, to try to decrease the disparities that women have in the 

labor force, that the minority population, you know, whether they 

be Hispanic or the African American population, have in the labor 

force? 

Mr. POWELL. Any kind of discrimination in our society, in our 

labor force, is, of course, unacceptable and not something that we 

can tolerate. Having said that, you know, we do not have the tools, 

broadly speaking, to address those things. 

The tools we do have, though, the biggest thing we can do is to 

take seriously our statutory mandate of maximum employment. As 

you can see, when we go into a recession, it is the most vulnerable 

populations whose unemployment rates go up the fastest and the 

highest, and you can see that they come down the most in the recovery. They tend to not get down as low as people with college degrees and things like that. But at the same time, that is really how 

we can contribute. 

Senator JONES. All right. Last, there were comments made in 

your testimony on the House side concerning the appropriations 

process and potentially having Congress appropriate your budgets 

for nonsupervisory type activities of the Fed, and I would like your 

quick opinion on that, and also how a potential Government shutdown might affect that should you have that appropriations—I 

have been fairly critical of the way that the budgetary process here 

has been taking place, and so we have had five—you know, we 

have had a couple of shutdowns in the last couple of weeks. How 

would that have affected your ability to supervise? 

Mr. POWELL. Legislatures all around the world, governments all 

around the world have seen fit to give central banks an independent source of funding, and I would say that that is a wise decision. The things that we do may not always be politically popular, 

32 

and I think it is wise to give us just a little bit of degree of separation. Of course, we are transparent; of course, we are accountable. 

And that is not just for monetary policy. Here in the United States, 

all three of the bank regulatory agencies have an independent 

source of funding. This is a decision for Congress, that Congress 

has made for the last 40 years. It has not stopped Congress from 

providing, you know, appropriate oversight of our activities and 

regulations. So I would just say that I do not see what problem we 

are solving here. 

Senator JONES. It seems to be working. If it is not broken, do not 

fix it. 

Thank you, Mr. Chairman. I appreciate that. 

Chairman CRAPO. Thank you. And before I turn to Senator 

Moran, I would note to our Members we have a series of three 

votes being started in about 5 or 6 minutes, and we have four 

speakers left here. If you are all very concise and stick to your 5 

minutes, I think we can probably wrap this up at the tail end of 

the first vote and go over. So please pay attention to the clock. We 

will not be able to go over and come back because of the three 

votes. 

Senator Moran. 

Senator MORAN. I am glad I am next, Mr. Chairman. 

[Laughter.] 

Chairman CRAPO. Five minutes. 

Senator MORAN. Mr. Chairman, thank you very much for joining 

us today. You are new at your job. I would tell you that, listening 

to you in previous settings and today, you are reassuring, seemingly competent, perhaps exactly the right thing we need at the 

Federal Reserve in today’s economic and political world. So thank 

you very much for your service to the country. I hope I do not have 

to change my comments about you in the future, so we look forward to working with you. 

Let me go through three things. A Treasury report recently indicated that the current exposure method, CEM, may not appropriately measure the economic exposure of a listed options contract, 

and that a risk-adjusted approach for valuing options for purpose 

of capital rules such as weighing the options by their delta might 

be in order. I think this issue need a quicker fix, and perhaps there 

is a long-term fix, but are you in a position to make the changes 

that you at least at times have said it is important to make? 

Mr. POWELL. Yes, we are, Senator. I think we are in the middle 

of a changeover from CEM to SACCR, which is the other way to 

do it, and we are also looking at the calibration of the enhanced 

leverage ratio. Both of those things should help. 

Senator MORAN. What kind of timeframe do you believe you are 

on? 

Mr. POWELL. I would be loath to give you an exact date. Why 

don’t we come back to your office on that? But this is an active 

thing, I think fairly soon. 

Senator MORAN. Very good. I would welcome the follow-through. 

Tomorrow I will meet with Esther George at the Kansas City Fed, 

and I look forward to that conversation. Part of what I will talk to 

her about is agriculture and particularly the rural economies of our 

33 

region. Let me highlight for you something that I think is important for you in your regulatory role to remember. 

Farmers and ranchers often come to me and ask about the safety 

net that comes from a farm bill. Farm policy is designed to help 

farmers and ranchers in difficult times, generally difficult economic 

times. We are experiencing those times now. The challenge is significant for someone trying to earn a living in agriculture. But 

there is a safety net that I think is often forgotten, and that is the 

relationship between the lender in their community, a relationship 

banker, a financial institution, and that family farmer. And I just 

want to highlight once again the importance that we do not get to 

the circumstance in which the examiners, the regulations prohibit 

bankers from making decisions about lending or access to credit by 

agriculture based upon some very restrained, restrictive method. 

Let the issue of character, relationship, history between what is 

often a family owned bank and a family farm continue. That is one 

of the most important safety nets in difficult times, the relationship 

between our lenders and our bankers, and where I see the threat 

of that diminishing or being eliminated is through the regulatory 

process in which a bank is written up for making a decision that 

they feel comfortable with but a regulator may not. 

Any response to that? 

Mr. POWELL. I will just take that very much to heart, Senator. 

Senator MORAN. Thank you very much. 

And then, finally, let me ask a question about education. If we 

are looking for economic growth, it seems that a highly motivated, 

trained, and educated workforce is a significant component of that. 

Do you have in your understandings of the circumstance that we 

face in the employment market where we should be focusing our 

support for education or where we should be emphasizing for students and adults—those two things are not different—for those 

who need an education and additional training, where we ought to 

be focusing our resources to meet the economy’s needs for that 

highly motivated, educated, and trained workforce? 

Mr. POWELL. You know, I am probably not the right person to 

get down into the details of exactly where to focus. I will just say, 

though, that my view is that in the long run the only way we can 

sort of win in the international competition is by having the best 

educated, most productive workforce in the world. There is really 

no way to hide from that requirement, and that is education. It is 

also training. It is not just college education. It is also, you know, 

apprenticeship programs and that kind of thing, which also can be 

very successful. 

Senator MORAN. Tax rates are an important component in making business decisions, but meeting workforce requirements is 

there as well. Is that true? 

Mr. POWELL. Yes. 

Senator MORAN. Thank you. 

Mr. Chairman, thank you. 

Chairman CRAPO. Thank you. 

Senator Warner. 

Senator WARNER. Thank you, Mr. Chairman. Let the record show 

your timeliness in starting meetings meant that me being 6 minutes late really was—— 

34 

Chairman CRAPO. I noted that and felt bad for you. 

Senator WARNER. It was quite a challenge. But I wanted to stay 

because I wanted to ask the Chairman two very important questions. Let me preface this by saying, you know, in my first year 

here, one of the most important pieces of legislation I have ever 

worked on was the Dodd-Frank legislation. I think Dodd-Frank, for 

all its challenges, has made our system remarkably stronger. But 

we are 8 years later, and there is a broad, bipartisan group of us 

who are going to debate on the floor next week legislation that 

would make some modifications. 

In this legislation, S. 2155, we have not changed the requirements that the Fed perform annual Dodd-Frank stress tests on 

banks above $250 billion. I think that is terribly important to 

maintain. We do give the Fed, after an appropriate period to do a 

rulemaking, the ability to look at those banks between $100 and 

$250 billion—and this is very important—to continue to undergo 

stress tests on a periodic basis. My view is that stress testing is 

the most important prudential standard and that frequent stress 

tests are some of the best tools we have to prevent another financial crisis. 

Can you give us your views on stress testing, including how rigorous they should remain and how frequent they should remain, on 

banks between $100 and $250 billion in assets if this legislation 

passed? 

Mr. POWELL. I would be glad to. Let me just echo what you said. 

We do believe that supervisory stress testing is probably the most 

successful regulatory innovation of the post-crisis era. We are 

strong believers in this tool, including for institutions of $100 to 

$250 billion. So it would be our intent, if this bill is enacted, to continue, that these institutions would continue to have meaningful, 

strong, regular, periodic stress tests, frequent stress tests. And, 

again, we see it as a very important tool for these institutions. 

Senator WARNER. I hope, again, folks will be listening to this. We 

are not touching anything on the largest institutions in terms of 

the annual stress test on folks above 250, and as the Chairman of 

the Fed has indicated, even amongst those banks between 100 and 

250, we are still going to have frequent, periodic stress tests that 

are still going to be strong, and the legislation lays out in some detail some of the requirements that we would have in those stress 

tests. 

My last question is this: In terms of overall enhanced prudential 

standards, we do move in this legislation from $50 billion to $100 

billion. But we give you then in the group of institutions between 

$100 and $250 billion an 18-month period to essentially tailor those 

standards more appropriately. And as you have indicated, we already have an institution below $250 billion that still qualifies as 

a SIFI. So I would just like to say again for the record, for folks 

who are watching and who will watch the debate next week, that 

you will take this responsibility of this 18-month rulemaking and 

do a thorough examination of the banks that fall in that category, 

and those that are claiming that somehow all enhanced prudential 

regulations of banks that fall into that category are going to suddenly magically disappear sure as heck is not the intent of this 

35 

individual in terms of that legislation and I hope is not the intent 

of the Fed. 

Mr. POWELL. What I see us doing is creating a framework—we 

will be looking at all the institutions that are in that area and all 

the risks that might arise in banks between 250 and 100, and we 

will create a framework for assessing where systemic risk might 

be, where there might be regional risks. We will look at everything. 

And that framework will then be in place in 18 months, and if 

there are institutions that are currently in that population or that 

over time become systemically risky or even risky to themselves, 

the way the legislation gives us a lot of flexibility to do that, then 

we will have that in place. And as you point out, we have not been 

shy about finding systemic risk under 250. We are perfectly happy 

to do that. So we will feel comfortable doing this job, I believe. 

Senator WARNER. Listen, I look forward to a fair and spirited debate next week. A lot of Members have different views. But I think 

it is very, very important when people go about talking about doing 

away with stress tests or eliminating any kind of enhanced prudential regulations, that is not our intent. There may be some tailoring 

that goes on in this new category, but particularly for the larger 

institutions, status quo is going to remain. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you. And Senator Heitkamp is next. I 

will let our Senators know we are 5 minutes on our way to the 

vote, so we have got to really go. 

Senator Heitkamp. 

Senator HEITKAMP. Thank you. I just want to follow up a little 

bit on HMDA and clarify what—I was not able to attend because 

I had other hearings, but what I understand has been discussed 

has been a clarification from you that nothing in this bill that will 

be debated next week undermines the Fed’s ability to enforce fair 

lending laws. Is that correct, Mr. Chairman? 

Mr. POWELL. That is generally right. CFPB really writes these 

rules, and you should seek comment from them, if you like. 

Senator HEITKAMP. But you would acknowledge that our bill preserves the traditional HMDA data collection on race? 

Mr. POWELL. It does, yes. 

Senator HEITKAMP. So while the bill does not undermine fair 

lending, it does meaningfully reduce substantial costs imposed on 

small lenders from HMDA data collection. I think this is the motivation. These costs can reach into the hundreds of thousands of 

dollars per year. One small institution estimates that the cost of 

HMDA quality assurance for their bank equals approximately 

$400,000 per year and involves five associates. So when it comes 

to regulation, we have to look at the benefits and the costs. 

One of the things that I think I just want to impress on people 

is that when you do not respond to these kinds of concerns, legitimate concerns from small lenders, there is a resentment to the 

overall policy that, you know, we tend to throw the baby out with 

the bath water because of the level of frustration. 

Wouldn’t you agree that we could, in fact, reduce costs to small 

lenders and still maintain the protections provided by HMDA? 

Mr. POWELL. Yes, I do agree. 

36 

Senator HEITKAMP. So when we are looking at going forward, I 

think it is important that we have a very spirited debate about 

this, but I think it also is very important that we put it in perspective and that we not exaggerate the results here or the purpose of 

this bill. And so, Chairman Powell, just one question, and I know 

you have been answering a lot of questions about the economy, writ 

large, but I wanted to just get your sense of economic growth as 

we look at—again, no big surprise I am going to ask a question 

about trade. I know you guys do not always like answering those 

questions. But it seems to me that we are now looking at a potential of tariffs being imposed on aluminum and steel for which there 

will be retaliation. We have, in fact, retreated somewhat from the 

commitments on NAFTA, and we no longer have a pathway into 

TPP. 

How concerned are you about the impacts of this trade policy of 

this Administration on our opportunity for economic growth long 

term? 

Mr. POWELL. I will not comment directly on the Administration’s 

policies, but I will say about trade that I think the record is clear 

that over long periods of time for many, many countries, trade is 

a net positive. It spreads productivity. It forces our companies to 

compete. It gives businesses and people the ability to buy and sell 

things in the world market. So, overall, the studies all show and 

theory would suggest that it is a good thing. 

But the benefits do not fall equally. There can be communities, 

there can be individuals who are negatively affected by trade, and 

we have seen a fair amount of that. I think it is more of that than 

probably was expected. And I think it is important that we address 

that as well so that you can sustain public support for trade. 

I think, you know, as Chairman Bernanke said, the tariff approach is not the best approach there. The best approach is to deal 

directly with the people who are affected rather than falling back 

on tariffs, but, again, these are not measures that are consigned to 

us. They are really for you and for the Administration. 

Senator HEITKAMP. But I think that these are measures that are 

going to have an effect on the kind of economic analysis that you 

do that is going to lead to monetary policy. I do not think there is 

any doubt that trade will have a dramatic impact on economic 

growth, and I am very, very concerned about making sure that our 

trade policy is consistent with economic growth and also very concerned about the speed at which systems today can react to trade 

policy as opposed to maybe 20 or 30 years ago when it was kind 

of, you know, plodding along. It was OK if the WTO took 10 years. 

Today I do not think that is true, and I do not think it is true that 

it is OK that it takes 10 years to get back into TPP. I think things 

will move a lot quicker, and they are going to have—it is going to 

have a dramatic effect on our ability to be competitive in this country and to encourage investment and growth. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you. 

Senator Reed. 

Senator REED. Well, thank you very much, Mr. Chairman. And 

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

37 

One of the things that we have noticed over the last many years 

is the decline in workforce participation of prime-age men. In fact, 

the Kansas City Fed has done a lot of good analytical work on this. 

One reason is automation. Those are particularly the types of jobs, 

it seems, that are easily replaced by some type of technology—machines and computers, et cetera. As we go forward, I would assume 

that that trend will continue, and it raises the question of how does 

the Fed plan to forecast these effects of automation with your mandate for full employment? We could find ourselves technically at 

full employment but with millions of Americans who are out of luck 

and out of jobs and technically not in the workforce. How are you 

going to deal with that? 

Mr. POWELL. The long history of this, as I am sure you know, is 

technology comes in and it can displace people, but ultimately if society—if the people in society have the skills and aptitudes to benefit from technology, then the advent of technology lifts all boats. 

So for 200 years really, since the Industrial Revolution, we have 

faced this problem, and over longer periods of time, it has always 

been the case that technology lifts all boats in a way. 

Now, I do not think there is any law of nature that says that 

that has to continue, and the reason—the part of it that we control 

is skills and aptitude of our labor force. To the extent people have 

the skills and aptitudes to benefit from technology, to operate technology, then they will benefit from it. And to the extent they do 

not, it is people with the high school degree and less who have really experienced the worst of this. You know, that is where wages are 

low, that is where labor force participation is low, all those things. 

So it is a really easy thing to say and a really hard thing to do, 

but it comes down to education. 

Senator REED. Do you think we are doing enough in terms of 

education, in terms of Federal, State, local investment? We just 

saw West Virginia shut down for 2 days because their teachers felt 

they were not being compensated well enough, and we have a situation I think in Oklahoma where they are only going to school 4 

days a week because of budget problems. So I agree with you, education is a key. We just do not seem to get that message. 

Mr. POWELL. There is nothing in the productivity data or any 

other economic data that suggests we are handling this problem 

well. All around the world, others are catching up and passing. 

Senator REED. And exceeding us. 

Mr. POWELL. Yes. 

Senator REED. Yes. One other point, and this is sort of a passionate issue with me, and that is the Military Lending Act. The 

Federal Reserve has the responsibility among many agencies to enforce it. The Department of Defense promulgated regulations in 

2015 which I think are tougher. It essentially says you cannot 

charge someone in uniform over 36 percent interest. That seems to 

me a pretty fair rule. And having just come back from Somalia and 

being with Special Forces people and their families back home, I 

think this has to be enforced aggressively. Can you tell me what 

you are doing to make sure that your responsibilities under this 

rule are vigorous and proactive and relentless? 

Mr. POWELL. Well, we share your view about the importance and 

value of enforcing this, I assure you, and this is one where—as I 

38 

think we have discussed, this is a very important regulation, and 

it will get aggressive enforcement from us. 

Senator REED. And you will get the message out to your regulated entities that this is really at the top of your list? 

Mr. POWELL. Yes, we will. 

Senator REED. Thank you, sir. 

Chairman CRAPO. Thank you. 

Senator Van Hollen. 

Senator VAN HOLLEN. Thank you, Mr. Chairman. And welcome, 

Mr. Chairman. Good to have you here in the Banking Committee 

in your official capacity. 

I know there has been some discussion about stock buybacks. 

Stock buybacks are primarily a way for corporations to increase the 

share price. Isn’t that right? 

Mr. POWELL. Yes. I mean, it works in that way, yes. It is a way 

for companies to distribute cash to shareholders as well. 

Senator VAN HOLLEN. Exactly. So I do think it is worth pointing 

out that since the tax bill was passed, which was in large part advertised as a way to dramatically increase wages of workers—in 

fact, the predictions were $4,000-a-year pay increases. We have 

seen the overwhelming amount of the money that has gone to corporations used for stock buybacks, in fact, $200 billion of stock 

buybacks just in the first 2 months of this year alone, including a 

$20 billion stock buyback from Wells Fargo, a major financial institution that we have had a lot of discussion about in this Committee, primarily because of a violation of consumer protection 

issues. 

I do think it is also worth pointing out that over 35 percent of 

the stock owned is actually owned by foreigners and foreign entities, which is why the Prime Minister of Norway, when she visited 

a short time ago, thanked President Trump for the tax bill because 

it dramatically boosted the stock value of the Norwegian Government and its holdings. But it means money not going into the economy, generally speaking, direct investment by those corporations. 

I wanted to ask you about the issue of cybersecurity and the impact of cyber attacks on our overall economy. We have seen big 

banks that have been victims of cyber attacks like JPMorgan. I believe the Fed in the past has been the victim of some cyber intrusions. And the Council for Economic Advisers just put out a report 

indicating that malicious cyber activity cost the economy between 

$57 billion and $109 billion in 2016—a big number—and the Chairman of the Committee has spent a lot of time focusing on this 

issue, and we had a hearing specifically on the Equifax breach. 

This evening, I am going to be teaming up with our Maryland 

State Attorney General, Brian Frosh, to have a forum on consumer 

protection. Seven hundred people have already signed up for this, 

and we expect many of them to have been victims of the Equifax 

breach. 

My understanding is there has been reporting, first of all, just 

this morning, that Equifax found an additional 2.4 million people 

impacted by the breach, and there was also a February 4th report 

saying that U.S. consumer protection official puts Equifax probe on 

ice, and the article says that the CFPB, under the leadership of 

Mr. Mulvaney, has ‘‘rebuffed bank regulators at the Federal 

39 

Reserve, the FDIC, and the OCC when they offered to help with 

onsite exams of credit bureaus in connection with the Equifax investigation.’’ 

Can you confirm whether or not the Consumer Financial Protection Bureau has rebuffed offers by the Fed to help them get to the 

bottom of the Equifax—— 

Mr. POWELL. No, I cannot. I had not heard that. 

Senator VAN HOLLEN. If you could get back to us—I mean, this 

is a publicly reported document. Would you be willing to get back 

to us and let us know, confirm or say one way or another? 

Mr. POWELL. Sure. 

Senator VAN HOLLEN. I appreciate that very much. 

In terms of the impact on banks, you have the direct impact— 

banks are also impacted when those that have less cyber protections—you know, Target, for example—are hacked, and as a result 

of that, the banks have to pay the credit card cost directly to consumers. And then they have got to go recoup that money from 

other entities. And so one of the things I have been focused on and 

the Committee has talked about is to try to get the SEC to increase 

its oversight with respect to cyber attacks and especially their responsibilities to disclose to the public in a timely manner. And I 

would just ask you if you could work with us and the other regulators in trying to come up with disclosure requirements that provide the public with adequate notice of these cyber breaches so 

they can protect themselves from the cost, not just the public but 

banks and others as well. I would appreciate that if you could do 

that. 

Mr. POWELL. We would be glad to. 

Senator VAN HOLLEN. Thank you. 

Mr. POWELL. Thanks. 

Chairman CRAPO. Thank you. And, Chairman Powell, Senator 

Brown has said—— 

Senator BROWN. I will be very brief, respecting your time and our 

getting to the vote. I heard you say a number of times in response 

to questions that there will be no relaxing of the rules for foreign 

banks, and I want to just—I just do not agree with that. A Treasury report last year, the Administration made it clear it wanted to 

lower standards. Secretary Mnuchin testified, sitting where you are 

right now, in January that he believed the bill would accomplish 

the goal. Paul Volcker has said it does. Sarah Bloom Raskin said 

that there will be less regulation of the foreign banks. Antonio 

Weiss said the same. 

I had an amendment during the markup on that issue, and it 

was defeated. Foreign banks lobbied against that amendment. The 

bill’s supporters rejected it. 

I have three very related questions. I will ask the three consecutively, and you can either answer them now or get them in writing 

to me, if you would. Promises she will push back against foreign 

bank lobbyists and Secretary Mnuchin to ensure that no foreign 

bank with more than $50 billion in U.S. assets will benefit from 

any deregulation. I would like that promise from you that you will 

push back against foreign bank lobbyists and Secretary Mnuchin. 

40 

I would like to know what you plan to do when a foreign bank 

sues the Fed for not treating it equally to a U.S.-based bank that 

falls in that 50 to 250 category. 

And I guess my final question: Wouldn’t it better to amend this 

bill to avoid litigation and make sure it does not benefit large foreign banks? So if you want to respond now, or you can respond in 

writing. 

Mr. POWELL. Why don’t we take those under advisement and 

give you a clear response in writing quickly. 

Senator BROWN. Fair enough. OK. 

Thank you, Mr. Chairman. 

Chairman CRAPO. All right. Thank you. And that does conclude 

the questioning. Again, I want to thank you, Chairman Powell, for 

being here and for the service you are giving to our country. 

For Senators who wish to submit questions for the record, those 

questions are due on Thursday, March 8th, and I encourage you, 

Chairman Powell, if you receive additional questions, to respond to 

them promptly. 

I also apologize that because of the pressure we have on the vote 

I am going to have to conclude this hearing and then run to the 

floor, so I will not be able to visit with you privately or more personally after your testimony, but we will have plenty of opportunities to do so. 

With that, the hearing is adjourned. 

Mr. POWELL. Thank you, Mr. Chairman. 

[Whereupon, at 12:06 p.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 

41 

PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO 

Welcome, Chairman Powell, for your first appearance before this Committee as 

Chairman of the Federal Reserve Board of Governors, and congratulations on your 

confirmation. 

Today’s hearing is an important opportunity to examine the current state of monetary and regulatory policy. 

Over the past few years, the Humphrey-Hawkins hearing has often served as an 

opportunity for Members of this Committee to review the new regulations imposed 

in the wake of the financial crisis. 

While I did not always agree with former Chairman Bernanke and former Chair 

Yellen, I appreciated their willingness to engage with the Committee and discuss 

possible improvements to the regulatory regime. 

These discussions were helpful in building common ground for our banking bill, 

S. 2155, particularly for provisions like the threshold for enhanced standards under 

Section 165 of Dodd-Frank. 

This bipartisan bill now has 13 Republican and 13 Democratic and Independent 

co-sponsors. 

The bill was the result of a thoughtful, deliberative process over several years 

that included hearings, briefings, meetings and written submissions from hundreds 

of commentators and stakeholders. 

The primary purpose of the bill is to make targeted changes to simplify and improve the regulatory regime for community banks, credit unions, midsize banks and 

regional banks to promote economic growth. 

Economic growth has been a key priority for this Committee and this Administration this Congress. 

The U.S. economy has failed to grow by more than 3 percent annually for more 

than a decade, by far the longest stretch since GDP has been officially calculated. 

But now, there are widespread expectations that growth is finally picking up. 

According to the January FOMC meeting minutes, the Federal Reserve increased 

its expectations for real GDP growth going forward, after 4th quarter growth exceeded expectations. 

The Fed cited the recently enacted tax reform legislation as among the reasons 

economic growth is expected to rise. 

In addition to tax reform, President Trump’s recently released Budget and Economic Report both emphasize that regulatory reform is a key component of rising 

productivity, wages and economic growth. 

By right-sizing regulation, the Committee’s economic growth bill will improve access to capital for consumers and small businesses that help drive our economy. 

Now that many are predicting a pickup in growth, a number of commentators 

have expressed sudden concerns about the economy overheating. 

While the Federal Reserve should remain vigilant in monitoring inflation risks, 

we also must continue to pursue commonsense, pro-growth policies that will lead 

to increased innovation, productivity, and wages. 

With respect to monetary policy, I am encouraged that the Federal Reserve is continuing on its gradual path to monetary policy normalization. 

The Fed has begun to reduce its balance sheet by steadily decreasing the amount 

of principal it reinvests as assets in its portfolio mature. 

I look forward to hearing more about the Fed’s monetary policy outlook as part 

of Chairman Powell’s testimony today. 

I also look forward to hearing about the Federal Reserve’s ongoing efforts to review, improve and tailor existing regulations. 

I know that you are working with Vice Chairman for Supervision Randy Quarles 

on those issues. 

Vice Chairman Quarles has done an excellent job so far, and I urge Congress to 

confirm him for his full term on the Board as soon as possible. 

PREPARED STATEMENT OF SENATOR SHERROD BROWN 

Chairman Crapo, thank you for holding this hearing. 

Chair Powell, welcome back to the Committee, and for the first time in your new 

role. You are leading the Federal Reserve at a crucial time, as the Fed normalizes 

interest rates and shrinks its balance sheet. 

The country is in its ninth year of economic recovery, though 2017 marked the 

worst year for job creation since 2010. And the recovery has not reached everyone. 

Wage growth has been slow and labor force participation has barely improved since 

2014. Nine years of job growth have still not done much to narrow income inequality 

or address employment disparities. 

42 

Nationwide, the unemployment rate for black workers is double that for whitesequal to the gap at the start of the civil rights movement. Looking more broadly, 

labor force participation is down for all minorities. 

Statistics show that large pockets of people are waiting to share in the benefits 

from the recovery. Instead of addressing their problems, Republicans are working 

hard to help Wall Street banks that are raking in profits. 

Despite the fact that we are 9 years removed from the recession, this Administration has embarked on a substantial fiscal stimulus, permanently slashing the corporate tax rate and providing the largest benefits to the wealthiest Americans. Of 

course, Wall Street, which is making record profits, will do well. 

Instead of fighting for workers and making sure labor market opportunities are 

shared among those who have been struggling, Republicans would rather push for 

tax cuts for corporations and the wealthy. 

Those tax cuts are not free-they will add over a trillion dollars to the deficit. The 

once and future deficit hawks on the other side of the aisle were more like marshmallow Peeps when confronted with tax cuts for the wealthy. 

The ink was barely dry when we began to hear calls for spending cuts that will 

hurt families across the country-the so-called ‘‘entitlement reform’’ that everyone 

should understand means cuts to Medicare, Medicaid, and Social Security. 

The claim was that it would all be worth it, because workers would benefit. 

I’m happy for any Ohioan who gets a raise, but we have seen how banks and corporations have responded to the tax cuts, and the numbers are staggering. In January, Wells Fargo announced a $22.5 billion stock buyback-288 times what it will 

spend on pay raises for its workers. 

This year, companies will start disclosing CEO-to-worker pay ratios, as required 

under the Wall Street Reform Act. Honeywell, which announced an $8 billion stock 

buyback in December, just disclosed that its CEO is getting a 61 percent pay raise 

and makes 333 times the average worker’s pay. 

It’s pretty simple—for each pay raise or bonus for workers, companies are often 

spending a hundred or two hundred times as much on stock buybacks and executive 

compensation. 

It gets worse. 

While the biggest banks lavish pay raises and stock giveaways on their executives, they continue to violate the law and abuse their customers. The Fed recently 

imposed an unprecedented-if belated-penalty on Wells Fargo following several scandals, including the opening of millions of fake accounts and improperly charging borrowers for auto insurance they didn’t need. 

The Fed told Wells Fargo it can’t grow until it demonstrates that it has improved 

board oversight and risk management. It sounds like the Fed has come to the conclusion many of us on this Committee reached a year and half ago-Wells Fargo is 

‘‘too big to manage’’. I’ll be closely watching to make sure the new team at the Fed 

doesn’t lift these penalties, without the bank making real changes. 

And, it’s not just Wells Fargo. Last week, Citigroup announced it illegally overcharged nearly two million credit card accounts for over 5 years, and that it will 

refund $335 million to customers. 

Though Wall Street can’t seem to go a month without a new scandal, the Senate 

is set to take up a bill that would roll back critical financial stability protections 

and limit watchdogs’ ability to police the largest banks. 

We can expect the banks to spend any savings from less oversight the same way 

they spent their tax cuts-more dividends, share buybacks, and mergers. 

Chair Powell, Wall Street may be focused on whether there are three or four rate 

hikes this year, but I think your focus needs to be on ensuring the Fed doesn’t once 

again permit the buildup of risk in the market and hubris at the Fed. The Great 

Moderation turned out to be not so great, and we forget that lesson at our peril. 

The Fed needs to take the side of consumers-making sure the financial system 

stays strong and regulations are enforced. Chair Powell, I look forward to your testimony. 

Thank you, Mr. Chairman. 

PREPARED STATEMENT OF JEROME H. POWELL 

CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

MARCH 1, 2018 

Chairman Crapo, Ranking Member Brown, and Members of the Committee, I am 

pleased to present the Federal Reserve’s semiannual Monetary Policy Report to the 

Congress. 

43 

On the occasion of my first appearance before this Committee as Chairman of the 

Federal Reserve, I want to express my appreciation for my predecessor, Chair Janet 

Yellen, and her important contributions. During her term as Chair, the economy 

continued to strengthen and Federal Reserve policymakers began to normalize both 

the level of interest rates and the size of the balance sheet. Together, Chair Yellen 

and I have worked to ensure a smooth leadership transition and provide for continuity in monetary policy. I also want to express my appreciation for my colleagues 

on the Federal Open Market Committee (FOMC). Finally, I want to affirm my continued support for the objectives assigned to us by the Congress—maximum employment and price stability—and for transparency about the Federal Reserve’s policies 

and programs. Transparency is the foundation for our accountability, and I am committed to clearly explaining what we are doing and why we are doing it. Today I 

will briefly discuss the current economic situation and outlook before turning to 

monetary policy. 

Current Economic Situation and Outlook 

The U.S. economy grew at a solid pace over the second half of 2017 and into this 

year. Monthly job gains averaged 179,000 from July through December, and payrolls 

rose an additional 200,000 in January. This pace of job growth was sufficient to 

push the unemployment rate down to 4.1 percent, about 3⁄4 percentage point lower 

than a year earlier and the lowest level since December 2000. In addition, the labor 

force participation rate remained roughly unchanged, on net, as it has for the past 

several years—that is a sign of job market strength, given that retiring baby 

boomers are putting downward pressure on the participation rate. Strong job gains 

in recent years have led to widespread reductions in unemployment across the income spectrum and for all major demographic groups. For example, the unemployment rate for adults without a high school education has fallen from about 15 percent in 2009 to 5 1⁄2 percent in January of this year, while the jobless rate for those 

with a college degree has moved down from 5 percent to 2 percent over the same 

period. In addition, unemployment rates for African Americans and Hispanics are 

now at or below rates seen before the recession, although they are still significantly 

above the rate for whites. Wages have continued to grow moderately, with a modest 

acceleration in some measures, although the extent of the pickup likely has been 

damped in part by the weak pace of productivity growth in recent years. 

Turning from the labor market to production, inflation-adjusted gross domestic 

product rose at an annual rate of about 3 percent in the second half of 2017, 1 percentage point faster than its pace in the first half of the year. Economic growth in 

the second half was led by solid gains in consumer spending, supported by rising 

household incomes and wealth, and upbeat sentiment. In addition, growth in business investment stepped up sharply last year, which should support higher productivity growth in time. The housing market has continued to improve slowly. Economic activity abroad also has been solid in recent quarters, and the associated 

strengthening in the demand for U.S. exports has provided considerable support to 

our manufacturing industry. 

Against this backdrop of solid growth and a strong labor market, inflation has 

been low and stable. In fact, inflation has continued to run below the 2 percent rate 

that the FOMC judges to be most consistent over the longer run with our congressional mandate. Overall consumer prices, as measured by the price index for personal consumption expenditures (PCE), increased 1.7 percent in the 12 months ending in December, about the same as in 2016. The core PCE price index, which excludes the prices of energy and food items and is a better indicator of future inflation, rose 1.5 percent over the same period, somewhat less than in the previous 

year. We continue to view some of the shortfall in inflation last year as likely reflecting transitory influences that we do not expect will repeat; consistent with this 

view, the monthly readings were a little higher toward the end of the year than in 

earlier months. 

After easing substantially during 2017, financial conditions in the United States 

have reversed some of that easing. At this point, we do not see these developments 

as weighing heavily on the outlook for economic activity, the labor market, and inflation. Indeed, the economic outlook remains strong. The robust job market should 

continue to support growth in household incomes and consumer spending, solid economic growth among our trading partners should lead to further gains in U.S. exports, and upbeat business sentiment and strong sales growth will likely continue 

to boost business investment. Moreover, fiscal policy is becoming more stimulative. 

In this environment, we anticipate that inflation on a 12-month basis will move up 

this year and stabilize around the FOMC’s 2 percent objective over the medium 

term. Wages should increase at a faster pace as well. The Committee views the 

44 

near-term risks to the economic outlook as roughly balanced but will continue to 

monitor inflation developments closely. 

Monetary Policy 

I will now turn to monetary policy. The Congress has assigned us the goals of promoting maximum employment and stable prices. Over the second half of 2017, the 

FOMC continued to gradually reduce monetary policy accommodation. Specifically, 

we raised the target range for the Federal funds rate by 1⁄4 percentage point at our 

December meeting, bringing the target to a range of 1 1⁄4 to 1 1⁄2 percent. In addition, 

in October we initiated a balance sheet normalization program to gradually reduce 

the Federal Reserve’s securities holdings. That program has been proceeding 

smoothly. These interest rate and balance sheet actions reflect the Committee’s view 

that gradually reducing monetary policy accommodation will sustain a strong labor 

market while fostering a return of inflation to 2 percent. 

In gauging the appropriate path for monetary policy over the next few years, the 

FOMC will continue to strike a balance between avoiding an overheated economy 

and bringing PCE price inflation to 2 percent on a sustained basis. While many factors shape the economic outlook, some of the headwinds the U.S. economy faced in 

previous years have turned into tailwinds: In particular, fiscal policy has become 

more stimulative and foreign demand for U.S. exports is on a firmer trajectory. Despite the recent volatility, financial conditions remain accommodative. At the same 

time, inflation remains below our 2 percent longer-run objective. In the FOMC’s 

view, further gradual increases in the Federal funds rate will best promote attainment of both of our objectives. As always, the path of monetary policy will depend 

on the economic outlook as informed by incoming data. 

In evaluating the stance of monetary policy, the FOMC routinely consults monetary policy rules that connect prescriptions for the policy rate with variables associated with our mandated objectives. Personally, I find these rule prescriptions helpful. Careful judgments are required about the measurement of the variables used, 

as well as about the implications of the many issues these rules do not take into 

account. I would like to note that this Monetary Policy Report provides further discussion of monetary policy rules and their role in the Federal Reserve’s policy process, extending the analysis we introduced in July. 

Thank you. I would be pleased to take your questions. 

(45) 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT 

FROM JEROME H. POWELL 

Q.1. Unemployment is at 4.1 percent. Wages are up 2.9 percent 

compared to a year ago—that’s the biggest hike since June 2009. 

The economy’s growing at a healthy rate—3.2 percent during Q3 

and 2.6 percent in Q4. Tax reform is going to boost that number 

back above 3 percent. Despite all the positive indicators, the market had several down days last month. Most of them were around 

your swearing in. If look back at the recent past, the Federal Reserve and your predecessors have cited stock market volatility as 

a reason to not raise interest rates. The Fed backed down so many 

times that this became learned behavior: stock market volatility 

means no hike in interest rates. Congress says to seek maximum 

employment and stable prices . . . no more and no less. Please answer the following with specificity: 

Q.1.a. Is a rising stock market a pillar of monetary policy? 

