U.S. GOVERNMENT PUBLISHING OFFICE

31–349 PDF WASHINGTON : 2018

MONETARY POLICY AND 

THE STATE OF THE ECONOMY 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FIFTEENTH CONGRESS 

SECOND SESSION 

FEBRUARY 27, 2018 

Printed for the use of the Committee on Financial Services 

Serial No. 115–76 

( 

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HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

STEVE STIVERS, Ohio 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

LEE M. ZELDIN, New York 

DAVID A. TROTT, Michigan 

BARRY LOUDERMILK, Georgia 

ALEXANDER X. MOONEY, West Virginia 

THOMAS MACARTHUR, New Jersey 

WARREN DAVIDSON, Ohio 

TED BUDD, North Carolina 

DAVID KUSTOFF, Tennessee 

CLAUDIA TENNEY, New York 

TREY HOLLINGSWORTH, Indiana 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

JOSH GOTTHEIMER, New Jersey 

VICENTE GONZALEZ, Texas 

CHARLIE CRIST, Florida 

RUBEN KIHUEN, Nevada 

SHANNON MCGAHN, Staff Director 

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C O N T E N T S 

Page 

Hearing held on: 

February 27, 2018 ............................................................................................ 1 

Appendix: 

February 27, 2018 ............................................................................................ 63 

WITNESSES 

TUESDAY, FEBRUARY 27, 2018 

Powell, Hon. Jerome H., Chairman, Board of Governors of the Federal Reserve System ......................................................................................................... 5 

APPENDIX 

Prepared statements: 

Powell, Hon. Jerome H. .................................................................................... 64 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Ellison, Hon. Keith: 

Article from Reveal News entitled, ‘‘For people of color, banks are shutting the door to homeownership’’ ................................................................. 69 

Maloney, Hon. Carolyn B.: 

Article from American Banker entitled, ‘‘We are not looking to relax 

regulation: Fed’s Quarles’’ ............................................................................ 82 

Powell, Hon. Jerome H.: 

Written responses to questions for the record submitted by Representative Royce ....................................................................................................... 86 

Written responses to questions for the record submitted by Representative Sherman ................................................................................................. 90 

Written responses to questions for the record submitted by Representative Wagner ................................................................................................... 93 

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MONETARY POLICY AND 

THE STATE OF THE ECONOMY 

Tuesday, February 27, 2018 

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The committee met, pursuant to notice, at 10:05 a.m., in room 

2128, Rayburn House Office Building, Hon. Jeb Hensarling [Chairman of the committee] presiding. 

Present: Representatives Hensarling, Royce, Lucas, Posey, 

Luetkemeyer, Stivers, Hultgren, Pittenger, Wagner, Barr, Rothfus, 

Tipton, Williams, Poliquin, Love, Hill, Emmer, Zeldin, Loudermilk, 

Mooney, Davidson, Budd, Kustoff, Tenney, Hollingsworth, Waters, 

Maloney, Sherman, Meeks, Capuano, Clay, Lynch, Scott, Green, 

Moore, Ellison, Perlmutter, Foster, Kildee, Delaney, Sinema, 

Beatty, Heck, Vargas, Gottheimer, Gonzalez, Crist, and Kihuen. 

Chairman HENSARLING. The committee will come to order. 

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

the committee at any time. All members will have 5 legislative 

days within which to submit extraneous materials to the Chair for 

inclusion in the record. 

This hearing is for the purpose of receiving the semiannual testimony of the Chair of the Board of Governors of the Federal Reserve 

System on monetary policy and the state of the economy. 

I now recognize myself for 3–1/2 minutes to give an opening 

statement. 

Notwithstanding the greatest monetary and fiscal stimulus in 

our Nation’s history, the economy has limped along for 8 years, 

averaging only 1.6 percent GDP growth. Wages remained stagnant 

and personal savings failed to recover from the 2008 financial crisis. 

A new phrase was coined by left-leaning academics in an attempt 

to rationalize the phenomena, namely secular stagnation. A far 

more accurate and descriptive phrase, though, is high taxes and 

heavy-handed regulatory policy. 