A.1.a. My colleagues on the Federal Open Market Committee 

(FOMC) and I set monetary policy with the sole purpose of achieving and sustaining our statutory objectives of maximum employment and price stability. Because monetary policy affects the economy and inflation with a lag, we need to be forward looking in 

setting policy. That is why, each time the FOMC meets, we assess 

the implications of incoming information, including information 

about financial conditions broadly defined, for the economic outlook. Our current assessment, based on all available information, 

is that further gradual increases in our target for the Federal funds 

rate will prove most appropriate for achieving and sustaining the 

objectives the Congress has assigned to the FOMC. We do not have 

a target for asset prices and we recognize that asset price fluctuations do not necessarily alter the economic outlook. Moreover, financial conditions are only one of many factors that can affect the 

outlook for the economy. 

Q.1.b. Has recent stock market volatility deterred you from your 

plan to raise rates later this year? 

A.1.b. After carefully considering all available information necessary to assess where the economy stood relative to the goals of 

maximum employment and price stability, and how it was likely to 

evolve, the FOMC concluded, on March 21, that it would be appropriate to raise the target range for the Federal funds rate by a further 25 basis points. Moreover, FOMC participants generally saw 

the economic outlook as somewhat stronger than was the case in 

December, and continued to judge that further gradual increases in 

the Federal funds rate are likely to be warranted if the economy 

continues to evolve as expected. Indeed most participants anticipated that, in light of the stronger outlook, the Federal funds rate 

might rise slightly more, in coming years, than they had 

46 

anticipated in December. Please bear in mind that we do not have 

a fixed plan for the path of the Federal funds rate. We will be 

watching how the economy evolves in the months and years ahead 

relative to our maximum employment and price stability objectives. 

If the outlook changes, we will adjust monetary policy appropriately. 

Q.2. I sold insurance for over 20 years, and I’ve said it many times: 

our State-based system of insurance regulation is the best in the 

world. The President’s Executive order on financial regulation and 

other Administration reports favor a deferential approach by the 

Fed to working with primary financial regulators. When it comes 

to the business of insurance that means State-based insurance regulators. Please answer the following with specificity: 

How will you and the Federal Reserve integrate State-based insurance regulators into your work? 

A.2. The State-based system of insurance regulation provides an 

invaluable service in protecting policyholders. The Federal Reserve’s principal supervisory objectives for all of the insurance holding companies that we oversee include protecting the safety and 

soundness of the consolidated firms and protecting any subsidiary 

depository institution, which encompasses protecting the depositors 

and taxpayer-backed deposit insurance fund. The Federal Reserve 

also undertakes supervision, through reporting, examination, and 

other engagement, of entities in an insurance enterprise that are 

not subject to financial regulation in order to protect against extant 

or emerging threats to the consolidated enterprise’s safety and 

soundness. 

The Federal Reserve’s consolidated supervision thus is complementary to, and supplements, existing entity-level supervision 

by the primary functional regulators, with a perspective that considers the risks across the entire firm. We conduct our consolidated 

supervision of all insurance firms in coordination with State departments of insurance (DOIs), who continue their established 

oversight of the insurance subsidiaries. In order to maximize efficiencies and eliminate supervisory duplication or ‘‘layering,’’ we 

rely upon the work and supervisory findings of the State DOIs to 

the greatest extent possible. We intend to continue to do so. Federal Reserve supervisors regularly meet, share supervisory information, and collaborate with State DOIs. We remain open to input 

from supervised firms, State DOIs, and other interested parties on 

how we can further tailor and better coordinate our supervision 

while achieving our supervisory objectives. 

Moreover, in the ongoing development of a Federal Reserve capital standard for savings and loan holding companies significantly 

engaged in insurance activities (described as the Building Block 

Approach (BBA) in the Federal Reserve’s advance notice of proposed rulemaking of June 2016), Federal Reserve staff have 

engaged, and continues to engage, with State regulators and the 

National Association of Insurance Commissioners in their development of the group capital calculation, a capital assessment that is 

structurally similar to the BBA. This ongoing dialogue aims to 

achieve harmonious frameworks to the greatest extent possible and 

47 

minimize burden upon insurance firms supervised by both the 

States and Federal Reserve. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE 

FROM JEROME H. POWELL 

Q.1. As you know, the Administration has invoked Section 201 of 

the Trade Act of 1974 to impose significant tariffs on solar panels 

and washing machines. 

Q.1.a. As Federal Reserve Chairman, your job is to stay abreast on 

the state of our economy. These tariffs will almost certainly impact 

our economy, I believe for the worse. What economic indicators are 

you consulting to evaluate the economic impact of these tariffs? 

Q.1.b. What has been the international response to these tariffs 

and the initial economic impact of these tariffs? 

A.1.a.–b.The Federal Reserve is entrusted to achieve its congressionally mandated objectives of price stability and maximum sustainable employment. Matters of trade policy are the responsibility 

of Congress and the Administration. 

Although the implemented trade actions do have consequences 

for specific industries, these trade actions are targeted enough that 

they are likely to have small effects on aggregate price stability 

and national employment. Federal Reserve staff closely monitor 

data on U.S. trade flows as well as domestic price developments, 

both of which could be affected by tariff rate increases. 

The international response has been consistent with World Trade 

Organization (WTO) rules. Canada, China, the European Union, 

Japan, South Korea, and Taiwan have been holding consultations 

with the United States under the World Trade Organization rules 

to protest the measures. China has claimed the right to suspend 

tariff concessions immediately equal to the amount of trade affected, and did so the week of April 2. The affected countries will 

likely proceed with the filing of WTO cases against the United 

States. 

Q.2. The Administration has announced that it will impose 25 percent tariffs on steel and 10 percent tariffs on aluminum under Section 232 of the Trade Expansion Act of 1962. 

Q.2.a. Can you identify any historical examples where tariffs have 

helped the United States economy or otherwise fixed the problem 

it was intended to address? 

Q.2.b. Based on the record of the Bush administration’s 2002–2003 

steel tariffs and other historical examples, how would you expect 

this 25 percent tariff on steel and aluminum to impact the U.S. 

economy? 

Q.2.c. Would this answer change if countries responded with economic retaliation against the United States, such as through tariffs? For example, I hear constantly from Nebraskan agriculture 

and manufacturing stakeholders of their concern that other countries will respond to the potential trade barriers by retaliating 

against agriculture. 

Q.2.d. Historically, what industries would be most impacted by this 

economic retaliation? For example, would agriculture be impacted? 

48 

Q.2.e. In 12 months, what economic data would you consult to 

evaluate the net economic impact of these tariffs in the United 

States? 

A.2.a.–e. International trade, facilitated by low barriers to trade, is 

likely beneficial to the U.S. economy on net. History has shown 

that countries that are open to trade often are more productive and 

grow faster than countries that are relatively closed to trade. The 

challenge is that the gains from trade are not guaranteed to be distributed as to make everyone better off. It is important to realize 

that openness to trade can cause dislocation and impose costs on 

some industries and workers. In part because of these costs, effort 

should be taken to ensure that trade occurs on a level playing field. 

Higher tariffs on products such as steel and aluminum would 

tend to reduce imports of these products, and shift demand toward 

U.S.-produced steel and aluminum. Although U.S. producers may 

benefit from increased domestic demand, other U.S. firms likely 

would have to pay more for these products when used as an intermediate input, increasing their production costs. Currently, most of 

the major exporters of steel and aluminum to the United States are 

subject to exemptions from the tariffs, including Canada, the European Union, and Mexico. As such, the effects may be muted. 

The granted exemptions are more extensive than in past episodes. For example, during the 2002 safeguard tariffs on steel, the 

European Union, a significant supplier of steel to the United 

States, was not excluded. Even so, the effects on employment and 

inflation from the 2002 measures were fairly muted. 

If countries retaliate by increasing their tariffs on U.S. goods, 

this will likely hurt exporting industries in the United States by 

reducing their competitiveness and demand for their products. Retaliation is typically equivalent in size to the affected sales to the 

United States. 

China’s announcement of retaliatory tariffs on products such as 

fruit and pork on April 1 were in direct response to the steel and 

aluminum tariffs, and the total amount subject to tariffs was 

picked to match the total amount of Chinese exports of these products (about $3 billion). China also has threatened to retaliate 

against a larger list of products, depending on what measures the 

United States Government takes in response to its investigation 

under section 301 of the Trade Act of 1974 into China’s policies related to technology transfer, intellectual property, and innovation. 

In calibrating retaliation, foreign countries often target industries in which the United States has a comparative advantage, 

such as agriculture. In part, this reflects that the United States 

tends to export more from sectors in which it is relatively productive. In addition, agriculture can make an appealing target for retaliation as agricultural products tend to be relatively homogenous, 

allowing the retaliating country to shift purchases away from the 

United States toward alternative producers with less disruption to 

local consumers. 

The Federal Reserve looks at a wide range of data to assess the 

state of the economy. Data which might be used to evaluate the effects of the tariffs would include import and export data, as well 

as the prices of imports and exports. In addition, domestic employment and overall retail prices might be informative. 

49 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCHATZ 

FROM JEROME H. POWELL 

Q.1. I would like to follow up on our ongoing conversation on the 

economic impacts of climate change. I understand that the Federal 

Reserve’s mandate and tools are entirely focused on monetary policy. However, the Federal Reserve’s implementation of monetary 

policy is informed by its assessment of the U.S. economy, including 

future economic trends and risks. According to your answer to a 

question I posed during your confirmation, your position is that the 

Federal Reserve is only concerned with ‘‘short- and medium-term 

developments that may change materially over quarters and a relative small number of years, rather than the decades associated 

with the pace of climate change.’’ 

Q.1.a. How did you arrive at the determination that there are no 

short- or medium-term impacts of climate change? 

Q.1.b. Have you or your staff considered or reviewed data from our 

Government’s scientific agencies about the rate of climate change? 

Q.1.c. In 2017, NOAA reported 16 separate billion-dollar climate events. Combined, these events cost the U.S. economy over $300 

billion—roughly 1.5 percent of U.S. GDP. Do you think that severe 

weather events that cost the equivalent of 1.5 percent of GDP qualify as short- and medium-term developments that the Federal Reserve should be concerned about? 

Q.1.d. Will you commit to having a staff-level conversation about 

these data sources to consider whether they should be a resource 

the Federal Reserve uses when assessing the national economic 

outlook and future economic risks? 

A.1.a.–d. Each and every severe weather event reported by the National Oceanographic and Atmospheric Administration (NOAA) is 

consequential for the individuals and communities that are directly 

affected. The most severe of these events can seriously damage the 

lives and livelihoods of many individuals and families, devastate 

local economies, and even temporarily affect national economic statistics such as GDP and employment. In that sense, severe weather 

events do have important short-term effects on economic conditions. And in assessing current economic conditions, such as our 

published statistics on industrial production, we take into account 

information on the severity of weather events. For example, we relied on information from the Federal Emergency Management 

Agency and the Department of Energy to gauge the disruptions to 

oil and gas extraction, petroleum refining, and petrochemical and 

plastic resin production caused by last fall’s hurricanes. Likewise, 

we frequently use daily measures of temperatures and snowfall at 

weather stations throughout the country from the NOAA to assess 

the short-run economic impact associated with unusually large 

snowfall events. 

However, severe weather events are difficult to predict very far 

in advance. Moreover, the historical regularity has been that these 

type of events have not materially affected the business cycle trajectory of the national economy, both because the disruptions to 

production have tended to be relatively short-lived and because 

such events tend to affect specific geographic areas rather than the 

United States as a whole. In contrast, monetary policy has 

50 

broad-based effects on the U.S. economy and tends to influence 

macroeconomic conditions with a lag. As a result, monetary policy 

is not well suited to address the economic disruptions associated 

with severe weather events. That said, the most severe of these 

events have imposed a significant drain on public resources. If such 

events become much more frequent or more severe, the fiscal cost 

would likely mount, and that would be an important issue for the 

Congress to consider. 

My staff is available to discuss these issues further if you would 

find that helpful. 

Q.2. There is currently $1.4 trillion in outstanding student loan 

debt, the highest category of consumer debt behind mortgages. It 

is also the most delinquent, with 11 percent of borrowers seriously 

delinquent or in default. The Federal Reserve Board of New York 

estimates this number is likely twice that rate, once borrowers who 

are in forbearance are taken into account. At the hearing, you 

agreed that student loan debt could create a drag on the economy 

as student loan debt continues to grow. 

Q.2.a. What indicators should we track to determine when student 

loan debt is starting to have a real impact on the economy? 

Q.2.b. What are the ways in which student loan debt could hold 

back the economy and how much of an effect do you think it could 

have? 

A.2.a.–b. Student loan debt can potentially hold back the economy 

through several mechanisms. First, high levels of student loan debt 

(and the financial burden associated with repaying such debt) may 

hold back student loan borrowers’ savings and therefore affect decisions such as home purchases, investment, marriage, and starting 

a family. Second, high levels of student loan debt may increase 

debt-to-income ratios or reduce credit scores, leaving some borrowers with more limited access to mortgage, auto, and credit card 

loans. In addition, unlike other types of household debt, student 

loans are not dischargeable in bankruptcy, which can make these 

loans more burdensome in times of financial hardship. Third, if 

student loan debt becomes exceedingly burdensome, students may 

be discouraged from taking loans to go to college, thereby dampening human capital accumulation in the economy. 

One important caveat to underscore is that if student loan borrowers earn more over their lifetimes as a result of obtaining more 

education, student loans would likely help strengthen the economy, 

instead of holding it back. 

Accordingly, there are several indicators one could track to gauge 

the possible impact of student loan debt on the economy. Such indicators include auto purchases, home ownership and household formation rates, as well as savings and investment behavior, especially among young adults with student loan debt. In addition, one 

could track the credit performance of student loan borrowers, not 

only on their student debt, but also on other types of debt. 

Q.3. So far, companies benefiting from the recent tax cuts have announced over $200 billion in stock buybacks. In contrast, companies have announced only $6 billion in worker bonuses and raises. 

51 

Q.3.a. As far as possible investments go, do you think stock repurchases offer the greatest potential for boosting productivity and 

economic growth? 

Q.3.b. How do they compare to investments in capital, innovation, 

or worker compensation in terms of the potential for increases in 

productivity and economic growth? 

Q.3.c. If companies put the vast majority of their gains from the 

new tax law into stock repurchases, would you expect to see an increase in economic growth and wages from the tax law? 

A.3.a.–c. Investments in new capital equipment or innovative technologies are important factors for improving productivity and economic growth. Similarly, increased worker compensation can be a 

factor in encouraging individuals to join or remain in the labor 

force and to develop new skills, which can further increase productivity and growth. Comparing the economic effects of these investments to the eventual effects of stock buybacks is difficult because 

we cannot be sure where the gains from buybacks will ultimately 

turn up. When a company buys back its shares or pays higher dividends, the resources do not disappear. Rather, they are redistributed to other uses in the economy. For instance, shareholders may 

decide to invest the windfall in another company, which may in 

turn make productivity-enhancing investments. Or they may decide 

to spend the windfall on goods and services that are produced by 

other companies, who may in turn hire new workers. In these 

ways, stock repurchases would also be likely to boost economic 

growth. 

Companies themselves are the best judges of what to do with 

their after-tax profits, whether it is to invest in their business, 

raise worker compensation, or increase returns to shareholders 

through dividends or share buybacks. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ 

MASTO FROM JEROME H. POWELL 

Q.1. The Federal Reserve has the responsibility for monetary policy. The Congress has the responsibility for fiscal policy. In the 

past few months, Congress spent more than a trillion dollars. The 

majority did not spend it on investments to build our outdated 

bridges, roads or electrical grids. The majority did not spend it on 

transit to reduce gridlock and reduce pollution and improve our air 

quality. The trillions of dollars did not provide housing for families 

struggling to pay rent. Or subsidies to help parents afford the cost 

of child care. Nor did we invest in pre-K education. Or research 

and development. 

Instead, multi-national corporations will see their incomes go up 

substantially: Warren Buffet’s Berkshire Hathaway will make $29 

billion more in profit. The seven largest banks will increase their 

income by 12 percent or more. Meanwhile, some families will see 

big tax increases because they can’t deduct their alimony payments 

or all of their property and State income taxes. 

Our national debt is already twice the historic average and higher than it has been at any time in history since World War II. 

Today, it consumes more than 77 percent of the economy. The 

President’s proposed budget would increase that level to as much 

52 

as 93 percent of our entire economy by 2028 according to the Committee for a Responsible Federal Budget. If we had chosen to invest $1.5–$2.3 trillion in rebuilding our infrastructure, investing in research and development and in our 

children and families, what is the Federal Reserve’s estimates of 

the effect on wages, productivity and economic growth? 

A.1. The Federal Reserve has not prepared an estimate of the economic effects of a large investment of the kind that you describe. 

Any such estimate would depend critically on the particular assumptions one made about the allocation of the investment among 

the purposes that you describe, as well as the efficiency with which 

investments could be targeted to high-rate-of-return projects. The 

Congressional Budget Office is well situated to provide economic 

analysis of this kind. 

Q.2. I appreciated your statements opposing discrimination in 

mortgage lending during your testimony. However, I remain concerned that if the Economic Growth, Regulatory Relief, and Consumer Protection Act, (S. 2155), becomes law the Federal Reserve 

will not have adequate information on the quality of mortgage 

loans made by 85 percent of the banks and credit unions in the 

United States. At the hearing, you told me the Federal Reserve relies primarily on historical Home Mortgage Disclosure Act data but 

that data does not include specific information on mortgage loan 

quality or borrower characteristics. In the run up to the Financial 

Crisis, the Federal Reserve and other regulators missed rampant 

discrimination in the mortgage market; African Americans and 

Latinos were more than twice as likely as a white family to receive 

a subprime mortgage. Even if Latinos and African Americans had 

higher incomes and credit scores, they still received worse loans. 

The Federal Reserve has oversight authority of banks with fewer than $10 billion in assets. 

• How will you ensure that those banks are not engaged in redlining or other types of discrimination if you do not have information about the loan characteristics, the borrower’s credit 

score or other information in the expanded HMDA requirements? 

A.2. With respect to fair lending, the Fair Housing Act (FHA) and 

Equal Credit Opportunity Act are critical to ensuring consumers 

are treated fairly when offered financial products and services. Discrimination has no place in a fair and transparent marketplace. 

Discriminatory practices can close off opportunities and limit consumers’ ability to improve their economic circumstances, including 

through access to home ownership and education. 

The Federal Reserve’s fair lending supervisory program reflects 

our commitment to promoting financial inclusion and ensuring that 

the financial institutions under our jurisdiction fully comply with 

applicable Federal consumer protection laws and regulations. For 

all State member banks, we enforce the FHA, which means we review all Federal Reserve-regulated institutions for potential discrimination in mortgages, including potential redlining, pricing, 

and underwriting discrimination. For State member banks of $10 

billion dollars or less in assets, we also enforce the Equal Credit 

Opportunity Act, which means we review these State member 

53 

1See, e.g., DOJ public fair lending settlements with Midwest BankCentre; SunTrust Mortgage 

Inc.; and Countrywide Financial Corporation. The public actions were based on referrals from 

the Federal Reserve, and can be found at: https://www.justice.gov/crt/housing-and-civil-enforcement-section-cases-1#lending. More information about recent referrals to the DOJ can be 

found in the Federal Reserve’s annual report at www.federalreserve.gov/publications/2016-arconsumer-and-community-affairs.htm#14890. 2See https://www.consumercomplianceoutlook.org/ and https://www.consumercompliance 

outlook.org/outlooklive/. 

banks for potential discrimination in any credit product. Together, 

these laws prohibit discrimination on the basis of race, color, national origin, sex, religion, marital status, familial status, age, 

handicap/disability, receipt of public assistance, and the good faith 

exercise of rights under the Consumer Credit Protection Act (collectively, the ‘‘prohibited basis’’). 

We evaluate fair lending risk at every consumer compliance 

exam based on the risk factors set forth in the interagency fair 

lending examination procedures. The procedures include risk factors related to potential discrimination in redlining, pricing, and 

underwriting. While we find that the vast majority of our institutions comply with the fair lending laws, we are committed to identifying and remedying violations when they have occurred. Pursuant to the Equal Credit Opportunity Act, if we determine that a 

bank has engaged in a pattern or practice of discrimination, we 

refer the matter to the U.S. Department of Justice (DOJ). Federal 

Reserve referrals have resulted in DOJ public actions in critical 

areas, such as redlining and mortgage pricing discrimination. For 

example, in our redlining referrals, the Federal Reserve found that 

the banks treated majority-minority areas less favorably than nonminority areas, such as through Community Reinvestment Act 

(CRA) assessment-area delineations, branching, lending patterns, 

and marketing. For our mortgage-pricing discrimination referrals, 

the Federal Reserve found that the banks charged higher prices to 

African American or Hispanic borrowers than they charged to similarly situated non-Hispanic white borrowers and that the higher 

prices could not be explained by legitimate pricing criteria.1

We also work proactively to support financial institutions in their 

efforts to guard against fair lending risks through outreach efforts 

that actively promote sound compliance management practices and 

programs. The outreach efforts include Consumer Compliance Outlook, a widely subscribed Federal Reserve System publication focused on consumer compliance issues, and its companion webinar 

series, Outlook Live.2 For example, in 2017, we sponsored an interagency webinar on fair lending supervision with almost 6,000 registrants. Several of the webinars and articles described the key risk 

factors related to redlining and pricing discrimination, as well as 

information about what banks should do to mitigate those risks. 

With respect to potential discrimination in the pricing or underwriting mortgages, if warranted by risk factors, the Federal Reserve will request data beyond the public Home Mortgage Disclosure Act (HMDA) data, including any data related to relevant pricing or underwriting criteria, such as applicant interest rates and 

credit scores. The analysis then incorporates the additional data to 

determine whether applicants with similar characteristics received 

different pricing or underwriting outcomes on a prohibited basis 

54 

3 A recent study of publicly available HMDA data conducted by The Center for Investigative 

Reporting and published by Reveal News concluded that African Americans, Latinos, and other 

individuals of color were more likely to be denied loans for home purchases and home remodeling than white borrowers. See Aaron Glantz and Emmanuel Martinez, ‘‘Kept Out,’’ Reveal 

News, Feb. 15, 2018, available at: https://www.revealnews.org/article/for-people-of-color-banksare-shutting-the-door-to-homeownership/. Studies such as these put much-needed focus on racial 

disparities and Federal Reserve staff carefully review them. However, as noted, HMDA data 

have limitations. These data do not include important underwriting criteria, such as credit 

scores and loan-to-value ratios. If concerns arise regarding a Federal Reserve-regulated institution, we will request additional data beyond the publicly available HMDA data to fully evaluate 

whether applicants with similar characteristics received different underwriting outcomes on a 

prohibited basis (for example, on the basis of race), or whether legitimate underwriting criteria 

can explain the differences. 4Majority-minority tracts are defined as census tracts that are more than 50 percent African 

American and Hispanic. 

(for example, on the basis of race), or whether legitimate pricing or 

underwriting criteria can explain the differences.3

With respect to potential redlining discrimination, the current 

data analysis does not rely on an evaluation of the additional data 

fields, but rather the number of HMDA mortgage applications and 

originations generated in majority-minority tracts by the bank and 

similar lenders. More specifically, the analysis reviews whether the 

bank’s record of HMDA mortgage applications and originations in 

majority-minority tracts 4 shows statistically significant disparities 

when compared with the lending record of similar lenders. Thus, 

although additional fields from the exempted institutions could enhance the data analysis, provisions in the recently enacted bill, S. 

2155, related to HMDA data collection requirements would not impact the Federal Reserve’s ability to fully evaluate the risk of redlining discrimination. Moreover, as explained further below, the 

data analysis is only one aspect of the redlining analysis. 

Q.3. Historical HMDA data does not collect information on certain 

racial and ethnic populations at a finer level of granularity. For instance, expanded HMDA requirements that would be rolled back by 

S. 2155 require reporting within the Asian community (Asian Indian, Chinese, Filipino, Japanese, Korean, and Vietnamese, among 

others) and within the Hispanic or Latino communities (Mexican, 

Puerto Rican, among Cuban, among others). 

Q.3.a. How will you monitor and ensure that banks are not engaged in redlining specifically against some of these subgroups 

without collecting this data? 

Q.3.b. With historic HMDA data only, do you have the capacity to 

discern whether lenders are charging single female borrowers higher interest rates or more expensive points and fees on mortgages 

compared to single men? 

A.3.a.–b. Consistent with the interagency fair lending examination 

procedures, the Federal Reserve’s redlining review evaluates 

whether the bank treated majority-minority census tracts less favorably with respect to the following risk factors: 

• CRA assessment area, 

• branching strategy, 

• lending record for HMDA-reportable mortgage applications and 

originations, 

• marketing and outreach, and 

• complaints. 

55 

With respect to the lending record, the data analysis reviews the 

HMDA-reportable mortgage applications and originations generated in majority-minority census tracts. The definition of majority-minority tract is based on the census data classifications for the 

race and/or ethnicity of the residents of the census tract, rather 

than on HMDA data classifications. Thus, although the additional 

data fields from the exempted institutions could enhance the data 

analysis, provisions in the recently enacted bill, S. 2155, related to 

HMDA data collection requirements would not impact the Federal 

Reserve’s ability to fully evaluate the risk of redlining discrimination. 

Also consistent with the interagency fair lending examination 

procedures, the Federal Reserve’s pricing review evaluates the following key risk factors: 

• financial incentives to charge higher prices, 

• loan originator discretion to determine pricing criteria and set 

the price, 

• disparities in pricing on a prohibited basis, and 

• complaints. 

The analysis of potential pricing disparities includes the review 

of potential disparities in the annual percentage rate, interest rate, 

and fees. Although not included in the public HMDA data, if warranted by risk factors, the Federal Reserve will request these data 

as well as any other data related to relevant pricing criteria, such 

as the interest rate and credit score. 

Also, the Federal Reserve analyzes the disparity on a prohibited 

basis, including potential discrimination for single females. The 

current HMDA data classifications allow for an analysis of potential discrimination against single females. Thus, provisions in the 

recently enacted bill, S. 2155, related to HMDA data collection requirements would not impact the Federal Reserve’s ability to fully 

evaluate the risk of mortgage pricing discrimination, including for 

single females. 

Please also see the response to question 2. 

Q.4. In your testimony, you stated that data collected under 

HMDA’s original requirements was adequate for the Federal Reserve when examining financial institutions for compliance with 

the Community Reinvestment Act. Wall Street Reform’s expansion 

of HMDA requirements included a number of critical requirements 

that were motivated by the financial crisis, including quality of 

loan, interest rate and providing the legal entity identifier (LEI) of 

the lender. 

Without the expanded requirements under Wall Street Reform, 

how is the Federal Reserve examining the quality of the loans 

being given to borrowers, particularly female borrowers and borrowers of color? 

A.4. To determine the risk of potential pricing or underwriting discrimination in mortgages on a prohibited basis (such as, sex, race, 

color, or national origin), the Federal Reserve evaluates State member banks for compliance with the FHA (and the Equal Credit Opportunity Act for State member banks with $10 billion or less in 

assets). Although not included in the public HMDA data, if 

56 

warranted by risk factors, the Federal Reserve will request any 

data related to relevant pricing and underwriting criteria, such as 

the interest rate and credit score. Thus, provisions in the recently 

enacted bill, S. 2155, related to HMDA data collection requirements for certain institutions would not impact the Federal Reserve’s ability to fully evaluate the risk of mortgage pricing or underwriting discrimination, including for female borrowers or borrowers of color. 

While we find that the vast majority of institutions regulated by 

the Federal Reserve comply with the fair lending laws, we sometimes find violations of the laws and regulations. If we determine 

that a bank has engaged in a pattern or practice of discrimination, 

we refer the matter to the DOJ, pursuant to the Equal Credit Opportunity Act. We also take evidence of discrimination into account 

when assigning consumer compliance ratings and CRA ratings, 

consistent with regulations and supervisory guidance. 

Please also see the response to questions 2 and 3. 

Q.5. Wall Street Reform also expanded on requirements when reporting ethnicity. For example, for Asian American Pacific Islander, 

lenders should also provide an ethnic breakdown. 

Without this specific data of race and ethnicity, will the Federal 

Reserve be able to identify discrimination against specific ethnic 

groups, such as Filipino or Hmong? 

A.5. Reviews of potential pricing or underwriting discrimination 

based on the race or ethnicity of the borrower may be impacted by 

HMDA data classifications, but other risk factors can be used to 

evaluate potential discrimination, such as loan policies and procedures, marketing, and complaints. 

Please also see the response to question 2. 

Q.6. A 2014 analysis of OneWest Bank—which was then owned by 

Treasury Secretary Steve Mnuchin—found that the Bank had a 

‘‘low satisfactory’’ on its last CRA evaluation; that only 15 percent 

of the banks’ branches were located in low- and moderate-income 

census tracts; and that the majority of ‘‘small business’’ loans made 

by OneWest were to businesses with more than $1 million in revenue. 

Q.6.a. What recourse does the Community Reinvestment Act give 

to the Federal Reserve and other regulators when banks have this 

kind of record? 

Q.6.b. How can banks that consistently receive low ratings for 

their lending to small businesses and communities of color be better incentivized to improve their record? 

A.6.a.–b. The CRA regulations define the ratings and recognize 

that a ‘‘low satisfactory’’ rating under the CRA lending test and/or 

service test is indicative of ‘‘adequate’’ performance in responding 

to the credit needs in its assessment areas(s), taking into account 

the number and amount of home mortgage, small business, small 

farm, and consumer loans, as well as an adequate geographic distribution of loans in its assessment area(s). 

The CRA ratings are publicly available, which motivates some institutions to seek to improve their rating. Regulators encourage 

and support banks in this aim by pointing out ways they can 

57 

5See Center for American Progress. ‘‘10 Years Later: The Financial Crisis State by State.’’ 

February 22, 2018. Available at: https://www.americanprogress.org/issues/economy/news/ 

2018/02/22/447031/10-years-later-financial-crisis-state-state/. 

improve their CRA performance, which would meet supervisory expectations and enhance how their record is viewed by the public. 

Further, an overall CRA rating of less than satisfactory can be an 

impediment to favorable action on an application or notice submitted to the Federal Reserve. 

Q.7. I agree with you that sound data is critically important in informing the policy and enforcement decisions you’ll be making. 

However, I am very concerned that such analysis fails to capture 

the human and economic cost of massive financial system failure. 

For example, in 2009, when I was Attorney General, Nevada had 

165,983 people unemployed. Also that year, in a State of 3 million 

people, we had 28,223 personal bankruptcies, 366,606 mortgage delinquencies and 421,445 credit card delinquencies.5 In addition, 

121,000 Nevada children’s lives and educations were disrupted by 

the foreclosure crisis. And, we had more than 219,000 foreclosures 

between 2007–2016. 

Q.7.a. Do you agree the Fed underestimated the human costs of 

the financial crisis prior to 2008? 

A.7.a. The recent financial crisis took a devastating toll on consumers, families, and businesses, as well as revealing weaknesses 

in our financial system. The fragilities that arose in the U.S. financial system by the mid-2000s resulted in the worst U.S. recession 

since the Great Depression and a painfully slow economic recovery. 

We have worked hard in the aftermath of the crisis to make sure 

we have a financial system that is safer, sounder, has more capital, 

higher quality capital, and is less prone to crises. Financial crises 

are immensely costly to the well-being of households, families, individuals, and businesses. It is important to make sure we do everything we can to reduce the odds of another devastating crisis. 

Q.7.b. How will your analysts accurately ensure you’ll get it right 

this time? 

A.7.b. The Federal Reserve has substantially increased its efforts 

to assess risks to financial stability on an ongoing basis, in conjunction with other U.S. agencies (through, for example, discussions at 

the Financial Stability Oversight Council). These efforts may provide insight into the buildup of risks and allow the appropriate regulatory agencies to take steps to mitigate risks to financial stability. 

At the same time, we are aware of the challenges facing anyone 

trying to predict rare events such as financial crises. In part because of these challenges, the Federal Reserve has focused on increasing the resilience of the financial system, so that when detrimental, unforeseen events occur, the system absorbs, rather than 

amplifies, them. An important part of increased resilience is a set 

of higher standards for key institutions. These standards are higher for the largest, most systemic firms and include capital regulation, liquidity regulation, steps to enhance the resolvability of large 

bank-holding companies, and stress testing of large bank-holding 

companies. 

58 

6For example, the following research paper discusses these issues and related research: Firestone, Simon, Amy Lorenc, and Ben Ranish (2017). ‘‘An Empirical Economic Assessment of the 

Costs and Benefits of Bank Capital in the U.S.,’’ Finance and Economics Discussion Series 

2017–034. Board of Governors of the Federal Reserve System (U.S.). 

We have implemented these standards as a response to the increased awareness among economists of the risks and costs of financial crises. Research, including research by staff within the 

Federal Reserve System, has documented the large adverse effects 

of financial crises and the benefits associated with regulatory 

standards that raise the resilience of the financial system.6

Q.7.c. What concerns do you have that cost-benefit analysis requirements allow financial institutions the ability to sue regulators 

to avoid regulation? 

A.7.c. The Federal Reserve Board (Board) takes seriously the importance of evaluating the costs and benefits of its rulemaking efforts. 

Under the Board’s current practice, consideration of costs and 

benefits occurs at each stage of the rule or policymaking process. 

Before the Board develops a regulatory proposal, the Board often 

collects information directly from parties that it expects will be affected by the rulemaking through surveys of affected parties and 

meetings with interested parties and their representatives. In the 

rulemaking process, the Board also specifically seeks comment 

from the public on the costs and benefits of the proposed approach 

as well as on a variety of alternative approaches to the proposal. 

In adopting the final rule, the Board seeks to adopt a regulatory 

alternative that faithfully reflects the statutory provisions and the 

intent of Congress while minimizing regulatory burden. The Board 

also provides an analysis of the costs to small depository organizations of our rulemaking consistent with the Regulatory Flexibility 

Act and computes the anticipated cost of paperwork consistent with 

the Paperwork Reduction Act. Increasingly, the Board has published quantitative analyses in connection with its rulemakings. 

Recent examples include the global systemically important banks 

surcharge rule, the single-counterparty credit limit rule, and the 

long-term debt rule. To further these efforts, the Board recently established an office and hired additional staff to focus on analyzing 

the costs and benefits associated with its rulemakings. 

The Administrative Procedure Act (APA), which the Board follows, provides for judicial review of final regulations. Affected firms 

have the right to challenge the actions of an administrative agency 

under the APA, including whether the agency has engaged in reasoned decisionmaking. Litigation, of course, imposes certain costs 

on the litigants including an agency and delays the rulemaking 

process. 

Q.8. I am very concerned about forcing more than 800,000 men and 

women—Dreamers—out of the country. It is a cruel betrayal of the 

promises we’ve made to them. In Nevada, we have more than 

13,000 Dreamers. If our neighbors, friends, and colleagues are deported, some estimate that Nevada would lose more than $600 million in annual economic growth. 

Q.8.a. Organizations, on both sides of the spectrum, estimate that 

detaining and deporting DACA recipients could cost the U.S. 

59 

economy between $280 and $460 billion a year. The United States 

Chamber of Commerce called ending DACA ‘‘a nightmare for America’s economy.’’ 

Q.8.b. Has the Federal Reserve published any information on how 

the deportation of the Dreamers will affect our Nation’s economy? 

Q.8.c. What do you think the economic impact of deporting 800,000 

Dreamers—90 percent or about 720,000 of whom are employed— 

would be on labor force participation, economic growth and productivity? 

A.8.a.–c. Over long periods of time, economic growth generally reflects the trend rate of growth of the population, the trend in labor 

force participation, and the trend in productivity growth. A large 

deportation of individuals currently living in the United States 

would probably reduce the level of economic output, for the simple 

reason that the population—and hence the workforce—would be 

smaller. That being said, the Federal Reserve has not published information pertaining to your questions. The manner in which economic output per capita would be affected is a more difficult question; the answer would depend on such factors as how the laborforce participation of the deported individuals compared with that 

of the remaining population; how the productivity of the deported 

individuals compared with that of the remaining population; and 

the question of whether problems of job matching would arise (if, 

for example, deported individuals were concentrated in particular 

industries, occupations, or geographic areas, and whether nondeposited individuals were available and willing to fill the resulting 

vacancies). 

Q.9. Neel Kashkari, the president of the Federal Reserve Bank of 

Minneapolis recently wrote an op-ed in the Wall Street Journal on 

why immigration is the key to economic growth. The Minneapolis 

Fed estimates that boosting legal immigration by one million people a year would grow the economy by at least 0.5 percent a year, 

even under the most conservative assumptions. 

Do you agree with the president of the Federal Reserve of Minneapolis that increasing legal immigration will grow our economy? 

A.9. Growth in the labor force is all important determinant of the 

longer-run growth rate of the U.S. economy. Because many legal 

immigrants actively participate in the workforce, challenges in the 

pace of immigration can affect economic growth. Having said that, 

however, the issue of immigration is well outside of the remit of the 

Federal Reserve System, and it would be more prudent for others 

to decide how best to address that issue. 

Q.10. I represent Nevada, which is within the San Francisco Federal Reserve District. We are one of the most diverse districts in 

the Nation—with many Latino and Asian Pacific American families. 

We value that diversity because it leads to innovation, economic 

growth and stronger connections with other nations in our globally 

connected world. 

A recent report by Fed Up, Working People Still Need a Voice 

at the Fed: 2018 Diversity Analysis of Federal Reserve Bank Directors, found that there is inadequate diversity at the Federal 

60 

Reserve. It specifically cited the San Francisco Federal Reserve as 

one of system’s least diverse regional banks. The report states, ‘‘Despite covering some of the most demographically diverse counties 

in the United States, 100 percent of the San Francisco Fed’s Board 

of Directors come from the banking and financial sector. The directors are 78 percent white and 78 percent male.’’ 

Q.10.a. How will you work with Director Clark to improve the gender and racial diversity of the Board of Directors at the 12 regional 

Reserve Banks? And specifically the San Francisco Fed? 

Q.10.b. How will you work to end the outsized representation and 

influence of the banking and business sectors among the Regional 

Bank Boards of Directors? 

Q.10.c. Have you identified directors with nonprofit, academic, and 

labor backgrounds that could also serve? 

A.10.a.–c. Diversity is a critical aspect of all successful organizations, and I am committed to fostering diversity and inclusion 

throughout the Federal Reserve System. In my experience, we 

make better decisions when we have a wide range of backgrounds 

and voices around the table. I assure you that diversity is a high 

priority objective for the Federal Reserve. 

The Federal Reserve Board (Board) focuses particular attention 

on increasing gender, racial, and sector diversity among directors 

because we believe that the System’s boards function most effectively when they are constituted in a manner that encourages a variety of perspectives and viewpoints. Monetary policymaking also 

benefits from having directors who effectively represent the communities they serve because we rely on directors to provide meaningful grassroots economic intelligence. Because all directors serve 

in this role, we believe it is important to consider the characteristics of both Reserve Bank and Branch boards. 

Each year, the Board carefully reviews the demographic characteristics of Reserve Bank and Branch boards. This information is 

shared with Reserve Bank leadership, including the current Chair 

and Deputy Chair of each board, and areas for improvement are 

highlighted. 

The Board thoroughly vets all candidates for Class C and Boardappointed Branch director vacancies, taking into consideration factors such as professional experience, leadership skills, and community engagement. The Board also evaluates a candidate’s ability to 

contribute meaningful insights into economic conditions of significance to the District and the Nation as a whole. As part of this 

process, the Board focuses considerable attention on whether a candidate is likely to provide the perspective of historically underrepresented groups, such as consumer/community and labor organizations, minorities, and women. 

Although there is room for improvement, the System has made 

significant progress in recent years in recruiting highly qualified 

women and minorities for director positions. For example, in 2018, 

approximately 56 percent of all System directors are diverse in 

terms of gender and/or race (with a racially diverse woman counted 

only one time), which represents a 16 percentage point increase in 

the share of directors since 2014. With respect to the San Francisco 

District, 21 of 37 directors, or approximately 57 percent of all 

61 

Reserve Bank and Branch directors, are diverse. On the Reserve 

Bank’s head-office board, 4 of 9 directors, or approximately 44 percent of Reserve Bank directors, are diverse. We also have numerous directors who represent consumer/community and labor organizations serving on boards throughout the System. In addition, we 

gain invaluable insight and perspective from directors who are affiliated with other types of organizations, including major health 

care providers, universities and colleges, and regional chambers of 

commerce, among others. 

Q.11. Chair Yellen was the first chair in Federal Reserve history 

to share data with this Committee about racial economic disparities during her semi-annual testimony. When she presented that 

data, she touted significant progress, and indeed, black unemployment fell from 11.8 percent at the beginning of her term to the current historically low figure of 6.8 percent. 

Q.11.a. What do you attribute this trend to? 

Q.11.b. Do you think the attention that Chair Yellen paid to this 

issue and the policies of the Federal Reserve deserve some credit 

for the progress that has been made? 

A.11.a.–b. The improvement in the black unemployment rate in recent years reflects the general strengthening in labor-market conditions during that time period; and the credit for the general 

strengthening, in turn, goes to the millions of individuals who go 

to work day in and day out and work hard, and to those who run 

businesses, take risks, and generate creative new ideas and new 

products. 

Chair Yellen deserves great credit for shining light on the important differences in economic well-being across different segments of 

the population; I intend to continue that practice. As a Nation, we 

have a long way to go before we will have achieved the objective 

of full economic inclusion of all segments of the population. 

Q.12. At that same testimony where Janet Yellen presented information about racial economic disparities, she said, quote ‘‘it is troubling that unemployment rates for these minority groups remain 

higher than for the Nation overall, and that the annual income of 

the median African American household is still well below the median income of other U.S. households.’’ 

Though African American unemployment is lower today, Chair 

Yellen’s point remains true. 

Q.12.a. Do you think the recent progress is sufficient? 

Q.12.b. What more can be done to ensure that unemployment 

among African Americans is equal to white unemployment? 

Q.12.c. And, how do you plan to respond to reports that African 

Americans with a college degree have lower employment and 

wealth than whites with the less education? African American 

women and Latinos are graduating from college in record numbers 

but are still having a harder time finding a job. 

A.12.a.–c. I do not think that recent progress has been sufficient. 

As I noted earlier, we have a long way to go before we will have 

achieved the objective of full economic inclusion of all segments of 

the population. The steps that will be necessary to attain full 

economic inclusion span virtually the entire spectrum of economic 

62 

policy areas. These are important issues for Congress’ consideration. 

Q.13. For years, many of my colleagues have suggested that the 

Fed is unfairly hurting savers through low interest rates. On the 

subject of seniors, savers, and depositors, I want to ask about a 

proposal by a nominee to the Board of Governors, Marvin 

Goodfriend. For decades, Mr. Goodfriend promoted the Fed to 

incentivize spending by placing a tax on currency. He does admit 

that ‘‘the regressivity of the tax’’ is a concern. 

If Mr. Goodfriend’s proposal were to be implemented, can you estimate what the impact would be on savers and low-income depositors? 

A.13. Nominations to serve on the Board of Governors are made by 

the President and require consent of the Senate. It is up to the 

President and Senate to evaluate the views and qualifications of 

potential members of the Board. I do not want to comment on a 

specific nominee. 

The Federal Reserve has not considered and is not planning to 

consider a tax on U.S. currency. Our Nation’s currency plays an 

important role as a means of payment and store of value worldwide 

and taking any action that could diminish its role in the domestic 

or global economy would need to be very carefully thought through 

after a thorough review and analysis of relevant data. 

Q.14. Chair Powell, at your nomination hearing, you told me that 

you supported strong consumer protections. Since that time, the 

Consumer Financial Protection Bureau has endured new leadership that is hostile to its mission. 

Q.14.a. If the Bureau continues to drop lawsuits against predatory 

online loan companies, like Golden Valley Lending or drop investigations against companies like World Acceptance Corporation, 

one of the biggest payday lenders, will the Federal Reserve’s consumer protection staff pick up the slack and protect people from 

fraud and abuse? 

Q.14.b. If the Consumer Financial Protection Bureau’s leadership 

refuses to ask for adequate funding, will you let us know if predatory and deceptive practices start going unaddressed by a weaker 

Consumer Financial Protection Bureau? 

Q.14.c. Has the Federal Reserve weighed in on the impact from the 

Consumer Bureau’s decision to weaken fair lending enforcement, 

suspend the civil penalties fund and stop investigating the hack of 

145 million people’s information held by Equifax? 

Q.14.d. What have you shared with the leadership of the Bureau? 

A.14.a.–d. While the Board plays a consultative role in CFPB 

rulemakings and coordinates in the examinations as appropriate, 

we do not have any oversight of the CFPB organizational or structural design, which is defined in statute, nor of CFPB enforcement 

priorities. By statute, the organizational structure and 

prioritization of the CFPB’s fair lending work is up to the CFPB’s 

director to decide. 

For our part, the Federal Reserve continues to carry out our supervisory and enforcement responsibilities for the financial institutions and for the laws and regulations under our authority. 

63 

1See 12 U.S.C. § 1867(a). A ‘‘bank service company’’ is defined as a company that is organized 

to provide services authorized under the BSCA and that is owned exclusively by one or more 

insured depository institutions. 12 U.S.C. § 1861(b)(2). 2Whenever an insured depository institution, or any subsidiary or affiliate of such insured depository institution, causes to be performed for itself services authorized under the BSCA, such 

performance is subject to regulation and examination to the same extent as if such services were 

being performed by the insured depository institution itself on its own premises. 12 U.S.C. § 

1867(c). 

We remain committed to ensuring that the financial institutions 

under our jurisdiction fully comply with all applicable Federal consumer protection laws and regulations. For example, in the last few 

years, the Federal Reserve has addressed unfair and deceptive 

practices through public enforcement actions that have collectively 

benefited hundreds of thousands of consumers and provided millions of dollars in restitution. In addition, our examiners evaluate 

fair lending risk at every consumer compliance exam. Pursuant to 

the Equal Credit Opportunity Act, if we determine that a bank has 

engaged in a pattern or practice of discrimination, we refer the 

matter to the DOJ. Federal Reserve referrals have resulted in DOJ 

public actions in critical areas, such as redlining and mortgagepricing discrimination. 

With respect to the Equifax data breach, the Federal Reserve’s 

authority is limited. The Board, the Federal Deposit Insurance 

Corporation, and the Office of the Comptroller of the Currency 

(agencies) have authority to examine and regulate bank service 

companies under the Bank Service Company Act (BSCA).1 Additionally, the BSCA provides the agencies with limited authority to 

regulate and examine the activities of other films that provide certain services to the institutions we supervise.2 The three largest 

credit reporting agencies in the United States (Equifax, Experian, 

and TransUnion) are not owned by insured depository institutions 

and are thus not bank service companies. Accordingly, any authority the agencies have under the BSCA with respect to the activities 

of these companies would arise under the BSCA in so far as insured depository institutions (or their subsidiaries or affiliates) are 

outsourcing services authorized under the BSCA. To date, none of 

the agencies has concluded that the credit reports that credit reporting agencies sell to the institutions we supervise are services 

within the scope of the BHCA. 

However, the Federal Reserve expects financial institutions to 

follow vendor management guidance issued by the Board and the 

Federal Financial Institutions Examination Council, which includes 

conducting an assessment of the relationships with third parties 

and their handling and protection of sensitive personal information 

of individuals. As such, the Federal Reserve holds the institutions 

we supervise accountable for conducting appropriate due diligence 

and risk management with respect to their relationships with 

third-parties, including credit reporting agencies. Our examiners 

regularly assess banking organizations’ programs for due diligence, 

contract management, ongoing monitoring, and overall risk management of third-party and vendor relationships as part of Federal 

Reserve examinations. In addition, the Board, along with the other 

banking agencies and the Federal Trade Commission have jointly 

issued rules under the Fair Credit Reporting Act that require financial institutions to maintain identity theft prevention programs. 

64 

These programs must include policies and procedures for detecting, 

preventing, and mitigating identity theft, and we examine the 

banks we supervise for compliance with these rules. Finally, under 

the Gramm-Leach-Bliley Act, the Board and other banking agencies have issued guidelines to institutions containing standards for 

safeguarding their customers’ data. 

Q.15. In recent years, Federal Reserve policymakers have warned 

that we should raise interest rates to counter asset bubbles destabilizing the financial system. Board of Governor nominee Marvin 

Goodfriend has suggested replacing liquidity coverage ratios and a 

host of other regulations with tighter monetary policy. 

Q.15.a. Do you believe that the blunt tool of monetary policy can 

be a substitute for sound financial protections? What is your reading of the historical evidence surrounding the relationship between 

monetary policy and asset bubbles? 

A.15.a. As stated above, it is up to the President and Senate to 

evaluate the views and qualifications of potential members of the 

Board. I do not want to comment on a specific nominee. 

Strong regulatory and supervisory standards are critical for financial stability. In the years leading up to 2007–2008, excessive 

leverage and maturity transformation left the U.S. and global economy vulnerable to a deterioration in the U.S. housing market and 

an increase in investor concerns regarding the solvency and liquidity of large, interconnected financial institutions. Reforms since 

that time, enacted by Congress and implemented by the appropriate agencies, have raised loss-absorbing capacity within the financial sector and reduced the susceptibility of the financial system to destabilizing runs. Monetary policy, already tasked with the 

goals of price stability and full employment, should not be considered a substitute for strong financial and supervisory standards. 

Moreover, asset-price swings owe to many factors, and monetary 

policy has not generally been a prime factor in historical episodes 

involving large movements in asset prices. 

Q.15.b. Besides monetary policy, what other tools are available to 

temper asset bubbles? 

A.15.b. It is difficult to identify whether an asset price has reached 

an unsustainably high (or low) level. For this reason, it is important to monitor asset price developments and to consider whether, 

for example, unusually rapid increases in asset prices are leading 

to vulnerabilities in the U.S. economy that could jeopardize financial stability, price stability, or full employment. If a rapid increase 

in nonfinancial borrowing, leverage in the financial sector, or maturity transformation accompanied a rapid rise in asset prices, tools 

aimed directly at mitigating such vulnerabilities could be appropriate. For example, the Countercyclical Capital Buffer is a regulatory tool that requires the largest, most systemic bank-holding 

companies to build additional loss absorbing capacity when the 

Board identifies a need for such additional resilience. 

However, the difficulties associated with the detection of 

vulnerabilities as they emerge highlight the need for strong 

regulatory and supervisory standards at all times. The capital and 

liquidity regulations and supervisory policies adopted by the 

65 

Federal Reserve, including stress testing, represent such an approach to maintaining resilience at a level that limit excessive risk. 

Q.15.c. Isn’t it true that countries with tighter monetary policy 

than the United States also experienced housing bubbles in the 

early 2000s? 

A.15.c. The housing boom during the early 2000s was global in nature, with house prices rising across most advanced economies. Although the availability of mortgage financing at favorable rates coincided with strong housing markets in some countries, there were 

particularly rapid house price gains in several economies whose 

key monetary policy rates never declined below 3 1⁄2 percent, including Australia, New Zealand, Norway, and the United Kingdom. 

Each of those economies experienced house price declines, to varying degrees of severity, during the global financial crisis that followed. Subsequent studies, including at the International Monetary 

Fund, have found that the stance of monetary policy is not generally a good leading indicator of future house price bubbles and 

busts. 

Q.15.d. Can you speak to the scale of interest rate increases that 

would be needed to rein in an asset bubble? 

A.15.d. As noted in the second answer to question 15, it is difficult 

to detect whether an asset price has reached an unsustainable 

level. A corollary of this challenge is that it is hard to determine 

what factors are driving unsustainable asset-price movements. The 

condition of markets is one of many factors that could influence the 

underlying economy, but efforts to influence asset prices in a manner that is not consistent with the Federal Reserve’s employment 

and price-stability objectives could compromise the achievement of 

those objectives. 

66 


30197001.eps

MoNETARY Poucv REPORT 

February 23, 2018 

Board of Governors of the Federal Reserve System 

For use alll :00 a.m., fST 

N!bruary 23, 2018 
67 


30197002.eps

lETIER OF T RANSMITIAL 

BOARD OF GoVERNORS OF TilE 

FEDERAL RE.SERI'E SYSTEM 

Washington, D.C., February 23. 2018 

T11E I'REs DE~>1' OF TilE Sr:NATE 

TilE Si'EAKt.l\ OF TilE HOUSE OF EP ESE~1'Alli'ES 

Tile lloard or Gol'crnors is pleased to submit its Monetary Policy Report pursuant to 

section 2B or the Federdl Rescfl'e Act. 

Sincerely, 

~H P~ 

Jerome H.l'owell, Chairman 
68 


30197003.eps

STATEMENT ON LONGER- RUN GOALS AND M ONETARY POLICY 5 TRATEGY 

Adopted efiecbve january 24. 2012: as amended efiecUve january 30, 2018 

The Federal Open ~1ar et Committee {FOMC) is firmly committed to fulfilling its statutory 

mandate from the Congress of promoting maximum employment. stable prices, and moderate 

loog-tenn interest rates. The Committee seeks to e.wlain its monetary policy decisions to the public 

as clearly as possible. Such clarity facilitates well-informed decisionmaking by households and 

businesses, reduces economic aod financial uncertainty, increases tbe etTecti~·eness of monetary 

policy, and enhances transparency and accountability, which are essential in a democratic society. 

Inflation. employment, and long-term interest rates fluctuate over time in response to economic and 

financial disturbances. Moreove~ monetary policy actions tend to influence economic activity and 

prices with a lag. Titerefore. the COnunittee's policy decisions reflect its longer-run goals, its mediumterm outlook, and its assessments of the balance of risks. including risks to the financial S}~ em that 

could impede tbe attainment of the COmmittee's goals. 

Tile in Hat ion rate over tbe longer run is primarily determined by monetary policy, and hence the 

Committee has the ability to specify a longer-run goal for inflation. Tile Committee reaffirms its 

judgment that inflation at the rate of 2 pereent, as measured by the annual change in the price 

index for personal consumption expenditures, is most consistent over the longer run with the 

Federal Rescn>e's statutory mandate. Tile Committee would he concerned if inflation were running 

persistemly above or below this objective. Communicating this symmetric inflation goal clearly to the 

public helps keep longer-term inflation expectations firmly anchored, thereby foote ring price stability 

and moderate long-tenn 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 f.1ctors that aflect the structure and dynamics of the labor 

market. These factors may change over time and may not he directly measurable. Consequently, 

it would not be appropriate to specify a fixed goal for employment; rat e~ the Committee's policy 

decisions must he infonned by assessments of the maximum level of employment. recognizing that 

such assessments are necessarily uncertain and subject to revision. Tile COmmittee considers a 

wide range of indicators in making these assessments. lnfom1ation 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 4.6 peroent. 

In setting monetary policy, the Committee seeks to mitigate deviatious of inflation from its 

longer-run goal and deviations of employment from the COmmittee's assessments of its a.~im m 

level. These objectives are generally complementary. owe~~r. under ciroumstanocs 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 hori1.0ns over which employment and inflation are projected to return to levels judged 

consistent with its mandate. 

Tile COmmittee intends to reaffinn these principles and to make adjustments as appropriate at its 

annual organiZ.1tional meeting each January. 
69 


30197004.eps

CONTENTS 

Summary .................................................. 1 

E0011omic and Financial Developments . . . . . . . . . . . . . . . . .. .. ... 1 

Monetary Policy ..........................•......•.. .... .......•. .. ...•.... 2 

SpeciaiTopics . ..... ... . ... . . .. .... .. .. .... . .. .... ....... ........ . ...... .. . 2 

Part 1: Recent Economic and Financial Developments ....... . . .. ..... 5 

Domestic DevelopmeniS.. .. .. . .. ...... .. .... ..... 5 

Financial Developments. . . . . . . . . . . . . ...... . ..•..... . .......•. ....... .. 21 

International DevelopmeniS ........... .............. .............. .......... 27 

Pari 2: Monetary Policy ............................... . ....... 31 

Part 3: Summary of Economic Projections ..... . .. .. . .. . . .. . ....... 39 

The Outlook for Economic Activity. .. .. .. . .. .. .. . .. .. • . . .. .. .... 40 

The Outlook for Inflation .. .. . ... . .. . ... ... . ...... ... ... .. ... .. ..... . .. ... .. 45 

Appropriale Monetary Policy . . . • .. . • . . • .. . • • . • • . . • • . • .. . . • . • • . . .. . • . . . . . 45 

Uncertainty and Risks.... .. .. . .. .. .. . .. .. . ... ...... ........... . ...... 45 

Abbreviations ...... . ...................... . ........ . ....... 55 

List of Boxes 

How Tight Is the labor Market? ............ . .... ....... ........................ 8 

Low Inflation in the Advanced Economies .. .. .. 14 

DevelopmeniS Related to Financial Stability. . . . . 24 

Monetary Policy Rules and Their Role in the Federal Reserve's Policy Process .. •.•.. . .•.• 35 

Forecast Unceminty .. ......... ..................................... .... ... 54 

Non: This repor1 reflects infonnalion I hat was l"'blidy available as of noon EST on February 22, 2018. 

Unless Olhenvi5e sUied, lhe time 5enes in lhe figures extend through, for d~ly data, februal'( 21, 2018; for monthly 

dat>, Janua'Y 2018; and, for quar1erly dala, 2017:Q4. 1n barch<>ns. EXcepc as nOied,lhechange for a gi>-en period is 

measured to i~ final quarter from lhe final quarter of lhe preceding period. 

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70 


30197005.eps

SuMMARY 

Economic activity increased at a solid pace 

over the second half of2017, aod the labor 

market continued to strengthen. Measured 

on a 12·month basis, inOation has remained 

below the Federal Open Market Commiuee's 

(FOMC) longer·run objective of2 percent. 

l11e FOMC rnised the target range for the 

federal funds rate twice in the fu'St half of 

2017, resulting in a range of I to I Y. pen:ent 

by the end of its June meeting. With the 

federal funds rate rising toward more normal 

levels, at its September meeting. the FOMC 

decided to initiate a program of grndually 

and predictably reducing the size of its 

balance sheet. At its meeting in December, 

the Committee judged that current and 

prospective economic conditions called for 

a further increase in the target range for the 

federnl funds rate. to I Y. to ~ percent. 

Economic and Finandal 

Developments 

'111e labor rnarket. The labor market has 

continued to strengthen since the middle of 

last year. Payroll employment has posted solid 

gains. a'~rnging 182,000 per momb in the 

seven months starting in July 2017, about the 

same as the average pace in the first half of 

2017. Although net job creation last year was 

slightly slower than in 2016, it has remained 

considerably faster than wbat is needed, 

on average, to absorb new entrants into the 

labor force. The unemployment rate declined 

from 4.3 percent in June to 4.1 pen:ent in 

January-somewhat below the median of 

FOMC participants' estimates of its longer· 

run normal level. Other measures of labor 

utilization also suggest that the labor market 

has tightened since last summer. Nonetheless, 

wage growth bas been modernte.likely held 

down in part by the 11uk pace of productivity 

gr0111b in recent years. 

IoDation. Consumer price inOation bas 

remained below the FOMC's longer·run 

objective of 2 percent. l11e price index for 

personal consumption expenditures increased 

1.7 percent over the 12 months ending in 

December2017, about the same as in 2016. 

The 12·month measureofinOation that 

excludes food and energy items (sa<alled 

core inftation), which historically has been 

a better indicator of where overnll inflation 

will be in the future than the headline figure, 

was 1.5 pen:ent in December-0.4 percentage 

point lower than it had been one year cadier. 

However, monthly readings on core ioDation 

were somewhat higher during tbe last few 

months of2017than earlier in the year. 

Measures of longer·run inflation expectations 

have, on balance, been generally stable, 

although some measures remain low by 

historical standards. 

Economic gromh. Real gross domestic product 

(GDP) is reported to ha1oe increased at an 

annual rate of nearly 3 percent in the second 

half of 2017 after rising slightly more than 

2 percent in tbe first half. Consumer spending 

expanded at a solid rate in the second half, 

supported by job gains, rising household 

wealth. and favorable consumer sentiment. 

Business investment groMb was robust, and 

indicators of business sentiment have been 

strong. 11le housing market has continued 

to improve slowly. Foreign activity remained 

solid and the dollar depreciated further in the 

second half. but net exports subtracted from 

real U.S. GDP gro111h as imports of consumer 

and capital goods surged late in the year. 

financial conditions. Financial conditions 

for businesses and households have 

eased on balance since the middle of 

2017 amid an impro1~ng global groMh 

outlook. Notwithstanding financial market 

developments in recent 11~eks. broad measures 

of equity prices are higher, and spreads of 

yields on corporate bonds over those of 

comparable-maturity Treasury securities have 

narrowed. Mosttypesof consumer loans 
71 


30197006.eps

remained widely available. though credit 

was still difficult to access in credit card and 

mortgage markets for borrowers wiU1Iow 

credit scores or harder-to-document incomes. 

Longer-term nominal TreJSucy yields and 

mortgage rates have moved up on net. The 

dollar depreciated, on average, against the 

currencies of our trading partners. In foreign 

[nancial markets, equity prices generally 

increased in the second half of201 7, and most 

of those indexes remain higher, on net. despite 

recent dectines Most longer-term yields rose 

noticeably. 

Financial stability. Vulnerabilities in the U.S. 

financial system are judged to be moderate on 

balance. Valuation pressures continue to be 

elevated across a range of asset classes even 

alter taking into account the current level 

of Treasury yields and the expectation that 

the reduction in corporate tax rates should 

generate an increase in after-tax earnings. 

Leverage in the nonfinancial business sector 

has remained high, and net issuance of risl'Y 

debt has climbed in recent months. In contrast, 

e~uage in the household sector has remained 

at a relatively low level, and bousehold debt 

in recent years has expanded only about in 

line 11ith nominal income. Moreover, U.S. 

banks are well capitalized and have significant 

liquidity buffers. 

Monetary Policy 

Interest ratepoUcy. The FOMCcontinued 

to gradually increase the target range for the 

federal funds rate. After having raised it twice 

in the first half of 2017, the Conunittee raised 

the target range for tbe federal funds rate 

again in December, bringing it to the current 

range of I Y. to ~ percent. The decision 

to increase the target range for the federal 

funds rate reflected the solid performance of 

the economy. Even with this rate increase. 

the stance of monetary policy remains 

accommodative, thereby supporting strong 

labor nl1rket conditions and a sustained return 

to 2 percent inflation. 

The FOMC expects that, with further gradual 

adjustments in the stance of monetary policy, 

economic activity will expand at a moderate 

pace and labor market conditions will remain 

strong. lnftation on a 12-month basis is 

expected to move up this year and to stabilize 

around the Committee's 2 pertent objoctive 

over the next few years. The federal funds 

rate is likely to remain, for some time, below 

levels that are expected to prevail in the longer 

run. Consistent 11~th this outlook, in the most 

recent Snmmacy of Economic Projoctions 

(SEP), which was compiled at the time of the 

lA"CCmber FOMC meeting. the median of 

participants' assessments for the appropriate 

level of the federal funds rate through the end 

of2019 rem.1ins below the median projoction 

for its longer-run level. (The December SEP is 

presented in Part 3 of this report.) However, 

as the Committee has continued to emphasize, 

the act11al path of the federal funds rate will 

depend on the economic outlook as informed 

by incoming data. In particu a~ with inflation 

ba1ing persistently run below the 2 pe.rcent 

longer-run objective, the Committee will 

carefully monitor actual and expected ioDation 

developments relative to its symmetric 

inflation goal. 

Balance sheet policy. In the second half of 

2017, the Committee initiated the balance 

sheet normalization program that is described 

in the Addendum to the Policy Normalization 

Principles and Plans the Committee issued in 

June.' Specifically, since Octobe~ the Federal 

Reserve has been gradually reducing its 

holdings of Treasucy and agency securities 

by decreasing the reinvestment of principal 

payments it recei1~s from these socurities 

Special Topics 

How tight is the labor market? Although 

there is no way to know with precision. the 

I. TbeiWl<adden<lwnis8\'ililableontbeBoonl's wtb;ite a1 h11ps:l/www f <deralresel'\~ g<ll'imonetai)'JlOI icy/ files/FOMCJ'olieyNormalilation .~t70013 p<ll'. 
72 


30197007.eps

labor market appears to be near or a little 

beyond full employment at present. The 

unemployment rate is somewhat below most 

estimates of its longer-run normal rate. and 

the labor force participation rate is relatively 

dose to many estimates of its trend. Although 

employers report having more diJfJCulties 

finding qualified workers. hiring continues 

apace, and serious labor sborta!!es would likely 

have brou!!ht about larger wage increases than 

have been evident to date. (Ste the box "liow 

Tight Is the Labor Market?'' in Part 1.) 

Low global inflation. Inflation has generally 

come in below central banks' targets in the 

advanced economies for several years now. 

Resource slack and commodity prices- as 

well as, for the United States, movements in 

the U.S. dollar-appear to explain inllation's 

behavior fairly 11~11. But our understanding is 

imperfect, and other. possibly more persistent, 

factors may be at work. Resource slack at 

home and abroad mi!!ht be greater than it 

appears to be, or inll3tion expectations could 

be lo11~r than suggested by the available 

indicators. Moreovtr, some observers bm-e 

pointed to increased competition from online 

retailers or international developmentsMONETARY POliCY R!l'O~T: f£8RUAA\' 1018 3 

such as global economic slack or the 

integration of emerging economies into the 

world economy-as contributing to lower 

inflation. Polic}mtkers remain attentive 

to the possibility of such forces leading to 

continued low inflation; they also are watchful 

regarding the opposite risk of inHation mo>ing, 

undesirably hi!!h. (Ste the box .;Low Inflation 

in the Advanced Economies" in Part 1.) 

Monetary policy rules. Monetary policymakers 

consider a wide range of information on 

current economic conditions and the outlook 

before deciding on a policy stanoe they deem 

most likely lo foster the FOMC's statutory 

mandate of maximum employment and stable 

prices. They also routinely consult monetary 

policy rules that connect prescriptions for the 

policy interest rate with variables associated 

11~t b the dual mandate. Tbe use of such rules 

requires careful judgments about the choioe 

and measurement of the inputs into these 

rules as well as the implications of the many 

considerations these rules do not take into 

account. (Ste the box ''Monetary Policy Rules 

and Their Role in the Federal Resem's Policy 

Process" in Part 2.) 
73 


30197008.eps

PART 1 

RECENT EcoNOMIC AND fiNANCIAL MLOPME~Ts 

Domestic Developments 

Tht labor market strengthened further 

during tht second hall ol 2017 and early 

this )ear 

1'3)100 emp~ment has continued to post 

solid gains. :m~raging 182.000 per roonth 

in the SC\'l:n roonths starting in July 2017. 

about the same pace as in the first half of 

2017.

1 Although net job creation last year was 

sligluly sl011tr than in 2016, it has remained 

considerably faster than what is needed, on 

:1\'erage. to absorb new entrants to the labor 

forct and is therefore consisttnt ~ith the 

riew that the labor nwket bas strengthened 

fun her (figure 1). The SUtngtb of the labor 

market is also e~ident in the decline in the 

unemployment rate to 4.1 percent in January, 

Y. pen:cntage point below its level in June 201 7 

and about !II percentage point below the 

median of Federal Open Market Committee 

(FOMC) panicipants' estimates of its longer· 

run no1111.111evel (figure 2). 

Other md~e.u rs also suggest that labor 

market conditions -e continued to tighten. 

The labor forte participation rate (LFPR)-

that is, the share of adults either working or 

ac ely looking for work-was 62.7 percent 

in January. Tile LFPR is little c.hnnged, on 

net, since early 2014 (figure 3). Ho"~vcr, the 

average age of the population is c.ontinuing 

to mcrease.Jn panicular, the members of the 

bab)·boomcohon increasingly are 111()1ing 

an to thear retiremrnt ~=a time when labor 

forct p:lltJCipation typJ:ally is~. That 

de>t lopment implies that a sustained period 

in which the demand for and supply of labor 

\\tre in b31ance would be associated with a 

downward trend in the overall participation 

rate- Accordingly, the Oat profile of the LFilR 

2. Tb<hrri<WJcslbllstrad: lbe t:ait<d Slarnd•lllll 

0.. KOCDcllulf of los1 ) ..., CUS<d Ab<lallll \'IIIIIXlD 

ialht-lb-~lbpou<mof)Obpm.blllht 

....... ptl'ilrmlnoe<l'"tt lbe pmod U I oil<* Q$ 

pnlbol>l) .. bstllloally lll>lf«<cd. 

during the past few years is consistent with 

an overall picture of improving labor market 

conditions. In line 11ith this perspective, the 

LFPR for indhiduals aged 25 to 5-I-which is 

much less sensitn~ to population aging-bas 

been risingsince 201S. Tbeempl0)1mllto-population ratio for indiViduals 16 and 

older- that is, the share of people who are 

working-w;u 60. I pen:ent in January and has 

been increasing since 2011 ; this gain primarily 

reflects the decline in the unemployment rate. 

(The box "How Tight Is the Labor ~1arketT' 

describes the a\'3ilable measures or labor 

marktl slack in more detail.) 

Other indic:uon are also consistent with 

continuing strong labor demand. The 

number of people filing inttial claims for 

unemployment insurance has remained near 

its lowest level in decades.1 As reported in the 

Job Openings and Labor Tt o,~r Survey, the 

rate of job openings n~'ined elevated in the 

second half of 2011, while the rate or layoiTs 

remained ·. In addition, the rate of quits 

Sta)'ed hi&h. an indteation thai \I'O£Urs are able 

to obtain a DC\\' job "hen they seek one. 

3. lnirialdoimsJ•mped in lhefall of 2017asa 

""""''•ene<of disrupriOIU from tht hurricanes and lhen 

r<l•med 1oa tow l"'d. 

_,. 

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-100 

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- 100 

I I I I t I I ' I J I ,, 

lO'.It 11111 !Ill au au .. ,, »u »"2111 !Ill 
74 


30197009.eps

6 PART 1: R£<lNT ECONOWICANO R~CIJII. OEVUOPMINTS 

2. Measures of lll»r uodttutiUtalion 

- 18 

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!00! 2006 2010 1: lOIS 

Norr Thtlh:aamac::lly lbtp::imt-etebb%1o:!:e~io::nu 

ii•p«tqe;o ~w..bticcJCtd2S»SC ncl*ttj)!ttprti~ 

a!cU!hccalpiO)-..c:!-:o-popula:io:ra:.>artpcr«llllp o(lbc~ 

lp516c::dO'r'tl 

Sol&CI: .Blnlllc(l..lboc:Slai1.'U\Uft.nuA:al)':i."1. 

Unemployment rates have declined across demographic groups, but unemployment 

remains high for some groups 

Unemployment rates have trended downward 

across racial and ethnic groups (figure 4). The 

decline in tbe unemployment rate for blacks or 

African Americans over tbe past few years bas 

been particularly notable. This broad pauem 

is typical: The unemployment rates for blacks 

and Hispanics tend to rise considerably more 

than the rates for wllites and Asians during 

re=ions, and then they decline more rapidly 

during expansions. Yet even with the recent 

narrowing, the disparities in unemployment 

rates across demographic groups remain 

substantial and largely the same as before the 

re=ion. The unemployment rate for whites 

has averaged 3.7 pertent since the middle of 

201 7 and the rate for Asians has been about 

3.3 percent. while the unemployment rates for 

Hispanics or Latinoo (5.0 percent) and blacks 

(7.3 percent) have been substantially higher. 

In addition, the labor forte participation 

rates for blacks, Hispanics, and Asians have 

generally been lower than those lOr whites 

of the same age group. As the labor market 
75 


30197010.eps

MON!TARY POLICY R£1'01tT: f[BRIJAI!.I' 2018 7 

- 11 

-16 

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~IG lOll 201-4 lGI6 lGII 

Nn.lf:lcaplo)10Cfi1111C!Ilafl.IIUIOIJit;X~~~ lo)'Cdua~ofOclaborfor\'C.Pc1ocr!6wliO$ce"'.zkhyif dcali!icdu~orl.cbtiUybcof 

cyracc.. ThcWdcdbcbdicmapc:iodo!"b;t;incarteaSioa.udc.fiDOSby~N&~ Bu:ca:.o~~ Rua.-ch. St:.u.a: bullorl.&boc' Sll!istir:t ,;. lli\'C:Mf.l)~ 

has strengthened over the past few years, the 

participation rates for prime-age individuals in 

each of these groups have risen. 

Growth of labor compensation has been 

moderate ... 

Despite the strong labor market, the available 

indicators generally suggest that the gro111h 

of hourly compensation has been moderate. 

Growth of compensation per hour in the 

business sector-a broad-based measure 

of wages, salarie~ and benefits tbat is quite 

volatile-was 2Y. percent over the four 

quarters ending in 2017:Q4 (figure 5), well 

above the low reading in 20t6 but about in 

line with the average annual increase from 

2010 to 2015.' llle employment COI)t indexwhich also measures both wages and the COI)t 

to employers of providing benefits- was up 

about214 percent in the fourth quarter of 

2017 relative to its year-ago le1<el. roughly 

4. The comp<nsaoion per hour measurt or .. ages and 

salaries decluled ao lhe end or2016, !)06Sibly refteaoog 

ohe sllifting or bonuS<S or oohcr oypes of inoome inoo 

2017 in anticipation of a possible cutin personal income 

la't rates. 

S. MeaswtS of einoge in hourly tomp<n.,tioo 

_ , 

-l 

-l 

- l 

_, 

. -G 

- I 

I 1 f I I I I ! I I I I 

2010 2012 2014 2016 lOIS 

lv.r.i:B"~~:lcoiso:.a~..zr.qtanr:t~ 

c~M,Fo:ee~111C;!*i::dex.~itOYer:l:cll~ 

c!qio lhtlutmce~clttet~ltl¢~bo"=ty~'~t 

u f:om ll :no;~ cdc; (o: Ox A~ Fed'' W. Ow~ Ta:ka:, tc da:a a.-r tho~~o-; as • l ·ruodh ~~~cot~ l«a(lll) per~ 

thq<. 