Fortunately, with the election of Donald Trump and the passage 

of the Tax Cuts and Jobs Act, that has all changed. Unemployment 

is now at a 17-year low. Wage growth is the fastest in almost a decade. Companies all over America are now announcing bonuses to 

their employees and expansions in their communities. Economic 

growth is once again averaging 3 percent. 

However, there are some concerns. We all recognize that there 

has been great volatility in our equity markets recently, although 

I note the S&P 500 is still up more than 14 percent since last year. 

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There is clearly concern now whether the Fed can successfully 

unwind a historically unbalanced balance sheet after a decade of 

radically unconventional monetary policy and artificially low interest rates. This was not particularly an issue when the economy was 

stuck in low gear, but now that the economic transmission has 

been shifted into high gear, it clearly is an issue. 

With that backdrop, we welcome you, Chairman Powell, to your 

first of many Humphrey-Hawkins hearings. Please know we are all 

rooting for you, for much is at stake. 

As we begin a new era in Federal Reserve leadership, I think it 

is a good time to reestablish Congressional expectations. Now more 

than ever the Fed must commit to a credible, orderly, and wellcommunicated normalization plan. 

The Fed must do an even better job of communicating clearly to 

market participants, all the variables used to conduct monetary 

policy and their relative weightings and interactions. Certainly it 

is a positive sign that the Fed has begun to compare their policies 

with known policy rules so that the public can better evaluate their 

performance. 

Next, monetary policy must remain independent but the Fed 

must also remain accountable to Congress, which incidentally created it and has the responsibility of coining money and regulating 

its value under our Constitution. 

Furthermore, it is critical that the Fed stays in their lane. Interest on reserves, especially excess reserves, is not only fueling a 

much more improvisational monetary policy, but it has fueled a 

distortionary balance sheet that has clearly allowed the Fed into 

credit allocation policy, where it does not have business. Credit 

policies are the purview of Congress, not the Fed. 

When Congress granted the Fed the power to pay interest on reserves, it was never contemplated or articulated that IOER (interest rate on excess reserves) might be used to supplant FOMC (Federal Open Market Committee). If the Fed continues to do so, I fear 

that its independence could be eroded. 

Finally, in addition to its monetary policy responsibilities, we all 

know the Fed has an outsized prudential regulator role vastly expanded by Dodd-Frank. This responsibility is clearly not designed 

to be independent of Congress and must be made subject to appropriations, as are other prudential regulators. 

Additionally, formal rulemaking must not be issued for de facto 

rulemaking through guidance, and all formal rulemaking must be 

subject to rigorous statutory cost-benefit analysis so as to not unduly hamper economic growth and the hopes and dreams of millions. 

In closing, regardless of the exigencies of 2008, monetary policy 

is not and can never be a substitute for sound fiscal policy. 

Chairman Powell, we look forward to a prudent path to normalization where interest rates are once again market-based and credit is allocated to its most efficient use. 

I now yield 4 minutes to the Ranking Member for an opening 

statement. 

Ms. WATERS. Thank you, Mr. Chairman, and welcome, Chairman 

Powell. I look forward to your testimony today on monetary policy, 

recent economic developments, and the outlook for our economy. 

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I am concerned that the hard-earned economic recovery, which 

came as a result of policies and reforms put in place by President 

Obama, Democrats in Congress, and the Federal Reserve, will be 

undermined by the reckless and misguided policies of this President and our Congressional Republicans. 

This President and his allies in Congress are working every day 

to roll back the critical protections for consumers, investors, and 

the economy that Democrats put in place in the Dodd-Frank Wall 

Street Reform and Consumer Protection Act. 

As they move to take an axe to Dodd-Frank, they seemingly have 

forgotten about the tremendous economic harm that resulted from 

the financial crisis and appear to be perfectly willing to pave the 

way right to another crisis. 

With their tax scam, Republicans have engineered a massive 

giveaway to corporations and the ultra-rich at the expense of hardworking Americans. The tax scam balloons the national debt by 

$1.8 trillion, gives corporations a $1.3 trillion tax break, and will 

eventually raise taxes on 86 million American families. 