Sf4a; &:ttr.;dlAborSta:htb,ilH&~"'Cf A:J~fe6cl~ReKn't 

WdAIII:::a,W~f;t(&cr"'~T~ao.U. 
76 


30197011.eps

8 PAAT I: Rra~'T ECONO,\IICAND FL'IANOAl DEVElDI'MENTS 

How Tight Is the Labor Market? 

Any assessment cl labor market tightness ~ 

inherently uncertain, as it im'Oives corrparing current 

labor market condjtions with an estimate of conditions 

that would prevail under full e<npjoyment, where lhe 

latter drwnmnre cannol be dlrecdy obselved or 

rreasured and can changeovtf tirre. Many economists 

would describe lhe labo< ma&et as being at full 

employment when the unemployment rate has reached 

an •equilibrium' level, sometimes called the natural 

rntc d unemployment ot the longer-run nomul rate of 

unemploymenL In judging the le•-el of full empiO) men~ 

one may also oonsider additional margins of labo< 

utilization-including lhe labo< fotee participation rate 

(LFPR), the share of wo&ers employed pa~ time who 

would like to be working full time, and indiliduals 

who are daS>ifl<d as ma~inally attached to the labor 

lotte-as 00fl'l>3red with trends in these measures. 

While the uncffiainty around the 'normal' ~ends in 

all ol these ••ariables is substantial, the labor ma&et 

in early 2018 appealS to be near or a li111e beyond lull 

employmenL 

The unemployment rate is n""' somewhat below 

llllOI estimates of its natural rate. Specifocally, the 

unemployment rate in January, at 4.1 percen• is 

'h percentage point below lhe median of Feder.>! Open 

Market Commiuee (FOMC) participants' estimates of 

the longer-run normal r.~ eof unemploymerc, which 

was rep<Jrted to hJ,~ boo> 4.6 pe<ctrrt as ollhe 

Oece<nber 2017 FOMC meeting. The unemployment 

rate is also about y, percentage point bel""' lhe 

Congressional Budget Oiiice~ (CBO) aJrrenl estimate 

ollhe natural rate; by this nlC3sure, the labo< markt1 is 

about as tight as it was in lhe late 1980s but less tight 

than in the late 1990s (tlgureA). That said, the median 

of FOMC participants' estimate< ol the longer-run 

nonrul rnte of unenrployment and the CBO's estimate 

of the natural rate ol unemployment have both been 

revised down by about 1 percentage point OVe< the J$ 

few )'ears, one ind.ication of the substantial uncertainty 

surrounding eslimates of the 'lull ..,..,toymenr rate of 

unemployment.' 

As discussed in the main te><l, lhe lfi'R has been 

roughly unchanged, on oe~ "'""the past lour years, 

representing an ~nt C)tlical i"ll'""ement 

relati•·eto its declining trend. While estimates olthe 

trend lfi'R are ~bject to substantial unctrtainty and 

differ among anal)"ts, lhe currentle•-el of lhe LFPR 

is relati•-ely close to many estimates oil~ end.' 

I. Au~ uw;hotion dRs unctr~.aulty, dle •~d 

fO.\IC p.tnietp.rms' estima<1'Sollfte long«·ntn normal"" ol ul"'eelliO)lM'It was 43 ao S.O perce111 in DKenter 2017. 

1. fota .. n.tyohwoadtesiO.,,essingrhele\01 ol uend lfPRandtheasiONted rang<>ol estimates, see Steph>nie ,.,04\SCI\ T""'zCaj...., Bnocefolllcl; r.lix 

The fact thatlhe lfi'R ior prime-age men remains 

below its pre-recession levels might suggest that slack 

remains along this dimensioo,; howe\'er, the lower 

level of the LfPR for prime-age men primarily seems 

to renect the oontinuation ol a decades-long secular 

decline rather than a C)dical shorlfall in their lfi'R. In 

addition, lhe U-6 measure of labor utilization-which 

includes the lllCmployed, those nu~inally attached 

to the taboo for~. and those employed pan time who 

would like full-time work-rosee•'en n""e ~e<ply 

than the unefl'l)loyment rate during and immediately 

after the recession and has since recoo.~ed to near i~ pre-recession e-~1. Althouglt there is substantial 

ur>rerointy aboutlhe trends in each of thecon-.x>nen~ 

ol U-6, its currenlle>-el can be cautiously interpreted 

as consistent with a labor ma&et dose to full 

e<nploynrent. 

One can also tool< at less-direct indicatm of labor 

market tightness. for eXiln'IJie, the share of S<llJII 

bosinesses with at least one job opening that they view 

as hard to fill is now dose to its reoord le>-els in the late 

1990s(asseen in the black line in figure 8), consistent 

•>ith the notion that as the labor market tightens, 

businesses lind it increasingly diff101h to hire additional 

worker~ Similarly, survey mrosu~ of households' 

Galbis·Rei8,Christcpl-.. Srrith, and Willtam IV. set... (2014), 

' labor Force P.uticip>tion: Rec.,. Dowlq>rron• •nd 

futt.w• P"""ec"; Brooi<i:ss Plpen on Ecmomk ~c.Viy, 

fol( I'P· 197-275, hups1 •ww.brool<ings edt1Mp«>'*"'~ 

..,lood~lO I f>/071falll0t4BPEA_AOitlnSOn_ et_>l;>df. Esunu"' ol tJE•d LFPR ore aloo provided by ilt•C80;. .,.,;, recuning ptblicadon The ~•rd E«tffomic Ourlool: and its updates. 

A. Uocmpi0)1Dtt1 rate gap 

No!i:'Tht~b)~:na.tStlt~Mttni:'U~ 

CoQpls.OMJ ~Ofl\.'t\t:Ci:.ltolfltUUt! n;ltol~~ 

""~ Wded. tu em~ peno& ot bt!st:rs !t'-'ftiiOC u &Gctd e,y ~ 

l'4:llotal~oCE4'0!1CI::*"lltirm 

~ for~lll ra:.t, BcmuofUbotS~ 6Qr=nl 

u:~of~..U. C.,US.(IQII BrqttOffi.-t:tll ''ll Httw A:AI}U."l 
77 


30197012.eps

pen:epeioos about job a~•ailability arecurrmdy at high 

levels, as sha.vn by the blue line in figure B. 

However, despite repo<ls that ernpioyers are now 

having more diffiOJIIies finding qualified workers, 

hiring has continued apace.Alihoogh payroll 

employmerl gains h"" gmdually sW.ved o,..,. time 

from about 250,000pe<month, on Mtage, in 2014 

to about 180,000 per month, ona\uage, in 2017, job 

grcw1h rE!l1ains conlistent with fur1her strengthening 

in the labor market.' finally, he~ofwagega ns 

has been 1110de.aie; while wage gains ha'e likely been 

held down by the !luggi!h pace of productivily growth 

in recent ~~rs. serious labor shorbges would probably 

bring about larger increases than have been obse<ved 

thus far. 

It is possible that labor""""ges have arisen in 

cabin pockets of the e(onomy, which CO<Ad be an 

early indication ci bottlenecks thai are not )<I readily 

apparent in the aggregate labor rrorkel. Howe,.,., even 

al theindustryle1.t itisdiffkultto"" rruchevidmceof 

emerging supply cons~aints.'lnso"" industries, such as 

trade and ~ansporbtion as well as leisure and hospitality, 

emplo)'ment growth has ~"'''fd marlcedly and it has 

l. Pa)'lllil ga•ns in thtrange ohbout90,000 ro tlO.OOO per mot~lh Jre eWmued to be C(lflsislffn with a const.l.nt 

u~l~rattarda dedinf in thtlabor fore~ 

participation rate in line with its den~i<:allydlh-en trend. 

4. The aiiOl)'is behind dis stuement conodered ox broad industries-<onstruction., manufacturing. uade-.tnd 

B. Job :rvailobilily 111d han!4 .. 611 posirioos 

10 

10 

.. 

... 

lO 

Scm: hb ~If)' • !htp:cpal"..tl! ofbouttbal& btiJ!'\q pb&m 

lt::JM!!WCU$~ ~bd~m:&J*m hzi 101«.~ 100. tbnko-60 • lbLo fhttt.~ =»'>'1:11 J\'a'fl\' or !!It po:;t;t ot call 

~ ll:t'"t')'t'd llo'lih Jlltul. Cit bni*fiUJOb ~q. d It. 

~·~b)·Ftdrra R.t5C:'·tBoriR6:).Lxllhlytori:,.lllldl::t 

6omtbeNI!.:ICaiF~of~Bractuatti=~J9$6. 

Tlw sladtd bl!1 ~ ptmds ofl:actt~ rrmuo: as dtUod by ~ 

NIIQt.I Bimrrloft."toiClCQII;' ~Dr:l~re:m!hly 

$).Ita F«pb rv.bbd1ty, C~ ~ fiX"b.ri<IO fll~ N!l(gl 

f~of~Busctu.. 

MONETARY POliCY REPORT: ffBitUARY l0t8 9 

~>ken Iongo< for busi""""' to Ond workm in re(ent 

rears, )<I wage growth has remained steadyor!lcwed. 

finall y, while the aggregate labor market appea" 

to be modesily tight at the mo""nl not all individuals 

ha1-e benefited equally from these de;'tlopments. As 

dLsrossed in the m.1in texl, noci<:eable differences 

in labor market outcomes rE!l1ain presmt across 

racial and ethnic groups. More<W<<. the labor marlcel 

lmpiO\"""nt in recmt rears has not been suffiCient 

to make irnpcxtanl progress in narrowing income 

Inequality. Finally, regional disparities arealsoSiriking, 

and in certain aspecls these disparities have widened 

in recent )~rs; for eleample, the emplof"""t· 

to-population ratio for pri.,...ge individuals has 

reco.-ered less for U101e outside of -o areas than for 

those in metro areas (r1gure C).' 

tranSfiO!~UOI\ lwlth and educauOf\ I"'"" •nd ho!piolil): .and prol~ional.and busitless seMc.s. 

S. 5eeAiisooll'<in8'tdenl10t7). 'l.OO.Mall:e\Ou""""" in M«roportlan ~rd t-.'on mt"Uopolilan ArNs: Signs oi G""'1ng Oilparitie•: F£DS N(IO'S~v..hingtoo: 8oaJd of COl,_, d the federal ~~ S)'ll<'ll\ S<ptenl>e< 2;), 

htqJS11•wwJedcnl i'!C1'1~-8"'1e(Ofl "'""'c<'f«<i.......,.bor· 

m;ub~ .(lutt:on~-in-metropolitan.and-non-metropo iun. 

ol eJS~-of-sr~ing-disp~ri ie5·20170915lltm. 

C. Prime-•ge employmeoHO·popolatiooratio by 

mrtropolitanstatu$ 

- 12 

-10 

-n 

- 16 

- 1' 

I s~"" 1l 

111111 l!!t!l"l!!l!l!!!!l 

1996199$ZOJ02002~1006 200Ut10201ll8 t10J421>1$ 

Nett Tbt llu a 12·::KI:O&& ~ 100\q l'lltllp 1...a:.-r tctll:iD.'llltt•(MSAs}COCIIt: ftSOO.OOOptq~le«=«t,a:d 

ct~~Utr!IISM<O!$dlo( 00.00010S00,000f«t))t, lbbdtd.h:IID4k'llt 

pl'IJCidJolb'~~ as clebd~!I!Soemlatt.uoll!alcom.:­

Rnm-~ 

SolacloAh«o W ....... COI1),.......,>.Url<<Otrtom«m 

-""'crdl'oc-Ami:StpoCO.O.q~· 

FEDS N«ts. {\\'~ 8ottl1 ol 0<1\'t:'"-«t of~ f'fdt:lllesrt\'t 

S)'s!m, ~ 25}. ft'W(~'t.p' (('(IC:U./Ma.Y~olltJ 

bbof·~«t."'O::II!'&-c~~lr.J:Ici---OD·~reu<SJp.-ol' 

~..,_'X:f·l0110925.J::t. c.kdllou 'elf 4111 to::. lbt U.S. Ceaa ba:, Cc;rd ~b.'JOQ Swvt); QOlt !hlllbt fkmll d Lm S:UOt."tlfCI~Oivtd C~~pro.'tU{OI tbtC\un:c:tPoplk:lcnSI!r\'C)' 
78 


30197013.eps

10 PAAT 1: R£aNT£CONOMICANO fiNAN0Al OMLDPMfNTS 

6. Cblltlgt in illffi·S«t r oulput pa OOw 

,_,_ .. 

%percentage point faster than it!i gain a year 

earlier. Among measures that do not take 

account of benefit~ ver.~ge houdy eamings 

rose slightly less than 3 percent through 

January of this year, a gain that was somewhat 

faster than the average increase in the 

proceding few years. Similarly, the measure 

of wage growth computed by the Federal 

Reserve Bank of Atlanta that tracks median 

12-month wage growth or in l~d als 

reporting to the Current Population Survey 

o11~d an increase of about 3 percent in 

January, sinillar to its readings from the past 

three year.; and above the average increase in 

the preceding few years.' 

... and likely was restrained by slow 

growth of labor productivity 

These moder.~te rates of compensation gain 

tik-ely reftect the otfsetting inftuences of a 

tightening labor market and per.;istcotly 

weak productivity growth. Since 2008, labor 

productivity has increased only a little more 

than I percent per year. on average. well 

below the average pace from 19% through 

2007 and also below the gains in the I 974-95 

period (figure 6). Considerable debate remains 

about the reasons for the general slowdown in 

productivity growth and whether it will persist. 

The slowdown may be partly attributable 

to the sharp pullback in capital investment 

during the most recent recession and the 

relatively long period or modest gro111h 

in investment that fo ll o11~d, but a reduced 

pace of capital deepening can explain only 

a ponion of the step-down. Beyond that, 

some economists think that more recent 

technological advances, such as information 

technology, have been Jess revolutionary than 

earlier genera). purpose technologies, such as 

electricity and intecnal combustion. Other.; 

bal'e pointed to a slowdown in the speed at 

which capital and labor are reallocated toward 

their most productive uses, which is reflected 

in fewer business start-ups and a reduced 

5. TheAUanlll Feds measoredill'e" from olhers in 

that it measures tht wage grt"M'th oo)y of voorktrs ~Abo 

werumpeyed boll! in lhecorrentmveymornhand 

12 moolhs earlier. 
79 


30197014.eps

pact of hiring and investment by the most 

innov1ltiv~ firms. Still others argue that there 

have been important innovations in many 

fields in rectnt years, from energy to medi<:ine, 

often underpinned by ongoing advances in 

information technology, which augurs well for 

productivity gro111b going forward. However, 

those economists note that such productivity 

gains may appear only slowly as new finns 

emerge to exploit the new technologies and 

as incumbent finns inv~ t in new vintages of 

capital and restructure their businesses. 

Price inflation remains below 2 percent, 

but the monthly readings picked up 

toward the end of 2017 

Consumer price inAation. as measured by 

the 12-month change in the price index for 

personal consumption expenditures {PCE), 

remained below the FOMC's longer-run 

objective of 2 percent during most of2017. 

The PCE price index increased 1.7 percent 

01~rthe 12 months ending in December2017, 

about the same as in 2016 (figure 7). Core 

inftation, which typically provides a beUer 

indication than the headline measure of 

where overall inOation will be in the future. 

was 1.5 percent overt be 12 months ending in 

December 20 7~.4 percentage point lower 

than it had been one year earlier. 

!loth measures of inflation reflected some 

weak readings in the spring and summer 

of2017. A portion of those weak readings 

seemed attributable to idiosyncratic e~n s, 

such as a steep 1-month decline in the price 

index for wireless telephone services. However, 

tile monthly readings on core inOation were 

somewhat higher during the last few months 

of2017. in contrast to the more typic.al pattern 

that has prevailed in recent years in wbi<:h 

readings around the end of the year have 

tended to be slightly below ~rage. Moreovec 

tile 12-month change in the trimmed mean 

PCE price index- an alternative indi<:ator of 

underlying inHation produced by the Federal 

Reserve Bank of Dallas that may be less 

sensitive to idiosyncrntic price movementswas 1.7 percent in December2017 and bas 

slowed by less than core PCE price inflation 

MOMTARY POliCY REPORT: fE8RUAAI' 2018 II 

7. Ctungc in lhc: pri« indox for pcrlOilll COilSumptioo 

c~pcoditwes 

r ... , 

2011 2012 1013 lOI-' 2&U 2016 1011 

Nrxr: lbtUm-nd!htqhDt~.'t!llbcrlO 1;d:qnatth'mot~t)ut 

........ SQ.aa:: F«l:t:'ltl'ntd!lt:IO.Ft&:l!Jtde'lf&:lko(De.llas;fot&lldlt, 

btcolF..."'IOll::''ltA:al)1--.;&ll Vlllb.wt Anat}rA.-'S. 
80 


30197015.eps

12 PAAT 1: R£aNT£CONOMICANO fiNAN0Al OMLDPMfNTS 

S Brrntspotondfuturespric<s 

- 130 

- 120 

-110 

-tOO 

911 

so 

10 

60 

lO 

40 

lO 

- lO 1 1. 1 1 I 1 1 o l .. o 1 1 f 1 o 1 l.o I I 

2014 lOIS l016 !l17 2013 

9. Nonfu<l imp<l!1 pricnlllld industrial m<tals iodexes 

~- -11)1 

:=~ =:: ~- - 93 

$f) - Ndudllllp«tptl."' - ?6 

bd!wia ~l -

11- - - 9-' 

Nm: 111t da:a li:c llldlxl ICIIIpOn sn:a a:t .cihly. nc ll:ll ro: ccb:ralan ,etamo;U:ly"~ orl.&llyc!a:aa:d Cltc:ICI.Iuot.IF 

Fdmlo:yll.lJOil 

5(uO: f« ~ ~ pn.~ &.=ra. ~ lAboc SlQ!Ia; for i:d::lshll m- S&:P CoSO ~I!UI Mt':llt Spx l!ldo: ,;. Ha'ot!' 

A:tlyli..... 

over the pas! 12 months.' (For more d.iscussion 

of inJlation both in !he Uniled Slates and 

abroad, see !he box "Low lnflalion in !he 

Advanced Economies.") 

Oil and metals prices increased notably 

Headline inftation was a little bigher than 

core inftation last year, which reflecled a rise 

in consumer energy prices. 111e price of crude 

oil rose from $48 per barrel atlhe end of June 

to a peak of about S70 per barrel early in the 

year and, even after recent declines, remains 

more !han 30 pertenl above its mid-2017 1evel 

(6gure 8).111e upswing in oil prices appears 10 

have been driven primarily by slrenglhening 

global demand as 11~ 11 as OPEC's decision 10 

further extend its November 2016 production 

cuts lhrough !he end of2018. The higher oil 

prices fed through to modera1e increases in the 

cost of gasoline and beating oil. 

I nftation momentum was aL10 supported by 

non fuel import pric.es, which rose throughout 

2017 in part because of dollar depreciation 

(figure 9). 111at development marked a wrn 

from the pas! several years, during which 

non fuel import pric.es declined or held flat. 

In addition to the decline in the dollar, 

nonfuel innport prices were driven higher by a 

substantial increase in the price or industrial 

mltals. Despite recent volatility, mltals prices 

remain higl1er. on net, boosted prinnarily by 

improved prospects for global den\1nd and 

also by governmem policies that restrained 

production in China. 

In coo1rast, headline inftation has been 

held down by consumer food prices, which 

increased only about Y, percent in 2017 after 

ba1ing declined in 2016. Food prices have 

6. The uimmed me4111 index e:tcludes ·v.-haterer prires 

shov.td the largest increases or decreases in a g.h·eo 

month: for example, the sharp decline in prire< '" 

•iretess telephoneservicts in Mattb 2()17 •as <Xdudecl 

from this index. 
81 


30197016.eps

been restrained by softness in the prices of 

farm commodities, which in turn has reftected 

robnst supply in the United States and abroad. 

Although the harvests for m:~ny crops in the 

United StJtes declined in 2017, they 11-ere 

larger than bad been expected earlier in 

the year. 

Survey-based measures of inflation 

expectations have been generally stable ... 

ExpectJtions of inflation likely inHuence actual 

inflation by alfecting wage- and price-setting 

decisions. Survey-based measures of inflation 

expectations at medium- and longer-term 

horizons have remained generally stable. In the 

Survey of Professional Forecasters conducted 

by the Federal Reserve Bank of Philadelphia. 

lhe median expec!ation for tbe annual rate of 

increase in the PCE price index over the next 

10 years bas been around 2 percent for the past 

several years(figure 10). In the University of 

Michigan Surveys of Consumers, the median 

\'3lue for inflation expectations over the next 

5 to I 0 years- which had drifted downward 

starting in 2014-has held about Oat since the 

end of2016 at a level that is a few tenths o11~r 

than had prevailed through 20t4. 

. . . and market-based measures of 

inflation compensation have in creased in 

recent months but remain relatively low 

Inflation expectations can also be gauged 

by m:~rket-based measures of inflation 

compensation, though the inference is not 

straightforward because market-based 

measures can be importantly alfected 

by changes in premiums that provide 

c~mpe sation for bearing inflation and 

liquidity risks. Measures of longer-term 

inflation compensation-derived either from 

dilferences between yields on nominal Tre.asury 

securities and those on comparable Treasury 

Inflation-Protected Securities (TIPS) or from 

inflation swaps hav~ increased since June. 

returning to levels seen in early 2017, but 

MOMTARY POliCY REPORT: fE8RUAAI' 2018 13 

10 M<dian ioOotioo apcdlltioos 

- M~t:~n"Y~ 

~ 

loromj:oJ~)~ 

-~ SPF'~.mccs 

icnca.IO)"tft 

- l 

_, 

- I 

I I I I I ! I I I I I I 1 I I I I 

2006 lOOi ~Ott 2011 :OIA lOl' 201$ 

Nm: The l.li±lta= t:::!'l"'ff 6ua ttt :IOCihly cl alelld 1h:·011&h 

f¢bNa:y; lbt f-ck.a~T dD ft ~. T"'..c SPf daa (or wl'll:lt'lll 

O:~~~ttt~da~ 

6oool00H)I ~~lOJ~Q . 

S'.l.:kCI: U;:n'CnlyofMt.iup:: S'-"\'()1: otC~ Fedml itekn't 

WclPh ~ia.S%\'tfot'"Prt'(~ror~C\(Sn) 
82 


30197017.eps

14 PART I: R!CENHCONOMICANDIINANCIAL DMLOPM(NTS 

Low Inflation in the Advanced Economies 

Inflation has been per<islenlly low in recenl years 

acroos many adiMced economies. In lhe Uniled $1ates, 

bolh o'" rall inflation and core (excludng food and 

ene<gr prices) inflation, as rrea5<~ ed by die price index 

Ia< personal consumplion expcndilures, ha." run bel<>v 

2 percenllor mos1 ol1he period since 2008 (ftgure A). 

In othe< a<honcEd econonies, rreasures of core 

inflation ha\'e run even lower in some cases. with core 

inflalion in lhe euro area currendy al around 1 percenl 

and in Japan al doseiO zero(figure B). 

Whal explains !his period ol low inflalion! Across 

!he ad•onced econonies, die main lac1ors holding 

inllalion down likEly include die ex..OOEd period cJ 

economic adt following lhe Greal Recession and 

!he falling prices oi oil and other commodilies I rom 

aroond mid·2014 10 early 2016. In lhe UniiEd Slales, 

infblion also has been held d<>vn by lhe rise in !he 

IO<<iin exchange value of ~e dollar from mid-1014 

lhrough 1016. The 1<>v cO<e U.S. inflation in 2017 has 

been more ol a puzzle lalbeil modest in rmgnilude) 

and harder to associate with an identifiable cause.' 

As is discussed in 1he Decembe< 2017 Summary ol 

Economic Projections (Pan l ol lhis repor1), mosl 

federal Reserve policymokers \iew lhese A!Cenl low 

infblion readings as likEly 10 pro•'Oir.lnsilory and 

projecl U.S. inflation !his year lo mo•·e closer lo dleir 

2 percenl ob ecli\ . Many pnvalelorecasle<S appear lo 

share this \'iew. 

I. For dlitional d,SC\Ission ol 100 reasons for lowinl'btion 

rnllleUniledSta"" .ee~netYellen(I0 7). ,rlb;on, Unc..,.in\)1 "Ill Mon<1>ry Polrcy.' lp«'Ch deli\fleclat 

'l'lo!per:• lci<Gto\\'th: """si ~ the Funrlamenla ~' S91h 

Anoo.1l Meeting cllhe NatioNI Assootiation b Business (cooon;~ Cl.....tard, Ohio, Sq>terrber26, hupsil•ww. 

leder ~esM•.g<>o>'ne•~-.l en20170926a.hom 

A. O.ange iJ !he price iruXx for pm\1nal cons1,unpti<!a 

expc~~r!iturcs 

- s 

-1 

II { I I I I I I I I I I I 20)1 MQ9 21)11 1(113 2015 2017 

?(Ott Tlltd.U•:ti~~2 11 ¢hq.sa:rf:aoot)'l'C" 

"""'· Sootcl: ~of~.bl)'Ul\'ll ltwtrAml}~ 

B. Inflation cxchldiog food Olld "'"I!Y in selecl<d am1lllC<d foreigo economics 

-· - -1 

' - -1 ""'"" . """ ! - ~ - 1 

-1 

I I I I I I I I I I I I I I I 

1ml MilO 2012 101: 201' lOIS 

Non: 1bt di!Afo: tbr t'WO ~rea 114'a'pX11~~!1ubatullll.t lor )1:1:1.')' 

S.ThtdalorC~dJI(I~ t:r!tcde::oo&h~20 . 

SNa: For~tkt.~~Otlict or tJo:;tJSU~..,;fixlapu, 

Cim...""Yoi~Afbna:IIC~~-Ibti'II."Oill'tl. 

5!1:..~ Oilict « tt Ewopte ~ rot~ s~ 

Ccad:a,aii''D """t:Anai)Uet. 

But our undootanding ollhe lon:es !hal dri•'O 

inflalion is perfec~ and lhe lacllhal many advanced 

economies are experiencing laN inibtion al the sarre 

time suggestS lhat o1her, poosibly more lers sten~ 

I actors rmy be al worl As one possibility, lhe nalural 

rale of unempiO) men! -the rale a1 which labor markets 

exert oeither upward nor downward pressure on 

inflalion-is tighly uncertain, and il could be lower 

in m.tny economies than most economists estimate. 

Ahemali•'Oiy, inOalion expcclalions could be lowe< 

!han suggestEd by die available indicalors. 

MO<e-lund.lmenlal changes in !he global eoonomy 

could also be conlributing lo die recenl stretch of 

lower inOation. First, anecdol31 reports suggest !hal 

lechnological changes could be reducing pricing 

pcwer in many indusltiO$, holding 00..'11 inOalion as 

that occurs.' For exalJ1>Ie, the increased pre\'alence of 

lnle>net shopping allows co su~ 10 compare prices 

mO<e easily acroosSEIIers, poosibly impl)ing grcalcr 

oompeli~on lhal could be pulting dO\\'nwatd pressure 

on consumer prices (figure C). While !his hypothesis is 

certainly plausible. II does not ea~ y square wilh 1he 

observalion lha ~ a! least wilhin die UniiEd Slales, prolil 

margins have been high (fogure D).' 

l . GoldntanS.Cio (lOin, -n..Am.zonEifectrn 

l'<r>peco,.; us. E"'""""ics Anall't !New Vorl:: Gold""n S.Cio,Scjl...WlO). 

l. SeeCouncilolfconorricAd\'i...,(2016), "BenEfos 

ol Corrpdioorurd lrdicoto" ol M.lrketll>w«; C..n<D 

ol Economic Advisers Issue Briel ~V.,hirtgiOO(ct\. "frill, ht.,sik/Jonta•~it>llouse..l hi..,.g<>o>~ ""llel'~t.ftesj>ag<>' 

file!ll0160-II•_<N_<0111"'>1ionJ"""-bri<f.pdf. 
83 


30197018.eps

.... 

- 10 

9 

- I 

- ' 

- I 

I I I I I I II !! I ! I I I I I I I I I I 

1999 200l 1005 200S lOU :!OU l017 

N&ii: ~utsattsalnrit«K.t:dst:\'l.'fll.,...«tr~or&1a 

lwedb,t•tWkoyer«-bcrtdle rtncdlta!IIIIRit &."t~O\'« 

t::Oillmti)'IUO a~~:lot)'OI'mtyl:IO!t!e~o:lmt. 

SOI.Jtt li:WI ~iO:tBmc:ll. U.S.C4nla Btrt.c. 

second, son-eobservefs have pointed to global 

de\oelopmen ~ as helping to explain persi~e t low 

inflation across oounlties. These de oe pm ~ 

include economicslack abro.ad or the integJation a emerging econorries into the world economy, leading 

to increased compelition or downward pressures on 

wages.• BIA the evidence that global ~ad<C3n help 

explain inflation in a gi'oen oounll)', be)ond ~ effect 

on oommodily and I"'IJOII prices, is mixed al best.' 

Moreover, measures a integJation, such as global 

trade as a fraction of gross don1eslic product or the 

partlcipalion in ~obal '1luechains, appear to have 

leveled off in recent yeors. 

A number ol other explanations lor low ~oba l 

inflation ha ~ hem advanced as well. These 

explanations include some enta i~-e evideooe 

suggesting lhat the aging ol the poJ>Jiation oould be 

ex<rting downward pressure on ~end inflation, perhaps 

because retirees may tend to be mxe price conscious 

4. S..Oaudro 8onoandAndri!W RlanJo (lOOn, 

'Giobalisation aJld lnllltioo: .., Ct.....CO.nuy E00ence 

on d>e Global De"""i"'n• oiO.....UC lniiJoon, • BIS 

1\'or\ing l'.lpm 227 (Basel, S"ill«l.lnd: 8"'* for 1111£<NO""'I s.tti"""'l> Ma)l, wwwbis org~ll> work2l7 jldt aJld 

R.phoel """' Ct•t.doo8orio, and Andrew filonJo(20in, 'Tho Globafisa; oo o( Inflation: lheGr .. ing lfi1X'Unce o( Global V•l"" O..ins: SIS 1\'0<IingPapers 602 fs.s.t l•itzerland: fHnkfor lntemJii(MI.ll S~, JatliJOU)'). V.WW.bis.orgt p<Jblhvork60l.pf. 

S. See )ane lhrig, Ste1<n B. Kamil\ IJ<borah Und""' and jauYlOMatque<{1010), ~orne SinJ>Ie Tell< of !he 

Clobaliution ~nd lnflinon H)-podlesis; lnten'liltional Fin~ nee, \U. I3(Winoer),pp.34l-7S;and(u"'fl"'nC.nuall!ank (20Jn, •OOfl....rcandG)(b.l Or;-..,ollnRationlnlhe£uJO 

Are.,· fC8l<on<mk 8ulk<i>, no. 4 Ounol, pp. 72-96, lq>s;/1 w.-..«b.etJ q».ru~..Oi>df orh«'<oban20171)l 01.en.pdf. 

MOMTARY POliCY REPORT: fEBRUARY 2018 I 5 

D. Corponle profllsasasbare of gmss oatioo3J produol 

Qom~ ·-

- I• 

-12 

- It 

- ' 

-. 1111 f! IIIJI I!IIII!!!!!!!!! I!11!111!11! 11 I 

19S2 19$'7 199l 19)1 200.! 2007 2012 ZOI7 

N<m; Tht 4!12 exle<:d lh:oi.IF 20 7~}. ~ p:oft.J ux:kr.t l!ll'tlt«)'n.b:IO;cd~~:.O::~..$. 

~ Blmuot cooon :~vuH.ntt.bt)U."4 

than other consumers.• OthffS have poinled to a 

.slowdown in O'K'dical services price increases aaoss 

cou ies, possibly associated with either heal ~~>a e 

relonn"' il<cal au>~erity.' This slowdown has had a 

material eiiecl on U.S. Inflation, though the ectent to 

which these declines will persist is uncertlin. 

In sumn13ry, while stlndard econon>ic models 

appear to explain rruch ol lhe posi-Great Recesoion 

period of low inflation, they do not preclude olher 

e"l'lanations. b-en as most pollqmakers eJqleCI 

inflation in !heir economies to """'e bad< to their 

l<l~s <1'/er time, lhey remain attentive to lhe possibility 

that lacro not included in those noodels, such as diOSe 

described here, may keep inflation low. Atlhe same 

lime, they ore auenti ~ to the opposite rislc ol inflation 

moving undesirably high, should tightening demand 

condRions lead to laster ri~<S in wages and prices lhan 

currently anticipated. 

6. S..)oflg-II'O<lYOO<\ )i,;ll lGm,•nd)ur>gjin lee(2014l 

11J>o1ctoiDerrogt.lphitO..~on lnilllion•nd lhe M..: oeconomy.'l\ rli ~ Pap« WP/1412 10 l\V.S~nglOII: 

lniOfn.lUONI Mo""'ry' fund No\ontor), ht!pSi/w\>,,drri. org·ox.,al~..o.f>\\pll0 4M l42 0jldl. Ho\1•'"1 orh« 

!'tidMce SlpiS inc:reastld inllatiwry pres5ure fronun agire pq>ulai>Or<,.. Mbel )ustlius and 116d Tolans{IOIS), "Con Demography olll«:tlnillliOtl•nd Mon<.,.ryPolicyr SIS Worli'l! Papers 485 (8>!01, S•itzerlond: Bank for lntemaliooal S.-. febfll>')'), hllp<1Mwwbis..or&\>IIW.Qfk.I8Sj>df. 7. SeeTimMohl'cly ondM.Jmlll.pro(lOJn, 'IVho(s 

O...n• llh lnflatiOfl?' FRSSf £conomicl-l017·3S(San Frant•sco: k!deral Reserve8ankdS..1nFrancisto, NOO.t'frber), htlpS1iw.YwJ bsf.Qf3'economic<esel ch~..O •utionsl 

OCOflOnic·l-'2017"""..t.rt<onui>won.olow-p«- inRatior>lrO<I>lie.lltht"'*; and Goldmar1 Sa<fls (lOin, 'll'h.lt 

Un We lNm (rom lO'! tr II1J.jlion Abtood:r US. Ecetu;mics An* (NewYort Goi&Nn Sad>s. N<Wtflro 12) 
84 


30197019.eps

16 PAAT 1: R£a NT£CONOMICANOfiNAN0Al OMLDPM£NTS 

II. 5-lo·IO.ycM·fcn'Oid inflation compcns>tion 

- JJ 

-l.O 

-2.5 

-2.0 

- tJ 

-1.0 

I t. 11 t. 11 t 11 .t . 11 1 11 .J 11 .! 11 .1 11 tt. "l I 

2010 2012 2014 2(116 201$ 

Nor£: The 6la •< wtU:fy &'lOp or Qu~ 411& ~ ~ Ol:wp 

FebN1..1' I~ lei& TIPSGTrmeyWla~-uG.Se.-wt~n. 

Scw:t f'oidll llt:Sr:'\l: BW: c(N('TI YoU; S..-dl),; Ffdol Rt:M'I'''C 

Bocdr.a!na:-.14. 

12. Oungein.Wgtossdomeslicproducial>:lgroos 

domcslic income 

• GI'O$Jdomtu~ot«yt;l"u.bic ror 20 HU. 

ScU.ct' &:mc.or~ArAy-..VlaHI\-c;~ 

-! 

nevertheless remain relatively low (fig.ure II)' 

The TIPS-based measure of 5-to-10-yearfonvard inflation compensation and the 

analogous measure of inflation swaps are now 

slightly lol'l~r than 2Y. percent and 2~ percent, 

respectively, with both measures below the 

ranges that persisted for most of the I 0 years 

before the start of the notable declines 

in mid-2014. 

Real gross domestic product growth 

picked up in the second hair of 2017 

Real gross domestic product (GOP) is 

reported to have risen at an annual rate of 

nearly 3 percent in the second half of2017 

after increasing slightly more than 2 percent 

in the fir:H half of 2017 (figure 12). Much of 

that faster growth reflects the stabilization 

of inventory investment, which had slowed 

oonsiderably in the first half of last year. 

Private domestic final purchases-that is, 

final purchases by U.S. households and 

businesses. which tend to provide a betler 

indication of future GOP 8,ro111h than most 

other components of overaU spending- rose 

at a solid annual rate of about 3~ percent in 

the second half of the year, similar to the firsthalf pace. 

The eon nomic expansion oontinues to 

be supported by steady job gains, rising 

household wealth. f.worable oonsumer 

sentiment, strong economic gT01'11h abroad, 

and accommodative financial conditions, 

including the still low oost of borrowing and 

easy access to c-redit for many households and 

businesses. ln addition to tbese factors, very 

7. lnftation compensation impli«< by the TIPS 

bttaltev<n inllation rate is l>lsed oo lbe dill'<r-. at 

comparable maturities. betw<tll )ields on nominal 

Treasory securines and yiclds on TIPS, "1riclt art inde.oc<d 

10 the beadlin< <00$1lM<r price index (CPI). lnllatioo 

mpS are contmu in •1riclt ooe pany mtl:es payments 

of certain fixed naninalamoun~ in acltange for cash 

ft01>~ thata .. inde:<<d tooomuJati,<CP! inftatiODOI'<r 

scme horizon. Fccu:sing on inftation compensation 5 to 

10 yea .. ab.ad is useful, pani"'larly for monetary policy. 

because such forward measures encompass market 

participants' view'S about \\be-rt inftation will sctde in lbc 

long term after de,'dopmmts infiuendog inflation in lhe 

short tenn bare nm thrir coarse. 
85 


30197020.eps

upbeat business sentiment appears to hare 

supported solid growth Ol'er the past year. 

Ongoing improvement in the labor 

market and gains in wealth continue to 

support consumer spending . . . 

Supported by ongoing improvement in the 

labor market, real c~nsumer spending rose at 

a solid amtual rate of 3 pertent in the second 

half of2017. a somewhat faster pace than 

in tbe first half. Real disposable personal 

income-that is. income after taxes and 

adjusted for price changes- increased at a 

modest average rate of I pen:ent in 2016 and 

2017. as real wages changed little over this 

period (figure 13). With spending growth 

estimated to have outpaced income growth, the 

personal saving rate bas declined considerably 

since the end of 2015 (figure 14). 

Consumer spending has also been supported 

by further increases in household net wealth. 

Broad measures of U.S. equity prices rose 

robnstly last yea~ though markets have been 

\'Oiatile in recent weeks; house prices have also 

continued to climb. strengthening the wealth 

of homeowners (figure I 5). As a result of the 

increases in home and equity prices, aggregate 

househokl net worth rose appreciably in 2017. 

In fact, at the end of the third quarter of 2017, 

household net 11 >rth was 6.7 times the ~al e of 

disposable income. the highest-ever reading for 

that ratio, which dates back to 1947 (figure 16) . 

. . . borrowing conditions for consumers 

remain generally favorable . .. 

Consumer credit expanded in 2017 at about 

the same pace as in 2016{figure 17). Financing 

conditions for roost types of consumer loans 

are generally favorable. However, banks have 

continued to tighten standards on credit card 

and auto loans for borrowers with low credit 

scores. possibly in response to some up1111rd 

drift in delinquency rates for those borrowers. 

Mortgage credit has remained readily available 

for households with solid credit profiles, but 

it was still difficult to access for households 

11ith low credit scores or harder-to-document 

income& 

MOMTARY POliCY REPORT: fE8RUAAI' 2018 17 

t3. Olangeio re>l pcrso1Uicons11Dplion «pmdnurcs 

•od dispo~able pcr;<ml iooomc 

- 6 

-S 

- 12 

-l 

I I I I I I I I I I I I I I 

2007 l009 2011 lOU lOIS lOll 

N1:£: Da:a m !lrvut:Dtn:mbc"2017. 

SrJ.aa: lk.<u~G ~:kd)U V. lhve A:alf.~ca. 

tl. Priccsof<Xi<tiogsingl .. &milyhoUS<S 

- Wt'•5e-Shdle 

~tulm&t 

-IS 

-10 

- s 

-10 

-IS 

- lO 

I I I I I I I I I I I I I I 

200'1 2009 lOll 2013 lOll lOll 

N!r.'i: Tbe dn (« lbrW JCat.sblk ~:do: QWd ~ -en~ 

20 7.1UWictet211w ndutndtb!C'cn~b&xtx:cdlh."Ofilb 

Do ~ lOll, 

$'.UCi: Cord_. U~ PrxY ~ Z.tlw, SlP.tae.shUb US. Nat::II omtPrk'elm.ll:tSU I(:..Shdlt:b:tlka~~S&P 

D~JW Jo:a ~ U.C d'w q aJlibm (For J)cr.v Jcocs illtim 

ll..~id~tetlbe!ltf.eo; e..e tcdmspet'l'~ 
86 


30197021.eps

18 PAAT 1: R£a NT£CONOMICANO fiNAN0Al OMLDPMfNTS 

16. Welltb-to income ratio 

... 

- 1.0 

-6..! 

- 6.0 

- !.S 

- !.0 

I !!!!l!!!!llf!!ll!!!!!lllf I 

1996 1999 200.! lOl5 lOOC lOll ztll;l 1017 

Ncnt:'P...tdo n:r.m! ~2011~). Thr te!!S a tb! :a» of 

~WiD:t.-ri~di~pmalm.-omt 

$OUQ: Fclc llelll'lrl. I Rtwn'l' ~ ~~tj!J:aJ Rekzse l-1, 

"fcao;W~oCtbtUncedS::a~rt"' f«~.amuorJ;.~ 

A:.I.I)'IIS\-.Ht•{t:~ 

11. Olinges it booscbold deb< 

-1,000 

lOO 

lOO 

I! I I I I I I I I I I I I 

2007 1009 2911 1013 MIS 2017 

l\'r.rTht~(«MI711:'t~ll'\\':1l.tSG tbetmO:allyelj:ls~ 

IM!lllutdquRtlytl0""~20 7;Ql 

Scua: re!ml R.etttw Botn!. Stn~:a~ R.dtut 2.1. ·rca:cid AttcnJ of tht tkh!d S:tr.u.. 

v - uo 

- 100 

10 

!0 

- 70 

60 

;11 - C~u:~lllr.ml - lG 

I I I 1 I I I I I I I I I I I II 

l006 ZOOl l:Oit ~U ):H! l!l& lOIS 

Non; Tht del cn:id Osnqh Jicb.lDIIYlOIS; tbt ftbrl:cy d;t::a Ct 

J(tlimw)' Tht~wtttillmlda:llft'~a:da:tbio:fd • 

100c19(4Thtrull~a~-cb!&artob:ble.!utbtllt! 

pe-~ of~UWT~ o;~ cily~ 10COtpsntre 

~pric:nc!l::q'Wtt:al)n: (l'l'lt'()pl:s 1001011~ ~-~ •• 

!:ret<::.OCOIIIIO\qa~ 

Sol4a: U::!'o1ttli\)'ofMidirpi.SwvqtoCCocsl;mm._ 

Although household borro11ing continued to 

increase last year, the household debt service 

burden- the ratio of roquired principal and 

interost payments on outstanding household 

debito disposable income, me<~S red for the 

household sector as a whole- remained low by 

historical standards. 

... and consumer confidence is slrong 

Consumers have remained optimistic about 

their economic situation. As measured by the 

Michigan survey. c.o1tsunxr sentiment was 

solid throughout 2017, likely reflecting rising 

income, job gains, and low inJlation (figure 18). 

Funhermore. the share of households 

expecting real income to rise over the next year 

or two has continued to strengthen and now 

exceeds its pre-rocession le~~l. 

Aclivily in lhe housing seclor has 

improved modestly 

Real residential investment spending cre<~Std 

around 2 percent in 201 7, about the s.ame 

modest gllin that was seen in 2016.1iousing 

activity was sofl in the spring and summer, 

possibly reftecling the rise in mongage interest 

rates early in the year. and ~1en picked up 

toward the end of the year. For the year as a 

whole, sales of new and existing homes gained, 

and single-family housing starts increased 

(figures 19 and 20). In contrast. multifamily 

housing statts continued to edge down from 

the solid pace seen in 2016. Going forward, 

lean inventories are likely to support further 

gains in homebuilding acli\~I Y, as the months' 

supply of homes for sale has remained near 

low levels. 

Business investmenl has continued to 

rebound ... 

Real outlays for business investment- that 

is, private nonresidential fixed ilwestnxnlrose at an annual rate of about 6 percent 

in the second half of 2017, a bit below the 

gain in the first half but still notably faster 

than the unusually weak pace n.'COrded 

in 2016 (figure 21 ). Business spending on 

equipment and intangibles (such as research 
87 


30197022.eps

and development) advanced at a solid pace 

in the second half of the year, and forwardlooking indicators of business spending are 

generally f3vorable: Orders and shipments of 

capital goods have posted net gains in recent 

months, and indicators of business sentiment 

and activity remain very upbeat. That said, 

business outlays on stn1ctures turned d0\\11 in 

tbe second half of 2017, as investment groMh 

in drilling and mining structures retreated 

from a very rapid pace in the first half and 

in1<cstment in other nonresidential structures 

declined. 

... while corporale financing conditions 

have remained accommodative 

Aggregate flows of credit to large nonfinancial 

firms remained solid through the third 

quarter, supported in part by continued low 

interest rates (figure 22). The gross issuance 

of corporate bonds stayed robust during 

the second half of 2017. and yields on both 

investment-grade and high-yield corporate 

bonds remained low by historical standards 

(figure 23). 

Despite solid gro\\1h in business investment. 

outstanding c.ommereial and industrial (C&f) 

loans on banks' books continued to rise 

only modestly in the third quarterof2017. 

Respondents to the Senior Loan Officer 

Opinion Suf\'ey on Bank Lending Practices. 

or SLOOS. reported that demand for C&l 

loans declined in the third quarter and was 

little changed in the fourth quarter e1•en as lending standards and terms on such loans 

eased' Respondenis attributed this decline in 

demand in part to fim'l> dra11ing on internally 

generated funds or using alternative sources 

of financing. Financing conditions for small 

businesses appear to have remained favorable, 

and although credit groMh bas remained 

sluggish, SUf\'ey data suggest this sluggishness 

is largely due to continued weak demand for 

credit by small businesses. 

S. Th.SLOOS ~available on lh< Boetdh<b&"., 

ps1/ww .fedetalrestl'l"e.go /datal;loo;/~oos tm . 

MOMTARY POliCY REPORT: fE8RUAAI' 2018 19 

19. Ne"'•andaistinghomcS3ks 

1.5- - 1.6 

-U 

- IJ 

- ·~ -.8 

- .6 

3.0-

1 I I I I I I I It I I I I I I I 

l006 2008 2010 2012 lOll 2016 2:018 

NT.E: Dl!J.L"t omhly.New~Wesex!db'-&h~201 7 

"" o:b!o """ •et;k·!.,;ty """ Em:q - ""' i:d!dto t.cP-'mi~, ~l•r .. •:!:ome,am! aMlpl&h 

SGu.a: Fo: '!Lft hccat salts. ~ CeJUS ~batt: fo: exil!q belOit 

»b.l'i.llloll&l APocialiqa o(RcaJIOni: til '' HI\'\:' AW/tlct. 

-U 

-1.6 

-IJ 

- J 

- .. 

I I I I I I I I I I I I I I I 

2006 20l8 laiO lOU 201' Mlfi MIS 

·

• 

-

~~pmc:1 a! m:qil;.lt iZ(lf.d - u HI 

ZOIO 2011 2012 2011 201: lOIS ltll6 on 
88 


30197023.eps

20 PAAT 1: R£a NT£CONOMICANOfiNAN0Al OMLOPMENTS 

22. Sck<1ro <OOlp<:<><Dis of net debt fJJDDCiog for 

nonfmaodal bu:sjoc:sstS 

- so 

I t I I I I I f I I I I I!! I 

lOC1i !1m 2011 20U 1015 1011 

SCM.1:0: ftl!ml Rt:StM Bori Sl*:islital l!.dmt Z.l, T"a:tltl A«*1!!!5of!!lrllnM!S!C6." 

23. Corporate bood >i<lds, by S<Cwities nting 

I If !1 I I If I II II I I II II I t I I 

21))1) 200l 1006 1009 ::Oil 2015 :Gil 

1\'m::tbtyitldstbowta.•"t)id!soeiQ..)'u:~ 

SC..-..ca: tCE k::l: o( ~ Mcrnl L)'1dll~ ~:Xi! wt.ll 

..,.-. 

24. Cb!nge io !W imp<:<<saod exponsof goods 

aodsmiees 

--.. l'll~ 

~ Q>- IS 

- ll 

_ , 

-6 

- l 

-l 

Net exports subtracted from GOP 

growth in the fourth quarter after 

providing a modest addition during the 

rest of the year 

U.S. real exports expanded at a moderate 

pace in !be second half of last year aflcr 

having increased more rapidly in the first half. 

supported by solid foreign growth (figure 24). 

At the same time, real imporiS surged in the 

fourth quarter iiOII~ng a slight contraction in 

the third quartet As a result, real net exporu 

moved from modestly lifling U.S. real GDP 

gro111h during the firstthreequaners of2017 

to sublrllcting more than I percentage point in 

the fourth quarter. Although the nominal trade 

and current account deficits narro11~d in the 

third quarter of 2017, the trade deficit widened 

in the fourth quarter(figure25). 

Federal fiscal policy actions had a 

roughly neutral effect on economic 

growth in 2017 . . . 

Federal government purchases rose I percent 

in 2017, and policy actions had littleelfect on 

federal taxes or transfers (figure 26). Under 

currently enacted legislation, which includes 

the Tax CuiS and Jobs Act (TCJA) and the 

Bipartisan Budget Ac~ federal fiscal policy 

will likely provide a moderate boost to GDP 

growth this year! 

The federal unified defiCit continued to widen 

in fiscal year 2017, reaching 3\1, percent of 

nominal GDP. Although expenditures as a 

share of GOP were relatively stable at a lillie 

uoder21 percent. receipts moved lower in 2017 

to roughly 17 percent of GOP (figure2?). 

The ratio of federal debt held by the public 

to uominal GDP was 75Y. percent at the end 

of fiscal year 2017 and rermins quite elevated 

relative to historical norms (figure 28}. 

9. The Joint Olmmiuee oo Tuanoo tstimalts that the 

TCIA ~;u redooe avmge annoal ta\ revmoe by a tittle 

more lh .. I pen:entofGOPO\'erlhenttt few year;. 

Tbis mlllutestimate does oot aocoaot for lhe potential 

macroeoooomic etTects or the l-egislation. 
89 


30197024.eps

. . . and the fiscal position of most state 

and local governments is stable 

The fiscal position of most state and local 

goVl!rnments is stable, although there is a 

range of experiences across these govemmen1S. 

Many state governments arc experiencing 

lackluster revenue growth. as income ta~ 

collections have only edged up, on average, 

in recent quarters. In contrast, house price 

gains have continued to push up property tax 

revenues at the local e1~l. Employment in the 

state and local govemment sector only inched 

up in 201 7, while utla;~ for construction by 

these governments continued to decline on net 

(figure 29). 

Financial Developments 

The expected path of the federal funds 

rate has moved up 

The path of the expected federal funds rnte 

implied by market quotes on interest rate 

deri•atives has moved up on net since the 

middle oflast year amid an improving global 

gro111h outlook (figure 30). Part of the upward 

shift occurred around FOMC communications 

in the falltbat were interpreted as implying a 

somewhat quicker pace or policy rnte increases 

than had been previously anticipated. The 

expected policy path also moVl!d higlter arouod 

the time when the U.S. Ia.~ legislation was 

finalized. 

Survey-based measures or the expected path 

of the policy rate have been generally little 

changed on net suggesting that pari of the 

rise in the markct-irnptied path reftccted higher 

term premiums. In the Federal Reserve Bank 

of New York's Survey of Primary Dealers and 

Survey of Market Participants, which 11~re 

conducted just before the January 2018 FOMC 

meeting. the median respondents expecied 

three 25 basis point increases intbe FOMC's 

target rnnge iOr the federal funds rate as the 

most likely outcome for this year, unchanged 

from what they bad expected in surveys 

conducted before the June FOMC meeting. 

-et-based measures of uncertainly about 

MOMTARY POliCY REPORT: fE8RUAAI' 2018 21 

25. U.S. tndc and curm>t accooot bolanccs 

- I 

-l 

-l 

- l 

-· -1 

I If I I I I 1 I I I I!!! I I I! I I 

lOOI 200) lOOS 20011009 1011 lOU lOIS 2011 

Nor.E:ODPapudta.!rirp:odua.C't:tttl1a.."«<!bm~ 

~101'-Ql. 

$r.(.'lC£ br::or~~Alal)-vlaHr;vc~u. .... 

26. Cbnngt in real gQvemmc:nt exproditurt"S on 

c.onsumption and im·estme:nt 

1 ·~ ~ltcd lllnl -· 

-6 

- 8 

I I I I I I I I I I I I I 

2009 201tJ>II lOil2013lOI4 201S 2016ltl1 

-l6 

_,. 

-ll 

-lO 

- 11 

- 16 

_,. I II I I II I II 1J II I I II I II I I I 

1991 1001 2005 2009 2013 MU 
90 


30197025.eps

22 PAAT 1: R£aNT£CONOMICANO fiNAN0Al OMLOPMENTS 

28. Foltral gov'"'""'" ~ be:d bye" pubuc 

-W 

-1<1 

-60 

-50 

_ .. 

-llO 

II I I I I I I I I I I I 

1M1 1m tm 1m 2001 2011 

Nm:Thtdo>ma:tli!uotlPlOll:QJ, Thtwixll"'""""' ~(GOI')ut~ r. t.":!l:ll :ct Fe&nldebtl!tldbythtpotbc~ 

1!6tnldtkb ~l«'dietbdd ft4o ~dd!Qf'dbc:tf11 

ll'tftad~( 'J,Iua;td.JllhttlllQ(iht~ 

F'or(I) :t!llloi'~A:talysit VIt lf.n'tfkll)ti~b 

fmtral dett.. f«kkal itt1tM" Sod. ~B" ~ Z.l. 'fCJCQII 

k0010ofltt lkli'.rdSllltf.. 

- 19.1 

-19.6 

-lfl 

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I I I I I I I I I I I I I 

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qt>r~. 

- ,..,_. .... B=o.rU!to:S-"'"'"""' dn wttOofS:cr~ Alulytls:all ''*lbvct.bl)'tn. 

-l.l 

-tO 

- I .S 

- 1.0 

lOll lOIS :019 

Nm: n.t ftdtu #!:r!dl~,CaCpliedb)'qoornon~ltdtx 

,,..._ dt::~\~'t toer! !ltd !I)~ tll ll"t't lt&nl ~ :J!r. Tbe 

~litds:Qastl tbt\'a.")'li.W t•('(IC'f*.'td. .;lhtll•o DJ.O. 

201i Thtpd: mimr.fd'tirih qlline~~ lttt!lpumfto. 

ofOb.upoa Tbtparhsatt.:ddroqti200:0.Q: Souaa:: Bl~kdtu!Recavt&a!daatres!&nllts.. 

the policy rnte approximately one to two years 

ahead have, on balance, edged up from their 

levels in the middle of 2017. 

The nominal Treasury yield curve has 

shifted up 

The nominal Treasury yield curve bas shifted 

up on net since the middle of 201 7, owing 

Lo greater optimism about the global growth 

outlook and invl:Stors' perceptions of higher 

odds for the removal of monetary policy 

accommodation {figure 31). Yields on shorter· 

term nominal Tre.asU!y securities increased 

relatively more than those on longer.term 

nominal Treasury securities. thus resulting in 

some Oattening of the yield curve. According 

to market participants, among the factors 

contributing to this outcome bas been the 

Treasury Department's stated intention to 

increase its reliance on issuance of short-dated 

securities, as discussed in the two most recent 

releases of the Treasury's quarterly financing 

statement. 

Consistent with the changes in Treasury yields, 

yields on JO.year agency mortgage-backed 

securities {MBS)-an intportant determinant 

of mortgage interest rates- increased but 

remain quite low by historical standards 

(figure 32). 

Broad equity price indexes have 

increased further ... 

Broad U.S. equity indexes. despite some 

declines seen in recent weeks, have. on balance, 

increased further since June2017. with most 

of the net gains occurring during the final 

quarter of last year (figure 33). Equity prices 

were reportedly supported in part by an 

increase in investors' confidence that changes 

to the feder.ll tax law will boost corporate 

earnings. Stock prices generally increased 

across industries outside utilitits and real 

estate. two sectors for which the increases in 

interest rates described eadier are likely to have 

weighed more heavily on stock prices: stock 

prices of banks rose more than the broader 

market. Implied volatility for the S&P 500 

index, as calculated from options prices, 
91 


30197026.eps

increased notably in early february, ending 

the period close to the med.ian of its historical 

distribution. 

... while risk spreads on corporate bonds 

have continued to decrease 

Spreads on both high-yield and investment· 

grade corporate bond yields 01~ r comparable· 

maturity Treasury yields have decreased 

funher since the middle of last yeat with 

spreads for high-yield bonds moving closer 

to the bottom of their historical ranges. The 

narrowing of the spreads since the middle of 

2017 appears to reftect both an anticipation 

that the losses from defaults on these bonds 

11ill be smaller and a lower compensation 

being charged for bearing the risk of such 

losses. (for a discussion of financial stability 

issues. see the box "Developments Related to 

financial Stability.") 

Markets for Treasury securities, mortgage· backed securities, municipal bonds, and 

short-term funding have functioned well 

Available indicators ofTreasury market 

functioning have generally remained stable 

over the second half of2017 and early201S, 

with a variety of liquidity metrics-including 

bid-ask spreads, bid sizes. and estimates of 

transaction costs- mostly unchanged over 

the period. Liquidity conditions in the agency 

MBS market have also been generally stable. 

In recent months, the functioning ofTreasury 

and agency MBS markets has not been notably 

alfected by the implementation of the Federal 

Reserve's balance sheet norn\1lization program 

and the resulting reduction in reinvestment of 

principal payments from the feder:ll Reserve's 

securities holdings. In early february. anrid 

financial market volatility, liquidity conditions 

in the Treasury market deteriorated but have 

recovered somewhat since. Credit conditions 

in municipal bond markets have also remained 

generally stable since June 2017. 0\er that 

period, yield spreads on 20-year general 

obligation municipal bonds over comparable· 

maturity Treasury securities have narro11~ 

on balance. Nevertheless, significant financial 

strains 11ere still evident for some issuers. 

MOMTARY POliCY REPORT: fE8RUAAI' 2018 23 

31 . Yi<ids on oomiml Tr"""l' S«<lities 

... , 

-T 

-6 

-S 

_ , 

- ! 

- I 

I I I I I II I I I I I Ill I I I I I II 

2000200111»'20061.t'XIS2010))1220J.ilt')l6!01t 

Nm: The T~ceadpcilll.a)Q: o(thc Jl).yw ~OU'*Ilma1lllr.>' 

kl)S~fctcua. 13,l00l,cdns.~~~~(I!~IC'a¢\fCQf~9.»J6. 

SGucr: ~o lb~ftus~~y. 

9-

......... 

- 100 

-2!0 

-200 

- llO 

- 100 

lO 

- t 

ltl!! l! !!l !! !l!l! l!!! l 

l((I&2WJ:ZOO'l00620<B2010l01lllli'2016WI8 

Sots; ~ dlll~~t daily. YW~ &bow:! • (« !It fCIIIC ),~ lfl.)'tC 

tu~r:tt:~Cr.«<p:~Cta:tat•~!leW~d.S«\Titirs 

woddbtpxtdJ!pr or f~.~Spera&sbotoiStolbt~dt!zo 

5-a:d l~l'II'OCI:&IiT.tml:l)')itiQ& lbtb!Atr.aldf:rcql!FtU'QI:y 

l~l.OIL 

Sol.'lltl: ~-=rtttol~tn~q.&di)'L 

33. £qui1yprioes 

- 200 

-m 

- ISO 

-ll$ 

-100 

lS 

S& 

- l$ 

f I I I I I I I I I 11 I I I I I I I I I f 

20))200.!2004~200Sl0U)201ZlO .t20 6201$ 

Sr.ua: ~k Poot's 1><1¢' Jo::.et b:!:i'es '' BI~(For Dow 

l«:al::6t.-n t .. "ff1SilJ&i:fom~ltioo., ~~tttht~co lhe:Cc:«al"f'.) 
92 


30197027.eps

24 PART I: R!CENHCONOMICANDIINANCIAL DMLOPM(NTS 

Developments Related to Financial Stability 

0\~rall vulnerabilities In !he U.S. financial s)~em 

rermin rroderate oo balance.* Valuation ptessures 

~tinue 10 be elevated aerO!> a rangulasset 

classes, Including equities and comnerd.al real estate. 

Vulnerabilities from le.erage in !he financial sedO< 

appear low, relleding in part CJpi~ and liquidity 

ratios of banks th "' ~ continued to r11> 0\~ from 

already strong positions. HO.\'E!\~ there are signs 

!hat nonbank financialle,..,.ge has been incr.,.sing 

in some areas-for exaf'fl'>lt>, in the ptovision of 

rmrgin credit 10 equiry lnveslor< such as hedge fund~ 

Vulnerabilities from nonfinancial lf\'fl3geare jtxlged 

10 be moderale. While housdlold debl balances ha'~ 

been increasing modesdy.lhe lf\-erage of the business 

sec;tor is elf\Oied, particularly among speculati,-e-grade 

firms. Vul..,.bilities related to maturiry and liquidiry 

transfonmtion remain low on net. 

<ft~r !he second half of W17, valuation pressures 

edged up from already elf\~ted levels. In general. 

valuations are higller than would be expected based 

solely on the cunent Je,-el of longer-term Treasury 

yie ~ In part reflecting gro"ing anticipation of the 

boost to futl1e(after·l3)() eamir>g$ frO<Oa corporate 

l3x rate cu~ prire o-earnif~:S ratios for U.S. stocks 

rose through january and were close to their highest 

!e--els outside of the late 1990s(figure/1); ratios 

dropped back somewhat in early February. in a sign of 

increasing valuation pressures in comrnertial real esl>te 

rmrl<ets, net operating income relati'-e to property 

values (referred to as capitalization rates) have been 

declining relative to Treasury )ields of CO<Op;lrable 

rmturity for lllJhifarrily and industlial p<operties. 

While these sp<eads narrowed furlher from already 

low levels, they are wider than in 2007. [\·en though 

the aggregate residential house price-lo rent ratio has 

been increasing fa~er than I~ long-run ~end, it is 

only slighlly elevated al p<esenl.ln OO<porale credit 

nurl<ets, sp<eads of corporate bond yields "'"'those 

of Treasury securities with COfT!lOrable maturities fell, 

and !he high-)Wid lpread is now near !he bottom of its 

historical distribution. Spreads on lereraged loans and 

coUateralized loon obligations-which are a significant 

I. An O\<r\10W of !he lrame.ort (0< as..,.;'1 fiNnr:oal ieabilityin lht Urnted Stales is pr011·ided in Su!Vy Fischer l2017l. 'AnAA«smerll ollinanaal Sobili1y in 1he Unil«f S~lt'S,· ~doli'""' 31 !he IMF 1\'orl:!llop on RNncial St.n'E'iBance and Comn1.11'1Ka6oo: Best Practic~frcm 

!>lin America, !he C.ribb .. n and A!Mrw:ed Econorrw<'S; Washingwn. June 27. WYtw.Jederalr('S(If\1f'.p' r~twS€'\t'niSI 

lp«<lv1lsd,..l0170617a.llun. 

funding source fO< the oorporale sector--$13yed 

oompressed. ln addition, nonprice terms eased on these 

~l"" of loans, indicating weaker i"'·estor protection 

than at the peak of the previous aedil cycle in 2007. 

Consistent wid> elf\11ed risk appetite, virtual currencies 

experienced sharp price increases in 2017. 

Vulnerabilities related 10 financial-sector lf\-erage 

appear lo.v.le\"erage at insurance companies and at 

b<oker-dealers is on the low end of its historical range, 

and most indicator< of leverage al other noobanl< 

Onanclal firms are stable. How"'·er, there is some 

evidence thai dealers have eased price tetmS lo hedge 

funds and real estate in,•estmenllrusiS, and thai ~ 

funds ha'~ gradually increased their use of le,-erage, 

in particular rmrgin credit lOt equity ltades. Although 

such ealing ol price terms has taken place again~ the 

backdrop of building valuadon pressures, the s~ro g 

capiial position of bank holding comp;~nies reduces 

the risk thai sudden drops in asset prices could 

g,1ifrcan~y affecl bank-affllialed dealer<. Risi·based 

regulatory capital ratios for most of !he largest bank 

holding CO<Op;lnies continued to increase from already 

high le>tl$. 