Despite the huge windfall for corporations, most are not raising 

wages, but are instead buying back their own stock to boost share 

prices. Some corporations are giving one-time bonuses for optics, 

but these one-time bonuses represent a tiny fraction of the windfall 

the corporations will pocket. 

On top of that, the latest Trump budget request is, again, a 

cruel, senseless proposal that would be deeply harmful to millions 

of families, seniors, veterans, and persons with disabilities. The 

budget request slashes the social safety net, cutting billions of dollars in funding for supplemental nutrition assistance and health 

care and housing programs. 

These policies show that Donald Trump simply has no interest 

in standing up for Americans who need a hand up. Instead, he has 

put forth a series of harmful policies that tell families and communities that they are on their own. 

Our majority colleagues have also launched a full-fledged legislative assault on the Federal Reserve. The majority is pushing damaging legislative proposals that roll back constraints on the influence of commercial banks within the Federal Reserve System, 

eliminate tools that proved critical to the Federal Reserve’s support 

of the economy following the financial crisis, undermine the Federal Reserve’s focus on employment, and eliminate its independence from the broken Congressional appropriations process. 

The majority is also using the Federal Reserve as a piggy bank 

to pay for the cost of legislation like the latest short-term spending 

measure and now H.R. 4296, which will be on the floor today. 

These Republican efforts to undermine the Fed diminish its ability 

to support American workers if we face another crisis. 

Chairman Powell, I look forward to hearing your views on the 

economy and the path to sustaining the economic progress that was 

set in motion during the Obama Administration. 

I yield back the balance of my time. 

Chairman HENSARLING. The gentlelady yields back. 

The Chair now recognizes the gentleman from Kentucky, Mr. 

Barr, the Chairman of the Monetary Policy and Trade Subcommittee, for 1–1/2 minutes. 

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Mr. BARR. Welcome, Chairman Powell. 

Since the 2007 and 2009 financial crisis, the Federal Reserve’s 

distortionary balance sheet has exploded from just under $1 trillion 

to more than $4.5 trillion, injecting new and unknown risks into 

the economy. 

Clearly, whether you believe this unprecedented Government 

intervention into our economy had merit or not, it has distorted 

prices of key assets like housing, stocks, bonds, and treasuries. 

That was the intention. 

Fortunately, the Fed has begun to unwind these distortions, and 

I hope that they stick to their plan, enabling a more free market 

environment that, like the recent tax cuts and regulatory relief, 

will help foster economic growth and opportunity for all. 

Over recent weeks, we have seen more than usual levels of market volatility. Without question, Chairman Powell, this volatility is 

attributable to the fact that no Fed Chairman has ever inherited 

the task you have before you: The job of unwinding the most unprecedented and unconventional monetary experiment in the history of central banking. 

Your task is to continue to unwind the Fed’s asset purchases, 

gradually and predictably return to market-based interest rates, 

and remove monetary distortions from the economy without producing excessive market disruption. 

This is a serious responsibility, but at least the Fed now has the 

backdrop of a strong economy and faster economic growth from tax 

cuts so that it can achieve this very difficult task. 

I personally want to commend you, Chairman Powell, for leading 

the way on normalization and I encourage you to continue in this 

pursuit. I also commend your commitment to tailoring financial 

regulations for community financial intuitions and rightsizing our 

regulations. 

I look forward to your testimony and wish you the best. 

Chairman HENSARLING. Time of the gentleman has expired. 

The Chair now recognizes the gentlelady from Wisconsin, Ms. 

Moore, the Ranking Member of the Monetary Policy and Trade 

Subcommittee, for 1 minute. 

Ms. MOORE. Thank you so much, Mr. Chairman. 

Thank you, Chairman Powell, for attending today. I look forward 

to your testimony and getting to know you through your tenure as 

Chairman. 

You are taking over the Federal Reserve at a very precarious 

time. Your predecessor has talked about slowly tightening rates as 

employment has improved and thinking it was a return to normalcy. I am interested in hearing if that means an emphasis on increasing rates and/or unwinding the portfolio. 

Your tenure comes at a time when the GOP tax bill will only 

make your task more difficult, I believe, as changes to health care 

may increase inflation for coverage. 