If interest rates were lo increase unexpectedly, 

banl<s' strong cap l position should help absorb the 

oonse<pent losses on sec .. ities. About one-third of 

the losses that could be experienced by banks would 

affect held-to-maturity securities. While these losses 

A. Forward pri(e.IO·eamings ratio afS&P 500 rums 

Nooi: 1bt F~lOIS\'llut II!QsedO!. tnld~tt:~!!Wt. 1lf 

diiJ dtpi.'t ibt aattflllle f«Wrd ~·No~ :co of S&P 500 Cim&. 

~~~~WcxQca~oc.dal1&o:l 9SSIO~fmC'l1.~ba::s 

u:Ct;-.epmodlo ~•cltfi•byac:Nux:dJ3tl:rMo(~ 

Resrmt. ()m,a..-ebutdc ll~~.edttnlll'il'prtt.!oa:t. 

Sl:u.ct:&.allutlmllt$butd:oc'lllo::llooRl\llm.IBES 
93 


30197028.eps

would nol reduce regula tO<)' capit>l. they could s1ill 

ha ~ a \'anety ol ega~, .. consequences-lor example, 

by """"'ing banks' funding terms. The large share ol 

deposits in bank liabilities is also likely 10 solten the 

effect of an une>peeted rise in interesl rates on banlcs, 

becausedepolit rates tend to adjust with a delay and 

bank profll>bilitywould i"1'rove in the meantime. 

0\'erall vulnerabilities arising frllm leverage in 

the nonfinancial sector continue to be modernte. 

CO<ltinuing its pattern in recent years, household debt 

has expanded about in line with nominal inoon1C, 

and the household credit·IO-GDP gap rtrnains sizable 

and negative (frgure B~ leverage in the nonfinancial 

busine!$ sector remains high, with ~iss ce of rislcy 

debt clini>ing in recent months. Ho a~r, the .hare of 

the lowest-qualitydebl in 10131 issuance declined, and 

relati,.ty low interest expenses mitigated some ol the 

vulnerabilities associated with eiC\'aled leverage. 

In port attributable to regulations inttoduced 

since the financial crisis1 \\llnerabilities associated 

v.ith liquidity and maturity ttansfonnalioo-that is, 

the financing ol illiquid Of long-maturity assets with 

short-maturity debi--continue to be low. lhe reliance 

ol global crrically l...,ortant banks (G-51Bs) on 

short-term wholesale funding has risen only slightly 

frllm poll-a isis lows, while their hold ~ ol high· 

-ll 

- 10 

- l 

N()tl:~dllltx'.clld~:OI1;Ql cdas::»ooC!fdgq• Hod:ri: ~ filer The: m5td N,., ~ ... ~ pmods or b:Jmw 

lt\'U.SIIOClUWIIXdbyttNa!IOI!al Bu:ttuoiF.:o:lccc:d:Rmant..(bps 

holtbtd.wtl8h1tdb'f~~o o.t:lle!diLGDPISa.-~ 

prodo.'l. 

SouX2 Ft&tal l.cv!Yt &..d. St.:~t:~o.-11 itde~V !J, '1cttDJ Aaw:tt d tbt Ucr.cd S:.ca-; ~ o( f.;o;.xzuc Aml)n ~ lbvtr 

A:.ll)tl.'1, 111ttoeel e.."'efft. a:d ~ a.'tCilll!tS, Tal* I 1.5: G:ou 

llo:lo>:l'mrtlloan!JU«c•l:•"""'-

MOMTARY POliCY REPORT: fEBRUARY 2018 25 

quality liquid assets stand at high level sand exceEd 

those r"!uired by the liquidity CO'Ierage Ratio. The 

share of core deposi~ in IOOI Iiabilities at G.SIBs 

also remains 31 historically high levels. MOte lhan 

-year after the money market fund reform, which 

reduced"'" risk as investors shifted from prime to 

go.•emmcnt funds, the growth in alternative shortterm in.esttnent \'ehicles has been limited. Regarding 

S«Uritizod rod . although the issuance of assetbacked securities V'-85) was Slrllng. overall i$$U3noe 

hasremained 1vell below pre-alsis le>us r~ asse~ 

classes. aJ\cl securitizations appear to in\'Oh-e lln;ted 

maturity or liquidit)' ttansfonrotion. Nonetheless, ABS 

issuance was boosted by the securitization d assets 

that were rarely securitized in dle pas!, such asaircraft 

leases and mobile phone conttacts. ln adcltion, certain 

nontraditional liabilities of life insurers, including 

funding.agceemer>t·badced securities, ha'·e grown 

not>Ny recently. although levels rennin low relative to 

the broader market fOf securitizations. 

Financial vulnerabilities in (()(eign ec:cnomies are 

moderate O\roll. Advanced foreign economies, many 

of which havesttong financial and real linkages to 

the United Stales, continue to llrllggle wilh elevated 

~luati ns. the disposal of legacy assets, and, In SOfne 

coses, worrisome rises in mortgage debl. Some major 

emerging market ecooomes ha!bor more prooounced 

vulnerabilities, rell g ooe or more of the following: 

subslantial corporate la-erage, fiSC<~ I coooerns, or e.xcessi\'e reliance on foreign funding. 

The counterq-clical capital buffer (CC)'B) is a 

maaop<udential tool the federal Rese~ .. Board can 

usc to increase the resilience of the finarrial S)'Stern 

by raising capital requirements on inlffnationally 

adi\'C banking ~n tions. The CCyB is activated 

when there is an elevated risk of above-normal future 

losses aJ\cl when the banking o~gan zat ons for which 

copit>l requirements 1wuld be raised by the lxiier 

are exposed to Of are contributing to this ele\Oted 

risl<-either directly Of indirect!)'· The financial stability 

developments, assessments, and fran\0\YO<k described 

and used here bear impa<tanU)• on the Board's !etting 

oltheCCyB.

1 ln December2017, the8oard 1'0tedto 

a fOrm the CCyB at its level of 0 percent. 

/<OOMued on ne.t page) 

l. S.. Boar<! <I CO\"""" <i tho Feder.~ I ResM .. S)<lem 

(l016). 'RegulatOry Capital Rul.,: The fede<JI Resen~ Boord's 

Fro,.....ocl. for lrrplem<flong tho us. s...t 111 Counlffq<bcal U!>it>IBtif«,• iooul policy"' '"'"' (!)«~;« No. R-1 Sl9). 

fodon/1/egis!er, \'01.81 ~ 16), pp.6l681-88. 
94 


30197029.eps

26 PART I: R!CENHCONOMICANDIINANCIAL DMLOPM(NTS 

Developments Related to Financial Stability {(1)(1tJnued} 

0\~r lhe second half of 2()17,1he Fede<al R~e 

Board has takm son-e key steps lo reduce regulatOI)' 

burden while promocing lhe financial stability of lhe 

United States. The federal Reser1<e Boord, Office of 

lheCOf11ltroller ohhe Currency. and federal Deposit 

Insurance Corporation joindy proposed amendn-enls 

to lhe banking agencies' commercial real estate 

appraisal regulations that raised the threshold price 

fe< mandating appraisals fre<n S250,000 10 $400,000, 

!hereby redJcing the number of required •PP'aisals.' 

In addition, the federal banking agmcies issued a 

proposal lo simplify aspects of oommunlly banking 

organintions' regulaiOI)'capil>l rules, with lhe goal 

oi reducing regulaiOI)' burden on smaller institutions 

while maintaining the safety and soundness of the 

banking S)'slem. • 

The Boord requested comment on a COJpO<ate 

governance proposal to enhance lhe effectiveness 

of financial firms' bo31dsof director~ The proposal 

refocuses d~t Federal Reserve\ superviSO<y expectations 

fe< the la~t fums' bo31ds oi directO<S on their CO<e 

responsibilities and would also reduce unnect'SSary 

burden f01 the boards of smaller institutions.' The Board 

l. S..Off<e olthec..,..,uoller ol theCuttency.li<lrud 

of GOI.....,rsol d" -I Re!<n• $)Stell\ •nd the f't<JE<al ll<posit lnsur>rw:e Cotpo<a;on (20 I n, ·R.,J !sulf 

"Wai!31s; n04ice rJ pr<pO<ed rulen\l~ng and r<quest IO< -t(l)oel"No.R-ISi>ll),Foderzlllegiut>r, voi.Sl 

Ouly 31), pp.l5413-9l. 

4. S..Off<e rJiheC""1'uoller rJ theCuttt>r<y. Boord 

ofGOI.....,rsrJdte-IRe«n•Sl"''"•ndthe-1 

Otpositlnsll'•rw:e(oiJ>Of•don(I01n, 'Sirrplific>tionsoothe 

Capio.l Rule Purs.,ntiO the [oooooic C.owlh •nd Reglti>IDry 

P.lpe~»orkReducbCiflActof 1996: oociceof pc<pO<ed rul..,.~'ll !Dod:<\ No. R-1576).ft'dml Rtogistt>r, vol.82 (Octob« 27).pp.4~500-14. 

S. See Boord of Grw!morsoflhe F<d"'l Resen"' Sys~em 

(lOJn, 'F<dt'r•l Reserve Board ln1ites l'lblic CO<nntenlon 

also adopted a fonal Nle 10 if11lr0\'e lhe resolwbllil)' 

and resilience of G-SIIls and !heir subsidiaries to 

res~iclions rega~ding lhe cerms d. cheir nondeared 

qualified financial cootracts.'ln addi6on,lhe Board 

proposed changes to ils super,•iSOI)' rating system 

lor la<ge financiallllllitulions lo belt" align wilh lhe 

post-crisis supetl'isory program f011hese Orms; smaller 

institutions, irduding ccmmunicy banks, would 

oonlinue 10 use lhe current rating system.' Finally, lhe 

Boord requested CO<Oil'enl on a package of proposals 

thai would increase lhe lr.lmparcncy of ils stress-testing 

program. in particular, the proposals would provide 

mO<e iniO<mation aboullhe noodcls used to estimate 

h)'polhetie>llosses in lhe stress tests while maint>ining 

the Board's ability lo lest 1he resilience of the nation's 

largest and rmst complex banks' 

T•o ff<lp0531~ Co<po..!f eo. ..... nctand RatingS)Will fOt ~rge Fimnciallmtitutions, .. press~~ August 3, 

ht.,.~ll>-.w.fed«•l....,.. govre.'K'I<n~jx""" """" 

bc:reg1017080lahlm 

6. Seel!oordofCo~«no• rJ ihef't<JE<•I Resen~System 

(20 17), •R..nc;ons on Qtt.llified Financial Conua<IS rJ 

S)slfmic.lly lrrporum u.s. 8anki'll Orgariz>oons and the 

U.S. OpE<ldons rJ S)>tonially I"""""' foreign B>riing Org.wizations; Revisions lO the Oefinition of Qwlif)i'1 

Mlstet NettingA~tand ~ated Oelinilions,• fir.al ru~ 

(l)oek<tNo.R·ISl8), fede<l/Riog$<er.IOI.31ll<!>-ll), W· 4lstl-916. 

7. St!re Board of Go~nors, "ffderal Reser\~ Board lnvhes 

PIA>Iic Cotrrnem on Two ff<lpOS31~' in 11010 S. 

8. See BolJd of Co-.rno• of the federal Resen~ S)"'"" (lotn, -r.detal R...,.Boord R"JuesuCoornentoo P.ltb&o ofPtoposa~ That \-\~lAd in<r..,. the Trnnsparerw:y 

rJ I• SOES6 Tes<i'll Ptogr>"'" press relea,., O.Cent.< I, 

.ww.feder.llresen .. p'newse~<en•'Jlres.<l<!i..,.Y 

bcreg1017 1107ahom 
95 


30197030.eps

In particu a~ prices for Puerto Rico general 

obligation bonds fell notably after Hurric.ane 

Maria ltitthe island and its economic outlook 

deteriorated even further. However. these 

developments len lillie imprint in broader 

municipal bond nk1rkets. Conditions in 

domestic short-term funding markets have 

remained stable since the middle of last year. 

Bank credit contin ued to expand and 

bank profitability remained stable 

Aggregate credit provided by commercial 

banks continued to expand in the second 

half of2017 at a pace similar to the one seen 

earlier in the year but more slowly than in 

2016. Its pace was also slower than that of 

nominal GOP, thus leaving the ratio of total 

C()Dlfllilrtial bank credit to current-dollar GOP 

slightly lower than earlier in 2017 (figure 34). 

Measures of bank profitability were liLLie 

changed at levels below their historical 

averages (figure 3S). 

International Developments 

Economic activity in most foreign 

economies continued at a healthy pace in 

the second half of 2017 

Foreign real GOP appears to have expanded 

notably in the second half of2017, extending 

the period since mid-20 16 wben the pace of 

economic growth picked up broadly around 

the world. 

Growth in advanced foreign economies 

was solid, and unemployment fell to 

multidecade lows ... 

In the advanced foreign economies (AFEs). 

ll1e economic reco~~ry has continued to firm. 

Real GOP in the euro area and the United 

Kingdom expanded at a solid pace in the 

se~ond half of the year (figure 36). Economic 

activity also continued to expMd in Japan, 

though real GOP gro"1h slowed sharply in 

lbe fourth quarter. in Canada, data through 

November indicate that economic growth 

moderated romewllat in the second half 

following a very rapid expansion earlier in 

tile year. Unemployment declined further as 

MOMTARY POliCY REPORT: fE8RUAAI' 2018 27 

34. Ratio oftol>t commcrci.ll billlk mditlo oominal gross 

doweprodu<l 

,_ 

-?l 

10 - - ., 

- -IJJ 

-Sj 

It I I I I I I I I I I I I I I I I I I 

ZOO! UIOl ~OOS ~001 UI09 ~II lOll 201.$ $11 

~ N4cnl ltttm~ Bori. SU!aW Rtlwt IU. -~ Jill! 

~ oCCo::atrMI S.W 1:1. I» U011td. S:.l<n". BlrM: fi EtoctD: 

A:idyll1 '"* BA-w.wl)o,u 

35. Profitlbitity oflxutk holding compl!llies 

hlecd,_.,,_, ~---

~0 -lO 

u - R<t=c...., 

-Jl lA-

.s- - 10 . 

0 

.S- -10 1~-

- Jl lJto- - lO 

I ! I I I I ! I I I I I I I II I I ! I I 

»l1 200llt»S »l72009MII:blll201!2tll1 

NT.£: Thcdfte:t~i~e:da:rteaw.dya!f..ld.'Tbtb:a~ 

t!oqO 21n ~Ql 

St.Wt Fo.3mt Rt:Se\<t Bod. r.,. FR Y-9C. Cc~u> d.lkd rlflll>...a St~ f«Bcl:llcM:&C«<IJ!dtt. 

36 Rcal!IIOSSdomestic product growth in sel«tcd 

!ldvtmctd fortign C'Callomi~ 

. 11-.J1olK ....... ., ... I ECO"'a:n 

•"'-"' 

l1lll 

HJ 

lOll 

- J 

_, 

_, 

~ 1\tdQfortbe Umltd(q.dcadtbt«tt .. n~ 

fluhct:tlt'l.itlf«2011~. Thtdai«Jtpe ~~~t:'11311Y 

et:l:ll&le bl011:Qt.l':&Qc&f«C'cDcxldlliilnqhl011:Ql. 

Stntt F«theU:t.l'!dK~OifiC'ff«N!!.:a!Sta.x..'1; -~ Clbl:dOCil~Go\'l':ll:'l!ll!Ofhran;forlbft(.!Oz;tt,Ei..~fk('.zmd&. 

S".utaC~ill"'Rtv!!rA:cl)'lll:'l. 
96 


30197031.eps

28 PAAT 1: R£a NT£CONOMICANO fiNAN0Al OMLOPMENTS 

37. Coosumer pri~X ir.Oll~n ic seltdtd a!h'RDCed foreign 

ecooomies 

-· 

- l 

-l 

- I 

- I 

l! 11 t 11 t 11t,! 11 t"' t.!.t """"''"'"'"'"'"'I Z:Olt lOU b316 lOIJ bll$ 

Nor!: lht&~foe~«::rn~!lzlh&bntortti« mt121)' 

:OJt. ~Wf«C41114ai!Odhpsn~~~ &."t!!t!tr2tl 1. 

Sol.ta: t« the ll':ttd J:.qdom.Oif""t rarl\~102 Sts!&£.a; ror ~ 

Muuy t( ~ Al&a Cld Com::a::~:a:.o:a,. (r.r ihc CWO eta, 

Sta!ai!IC'IIOif~etoftllf~C~forC«::adt.S:a)t).:J 

Cata.!a; aiiV'llk\>r.AIW)~I.'&. 

lS. Real gross dom<Stk p!oduct grow1h in selmcd 

cmngiog DlJfkct t'c:OIIOilliC$ 

l014 lOll 

-12 

-' 

- ' - l 

- J 

- 6 

s.m: 1M dlla ornea~ · adJ"' t·lcd by Sod DJt Tbt~ 

for Kott&, llftxa.., ao.1 &cam Y &qutcd bf Ibn mpo.'li"'« 

COYG'"~~ lbedalli'Ora.t~~:eetlltiiellm:M 

ZOI1Qol., TbtdoiOr&-mla:d:th:or.:ab2017;QJ. ScUo; FarChir.a,CU!a ncal&:mu.otS':atim:r«K«t&.BI:i 

ol MiRa; for Cai.."'. l::st=IO Naao:;;allft Utad.aD. y C-oopt, io;-

lka.ol ll:Uto&ulltro~Gttplia r Eu:lf!ir.'l; Ill'' Hl\-cr A:atyli.:t. 

wei~ reaching 40-year lows in Canada and 

the United Kingdom, while growth in labor 

compensation ticked up only modestly. 

... but inflation remained subdued ... 

Consumer price inflation rose somewhat in 

most AFEs. boosted by the rise in commodity 

prices (figure 37). Howe1•cr. headline and 

especially core inflation remained below the 

central banks' targets in the euro area and 

Japan. In contrast, U.K. ioDation rose rurtber 

above the Bank or England's {BOE) 2 percent 

target as the substantial slerling depreciation 

observed since the June 2016 Brexit 

referendum continued to provide some uplift 

to import prices. (For more discussion 

of inflation both in the United States and 

abroad, see the box "Low Inflation in the 

Advanced Economies'' in the Domestic 

Developments section.) 

... leadingAFE central banks to maintain 

accommodative monetary policies 

The Bank of Japan kept its policy rates at 

historically low levels, with tbe target for 

JO.year government bond yields around 

zero. In October, the European Central Bank 

extended its asset purchase program until 

September2018. albeit at a reduced pace. The 

Bank or Canada and the BOE both raised 

their policy rates but also indicated that they 

intend to proceed gradually with further 

removal or policy accommodation. 

In emerging Asia, growth remained solid ... 

Economic groMb in China remained ela y 

strong in the second hair or2017 even as the 

authorities enacted policies to limit production 

in heavily polluting indiJStries, tighten financial 

regulations, and curb bouse price growth 

(figure 38). Most other emerging Asian 

economies regisJered very s1rong growth in the 

third quarter of 2017, fueled by solid external 

demand, but slowed in the fourth quarter. 
97 


30197032.eps

. . . while the largest Latin American 

economies continued to struggle 

In Mexico. real GOP declined in the third 

quarter as two major earthquakes and a 

hurricane significantly disrupted economic 

act~ it , but rebounded in the fourth quarter. 

Following a prolonged period of contraction. 

the Brazilian economy continues to recover. 

but only at a "~ak pace. Pm'llte investment bas remained sluggish amid corporate delevcraging 

and continued uncertainty about government 

policies, althougb it turned positive in the third 

quarter for the fir.>! time in nearly four years. 

Foreign equity prices rose further on net. .. 

Solid macroeconomic data and robust 

corporate earnings helped broad AFE and 

emerging market economies (EMEs) equity 

indexes extend tbeir2016 gains througb the 

start of this year (figure 39). Declines since 

the end of January have erased some of these 

gains, and volatility in foreign stock markets 

increased. On balance, most AFE stock 

prices are higher, and E:VIE equity markets 

significantly outperformed those of AFEs. 

Capital fto"~ into emerging market mutual 

funds generally remained robust as higher 

commodity prices added to optimism about 

the economic outlook (figure 40) . 

. . . and government bond yields 

increased 

Longer-term government bond yields in most 

AFEs were noticeably higher than their mid2017 levels, reOcctingstrengthening growtll 

and mounting prospects for the nomulization 

of monetary policies (figure 41). In Canada. 

where the central bank has raised its policy 

interest rate 75 basis points since June, the rise 

in longer-term yields was panicularly notable. 

On balance, spreads of dollar-denominated 

emerging market sovereign bonds over U.S. 

Treasury securities were stable around the 

levels observed in mid-20 17 (as sh0\\1l in 

figure 40). 

MOMTARY POliCY REPORT: fE8RUAAI' 2018 29 

39. Equity indexes for selected roreign economies 

- 1>4 

- ~ 

- lAO 

- ll! 

- llt 

- ~ 

-UQ 

- m -lit 

- 10! 

- 100 

9S 

!0 

l.b><!<- - » , , , I,,, I, I I 

2014 lOU 

No?E:T"...!~ctwetl!y~fi&.:i!yb!Amdeua~ 

~l ,lJl ~ 

SGQcJ· Fe: NO a;n. OJ b S'R:tt l:dn: to. ~ TOPIX 5*"' 

tnr:a; 

~ 

Cor U:u\tl! Ji.~ FTSE 10> S'lOd: llldrx: f« c:!1ttR ~ 

MSO ~ Mdt:s Locd ~ l!ldet:; .ttl \'lS. 

-.. 

• &cd !mdllo"'c..;u:ril) 

lOO - • ~''" '"''-'c)tuo) - 60 

-'0 

-lO 

- lll 

-'0 

lSO - El.tBI+Ild!:am) -60 

::014 lOU 1016 201J lOll 

Nr.l: Tbebo::d~C'I\Wty~l»wl.Dmf\U&fldyllm!lolv.~ 

da:a.ltcnah:.:Myl,201, ~&."C11bc3 ,20J1 d:'IIOtllhlySII:IIIG( 

v.'CekJ)·4Uf:a cr;crl,lO ~WFdruatyJi,lOit The~tlcnfsdlll 

ndldt f:ods b.~ c Cbma. 1be l.l. l.lqc f.lllqq ).(Wll Bo:4 l""'l'lllS(llMIII<) Ialac.W«l::ya"""'<l<!oilydolldn!t>l 

~~l0 3. 

s-.ucr: F« bol:.d ~ tqJtl}' ~.md flows, EPfR C.w.J; («: EMBI+, 1, . 

MoqaEtacrgC,~Cdtls Ba:d.llllalt:.$\it Bloooilcq. 
98 


30197033.eps

30 PAAT 1: R£aNT£CONOMICANOfiNAN0Al OMLOPMENTS 

41. NominaliO-yc:u g<Wc:rtllllCill bood yield< io 

S<kct<d odvao<<d """""""" 

...... 

-l.O 

-l.$ 

- l O 

- t.s 

- 1.0 

It I !t ' ,,, I I •.. I I I,,, I'· ' I I 

lll~ ZOIS l016 leU lOit 

42. U.S. doD:1r <l<th:mg< rat< iod<l<« 

- Dolm apperia~ - 170 

i - 16<1 

-ISO 

- I'll 

-uo 

- uo 

- 110 

- 100 

- llO 

(I I I I! I ! • I! I! I ' I I 

ZOIL lOIS l\116 1017 101$ 

~ lbtdi2,~att l'o!tit=~uni!Jj~trtol~ ttftt\1y 

tw:rttno tiyc%all!dtmld~ 21 ,101S.Asi:6t:t~b) 

tf&l'!OW,I:t."ttUtfCtht da!a~ US. dolll: app~i&icc,d 

&mu.s.,.,_u.s.&>Ut"""'..,;,. Scua: Ftrdml Rdt:w Bori. Swit:tbl B.dt»t H.IO, .:n~ 

"'"""'""" .. 

The dollar depreciated on net 

The broad dollar index-a measure of the 

Jrade-weighted value of the dollar against 

foreign currencies- fell roughly S percent in 

the first half of2017. Notwithstanding some 

appreciation in e:1rly Febn1ary, the currency 

has depreciated funber since the end of June. 

partially reversing substantial appreciation 

realized over the period from 2014 to 2016 

(figure 42). Tbc weakness in tbe dollar mostly 

reftects a broad-based improvement in the 

outlook for foreign economic growth. Brexitrelated headlines weighed on the British pound 

at times during the second half of 2017, but 

progress regarding the terms of the U.K. 

separation from the European Union boosted 

the currency later in the year.lncontrast, 

the dollar appreciated against the Mexican 

peso, on net, amid uncertainty around North 

American Free Trade Agreement negotiations. 
99 


30197034.eps

PART 2 

MoNETARY Poucv 

The Federal Open Market Committee 

raised the federal funds rate target range 

in December 

For more than two years, the Federnl Open 

Market Committee (FOMC) has been 

gradually increasing its target range for 

the fedemt funds rate as the labor market 

strengthened and headwinds in the aftermath 

of the recession continued to abate. After 

having raised the target range for the federal 

funds rate twice in the first half of20t7, 

the Committee mised it again in December, 

bringing the target range to I Y. to I Y, percent 

(figure 43}.

10 As on previous occasions, the 

decision to increase the fed ern! funds rate in 

December reflected realized and expected labor 

market conditions and inflation relative to the 

FOMC's objectives. Information available at 

that time indicated that economic activity bad 

been rising at a solid rate and the labor ~rket had continued to strengthen. ln addition. 

although ioftation bad continued to run below 

the FOMC's 2 percent longer-run objective, 

tO. See Boani of Go>~mors of dlel'tdernl Reserve 

Syst<m (20t 7). "F<d<Itll Reserve Issues FOMC 

Statement," press relm<, Deoemb<r 13. https:i/ 

.. "WW.ftderalteserve.govln .. .,evmts/pr=elease;/ 

mon<tai)·20J71213a.btm. 

43. S<iemd iruerest rates 

31 

the COmmittee expected that it would stabilize 

around that target over the medium term. At 

its most recent meeting, which concluded on 

January 31 , the Committee kept the target 

rnnge for the federal funds rate unchanged." 

Monetary policy continues to support 

economic growth 

Even with the grndual increases in the federnl 

funds rnte to date, the Committee judges 

that the staoc.: of monetary policy remains 

accommodati\<e. thereby supporting strong 

labor market conditions and a sustained return 

to 2 percent inflation. The federnl funds rate 

remains somewhat below most estimates of its 

neutral rate-that is. the level of the federal 

funds rnte that is neither expansionary nor 

contractionary. 

In evaluating tbe stance of monetary policy, 

policynm:ers routinely consult prescriptions 

from a variety of policy rules, wbicbcan 

serve as useful benchmarks. However, the 

t I. Set Boani of GOI<mors of th< Federal 

Restrve System (2018), "Fed<rnl R<Setw Issues 

FOMC Statem<nt," p=relea«, Janu31) 31 , https1/ 

..... w.federalres<f\<.gov/newsmntslpressrelease;/ 

monetl!l)'20180131a.btm. 

- s 
100 


30197035.eps

32 fAAll: MO'!TAAY POliCY 

use and mtcrpreution of SIICb prescripuons 

require careful judgments about the chon 

and measurement of the inputs to these 

rules as 11~11 as the implications of the n\lny 

considerations these rules do not take into 

account(~ the box "Monetary Policy Rules 

and Their Role in the Federal Reserve's Policy 

Process"). 

Future changes in the federal fund> rate 

11-ill depend on the economic outlook as 

informed by incoming data 

The Commiuee bas continued to emphasize 

that, in determining the timing and size of 

future adjustments to the target range for 

the federal funds rate, it will assess realized 

and expected economic conditions rebtil~ to 

its objecllllS of tm:timumemployment and 

2 perctntanHatiOn. This assessment "•II take 

into ac:(()unt a \\ide range of information, 

includmg measures of labor market 

conditions, indicators of inOatioo pressures 

and inflation expectations, and readings on 

fi nancial and international developments. 

The FOMC has emphasized that it will 

carefully monitor actual and expected ioDation 

de\·etopments relati\'e to its S}mmetric in Dation 

goal. as mHation bas betn running persistent() 

belollthe 2 perctntlonger-run objectil-e. 

The Comminee expects that the oogoing 

strength in the economY 11illwarrant further 

gradual increases in the federal funds rate, 

and that the federal funds rate will likely 

remain, for some time, below the levels that 

the Committee expects to pRI'aiJ in the 

looger run. Consistent "ith this outlook. 

in the most recto! Summary of Economic 

ProjeciiODS. "bich was (()nlpikd at the time of 

the December FO~iC meeting, the median of 

particip~nts' assessments for the appropriate 

level of the ntidpoint of the target range 

for the federal funds rate at year-end rises 

gradually over the period from 2018 to 2020, 

remaining below t~ median projection for its 

looger-run le\'d through the end of 2019.u 

t l S..lllt D<cembet s-or E'.coocm< 

Plo,....... ~~Jc:b 8J>P"rod as ao &ddmdliDIIO lbt 

The size of the Federal Resen.e's balance 

sheet has begun to decrease 

The Commillee had communicated for some 

time that it intended to reduce the size of 

the Federal Reserve's balance sheet once 

normalization of the lc,·el of t~ federal funds 

rate was well under way. At its meeting in 

SeptembeL tbe F0~1C decided to initiate the 

b3l3nce sb«t n~tion program described 

in the June 2017 Addendum to the 1\>licy 

Xormalization Principles and Plans. This 

program is gradually and prodicubly redocing 

the Federal Reserve's securities holdings by 

decreasing the reinvestment of the principal 

payments it recei1ocs from securities held in the 

System Open Market Account (S0~1A). Since 

Octo~r. such payments haw ~en rein\'eS!ed 

only to the extenttbatthey exc:ttded gr.tdually 

ri:.ing caps (figure 44). 

In the fourth quarter. the Open ~1 arket Desk 

at the Federal Reserre Bank of New York. as directed by the Commiuee, reinvested principal 

payments from the Federal Resem's holdings 

of Treasury securities maturing during each 

calendar month in e:<eess of S6 billion. The 

Desk also rein,-ested in agency mortgage. 

backed securities (\ISS) the amount of 

principal payments from the Federal Resel\-e's 

holdings of agtncy debt and agency ~fBS 

rece~ ed during each calendar month in exc~ 

of S4 billion. Since January, pa)'111ents of 

principal from maturing Treasury securities 

and from the Fedeml Reserve's holdings 

of agency debt and agency MBS bm·e been 

rein,·ested to the extent that they h3\'e exceeded 

Sl2 billion and SS billion. respectil--ely. The 

Commiuee has mdated that the cap for 

Treaswy ~uritics wdl continue to increase 

in steps of S6 billion at three-month intel\-als 

until it reaches S30 btllion per month. and 

that the cap for agency debt and agency MBS 

will continue to increase in steps of S4 billion 

at three-month intervals until it reaches 

S20 billion per m011th. These caps will remain 

in place until the Commiuee judges that the 

Federal Resel\e is holding no more securities 

mm•~<Sc( m< D<amb<r 12· IJ,l017.m<rinl o( Ill< 

FO~!C aodiSp,_t<d m Pan 3orthis,..port. 
101 


30197036.eps

44. Principal jX!ymaus 00 SOMA -riti<S 

. ~ .. a Rtm\'atllXnb 

- M.,illY"P 

- 00 

-~ 

-60 

-ll 

_., 

r+-+ill-+-1-- 30 

MOMTARY POliCY REPORT: FEBRUARY 2018 33 

'''""' .-.. ... • Rem\utmeaiS 

- M .. I~"P 

- Ill 

-70 

-60 

-ll 

_., 

,~llllllll llllllllllllll~ : :UI1 '2918 201.9 

Nort: Rritt\'t'Simtot aod redttqlli.;,otn)()Ct)IJ;(I{ 9teo"Y rnx~pg;Miacktd !leCIIriliesart rr~'tiooutaning ill Jauuary2(!18. The 

data t:Umd t.ltroutb ~anber 10 ~. 

S<mc.: Fed<r~ R-.. BmoiNowYort; Fed<nl R""'' Boardsial!<ai:W.ooOi. 

than n~ssary to implement monetary policy 

efficiently and elfcctively. 

llle initiation of tlte balance sheet 

normaliz.1tioo program was widely anticipated 

and therefore did not elicit a notable reaction 

in financial markets. bseq ent~·. the 

implementation of the program bas proceeded 

smoothly without materially affecting Treasury 

and M llS markets. With the caps having 

been set thus far at relatively low levels. the 

reduction in SOMA securities bas repre.sented 

45. Fed<nl R<s<rvt -~ •nd tiabilnies 

a small fraction of the SOMA securities 

holdings. Consequcotly, the Federal Reserve's 

total assets have declined somewhat to about 

S4.4 trillion, with holdings of Treasury 

securities at approximately S2.4 trillion and 

holdings of agency debt and agency MBS at 

approxin\1tely St .8 trillion (figure 45). 

Interest income on the SOMA portfolio has 

continued to support substantial remittances 

to the U.S. Treasury. Preliminary financial 

statement results indicate that the Federa.l 

-s.t - <.5 -U 

-B -l.t - u -2.0 -15 

-10 

-.s -' -.s 

-u 

- 15 -11 

-25 -l.t -u -4.0 

-<.5 

qS.O 

N01!: "Qcdr. DJ lipirily fao:•lili:l'" coif'.s o! f'liuly. ~. a1 I a:o&!; late caQcQ <ndit ocwaJ bank lipi:y ,....: st4'po:t for 

Mai&tll.a!le, Bet Sm!ls, cod AIG; Dd othtt c:rtdit !acilit.e&, i~ ~ Prinw'y DWet Cm:tit F~~o:iUry, fie. Assd·Ba.ek-o:t ~bl. MDnCY 

Matlr:et Mll!liiJ f\lld J..Qalhy Facility, t.')e Co:rttcrcitl P~c:r P'ltldinc Fad!i:y, e:d !be Tctm Asset &eked So."'lrili« Lam flci~. "'t.bttmaa• h."bb !.IID'XI':IIZ<d ~ t:ld ~on ki."U!'t.io )lcld Olllrigbt. "(Apital DJ «her bllbili!les" itdada: mctK ~ lpctUII'o.i. iho l!.S. T:cul.l)' 

Cioooni-..StloU.S """l'~f"""-a.A......_lbo ......... r:...pfcb.""'YI~lOit 

S<m.a: Fecknl Rac:\'f. BoW. S:llit:.i"-1 Rdwt K.ol 1. "F..:o3A!f'~bJR.acr.-c:8~ .. 
102 


30197037.eps

34 fAAil; IO'i.l~POUCY 

Reserve remined about S801 billion of its 

estim:ued 2017 net income to the Treasury. 

The Fedtral Remve's implementation of 

monetary policy has contin ued smoothly 

In J)ec(mber 2017, 1he Feder:!! Resen~ raised 

the effective federal funds rate by increasing 

I~ intt~lrate JXIid on mme baJ.ux:es along 

Wllh the Interest rate offered on overoight 

m'ti'Se repurchase agreements 0~ RRI's). 

Spe~:ifically. the Federal Reserve increased 

the interest rate JXIid on required and e.~cess 

resem balances to ~ perrenr and the 01\ 

R RP offering rare ro I !4 percenl. In addit.ion, 

the Board of Go\ernors appiUI~ an incrt3Se 

in the discount mre (the SO<alled primary 

credit rate) to 2 pem:n1. Y'relds on a brmd set 

?f money market instruments moved higher 

1n response to the FO~iC's policy action in 

December. The effective federal funds rate rose 

in line 1\itb the increase in the FO\fC's laflel 

ranr,e and generally traded near the middle 

of the IJC\4 laiget moge amid orderly tradmg 

conditions in money markets. Usage of the 

ON RRP facility has declined on net since the 

middle of 2017, reflecting relatively attractive 

}idds on altemati1·e inrestmeots. 

Although the normalization of the monetary 

pohcy stance has proceeded smoothly, the 

Feder:!! Reserve has continued to rest the 

operation:tl readiness of other policy tools as 

part of prudent planning. Two operations of 

the Term l:>tposit Facility were conducted in 

the second half of 20 17; seven-day deposits 

were offered at both operauons 11ith alloating 

rate of I b:lsis point over the interest rate 

on etcess reserves. In addition. tbe Desk conducted Stl"eral small-va.lue mrc:~SeS solely 

for tbe purpose of maintaining operational 

read mess. 
103 


30197038.eps

MOMTARY POliCY REPORT: fEBRUARY 2018 35 

Monetary Policy Rules and Their Role in the Federal Reserve's 

Policy Process 

What are monetary policy rules? 

Monetary policy rules are forroolas 1hat prescribe 

the setting of a policy rate, such as lhe federal funds 

rate, that should pre~~il in relation to lhe values oi a 

small number of other variables-t)'Pic.>lly including 

the gap be vee<>act l and target inflation along with 

an estimate ol resource slack in the econonny. Policy 

rules can provide helpful guidance ior policyn\lkers. 

Indeed, since 2004, prescriptions from policy rules 

ha1~ been part of lhe information regularly reported 

to the federal Opm Market Committee (fOM<:) 

ahead ol ~ meet ng~' However, h>terJ)retation of the 

prescriptions ol policy rules requires carelul judgn-ent 

aboutlhe me3SUrement of lhe inpu~ to lhe rules and 

the ifrlllications of the m.1ny considerations the rules 

do 1101 take into aocount. 

Policy files can incO<po<ate key principles of good 

monetaoy policy. One key principle is that monetaoy 

policy should respond in a predictable way to changes 

in economic cond ti~ h second key principle is 

that monetaoy policy should be aoc.ommodati1-e 1vhm 

inflation is below lhe desired level and emplo)ment 

is befow its maximum sustainable level; conversely, 

mor><-tloy policy should be eslrictil~ when the 

opposite holds. /I third key principle is dla~ to ~abilize 

inflation, the policy rate should be adjUSled by more 

than one-for-ooe In response to persi~ent nt~eases or 

decreases in intlation. 

EoonomiliS ha1~ anal)'led many monetary policy 

rules, including the well known Ta)ior(t993) rule 

as well as ocher rules that will be discussed later: the 

•balanced approach' rule,lhe 'adjusted TaylO< (1993)' 

rule,lhe ' price level' rl.le, and lhe •first difference' 

rule ~g reA).' These policy rules generally errlxxly 

I. Ptc-«<ippioffs frO<nl110f"<Urypolky nAes"eincluded in lhe t!oard !tlffs T,.lbook (previOtllly lhe Blutl>ooll: the precise sec of rules ptesented has<Nnged f1om time to time. 

The "'""rip" ind bnef~ fl\l1tfiab for FOMC n...U~ dl1ough ~011ore .vailableoo !he t!oard's w<bsite" ht•ps:/1 WYI'W.f«<efa.IEesM'e.gQV/'Ill)fleUr)l)l)hC)?fonlC _ h1stori(~l. 

hunln lhe"'ueriats from 1011, lhepolicy n.leptescription< arecontaint'din the \I,Jneta.ryPdic)•SU".ltegi<'sSfrCiionof 

Teal boot B.ll!e briefrng material< lh>t FOMC pol'9ma'-" reviewreg>Aarly olso onclude the Boord ltlffs one 

f<>«<:ossiO<theoconcmyandfllOd<l siorulauonscla10rie<yof alternative smurios in~ended to ptO\;du SMStd the effects of""" plai.ISible ~cpment> !hat .. .,. no< Included in the s:taffsbaselinef<lft'Cast. 

~.The T>yi0<(199J) n.lewas fi•uugges•<lin John 8. Ta)lo< (1993), 'Oiscre<ion '"'"'Policy Rul<'< in Pooic:e,' 

Clmegit-RDdle<fftCoole<ence SOOts oo Pvb5c A>!i:y. 1-oi. 39 JOecennE!}, pp. 19S.114. The bolantfd·;approoch rule was 

an.1ly<ed in John 8. Toylor (t999), 'A H1S10rkol Anol)1is of 

the tlwee key principles of good monetloy policy 

noted earlier. Each rule tokes into a<:count estin131es 

of holv far away the econonny is from achieving lhe 

Fede<al RO$e<\'e·sdual-mandate goals d maximum 

employment and price stability. Specitocall)', most ol 

the rules include the difference between the rate of 

unefrllloyment that is sustainable in the longer run (<r') 

and the rurrent une...,loyment rate (the UnffTilloymmt 

gap); the fir~ daference rule includes the change in the 

une...,loyment gap rather than i~ le>ol.' In addition, 

r1105t of the rules include the difference between 

inflation and its longcr·run objecti••e (2 ~t as 

mea.!Ured by the annual change in the price inda 

for personal consumption expenditurES (I'Cf), in the 

case r:J lhe federal Reser.~). while lhe price-le•ol rule 

includes the gap bellveen the le\'01 ol prices toc!Jy 

and the l"'el of prices that would be obselved II 

inflation had been constant at2 percent from a 

specit.OO starting year. 

lhc layl01 (1993), oolanced·3JlllrOOCh, adjusted 

Taylor (1993), and price-le•ol rules pr<Wide 

prescriptions for the level ol the fedml funds rate and 

require an estin13te of the neutral real interest rate in 

the longer run (r"}-that ~ the level d the real federal 

(coot.Ulued oo n<JCI I"&• I 

Mon"''l' l'olicyiM"'; in Jofrn B. Ta)lot ed. Monf<J'}' Po.'it:y Rules (Chicogo: Uni,.,sityof 0\icago Pre!$), pp.l19-41. The adjusledT•ylor (t99Jl rulewa<lll<lied in Oa1id Reifschneider andJofrnC. 1\'illiams(lOOO), 'llrreel"""'sforMo•,...ry Policy in a Low.Jnllauoo Er~ Jooma/ of A~ Cttdi,.OO 

8>/lking. 101. 32 (NOl..mer), pp. 9~ A price-1"-.1 rule >n~d"'=uSiedinRdJen E. HolllJ!;S-1), 'MoneoryS...Ieg}' 

• ill> an Ebstic Ptke Sond.ud,' in hice Subiliry and PIJI;/ic 

Policy, ptcc«d ~ d a sy"1'0'iumspoMOred by lhe R!deral ""'~ 8011k ofK.nsos Chy, held inJacl:son Hole, W1o. A'4!'J~ 2-3 (}(ansuCny: ft<ltr•l Res<n~ Bani< d K"""' City). pp.IJ7-59, ""'tw.w k>n!OSCit}'fed.~ptblicaV 

S)"1""-''9$1~j>Cf. Anally. the fiot~if .,_ru e was introduced by Athwsios Orpl>onides UOOl), 'Hiooric•l /l~"'ry PolqAnalysisand lhe T>jior Rule,' /outm/ ofMm&'}'kcncmil:$,1oi.SOQul)l,pp.!l.!3-10ll.A con-prehensNt review d policy rules is in John 8. la)lo< and John C. 1\'llliams (2011), 'Silr9ie and Rooi.ISt Rul<s fo. Monwry Polq.• in BMj~nin 1\l Friednurund Michael 

WoodiO<d, eds, H~~ d Monetlty(<""""i<s, 101.38 (Amsterdant Nooh·Hollandi, pp. 819-59. The""" 1olu111e oftheHlJldbool. dMoneury(conMli;$ alsodis<usses opprooche>o<her th.ln policy n.l<'< for c~<m;ngp<il<cy rate pr<'SCiip<ions. 

3. The Taylo. (1993) rule r'Jlresenled slack in resource ub1izal)on usif1 O~UlgJp (the diff£fera bEtwet>n the 

currentlc..-.1 d "" gr"" do""'"' prowct (COP) and • hat GOP would bt if th! KMOn"')' was cper.tlif! at ma.lif'l'llm tfl1)1o,menO. The rules in fi,&l.lreA ~esent$1ad. in resource 

UDiiulioo IISing lhe lffllllloyrrentgap insiead. bEcause !hal g;pbeltil capcures thefO.\IC's SGIIlory go>! toP""""" m.u:inJJm envloyment. M0\1.'ti~S ~ ahernJth>e 
104 


30197039.eps

36 PAAll: M::>N!TAAY POLICY 

Monetary Policy Rules and Their Role (conlinvedJ 

A. Monetary policy rules 

Taylor(I99J) ruk 

&lanced-approocb rule 

Taylor (1993) rule, adjlstcd R;-""'1 =maximum (Rf"- Z1.0) 

Prict-levelrule Rr' = maximum (r.'" + "' + (U."' - uJ + O.S(PLgap,),O) 

Filst-dift'<rence rule 

NorE: Rf", Rf'.il;""1• Rr'.and R[D r<presan theval~ofthenominalfederal funds rate prescribed by 

the Taylor {1993), balanned-appt()Qch, adjUited Taylor {1993), prict 1.-~L and 6nt-dift'erence rui<S, ,..'])«ti\•ely. 

R, denot<S the acroalnominal federal fund! rate for quaner 1, •• is four.quaner prioe inflation forquaner 1, 

u1 is the unemplo)ment rate in quarter r, and rt' is the kvd of the neutral rral fcderalfunds rate in the longer 

nm that. on awrage, is expected to be consistent Viith sustaining maximum employmen1 and inftalion at its 

2 perc.nt long<r·tun obj«tive, ""'· In addibon, u."' is the rate of unemployment in the longer run. z, is the curnulati,·e sum of past de'iations ofthe federal funds rate from the prescriptions of the Taylor (1993) rule~nen 

th<U rule prescn'b<sseuing the federal funds rat< below:r<ro. PLgapr is the perc.nt d.,;ation oftheacruall<'d 

of prioes from a price le-.1 that rises 2 peroent per )<ar from i~ 0\~l in a speciJied starting period 

The Taylor(1993) rule and other poticy rules are generally written in tetmS ofthede-iation ofrral output 

fran i1sfull capacity leveL In these equations, the output !iiP has been replao:d wilh ute gap beiWCen the rate of 

unemplo)ment in the longer run and its actual level (using a relationship known as Okun 'slaw) in ordtrto 

represent the rules in ~<rms ofth< FOMC's statutory goo~. Histo.rically, mOI'ements in the output and 

unemplo)ment gapS have been highlyoorrdated. Footnote 2 prO\ides rtferenoes for the policy rules. 

funds ralf that is cxp«:ted to becoroistent in the Ionge< 

run with sust>ined maximum emplorment and stlble 

infblion.' In contras~ the first.cJifference rule prescribes 

how the le\'el oi the federal funds rate at a gi,..., time 

sllould be altered from its pre\'ious le\'cl-tllat is. it 

indicates how the existing rate sllould be itl(re;~sed 0< 

dccre.Jsed in a pMicular fl"'iod. 

The adjusted Ta)iOr (1993) rule recognizes tlttt 

the federal funds rate cannot be reduced materially 

bElow zero, and that following the prescriptiOn$ <i 

the Tarlor (t99l) rule after a period 11ilen Interest 

rates ha,~ ~constrained may no1 provide enougn 

policy acconmxlation. To make up for the cumulati'-e 

sllordall in accommodation (Z), the adjusted rule 

prescribes only a gradwl retum of the policy rate to 

the (pooiti,..,) le\'els prescribed by the unadjusted Ta)'lor 

(1993) rule as the~ reoo\'e!S. 

me~ es oi tE$0Uiteublitation are highly coneb1ec:l For rrore infor!NtiOI\ see !he note below 1tg\ue A. 

4. oylor~)l't Nles-lncluding John TO)io(s origi"'l ru ~ha\'t' dten been esDmated assunlng !hal the \';llue of 

dlf new,ll reJI intf(estU~Iein dle longer r~ P, is equa1110 

2 pete..._ •~icb roogtly C<ltresponds to the """80 hist<ltic>l 

v.tlutofthe real ieder.al runck r.at~bebe d~e financial crisis. 

In four of the rules, the interesl rate responds to 

de\'iations of inOation from Its longer-run value of 

2 percent; in the price- e~d rule, h01ve\<r,the interest 

rate responds to lhe price.!.-.. gap (PLgap). This 

gap measures OO.v far the price 1<!\-el is from where it 

would ha'-e been had it been lnc<easingat 2 percen1 

each year' The price-level rule thereby takes account 

ol des•latiOO$ <i lnOation from the longe<-run objective 

in earlier periods as well in the current period. Thus, 

if Inflation ltts been running fl"'~Slent y abo1-ethe 

central bank's objecti''f, the price-les•el rule would 

prescribe a ~ policy Interest rate than rules that use 

the current inflation gap. likewise, if inOation as~ 

running pet1i~ently below the central bank's objective, 

a price-le\'el rule would prescribe setting the policy 

rate lower than rules that use the current in03tion gap. 

The purpose oi this dependence on previous inflation 

S. EstiiNti«l<:ldv!price~ rulerequiressel«ringa 

"'""ll ) .. r r.r the price~Ml from•hidliO ct•nwte the 1 pet'COOt annwl inOatioo. Fonhe U.S. economy, 1998 is used 

"the .. rting r••r. •roond IN tome, theunder ~'l!"""" 

of inllob<l<l •nd long«·lfml inf4tiorl expecutions srabaized at a 1{>\'fl co~is!Mt 'Ailh PCE price infblion bei" dose 10 

lpettent 
105 


30197040.eps

bEhavior is to bring the price level back into line ~>ith 

where it would be if it had been running a! acons:IJnl 

2 J)E<Cerlt per )'E'ar. Like the adjustedTayiO< (1993) 

rule, the pric.e-le1'E'I rule recognizes !hat the federal 

funds rate cannoc be reduced rroterially below zero. 

If intlatioo runs bela.v the 2 percent objective during 

periods when the rule prescribes setting the federal 

funds rate well below zero, the price-level rule will 

make up for pa~ inflation shortfalls as theeconO<ny 

recO\•ers. 

The adju~ed TayiO< (1993) and price-le--d rules 

may prescribe rro<e awropriate policy settings than 

the other rules following a period •oAlen the policy rate 

ialls below zero. H011""er, all ol the rules shown are 

highly simplified and do not apture the sub$tanUal 

oomplexity of the U.S. economy. furthermore, both 

the level ol the neutral real interesl rate in the longer 

run and lhe le-~1 of the unemployment rate that is 

sustainable in the longer run are diffocult to eslim3te 

precisely, and eslimates made in real tinJe may differ 

subslantblly from esijmates made later on, after 

the relmnt econorrk dala ha1'0 been revised and 

additional dala ha1~ become available.' for example, 

since 2000, responden~ lo lhe Blue Ctip sun'ey have 

markedly reduced their projections of the longer· run 

level of the real short~erm inleresl rale (figure B). 

ur~'ll)' respondents ha1~ also made considerable 

changes Ol'et time to their eslimates of the rate of 

unemployment in the longer run, wilh con>6juences 

fO< the unernpiO)moot gap. Revisions of this magnitude 

to the oeu11al reJI interesl rate and the rate of 

unemployment in the longer run can ha1~ imporl<lnt 

implicalions for the federal funds rnle prescribed by 

monel<lry policy rules. Policy rules must be adjusted to 

take into account these changes in the projected values 

of onger~run rates as lhey occur O\'ef time. 

Accounting for risks to the economic 

outlook 

Monetary policy rules do noc l>ke account of 

brooder risk considerations. In tlle rears following the 

fmancial crisis, with the federal funds rate still close 

to zero, the H)MC has rec~ zed that it11oold have 

limited scope to respond to an uoexpecled weakening 

6. Thefirst<liiforencenAuhown in f'll•reA reduces the 

need for good""'"""" oll""l'"·run ""s b«a.,. it 00.. nol ~irt an estl~mlfof d~ nMJal rNJ lntereS.t me 1n lht 

~ 1\11. How('\'ef,lhis rule hal il.i ov. nsi'M::ttorrings. Foe <1Q"l'le, researdl sugge• that this sortol nAewill r...,ltin 

gc~wr \()latility in tcrploymHt ard ini'blion K'bli~ lO 'A 'hal ""'ldboci>oined unclor illeTa)io<(l99l) and balanced· approach rules unless the estmu~eJ cl the new .tl re1l federal 

funds""' in thel""l'" run and the ,.,.o( 000f1'\110f"""t in die long« n11 are $tJ(fic:iendy fa1 from their true ,arues. 

MOMTARYI'OliCYREPORT: fE8RUARY2018 37 

B. Re>l·time eslimates oft!:< DCu•ol re:l! interest nit 3lld tl:< Wl<lllploym<nlntc in illc looger run 

12-

10-

11-

16-

~·­ ~~-

lOuuuu - t0 -

8-

- $ .. 

- 16 

-l• 

-1.2 

-!& 

- .u _,. E.G~IUIUifkt}'llall. 

o:u:!htbip::~ 

, _ - I I I I I I II II II I II I II II I 

2001 'Z(C)l 'ms 1e07 2009 2011 lOU lOIS 20H 

Nott: Tbtc!.oab.a::&ala::.d.~~tt£ttpOIUi~)'ltk1~y 

.... m lbtC$I.:t:llitdlltG:dmlm~t:temr cibti:qffn:a tQWklht 

th!M-~!h TfHSUYbll :m p:o;t(':td o lilt lcq tat&&it'C! b'f~ 

=5WJI'rte6a:alll~mlbt rnc&tlo:ps~ 

S0W:S: Wotm taraw. Skit O:IP 6:01101X ~ 

In the economy by lowering short·term interest rates. 

This asrn1me~ic rio!< h.>s, in recent )'Cars, pro•ided a 

sound rationale fO< following a more gradual poth of 

rate increases than that p<escribed by peAky rules' In 

these circumslanct'S, increasing the policy rate quiddy 

In~ lo h.>•·e room to cui rates during an econonic 

downtum could be counterproductive because it would 

make the dOIYntum more likely to h•A>OO· 

Uti mates of the neulral re.1l interest rate In the 

longer run (such as those in figure 8), taken logether 

with the fOMC's inflation objedi•e c4 2 J)E<CenL 

suggest lhat the neutralle,'el of the federal funds rate 

~1at can be expE<:led to prt!lllil in the longer run is 

u....,~y around 3 percent, 11-dl below the aVEJage 

federal funds rate of 6 percent from 1960 to 2007. 

With the oeutrol federal funds rate so low, there is 

a likelihood that the policy interest rate will hit its 

lower limit oi zero rrore frequently than in the past 

Hi~orically,the fOMC has culthe federal funds rate 

by 5 percentlge points, on a.mge, during downtums 

in the econom)'-Cutting the policy rate by this rruch 

starting from a neul!alle~'el c4 3 percent woold nol be 

feasible. Under these drcurn<lanct'S, the ptescripeions 

from many policy rules would lead 1o poo< ec:onorric 

per!O<mance, with Inflation averaging below the 

(conlinued on ne.t ~ge) 

7. Asyrrrnooic risi: need not af~ats pro\'ide ~ tatiocult IO<' m>regr.dwl poth; if the nsl< •er•"""'B'Y bllt'd 

t'""ol wbsuMi•l•nd perso...,OI.,lwting and wo-tigh intlatiOO. the asymnv:uic risk coold .1rgurt Ki higtwf rates INn 

presaibod by on1'1• rul ... 
106 


30197041.eps

38 PAAll: M::>N!TAAY POLICY 

Monetary Policy Rules and Their Role (cMmuedJ 

C<>mmttee~ 2 percent cbjocti•e.• Rules that tty to olfSI!l 

therumulati1'0shortlall of accommodaijon posed by 

the ze<o bound on inte<est rates, such as the adjusted 

Taylor(t99l) rule, or nukeup thecumulati1'0 shortlall 

in the 1 ..... 1 of prices, such as U1e price le.el rule, a<e 

intended to help achie\-e average innation at or net~r 

2pe«:<ntcwer time.' 

Different monetaty policy rules oltm offer quite 

different prescripoons for the federal funds rate, and 

there is no unambiguous metric for fa\'Oring one rule 

<!I'Cr another. While moneta')' policy rules often agree 

about the direction (up or down) in which poliC)makers 

should m<!le the federal funds rate, they frequendy 

disagree about the appropriatele;~l ci that rate. 

HiSIOrical prescriptions from policy rules differ from 

one another and al«> dif!Cf from the Comminee's targ<i 

fe< the federal funds rate, as sh<!lvn in figure C. (These 

prescriptions are calculated using both the actual data 

3. for fll1her disct6sioo ol th<se ;,...,, !<'t Micflar.H. 

Kilty and )clln M. Rd>Ms 110t7), 'Mon&l)' Pel icy in a lew 

l""'estR. .. Wodd; 8rooi.ilgs Pilp<N"" f(f)llOmic:Aao·ly, Sprire pp.l17·71, l'orpsi • .,wwbrool.ings.«<u'"l><or<ooV tl'loads/2017.1l&l.iiE!)IDtif1171ifl<.>jldl. 9. (conom51ShaV(' (ou00 1hata m.1~polkyan 

~~~~ =ti~~=;~:«N~~;~, 'M<>neUry Policy in a New Era,' papE< presentod at 

RI<h nM~ Macr~c ~· a corkrence held atohe P'ttec$0n ~ituteb lntemJ.tional Econonia, W.-.shing~on. 

0<1obtr 12· 13. h'1>S'i,.....wbrool;ngs.<'du\,p<anrcMI 'l'loads/2017/lObe<nanl.e ""•m~moc o.r.no jldt 

ard MicNelll'oodford (19991 'Commeoory: How Should Moneo.uy Polley BeCondtK'Ierltn an Ero ol Price Stabilnyr 

and the estimates of the neullal real interest rate in 

the longer run and oi the r.~te ol ~oyment in the 

longer rurl-datl and estimates that werea,-ailable to 

fOivtC policyrrokers at the dme.) Moreo\'ef, the rules 

sorrEtimes prescribe Sl!lting shO<t·term interlOI rates 

well be!<!lv z~ setting that is not feasible. With 

the excep«ion of the adjusted Taylor (199l) and pric., 

level rules, which impose a lower limit ol zero, all ol 

the rules sh<!IYn in figure C called fOf the federal funds 

rate to tum negative in 2009 ~ncl to stay below zero 

for several years thereaflel. Thus. these rules indicated 

that the federal Resen~ should pr"'ide more monetaty 

stifllJius than could be achieved by setting the federal 

funds rate al zero. Almost all of the policy rules have 

called for ri!ing values ol the federal funds rate in 

recent )IM, but the pace of tightering that the n.les 

prescribe has varied widely. Prescriptions from these 

rules fe< the lt'l-el of the federal funds rate in the foorth 

quarter of 2017 ranged from 0 basis points (price.le,-eJ 

rule) 10 l.O percent (balanced· approach rule)." 

in Ntw Chai.'M8« lot MM«>ry POOcy. proc<fdi~s ol a syfll)OSium 'P<'f!SOied bv lhe Fedenll R~\'e BankofK.ns<ts Cioy, held in ladson Hole, W)'O., Augt6t l6-l8 (1(.,... 

Ciry: r.detal R""'"'BankofK>nsasCil)'),pp.m-lt6, hti>S1iwl1w.bnsascit)ied.or&~ublicatiom'research'escpl 

syrrposiums'escp·l999. 10. As nol<d earlier; ohepric .. ~ev<~ rule ll\ll.es 'I' r., rt.. cunwiJtnoe shorWO in the ptict lc<\'{'1 when iN'lation runs 

below 2 percenL 8ec>t6(' inflarion Jw b ... below 2 i"'C"" in recent yt-JIS, the price-IE!\'el n-'tCfllls for !he fedetal funds ntttorerNinalzero. 

C. t£S!Orical fedml iilnd! r•" p...ttptioas from .:..Pie policy rules 

""" 

lOOt ll»l 2007 II lOIS 2011 

NoTi: Thftultst~~t!HI-Iimt~v-.ot~~(f'dml~:n.lll!tbel:t::p!Ofme!!tta.lnlbilci&~tdubl'oa:.quanrr~l!fll 

d:r.~ ett!':t~ecdt.x &>r~i10(~~ apm:!ibl tl~looda:xl t:~cq,r. Qa.~tlrP"..-1ia:.sol~<e<rJbt ~~~'er f«<tnn ta11ktU 

cd~~aucec!criYtdllrorcb~llboclofbtiM.:.IIrr~eo=Bb~~~ lltkq_-n::nktford.aOOcis fiu!tts2 ptltft!t.T.br~''».!toltbe,r:bW detJ\'t:f9~'t t.fp:i:tcdo:IO!:pmoe-Ata~qricct'l~txtl:qi»d~er.;ryll 

ljl9$,ntnpoh:tdn2pet;C'l!t('lt'rytsl So.ta:: Fllkrallt.t.urYtBckolrtlla&lrt-;WokmKIIIW'If,BbCbip&.•(oXIIkb!ian:n;FcQmlltscr.·c&cdcall'~ 
107 


30197042.eps

39 

PART 3 

SuMMARY oF EcoNOMIC PROJECTIONS 

The following material appeared as an addendum to the minutes of the Docember 12-13, 2017, 

meeting of the Federal Open Market Committee. 

In conjunction with the Federal Open 

Market Commiuee (FOMC) meeting held on 

December 12- 13, 2017. meeting participants 

submilled their projections of the most likely 

outcomes for real gross domestic product 

(GOP) gro111b, the unemployment rate. and 

inOation for each year from 2017 to 2020 

and 01<er the longer runu Each participant's 

projection was based on information available 

at the time of the meeting. together with ttis 

or her assessmem of appropriate 010netary 

policy- including a path for the federal 

funds rate and its longer-run value-and 

assumptions about other f.1ctors likely to 

alfect economic outcomes. The longer-run 

projections represent each participant's 

assessment of the value to which each variable 

would be expectc<l 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 for 

economic activity and inOation that best 

satisfy his or her individual interpretation of 

the statutory mandate to promote maximum 

employment and price stability. 

All panicipants who sub milled longer-run 

projections expectc<lthat. under appropriate 

tl Fcormembersoflhe BoaroofGovemors•~r< 

in offie<aubelim< of the Dt<anb<r 2017 meelin~olh< 

sam< n1llllb<ras in Septemb<r 2017. Hoo-<vtr. sin« 

lhe Scptcmb<r meeting, one member, S1anley Fis<b~:~; 

r<Siped from tb< Boaro and anolh<r, Randal K. Quarles. 

joined. The incoming presidtnt of the Federol ResctVe 

Bant of Richmond is sdleduled co a.<s1lllle offiee on 

January I, 2018; Firsc Viet President Mart 1.. Mullinix 

sobmined e<onomic projections at lhisme<ling as be did 

in S.ptcmb<r. 

t4. One panicipont did not submic longer-run 

projections for ml output gll7NCh, the unemplo)m<nt 

r.ue. or lhe federal funds rate. 

010netary policy. growth in real GOP in 

2018 would be somewhat stronger than their 

individual estimales of its longer-run rate. 

All participants projected that real GOP 

gro111h II'Ould moderate in 2019, and nearly 

all predictc<lthat it would ease further in 

2020; a solid majority of participants thought 

that growth in real GOP would be at or 

close to their individual estimates of the 

economy's longer-run growth rate by 2020. 

All participants who submiuc<l longer-run 

projections expected that the unemployment 

rate would run below their estimates of 

its longer-non normal level through 2020. 

Participants generally projected that inflation, 

as measurc<l by the four-quarter percentage 

change in the price index for personal 

consumption expenditures (PCE), would 

step up toward the COmmittee's 2 percent 

objective in 2018 and be at or dose to that 

objective by2019. Most partici)>ants indicated 

that prospective changes in fc<leral tax policy 

were a factor that led them to boost their 

projecJions of real GOP growth over the next 

couple of years; some participants. however. 

notc<l thatthey bad already incorporated at 

least some elfects of future tax cuts iu their 

September projections. Several also noted the 

possibilily that changes to tax policy could 

raise tbe level of potential GOP in the longer 

run." Table I and figure I pro11desunm~a y 

atistic~ for the projections. 

As shown in figure 2. participants generally 

expected that the evolution of the economy 

relative to their objectives of maximum 

employment and 2 peocent ioDation would 

t5. Participontsocmpteted cbeirsubmissioos for 

the Summary of Economic Projections b<fore the 

recoo<iliatiooofthe HoUS<and Senatecu Mlsin the 

Congress. 
108 


30197043.eps

40 PARI 3: SUM.\1>\RY Of £CO~OM C I'RO!£CTIONS 

Table I. Economic projections of F«<erol R"""'' Bootd members and F«<eral Resen• Bank presidents, under !heir 

mdividual assesoneniS of projeco«<appropriaoe moneoary poticy, December 2017 

r..... 

~17 I ;>liS I ;>)19 I ~)!) ~:!" lOll I ~II I ~" Ill))) It:!" Cba~~tt in tafG-DP 

Scptr.bto,projectioa 

1.S lJ 2.1 2.(1 f u 1.4 2..1 1e u ; u 

4J l9 3.9 4.0 i 4..6 

l"'-lJ U..U 1.9..1) I 7-l.O i IJ.IJ 1C.l6 2.2--2.8 1.7-14 1.1-2.2 j U..U 

2.:t.-2J. l_h.,Jj L7..J.I 1.'-'l.O jl.J...l.O 2.2 .. 2.1 u .. H ~. ... u 1..._.1t jl.)...2.1 

UatmrW;10dllra. 

~k projlcCJoa 

PC'Eiabioo 

$tpnbt1 pro~tioa 

~l •J •.• u I •. , ' ' 1.9 2.0 2.0' 2..0 

1..61.9l&l011h 

4J l.l-4.0 l~ H-4.1 1~4--4.7 4.1 l~.O l.l-41 l.l-l.l i4J-M 

<J-U <.0-4.2 l.t-4< <.o-4.lj<J-<.s u.u l.9-4.l l-*-'.S Ji-<!j•-•-s.o 

U·~U 1.1.1..9 l.G lO.J,I i U IJ..1.7 l.i..JJ I.S...U U~l-l i 10 

IJ...U 1.$..2.1) l.G :t&-2.1 I 10 I.S~IJ 1.1 ~2.(1 1.$..2.2 l.t-1.21 2.0 

CottPCBiflftllft' 

~krpro~~ 

u 1.9 w ~o I tS IJ-1..9 l.l) Ul-lJ ! 1.4-1.5 IJ-1.0 IS--lJ U-23 ! 

t5-l" U-l.O 1.9 lO-J.d 1.4-1.7 IJ-l.O ~U 1.9-Hi 

Mm~o:P~ 

appropialrpola:y~b 

1.5 1.9 l.& 2.0 

I i ~ftttdt :ut 

Sqln:krproj«ioo 

1.4 1J lJ 

lA lJ lJ 

!.i lu 

19 i u •.• l.t-14 l4-3J 

l.I-JA U-H 2.4-JJ 

IJ-U IJ-2.6 

U-L6 U-U 

1.4--3.6 1.4-4.1 13-.lO IJ-14 IJ-19 ! ll-lJ 

No:a:~•ot<b&II IINI~~~«(G1>P)LI4poo~fork6ot~~~:wofll.&it1011t.,;oacat~trlma.'""~tw1Uoft~~,utto 

lki>.,~qJattcto!~JUt•tno.! PaWat»Ju4«~nPa!ldtO*utlkpct:c;11f!~~~~~f<blflla.:t~IM~.otsbrpcti(IUI~capcW:ltu 

(i"CEJ..-J .. p:kllcdo.I.XPCEutW-akotfuftOI:D-~IIWbW•~rrutM~;:~:l:otlbt~(fl",l&aua~lorl:niM•tl'b.lh•wtcrof!k)'nf 

ll»!lcttt.l E.ct;ownFGI'•~ .. "kM<dlr«kuu~amrttoft;F«-;fll.'ll: m:otiUJpolq 1o•:.ne~.et~"P"Iutadl~fn:..:mee~ot6tnlt 

llf~tdftli.t~-l!bt cqoc(!JdiO<QI:I'Ctjll•idu•~7f'OfOl.'tlmU~IJ~~-·hs.Ut:r:.dl'v~rrlt.xb~olbtto:r..q. nt~brlbtfWe!tlf'ml 

tt:tl.lt!k-.oftk-po~UOfl1~llf'.II'O(..t~ltltUII''"*Ifb!klt4tni.Jtan~torltrJ~(It4~ll:et.I'IClJndl)rl1cft4tltlhltbtl!Ct.;lt.cQdtftM 

tpec6rdOtlt:l4lfJUIOIO"V!ltt!Qcj'l!ta 1\c~~~~~~ il«eq~tl(b)ldl}.e.lfi:~!D,o!tt:fFt'.t!&l0pu~u\¢Coc:aill.tcoa$t;«mbetlMI, 

20U¢11,~4ttJOt•~-~)CIO~brtbl:~ltltmiGDP,I)c~IIU11h.Ofdlt~e:'allU41~1tiU014' ... '11\1,1)1St~llJ..& 

l<ltl,OClilll"Cott~p&at44~te~n"-iilit4~je(WIU1t~.clcrl-.i.fttt\«rrhttll-IJ,10t1,11ifC".;Jif, 

I. &Pd~~ik-.tlaalllk.U:.~t ... l*~"runup4hco~I.IO!libii.\\1.Qik•rrkot~ulwu,lh_.. •• h,,'lfi1J 

ofltlttwO!dt~Hll~• 

L TM een"1111t!tr.Judl4u !b 11~ ~lui udtlm biiUI}~jf(!~ou~ult ~~lull& ,ru. 

J l'wtattitbii'MlNI•t$1UJ'CM•dl4cftl!;uu.-...u'~s,!~ttalowea10llik!.l:otlbt~e6u.,ut 

• l..oaifU•I'41~ectU.bt<O"PC!id~mXI!oollede;i 

likely warrant further gradual increases in 

the federal funds rnle. Compared with the 

projections they submiued in September, 

some panicipants raised their federal funds 

rate projections for 2018 and 2019, while 

several other.; lowered !heir projections, leaving 

the median projection for the federal funds 

rate in those years unchanged; the median 

projection for 2020 was slighlly higher, and the 

median projection for the longer-run normal 

level of the federal funds rate was unchanged. 

Nearly all panicipants saw it as likely to he 

appropriate for the federal fu nds rate to rise 

above their estimates of its longer-run normal 

lm l at some point during the forecast period. 

Participants generally noted several sources 

of uncertainty about the future course of 

the federal funds rnte, including the. details 

of potential chang,es in tax policy, bow !hose 

changes would aft'ectthe economy, and the 

range of factors influencing inflation o•~ r the 

medium term. 

In general. panicipants '~ewed the uncertainty 

attached to their economic projections 

as broadly similar to the avernge of the 

past20 years, and all participanls saw !he 

uncertainty associated with their projections 

for real GDP gro\\1h, the unemployment rnte, 

and inflation as essentially unchanged from 

September. As in September, most participants 

judged the risks around their projections for 

economic groMh, the unemployment rate, and 

inflation as broadly balanced. 

The Outlook for Economic Activity 

The median of participants' projections for the 

gro\\1h rate of real GDP for2018, conditional 

on their individual assessments of appropriate 

monetary policy, was 2.5 percent, the same 

as for2017. The median projections forGDP 

growth in2019 and 2020 were slightly lower, 

at 2.1 and 2.0 pen:ent, respoctively. Compared 

\\~ lh the Summary of Economic Projections 

(SEP) from Sep embe~ !he median of !he 

projections for real GDP growth for2018 

was nombly higher, while the medians for real 

GDP growt h for 2019 and 2020 were modestly 

higher. The median of projections for the 
109 


30197044.eps

MOMTARY POliCY REPORT: FE8RUAAV 2018 41 

Fi&•« I. M<dians, ,...,,ral 1rndcncics. and ranges of «<nomie pJO#lions. 2017-lfJ and "'" lh< loog<r nm 

"'""'' 

Q,.r;emreaiODP 

- Mtdian ot projtd;.. 

Q (d.hlerldt..:yor pojecdOM 

~ofprojK'{iou 

/"'--- iiiiii m 

~ 

,- -l ...... 

-~ _, 

1(112 ::!Ill W14 Wll 2()16 1(111 1()1S :!019 2010 L<'nt« 

nm 

"'""'' 

l.foen>plo)mtnlrale 

-8 

~ _ , 

_, 

--,-

~ c::J ffi --. ::!Ill Wll ))14 :!IllS 11116 ll11 :!IllS lll9 :!Ill! Lont« 

nm 

"'""' PCEinllalion 

- J 

.....- :c iiiiii - - l 

~ ~ I:CI 

- ' 

:Wll :Wil :!014 :!IllS 11116 lOll :IllS lilt lOll Lont« 

nm 

"'""' C«t PCEmllaUOD 

-l 

.- ,-

i:i:J ::c = ~ 

- l 

= - I 

llll2 ::!Ill 1(114 lOll 2()16 Wl7 "-'liS 2019 2010 LOUl'f 

nm 

Non: D<limd""'of ,.,_and olh<1<tpl,.aliooomio lbeool<S m l>blo l. Tbedala for lbe a<tull vol"" of lht nriabla 

artatti!Ulll. 
110 


30197045.eps

4] PAA13: SUM.w.RV Of ECO MIC I'RO!ECliONS 

Figure2. FOMC pani<ipQols'assessmeoiSofappropria~tmooclarypO!icy: ~lldpOinlofflllltl ~ange rlllrgct le--d 

for lhe fod<ral funds"" 

----------------------------------------~----------- lO 

·· ~··· ·· ··· ··· ·· ·· ··-

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-

__________________________ ····································································································································- _:• ________ .,:.- ... ~- ----+---- l.O 

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-----------------"'------------------------~' ----------- u .................. ~ .... 

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-'''''''''''''''"' " '''''''''''''"' ''''''"'"'''''''''''''" ''''''''''''"' " ''' '"' '''''''''"''''''' " ' 1''''''"''''"''''''"'''' - t)j 

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' ---------------------------------------T---------- 00 

20t7 loDt"flUtl 

Non: b s.hJded arde itldicates I he \'llut (rounded to 1ht neamt IJ8 pt:t'OO!lJIIt pouu) of an iOOnidtL'd partkipant's 

JU<ll!lll"'l c{ llle nudpoinloflh..,ppropnate ~' rnnte for llle Ceclefallilnds ra1<or lbe approPlatelartell"-.1 for lbe fodetat fut1dJ ratt ai lhett~d l)rtbes[»:lfiedcal~dllr year « orer lhf.ltJDtff run. Oft~ pa.tticipant did oo1 sulrnii h)oger-run JM' )OGS 

for Lilt redml run& ntt. 

longer-run normal rnte of real GDP gr<m1h 

remained at 1.8 percent. Most participants 

pointed to changes in tax policy as likely 

to provide some boost to real GDP gro111h 

om the forecast period; in Septembe~ fewer 

than half of the participants incorporated 

prospective tax policy changes in their 

projections. Severn! participants indicated 

that they had marked up their estimates of 

tbe magnitude of tax cuts, relative to their 

assumptions in September. 

ne medians of projections for the 

unemployment rate in the fourth quarter 

of both 2018 and 2019were 3.9 percent. 

0.2 percentage point below the medians from 

September and about % percentage point 

below the median assessment of its longerrun normal level. The me-dian projection for 

the unemployment rate ticked up slightly to 

4.0 percent in 2020. 

Figures 3.A and 3.B show the distributions of 

participants' projections for real GDP growth 

and the unemployment rate from 2017 to 2020 

and in the longer run. Tlle distribution of 

individual projections for real GDP growth 

for2018shifted up, with more tbao half of 

the panicipants now e~pocti g real GDP 

growth of2.5 perctnt or more and none 

seeing it below2.2 perc-ent. Tbe distribution 

of projected real GDP growth in 2019 and 

2020 also shifted up. albeit only slightly. The 

distribution for the longer-run normal mte 

of GDP growth was little ohanged from 

September. 111e distributions of individual 

projections for the unemployment rate in 

2018 and 2019sbifted down relative to those 
111 


30197046.eps

MOMTARY POliCY REPORT: FE8RUAAV 2018 43 

Figart JA Oisuibutioo of pani<ipanls' projtaioo:s for lhecbange in real GOP, :ID17-20 and OV<r the loogcr n1n 

r 

r 

r 

r 

lOll 0 ~krproi«'C"* •• ~kllbnpr~I»>On 

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-II 

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112 


30197047.eps

44 PAA1 3: SUM.w.RV Of ECO~OM C I'RO!ECliONS 

Figort J.B. Oisuibouoo of perticipan~· projections for lhe on<mploymcol """ 2017- 20 and o,·er lhe looger run 

-IS 

~c--~.~~--~,.7--~7,----,~,-.~

u

~ •• ou 

r--L .. j7.~ .~.- ~.~,----~ .. ~---~,7 •. --~ ~~ 

c 

c 

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))ert(DtJIIDgt 

20!8 

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2019 

U - U 

. r:Jr-- ,__- -1.--, J,t- J4- U - tl - H - .U- H - JS l.1 !t AI 0 4.5 H 

Ptretll-lfati:F;t 

... ., 

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-II 

- II - 14 - 12 -10 

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113 


30197048.eps

an Scptembet broadly consistent 111th the 

changes 1n the distnl>utions for re:!l 

GOP growth. 

The Outlook for Inflation 

The median of projections for headline 

PCE price inflation was 1.9 pe~ttn t1 n 2018 

and 2 perctot in 2019 and 2020, the same 

as in the September SEP. Most p3nicipants 

anticip3ted that inftatioo would continue to 

run a bit below2 perrent in 2018, and only 

one panicip3nt expected inftation above 

2 pertenttbat year. A majority of participants 

projected that inftation would be equal to 

the Cornmiuees objective in 2019 and 2020. 

Se\'er:!l panK:ip3nts projected that inflation 

IIOUld slightly exoeed 2 percent in 2019 or 

2020. The medians of projections for core PCE 

price inftatioo 011:r the 2018-20 period 11m 

the same as those for headline inftauon. 

l'igun:s J.C and 3.0 provide information on 

the distributions of partK:ipants' views about 

the outlook for inOation. On the 11hole. tbe 

distributions of projections for headline 

PC I:. price inOation and core PCE price 

inftatioo ~nd 2017 v.-ere little changed 

from September. 

Appropriate Monetary Policy 

Figure 3.E provides the distribution of 

participants' judgments regarding the 

appropriate target-or midpoint of the target 

range-for the feder:!l funds rate at the end 

of each year from 2017 to 2020 and 1n the 

longer run. 0\l:r:!ll the distnl>utions dtlfertd 

an only small ways from those reponed in 

the September SEP. There was a moderate 

reduction in the dispersion of the distribution 

for 2020 and for tbe longer run; some of the 

lower-end projections for those horizons from 

the September SEP were re~ised up in the 

current projections. 

The median projection of the year.tnd feder:!l 

funds rate continued to rise gradually 011:r the 

2018 20 penod. The median p10Jtct10n for the 

end of 2018 was 2.13 percent: the med1ans of 

MO~(IARI' POliCY R(POIH: FE8RUARI' 2018 45 

the projec110ns 11ere 2.69 percent at the end 

of 2019 and 3.07 perctnt at the end of 2020. 

Nearly all panicip3nt.s projocted that it would 

likely be appropriate for the feder:!l funds 

rate to rise above their individual estimates 

of the longer-run normal rate at some point 

Ol'tr the forecast period. Compared ~ith their 

projections prepared for the September SEP. 

a few p3rtrip3nts raised their projections for 

lbe fedmtl funds rate 10 the longer run and 

one kll'•ertd it; the median was unchanged at 

2.75 perctnt. 

In discussing their rojection~ many 

particip3nts once again expressed the view 

that the appropriate trajectory of the feder:!l 

funds ratemtrthe ne~l few years would 

likely imoll'e gradual increases. This \lew 

was predicated on SC\l:r:!l factors. including a 

judgment that the neutr:!l real inten:st rate 

ll'liStumntly low and would n101-e up only 

slowly, as ~~II as the balancing of risks 

associated ~i th, among other things, the 

possibility that inflation pn:ssures could build 

if the economy upands well beyond its longrun sust.tinable lm l, and the possibility tlu!t 

the forces depressing mOation could pro\-e 10 

be more persislentthan cumntly anticipated. 

As always, the actual p3tb of the feder:!l 

funds rate 11iU depend on C\'01\ing economic 

conditions and the1r impl~tions for the 

economic outlook. 

Uncertainty and Risks 

In as=ing the path for the federal funds rate 

tlu!t in their view, is likely 10 be appropriate, 

FO~{C p3nicip3nts tal.-e account of the 

range of possible econormc outcomes. 

the lil;elihood of those outcomes. and the 

potenti.ll benefits and C0>1S should they 

occur. As a reference, table 2 provides a 

measure of forecast uncertainty, based on 

the forec.ast errors of various I>rivate and 

gO\>emment forecasts over the past20 }'ears. 

for real GOP growth, the unemployment 

rate. and total consumer price inftation. That 

mea;."'lre is UICorpor.ued graphically in the 

lop p3nels of figures 4.A. 4.8. and 4.C. which 

display "fan chans" plouing the median SEP 
114 


30197049.eps

46 PAA13: SUM.w.RV Of ECO~OM C I'RO!ECliONS 

Figurt 3.C. Distn"butioo of partiapQoiS' proj«tioos for PCE inllatioo, 2017-20 and 01~r lht loog<r ruo 

2017 0 D«tmbttp~os - 18 

• • Sq>1rabtq,roj((1ioc" ~ 

C

:: 1 _. ;~~ [: ~~ ~~~~b ---:-:,------:-:------:-:--_;§ 1 2 ~ ~ ~ ~ ~ ~ 

I' U ~ U ~ 

Pcrc('Jitra~ 

1018 

:1 (• : ~r-----.~,,-----~--~~, -- ~ ,._ 11· 

u U1< 

2019 

r 

r 

16 u a 

... 

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... 

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l'troenlrut< 

II.--. ~ ------ r----- . ~. , , 1.1- )f. ll· 

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:[ h I: L7- ,._ ll- u ,. u 

Peroeu1raoge 

fl I! 1.7- "· ll- u lJ u 

Ptrctl!trallt't 

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lA 

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- 18 -

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- 18 - 16 -II 

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- 18 - 16 - II - 12 - 10 -8 

_, 

-· ., 2 

- 18 -16 

-II 

- ll - 10 -

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8 

--, · l 
115 


30197050.eps

MOMTARY POliCY REPORT: FE8RUAAV 2018 47 

Figart 3.0. O~Cributiat of par11<ipao1S' proj«tims for a>r< PCE inftatiat, 2017-20 

lOll 

C ~bcrpo}!dK* 

... Stpltmkolprojltti<Gl 

n I I 

I I 

-----~~ -------, 

2018 

IJ. 

,, 

u~ 

.. 

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IS- 1.1 - ,. 

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I 
116 


30197051.eps

48 PAA13: SUM.w.RV Of ECO~OM C I'RO!ECliONS 

FiguJt 3.E. O~tn1>uti<JJ of particip311ts' judgmam oftb< midpOint of the appropri.lte llll!tt r31lg< for tb< f<dtral 

funds'"' or tb< •ppropli3te target lev<l for the f<deral funds""· 2017-20 one! 0''" the longer run 

:!011 C Dtumbrtprcjctlic.t - t8 

•• StpttmbftpojeftiOIII -I! _,. - tl - to -8 

-6 

-· ..., ~ 

;

- 0 I ~- .J I C le:::::l --.., IU- l!t- US- I.U- l.U- u•- UJ- ue- Jll- "'· )Q. . ..4U- IJ'l JQ U7 lll l.Ji 242 UJ lU JJ1 .., "' "' .,, l'<tct~~tl1ll&e ~rmtrflfPI!tlelPl,. 

2018 - t8 -I! 

-14 

- ll - to -8 

-6 

-· -, l UJ.. 138:- UJ- 1.11- lll· tl&- JQ. 10- Jll- JJI. lQ. ... ltJ IQ U? lU UT l-41 U1 JU '"· "' "' Ul "' HI 

r r - .. _ a:=::=" 

lll- 13t- lQ1.11 JQ U1 

C r-..,'==' 

r 

UJ- ll*· l.Qrn tc u1 

Ul· 

Ill 

Pttcentrante Nla61rflip.r.•• 

- t8 - I! - 14 - ll - to 

.. - J'§E3'(=T~l=J

-8 _, 

-· -, l UI- W- 2.38- 2.43- 113- lll- tlt- JQ. Ul- .cu. 212 2J1 U2 211 112 JJJ J;Q "' 41) HJ 

Pt-:ceot range 

-IS 

- t! - 14 - ll - to 

-· _, ;...:..: .=-;Oil..=-.-.. ____ ,r=:=w ; l Ul· lU- 1.33- lhl- l.U• lll- 13*- J.Q. l*i• .cu .. 211 Ut W lJT U2 U1' lQ Ul ~ 11 UJ 

Ptrteotrtllte 

- 18 - I! - 14 -ll 

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1\'ttl'tll nwze 
117 


30197052.eps

projections for !be three variables surrounded 

by symmwic confidence intervals derived 

from the forecast errors presented in table 2. 

If the degree of uncertainty auending these 

projections is similar to the typical magnitude 

of past forecast errors and the risks around 

the projections are broadly balanced, future 

outcomes of these variables would have 

about a 70 percent probability of cocurring 

within these confidence intervals. For all 

three variables. Ibis measure of projection 

unctrtainty is substantial and generally 

increases as the forecast horizon lengthens. 

Participants' assessments of !be le\-el of 

uncertainty surrounding their economic 

projettions are shO'i\11 in tbe bottom-left 

panels of figures 4A 4.8. and 4.C. 1\early all 

participants viel\-ed the degree of uncertainty 

attached to their ccooomic projections about 

GOP p1b. the unemployment rate. and 

in Dation as broadly sinilar to the ~-erage of 

the past20 yea~ a •iew that was essentially 

unchanged from Septembet" About half of 

the participants who commented on this topic 

suggested that uncertainties about the details 

of the pending tax re<>eisi.Uion bad raised their 

assessment of uncertainty for GOP gro111b. 

albeit not by enough to tip their assessments 

into the higher-than-average category. 

Because the ~1n charts are constructed to be 

symmetric around the median projection, 

they do not reflect any asymmetries in the 

balance of risks that participants may see 

in their economic projections. Accordingly, 

participants' assessments of the balance of 

risks to their economic projections are shown 

in the bon om-right panels of figures 4.A, 4.8. 

and 4.C. As in Septembet most participants 

judged the risks to their projections of 

real GOP growth, the unemplo)ment rate. 

headline inOation and core inOation as 

broadly balanced-in other words. as broadly 

t6. Allbtmdofdussllll!!!!3t): tbtbos "Forecast 

llnoenauuy" ~ "''"'"""'""' •mrprttaDOD <(""""'"""'in lht..,.,....;.""""'" .,d aplllllS 

lbt aw-JI•IS<d IOISOI$$ lbt """"""'>'ODd ll$l:s 

••mdins lht pomaparus proj«ooos. 

MOMIARY POliCY RlPORI: I £BR\ull11' lOIS 49 

Table 2. A"fai< b!lloncal projt¢don error ran&es 

Jl«a .. potl. 

.. ..,.. ~~~ ~~ 

CU.,.io ... GOP' tO! !ll 

Unc.plo)lllf'lll ttlr' tO.! tot ll.t 

Totd<eai-.tpfiottl ttl :10 •u tu 

Slloct-fllmi iDII!Ir.IIUIIft1• tt.l ! U 11.9 !U 

l":l•fnorN .. ~lltiiKIWM .. tl•«-tkiOOl ... I .. Mitd 

UfiOfllt!¥1 >tltrl,.,tiO·lO"'".,..~!uNII!ic•'ffl'1"f''IOt 

'""" •• ,.,._, *:~*"'l Al ....... lllkM. ""'Ml.JiooWI• !J."tMW(!W!WaWJtrJ~-.t)m•tM.It",..,. .. ~thl~ 

"IOIIDIJlwlniOOP.••.,_, _ _,,.._~tkfil,hnl,.41m 

W\IM.Nitl_.,...,,.,_.,...utl'",«._t_DJ.a6c,.,. 

llor*"llf:tD"-.Ptr,•o.r.i ...... ~•c ... l'qNplJII1),"01..c .. u.r ..... ...,., .. a.w.O.!Sd:U.. ...... f'~•·h..-n. Ftdt"'._,...,..., .......... UICIIU!d~o.c-eSitllt)117.Q 

(WIIUFH- ._,..,Or=...,..ol-.NMI...,..,._.......,~_, 

.._,......~.,~t-.tJI111X..ttft 

1 ' 0611Uot w- .............. """'""''"*' .... ...._._ ..... ...,,,,..n_IW..,IMII .. ...., ... ....,.... .. ,..,... ................. ............... _..._.,........,.., J loriWimf._,...,.._ ___ •• , .......... ,. ... .... .................... r.t_, ............. ~ . 

.. -~~ ............. " ... 

consistent 11ith a S)mmetric fan chan. The 

baboce of risks to tbe cconollliC outlook 

sbtfted slightly to the direction of strength, 

11ith two more partiCipants seeing upside risks 

to pth in real GOP thu in September and 

one more seeing risks to the unemployment 

rate as IICf&bted to the do1rnside. ln add1tion. 

one more participant than before saw risks to 

inflation as weighted to the upside. 

Participants' assessments of the future 

path of the federal funds rate consistent 

with appropriate policy are also subject 

to considerable uncertainty. Because the 

Committee adjusts the federal funds rate 

in response to actual nd prospective 

developments over time in real CD I' growth, 

unemployment. and inflation, uncertainty 

surrounding the projected p.1th fOr the funds 

rate importantly reOects the uncertainties 

about the path for those key economic 

variables. Figure 5 provides a graphical 

representation of this un«rtainty. plotting 

the median SEP projection fOr the federal 

funds rate surrounded by confidence intervals 

deri\-ed from tbe results presented in table 2. 

As with lhe m.1C!'OOCOOOmic \'llriables. forec~t 

un«rtainty IS substantial and IOCfeases for 

longer horizons. 
118 


30197053.eps

50 PART 3: SU~\'MRY Of (CONOMIC I'ROj(CIIONS 

r,gur<4J\. Uno.nainryand risl:sin projeclionsofGDPyowlh 

M<dian proj«rioo and coafidnu:e in1<n'81 bas<d oo historical ro...- ""'" 

OIIJ>tOior<>IGDP ~Wi:l•ofpojtl.~ 

- 1\f ~ood•ltnaJ 

2012 201) lOll lOIS 

-· 

-) 

- l 

- I 

-0 

2016 2011 2018 1019 2010 

FOMC potticipaniS' a;sessmmtsohncerminryand risks around th<ir«a>omic proj<ctioo< 

N1mb« cl pa.rti.ipu.u 

u-tainty abool GOP 11 .. 111 D Dcoocubetprojrd~ 

• II 

"" : •• s., .. t.<,.o;« .... n· ... I -12 I · It 

I I • s 

I I • ' I • ' 

[ 1===-JI, l Hi!l><r 

Ri>btoGDPrr .. 1h D Oramlrtc Pfo;aio•• '"' ~•llttpcojcc~oos · II 

- I! 

• II - ·I n· I :•: I 

. I I . ' 

• I • ' 

[ j - - - - I y:-::-:1 I ] l 

Broodly 

bolan«d 

Wtig)><dto •p!id• 

Non: Tht blot IJid rod ti"" ill lilttl'p P'll'l W>·•o.1aal ''~~"'and""""" projo<t<d ,>I..., "'P"'Ii'.ty. ofllte..,...t cba"t" ia reaJu""clo""""prod""(GDP)Crom lilt fourlhqu.ll1"cfliltprnioosJ<:lTIO lhtfou.lb qow1<1 oflhtJW iD»."'It«l. The ~»D6dcoxiokn~ :u01.11d tbtrrillJ pr~ltd ':dllleS isiS$UIIIedtQbeS)liUZII!t0; aod ~:sbooloo root mt;&n 

sqw<d m~n:(){ 'Wus pri'-a~taod t"''mllml fl'lr('l.-asts made oo.tt tbeprt'titlos zo >'tan.; IIINt ic(Ofll\ltico aboclllhese dt•a 

is avria'bl;e m tat* 1. Bc\71!$C CUtftDI ~niml)' difkr ft\'!ID lhct!t that prC'Yitikd. «< a\U2&4 0\tf ~~~ 1-'"'~US20 )ar$., 

the •idrb and tltaprofllte «'116rl<o:<intoml••ledon lilt b>si$ohh< hlslorioll for<I:>Sierroa aray DOC r<G<\1 FOMC 

p.uti.ip;mts:· cvrcol ~"SSDttltsorabe1110ertaiDt)' od risb aro1111d lbcir pr\lP,.i.ioos; lhaecarreot asses:s.mmtsartsumm&riz«< 

in llre lo•'<t pollds. O.D<nlly 'JltWZ, poni<i.,..a •llo j"""' lhe llll«'rlailnyaboulllteir projo:oloDJu "1>\"rllysimill(' 10 

cbc t\"tft¢tk>ds l.'(lht P'l!t 10 )t-¥'5 Ytl)uld ,icw the •idlb ~rtht c«~6b.~ io.tcr.~ M-n i11 tbe: !tislori.:aJ flU! chan as tartd)' 

C«<.iistl'DI ~ilh lheiCIS.'leS$IIlfti.IJ ~tile ~aiQl)'ab."'~U beirpr~J.. l.a1;no.~ pmicipaDIS'\Iibojlld&etlle rists IOtbei' 

poj(\'1.io-nus "'broad!)' bllm."td'* woald \itw Jhct(ICJ)dtet:e i1tCf\"'31aro!ZDCI tbtit projt\"1i\tDS u ap~ttlysymmtlrit. f« 

~niioo$ofUDCfttaiutya:od ri:skJ iUO;!DOmk:poj«tiOO$.a-tthtbo,x "f(t'«ast lJucatai11ty: 
119 


30197054.eps

MOMTARY POliCY REPORT: FEBRUARY 2018 51 

Figure 4.8. Une<nainl)' and rhls in projections of lhe unemploymmr rate 

Median projection and oontidenoe inremd based on bi<rorical for<a~SI error< ........ 

u...,pi0)11XIlrrare 

- ~~ dprojrdiou 

r~~intrMJ 

lOll lOll 11114 lOll 2016 

-10 

-9 

- I 

-1 

_, 

-! 

-· 

-) 

-l 

- I 

I 

2017 2013 2019 )ill) 

FOMC portia pants' "-""'mmrs o{ uncertainty and risks around !heir ecooomic projecdoos 

N11abrtof,.ani:~11U 

tlo«rtaittryaboutlllttmtm~tratt 

D ~mbtrpcoJt<tioos 

: • • Stpcmkr pr~ons 

Lo~~o-er Broadly 

similar 

-IS 

RiWtoll!ettDtlllplo)'llltntratt 

0 Dl!ffllbttproJl(tiotu 

: • • St{lluabn'proj«!K.s -18 

_,, : nI · 1 -10 

:~ : : I = : - I -I 

rlf::] ~ L - __ _ ,

1: 

Non: The bhx and red lmH iD the top pantl.sllowactual \'alUC$aod IUtd.liiD prvjxtcd \'llut$.. rtspXll\cly. c.f the 3\'tr.J:tt 

civib:UI UMtDploymea1 nee ill !.be foorth qoarttr oftbe reatJDdica1«1. The c.,:~!Wdeo..;e tatcrval arov.Dd lbemNiu pr".iect«l 

vahles is assumed to beJ)liiJI)f:trie and is basedo%1 rootmeaa squared mon(){ \'arious priva1eat1d ll)\'tr.D.metH for«as.U made 

o\tt cbe pmioas 20 )e.m: IUC!II! infOCtDJtioa ~~ th& data ISt•-:ubblc io cable 2. B«anseC'Ur!tDt conditions m11yditftt 

from those: tbal prevaiJed, oo a\wa~ O\'er !be pre-.wus 2(1 year5.tbtwidtll11Dd shapeoftbeooofideoctiDttn"'li estimated on the: bun(!f the biuorx:al fore.:au mon may oot rdlect FOMCparOOpantl" carrtr~t asse3UD.tniJ c( the W1Certamtyand ri3b 

ar~>und thrir projectioo:s; Lhtseet~ntOl wtS&nltt~ts artsummariud iD lht IO'!\-'tr ~t GeomDy q:'C'lkin&. ~rtiipnnu whG 

jud&e the UDCert.a~I~Iyaboollhev prQjecCM>DS as "broa4Jy sn:niJar" to the average Je\tlsof the pa.sl20 yean would ¥iew lbe width of the ronfide:ocemtefVal s.h~11w the histOii."tl flUI cba.rt as latr,dy toosis:tet!l 'Ailh l.bftr as..o:ressmeouof tbe W11:tftainty 

abont thttr prcjtctwos.l.ikto\1~ plrtlapana "'M Jlldte tht. nsl:s to lhc.r pro)tl.':tltous u "broadly balaii'Ced" ... -uwd \ttWtbe c.oofide~ iDUT\11 aroaod tlltu proj«ti®sas awroo~imtelyS)111mf'lnc. For &tirntions of u::ocmlintyaod r~k.s ia toooormc proje.;t.ons, see the box "For«ast Uooenaioty." 
120 


30197055.eps

52 PAA13: SUM.w.RV Of ECO~OMIC I'RO!ECliONS 

Figurt4.C. Uoctr~aintyand risks in projectioruofPCEillllation 

Median projection and CXlllfideoct intaval based on h~toriatl forecast errors 

PCEmftati~ 

- Medsuor prcj«lioet 

•10%toor..1motinr.tMJ -J 

-1 

- I 

-0 

2011 2014 lOIS 2016 ::011 :018 2019 11120 

FOMC partieipaots' a.~<niSofunctnainl)' and tisl<s aroaod tb<ir«<>oomieprojoctions 

N•brtofparDop~~o• 

llao:maintyoboutPCl.inllatioa 0 ~mbnpoFiioa• 

- .... StJ*mber pro}t«iortt 

Lo•..- Broadly 

!inillar 

UDC«tawtyab:lul COR PCE iolbtioo C i)(QembuJ(Ojrcliortl 

= .. • ~btl pKI}tCtio. 

Broadly 

similu 

-II 

-II 

- H 

- I! 

-10 

-I 

--' . Hither 

-IS 

-I' 

-1< 

-ll 

-10 

-I 

-' 

-' l 

Risb ~ PCE inft:ati~ 

0 l>NrabnprojectiOOJ 

= •• Stplft&bcrpcoFwM -IS 

- II 

_ n -_14 

--- I - ,, 10 

= 1 I =: -r--- ~ - • 

r 1 r---=:1 _ Lr=-='=3 11 1 

ll'ctpuolto llroo<lly ll'<ojjltcdto 

dO'It'Dside: balaoctd Up!:ide 

RllkltoOORPCEinlhllOa D Ortot•krP'o,i«'tioa• 

= .. s."""""'"'"'''"' - IS 

- 16 

_ n - I< --- I - ll to 

= I I =: ·r -- -- 1 : - : 

f•IE""""""7- "fEE£3 11 . Wo&Jl!ed to ltrOI!IJy Wcit:Jltcd 10 

dOl'>sitlo balit>ced D!'li<l< 

N0tt1: The bl"'aad red lul<Sia lhe "'P JIOll'l sllowo:tual ''~~"'""dm<dian proj«red vaiU<S, "'J'CCii'Oiy, oflhe """" <han&etn lhe p-icttodcl for persotlll CIJDSumptiOU e!p!Odittues(PCE} (rOOitbe fourth qwtrln oftbe F•ious yt.ar (b the r,unh qt1311tr ofche yearmth:ated. The c:oc.fitbcetoten'll ar011111l t.ht medsc ~1«1 valutS iJIS$liJXI«l to bt s;mmetri:-ltld is~ 

oo rool rneau squared mmofvarioos !Ji\"J.It&Ddt~Wm~.mect fM!OtSIS mtu.ieowr lht pre~iocs 1Qyem:moreinf\lnnaoon 

aboultht$edata isanilable iD 111*2. Btcauseettrm~t oooditioll$ tta)' di.fi3' from tho!t lh.at prl!'l'tiled. oa \~ O\'er the 

prfYioUJ2llyear$-.lhe'l'idllta~~dJhapeoftbe~ioterw.JestimatedootbebasiscflbebntQrictl(orecaste:rrorslt)lyWI 

rtll«t FOt..tC panicipanll cwn:ot a;:-essrueolll'ftlw: III!Certai!lry and ri5ks aroWid tbrir rr~ti.:'!as: tbesecwnat assessltlillll are !Ummarired ill lhelo.-er pllltls. Gol<nlly SJl'Umt. parti<iP"'" wbo j\ldte tbt """"•mty abo1ll thcir proj«lioo<., "broo<lly 

similar"lo the a\mt;e le•~oftht plSI 20 years ,.·oold \W'o\' the "'idtborthec:oddcocemttmlsbo"l1 ia the b.kloB:al t'aucltan as latttJycoosisttutlll;lll tbeu a~ IS of the utloertaiory about their projectK!ns.like'!llise. j.Wticip;wts w-ho j~ tberisb to 

lhea proj«<ioD<" "br"'dlfbai>D<td" '"""view lhecoalid<l><t ial<rVlll arotllld lheo p"J"(i>"'" lpp!ODn>ltdyl)1lW<Vi<. 

For de&itioos of tn):ertlU.Oty aod ri!b io «<oomk pr\.'lj«tk1a' Stelbr OO.r '"fon'C&S1 Ut~CXT~aiu y.• 
121 


30197056.eps

MOMTARY POliCY REPORT: FE8RUAAV 2018 53 

Figu.- 5. Un«11aincy in projec1ions of lhe fedtral funds,.,. 

Median projtaion and oonfideoce interval bas«! on historical forecas< errors 

FaX-raJ fWlih rate 

- )b;lpoill~oftlqtUIIl" 

Ma.m.or~,. 

i\J'hmlidrootllltt'VIIl• 

- s 

_ , 

-) 

-l 

- I 

-t 

Ntm: The bloe aod R<l inesare bo;ed oo o:IUal '11"' aod moliOll projected '1llues, '"""""ly· olllle Coounittoe's laJlel for lllefed!ralfands rnrt" llle .. dofille)Ollt indi:am Tbeacroal ,.,...,. llle midpoiutoftbelaJlellllllt'; lllemediatl proJO'Ied 

,-J.Jurs are baW oo cihtr t~nudponu cltbe laJttl nmr,r C"T the ~~lc\~1. Tbt C(lllfidr.nct uHrrval around Lht mediaD jX(ja:ltd 

\'allieS is based OD root meaD squared mOB of YUJOIIIS pi•taSt aod &->Vet:IIJOOIL fmc3SUmade 0\'el" tbe ~ious 20 )em. The 

cooliikn<o inl<r\'11 is DOislri:llyCOCl!is""twith llle pn>j«tioosforllle fed!ral fondsrMO, primorilybeca"' llle!e pr<ti«tioos ore 

DOif rewuollhelil.e!iestooiOOilleSforlllefedenlloudsl1t~butntherprojectioosolponi:ipwlu'io<lilicloal'""""""uo! 

IIJl!lopriart '"""""Y l" . Slill, luolorical fl'rt<ast"""' prll\1de a broad...,seolllle llllC<tUioty around llle fm~~tt poillof llle (OO..'Dl fllllds ralrtmerat«l b)' llle u:ucertaiutyaboUI tbe macrt»:onor,)JC \'Uillbiesas v..'cll asadditio!W adJus.tnx'OU 10 m.o~nry 

polic:ylltat may be owopriote t.>om.t llle c&:u of shocks"' tbeo:<>Dilllly. Theconfideoct iDtcrva! isamuo.ed to beS)tn:nttriceuq:c 'A 'btl) i1 is tnux:atedat m4>-tbe bout:lm of the Jo~~ol!lt la.tf:Ct ratite fer the federal funihrate that bas bo.'tl adopkd.Jo thc-pa:st bythe.Commiuoo. Thistnlllcaticn would ooL 001nlmdtd LO mdntc 

lbe likelihood of Lbe use ol oega tr.'t mterest r,nt$ so pro\lde addi oonJ mootwy pobcy act0t1111l0datioo tf doiu& so "'aS jladc<d 

"ffl'''"''ff'~.lo sucb O!llatlon< ille Comrrutteecollld alsompoyoilltr tools. rndudi!l&f«Wlltd !)lid,.. aDd latte..:alea"" purchases, to jXOVide additiocal ~ni!UodallC'll . &.--alljCctuJtiU cooditWos maydifftr fr® tbo!t that prevailed, on O\'tratt, 

owr lbe pre-•lOUS 20 )UU.lbe ,.idtb aud sllape of tbecoafideDOeiultJWJ estlm.aled. OD lhe b.lsi:soitbe biStQncal fmcast err \Irs 

may 1101 rellea FOMCputicipants' ciUreot a~ a of tbe ltOC:tt13liU}' and rsks oJou.nd tbeir pro;tct;ocl. 

• Tbee«~tldtnceintcr'\'l\1 isdtrivtd rrom forttaSI!of t.ht averattlt·.'d <>f short·ltrm iottrt$1 rate5Jnlhefottrtb q~~~rtn ollht 

)·tar iodated; mort infonD31lOD aboutlbne dma is anibbk iu lablt l The sbaded an.a~o.n:opas5tl )e$$1hau a 70 r.ma~t 

conlideooeiotaval if the confih't interval has b.>(oo UUD.-aitd at ztro. 
122 


30197057.eps

54 PARI 3: SUM.\1>\RY Of £CO~OM C I'RO!ECTIONS 

Forecast Uncertainty 

The economic projecli01"6 pro,icJed by !he members of 

the Board ol CovEmOI> and the p<esidents of the federal 

Reser'oe Banks inform discussi01"6 ol mon&ry policy 

among poliqlll3k<Ys and can aid public unde1$l>nding 

of the basis for policy actions. Considerable uncertainty 

attends these projections, howe-~r. The eoonomicand 

sta~stical models and relationships used to help produce 

eoonorrk IO<ecasts are nooes!3rily imperfect descripUons 

of the real world, and !he future path of ~>eeconomy 

can be affected by myriad uniO<eseen de.oelop<nents and 

0\oenls. hu~ in setting the st~nce of monecary policy. 

pal1icipants consider noc orly what appears to be the 

mosllikely econorri<: outcome as <Ynbodied in their 

projections, but also the range of aliemati\oe prlS'ibilities, 

the likelihood of their occurring. and the pocential cosls to 

the economy should lhey occur. 

Table 2 sunmarizes the average historical accuracy 

of a range of fOtecasts, including those reported in past 

MO<Jelary Policy RepotU and those prepared by the 

Fodera! Res<YVe Board'sst>ff in advanceol meeting< 

of the federal Opoo Marl<et Comrrinee (fOMQ. The 

projcclion enor ranges shown in thel.llie illustrate !he 

considerable I.I>C!Ytainty associated with economic 

fo<ecasts. for eocample, suppo!C a pal1icipant projecls that 

real gross dornesoc product (COP) and tocal consumer 

prices will rise steadily at a nnw I rates of, respecti,oely, 

3 pertent and 2 perce<\L il lhe uncertainty attending those 

projections is similar to that experienced in the past and 

the risks around the projections are broadly balanced, the 

numbers reported In table 2 woold ilrfly a probability ol 

about 70 pe<eenllhat actual COP would expand within 

a r:mgeol2.2 to 3.8 percent in !he current )'Car, 1.3 to 

4.7 percent in the second )'03<, 0.9 to 5.1 pe<eenl in the 

third year, and 0.8 to 5.2 pe<eent in the foul'lh)oear. The 

corre-sponding 70 pe<ccnt COilftdcnce inlen•ls for overall 

inflation v.oold be 1.8to 2.2 pe<eent in !he current year, 

1.0 to 3.0 percent in the second year, 0.9 to 3.1 pe<eent 

in the third )ear, and 1.0 10 3.0 pe<eent In the fourth 

year. Figures 4.A through 4.C illustrate these conOdence 

bounds in 'ian charts• that are syrr.netric and cent<Yed Oil 

the medians of fOMC par1icipanls' projections f<lf COP 

~rowt , ihe unemployment r.ne, and inllation. However, 

in some instances. the risks around the projections may 

noc be syrrme~ic.ln pa11icular, ihe unemployment rate 

c.annot be negative; iurthamore, the risks around a 

pal1icular projection might be tilted 10 either !he upside or 

the d<>vnside, in which case the corresponding ian mart 

would be as)mn>arically positioned aroond the median 

projcclion. 

Because current conditions may differ from those that 

prevailed, on cl\'erage, o\'er history, participants provide 

judgment$ as to whethe< the uncertainty atiached to 

their projections or each economic variable is greater 

than, smaller than, or broadly similar to t)'picallevels 

of fO<ecast uncerl.lfnty seen in !he past 20 )'Oaf$, as 

presented in table 2 and rellected in the widths of the 

conftdence intervals shown in !he top panels of f.g1Jres 4.1\ 

through 4.C. Parlicfpants' current a~ments of the 

uncertainty S~.<rounding their projections aresunrnarized 

in the botton>! <it panels d those f'Sures. Pal1icipants 

also provide judgments as to wfleth!Y !he risks to their 

projections are wei girted 10 the upside, are weighted to 

the downside, or are broadly balanced.Th3t is, while the 

S)mmetric histO<ical fan charts shown in the top panels of 

f~gures 4.1\ through 4.C imply that !he risks to pal1icipants' 

projections are balanced, panicipants may judge thai 

there is a greatlY risk that a gh'E!Il variable will be abo, .. 

raiher than below their projections. These judgments 

are summarized in the lower·right panels ol Ogures 4.1\ 

through 4.C. 

As with real adi'·ity and inflation, ihe outlook for 

the future path of the federal funds rate is subject to 

considerable uncertainty.llis uncertainty arises primarily 

because each panicipanrs assessment ol the appropriate 

stance ol mon&ry policydepcrtds importantly on 

the evolution of real activity and inflalion OV<Y ti...,.lf 

economic conditions e\dve in an unexpected manner1 

then a,..,.meniS ol the appropriate setting of the fedc<al 

funds rate would change frorn that pointlonvard. The 

fi nal line in table 2 showsthecrror ranges forforcca<ls of 

short·tenn interest rates. They suggest that ihe historie~l 

confidence intemls associated with projections of lhe 

federal funds rate are quite wide. It should be noted, 

howev<Y, thai these confidence tntenols are noc stric y 

consistent with ~~e projecijorlS lor the federal funds 

rate, as these projections are noc forecasts of the most 

likely quartalyoutcomes bui rather are projections 

ol participants' individoal a5$CS$n>en1Solappropriate 

monwry policy and arc on an end.of·)'eaf basis. 

Howe,>er, !he forecast error,; should pro' ide a sense ol ihe 

unc«tainty around lhe future path ollhe federal funds rate 

generated by the cert~ inty about the rroooecooomic 

\otiables as well as additional adjustments to monetary 

policy that would be appropriate to offset the effects of 

shocks to the economy. 

If at sorne point in the future iheconftdence inteMI 

>round the federal funds rate were to extend below tEto, 

it would be truncated at zero for purpcoes of the fan ch3rt 

shown in Ogure 5; z<Yo is the bottom olthe lowest target 

range for the federal funds rate that has been adopted 

by ihe Comrrillee in the past. This approach to the 

construction of telederal funds rate fan chart would be 

merely a COO\'ention; it would not have any impliations: 

for possible ltAure policy decisions regarding lhe use ol 

negat:i\'f: interest rates to pro'Oide additional monetary 

policy accommodation if doing so were appropriate. In 

such situations.lhe Comn111ee could also employ other 

tools, including fonvard guidance and asset purchases. to 

pro,;de additional accommodation. 

While ~gurO$ 4.1\ through 4.C prO\•ide information on 

the unce-rtainty around the econaric projections, frgure I 

pro,;des information on ihe rangeol view~ across FOMC 

participaniS. A comparison ol figure 1 v.ith f.g1nes 4.A 

through 4.C shows that ihe dispersion of the projections 

across pal1icipants is much srroii<Y iltan !he average 

foreca~ erro<s over the pa~ 20 ye31$. 
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ABBREVIATIONS 

AFE 

BOE 

C&l 

EME 

FOMC 

GOP 

LFPR 

MBS 

Michigan survey 

ON RRP 

OPEC 

PCE 

SEP 

SLOOS 

SOMA 

S&P 

TCJA 

TIPS 

advanced foreign economy 

Bank of England 

commercial and industrial 

emerging mark-et economy 

Federal Open Markel Commiuee; also. the Conuniuee 

gross domestic product 

labor fon;c participation rate 

mortgage-backed securities 

University of Michigan Survers of Consumers 

overnight reverse repurchase agreement 

Organization of the Petroleum Exporting Countries 

perwnal consumption expenditures 

Summary of Economic. Projections 

Senior Loan Oftlcer Opinion Survey on Bank Lending Practices 

S)~lem Open Market Aecount 

Standard & Poor's 

Tax Cuts and Jobs Act 

Treasury lnllation-Protected Securities 

55 
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2121112018 

Login Free TriaVSubscribt 

= AMERICAN BANKER 

The Latest {0/SJ 

SIFI hike could kick-start bank M&A 

By Jackie Stewort 

Published November 14 2017, 4~2pm EST 

Mort In Regional bonks, M&A, SIFis, Dodd· Fronk 

f in "# ~ ••• Print f€!1 Reprint 

Sweeping regulatory changes could nudge more big bonks to consider acquisitions. 

A big port of o deal between Senate Bonking Committee Chairman Mike Crapo ond o key 

group of Democrats to amend the Dodd· Fronk Act involves raising the systemically important 

financial institution threshold from $50 billion in assets to $250 billion. 

That could immediately free o handful of bonks from enhanced oversight, including capitol 

requirements, while giving institutions nearing the current threshold more confidence that 

organic growth and acquisitions will not lead to added regulatory burden. 

'All of those bonks that ore interested could be more active' with acquisitions, said Brion Klock. 

on analyst at Keefe, Bruyette & Woods. 

tn 
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212S/2018 SIFIIIike COt.ld kitk-slart bank M&A 1 Amencon B•nke< 

Dwellers on the threshold 

These bonks could get a reprieve from fast-approaching 

standards for SIFis 

e Assets 

New York Community 

•••••••IIIIIIIIIIL ___ !jPe'1.Qogle's United 

Po ulor 

••••••••••••L ______ JSiliJi nature 

First Citizens 

BOK Financial 

S novus 

F.N.B. 

$208 $308 $408 $SOB $608 

Sources: Federal Reserve, Sandier O'Neill 

Optimism has been building among bonkers that lawmakers would eventually increase the 

SIFI threshold. 

Washington's outlook on regulatory relief seems "o lot more favorable today than it was o year 

ago" in terms of compliance issues such os the $50 billion-asset mark, Dovid Rosato, chief 

financial officer at People's United Financial in Bridgeport, Conn., said during o conference coli 

lost month to discuss the $44 billion-asset company's financial results. 

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217 
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212812018 StFI hike could kid<-otart bank M&A 1 Amel'can Banker 

Still, People's United continues to act as though no relief is imminent, Rosato said, noting that 

the company continues to prepare for the stress testing required for SIFis. 

The Crapo-led plan could allow SVB Financial Group to 'focus even more on lending and job 

growth,' Greg Becker, the $48 billion-asset company's CEO, said in a statement issued 

Tuesday. 

People's United and SVB are among a cluster of about a dozen banks with $35 billion to $50 

billion in assets that should benefit greatly from the plan, said Greyson Tuck, an investment 

banking adviser at the law firm Gerrish Smith Tuck. The proposal would let institutions, 

especially those with less than $100 billion of assets, avoid annual stress tests, higher capitol 

and leverage requirements and other heightened standards. 

Only one bank - CIT Group - has clearly crossed the SIFI threshold with an acquisition. A 

significant increase from $50 billion could open up more options for banks that were keen on 

deals but concerned about becoming a SIFI. 

' If you're a $45 billion-asset institution and you want to [buy] a $15 billion bank ... you can 

increase your size by a third but not pick up everything that goes along with becoming a SIFI,' 

Tuck said of the proposed legislation. 

For some, the $48 billion-asset New York Community Bancorp's effort to become a SIFI by 

buying Astoria Financial was a test case for the industry. The deal, however, fell apart late last 

year over regulatory concerns. For many quarters, the Westbury company has been actively 

managing its assets to stay below $50 billion. 

'While we believe SIFI status should not be determined by size, but by individual bank risk 

analysis, we certainly welcome raising the threshold to $250 billion, as has been reported,' 

3fl 
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2128/2018 SIFI tlike ccMd kick-start tank M&A 1 American Sanker 

Joseph Ficoloro, New York Community's president and CEO, said in a statement Tuesday. 'It is 

a critical first step in the right direction and will be a positive for our company and beneficial 

to the industry, and the greater economy, as a whole." 

Banks that are already considered Sl Fls should benefit, too. The annual Comprehensive 

Capitol Analysis and Review has constrained banks' deployment of capital; it also influences 

how they approach a number of decisions, including acquisitions, industry experts said. 

Immediate relief 

A plan to ease certain bank rules would instantly free these 

institutions from some forms of enhanced oversight t Assets 

Discover -- - ~ -- - - - -~-~-~- --

BBVA Compass 

Comerica 

Zions 

Deutsche Bank 

CIT Group 

$408 $608 $808 $1008 

Source: Federal Reserve, Sandler O'Neill 

Giving more control of capital management back to CEOs could spur more acquisitions. 

"I think it is o capital management issue." said Scott Siefers, an analyst at Sandler O'Neill. 

"Rather than ask permission once a year, you can probably more in real time advise 

[regulators about) what you're doing rather than asking to do it." 

Though the plan raises hopes for more consolidation, same industry experts remain skeptical. 

While the proposed legislation could remove one impediment to M&A, Charles Crawley, a 

managing director at Boenning & Scattergood, said it is unlikely to lead to a 'huge wave' of 

l'ltlps:J.WWW.americanbatlktt.c:omlnewslsi!Wlike-coui<Sobe·thMicl<·slart·barlk·m.&fleeds 4/7 
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212!12018 SIR hikt CCIIId10ck..w1 bonlc M&A I Americanbig ~eels. 'Sometimes investment bankers and attorneys soy there will be a wove - and it is 

just wishful thinking,' he said. 

At the some time, there ore limited options for big bonks to gain significant scale with just one 

acquisition, industry experts said. And there ore two roughly dozen bonk holding companies 

with assets of $50 billion to $250 billion. 

Larger bonk deals will likely continue to be highly scrutinized by regulators. and community 

groups ore more opt to rally against bigger mergers since such deals typically impact many 

markets. Several big bonks ore still working through issues tied to the Bonk Secrecy Act. the 

Community Reinvestment Act and fair-lending lows. 

Many of the nation's biggest bonks are likely to steer clear of acquisitions altogether, Tom 

Michaud, KBW's president and CEO, said during a panel discussion last month hosted by the 

University of Mississippi. 

Banks that nave crossed the SIFt threshold are unlikely to see compliance costs meaningfully 

decline, Industry experts said. It is doubtful that management teams would dismantle systems 

and processes just because of a legislative change. 

"You might be able to pu.sh a few consultants out of the building,' said Jeff Davis, managing 

director of Mercer Capitol's financial institutions group. 'But I don't see how you turn it off.' 

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V2812018 S1F1 hike cMI <kk-slart bankM$A IAtnericon 8anhr 

Bonkers may remain cautious even if o low is passed in order to find out how regulators will 

implement any changes. For instance, the Crapo-led plan would let the Federal Reserve target 

companies with less than $250 billion in assets if they ore viewed as o risk. 

The $41 billion-asset Signature Bonk in New York is on track to become o SIFI by early 2020. 

'We're going to wait and see what changes' regulators might make, Signature President and 

CEO Joseph DePaolo said when asked during o recent quarterly conference call about the 

potential benefits of o raised threshold. 'Then we'll be able to give better guidance." 

f in '# li:il ... Print e If! Reprint 

Jackie Stewart 

Jackie Stewart covers community bonks and mergers and acquisitions for American Banker. 

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