The GOP tax bill is a windfall for shareholders that will untether 

the real economy that most of us live in, as distinct from Wall 

Street, leaving you stuck between competing problems: A contracting real economy and growing asset bubbles, with minimum 

room to lower rates if necessary. 

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We should thank Dodd-Frank that has buttressed the financial 

system and that we should hold on for, perhaps, a bumpy ride. I 

hope your term is successful and I look forward to your testimony. 

I yield back. Thank you, Mr. Chairman. 

Chairman HENSARLING. The time of the gentlelady has expired. 

Today we welcome the testimony of the Honorable Jerome H. 

Powell. This is the first time that Chairman Powell has appeared 

before this committee. It will not be the last time he appears before 

this committee. 

Chairman Powell took office as Chairman of the Board of Governors of the Federal Reserve System on February 5th, 2018, for 

a 4-year term. He has previously served as a member of the Board 

of Governors and took office on May 25th, 2012. Mr. Powell also 

serves as Chairman of the Federal Open Market Committee. 

Prior to his appointment to the Board, Chairman Powell was a 

Visiting Scholar at the Bipartisan Policy Center, as well as a Partner of the Carlyle Group. Chairman Powell has previously served 

as an Assistant Secretary and as an Undersecretary of Treasury 

under President George H.W. Bush. Prior to joining the Administration, he worked as an attorney and an investment banker in 

New York. 

Chairman Powell received an A.B. in politics from Princeton University and earned a law degree from Georgetown University, 

where he was the editor-in-chief of the Georgetown Law Journal. 

Without objection, the witness’ written statement will be made part 

of the record. 

Chairman Powell, again, welcome, and you are now recognized to 

give an oral presentation of your testimony. 

STATEMENT OF HON. JEROME H. POWELL 

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

Ranking Member Waters and members of the committee. 

I am pleased today to present the Federal Reserve’s Semiannual 

Monetary Policy Report to the Congress. On the occasion of my 

first appearance before this committee as Chairman of the Federal 

Reserve, I want to begin by expressing 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 would also like to express my appreciation for my colleagues on 

the Federal Open Market Committee. 

Finally, I want to affirm my continued support for the objectives 

assigned to us by 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. 

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 

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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 below that of a year earlier, and the lowest rate 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 in 

wages 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 

GDP rose at an annual rate of about 3 percent in the second half 

of 2017, 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 demand for U.S. exports has 

provided considerable support for 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 long run with our Congressional mandate. 

Overall, consumer prices, as measured by the price index for personal consumption expenditures, or PCE inflation, as we say, 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 bit 

higher toward the end of the year than in earlier months. 

After substantially easing during 2017, financial conditions in 

the United States have reversed some of that easing over the past 

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month. At this point, we do not see these developments as weighing heavily on the outlook for economic activity, the labor market, 

or inflation. Indeed, the economic outlook remains strong. 

A 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 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 committee’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 we will continue to monitor 

inflation developments closely. 

Turning 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 

rate for the Federal funds rate by a quarter percentage point at our 

December meeting, bringing the target 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, and that 

program has proceeded quite 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. 

Engaging 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 committee’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 

conducts monetary policy rules that connect prescriptions for the 

policy rate with variables associated with our mandated objectives. 

Personally, I find these rule prescriptions quite helpful. 

Careful judgments are required about the measurement of the 

variables used in these rules, as well as about the implication of 

the many issues that the rules do not take into account. 

I would like to note that this monetary policy report provides further discussion of policy rules and their role in our policy process, 

extending the analysis we introduced last July. 

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Thank you very much, and I look forward to taking your questions. 

[The prepared statement of Mr. Powell can be found on page 64 

of the appendix.] 

Chairman HENSARLING. Thank you, Chairman Powell. 

The Chair now yields to himself for 5 minutes. 

Chairman Powell, in your statement, you used the term ‘‘normalization.’’ I would like to explore that for a moment, and particularly 

with respect to interest on excess reserves. Is our expectation, 

should it be, that IOER is the new primary monetary policy tool, 

or will it instead be the fire extinguisher behind the glass that you 

break out in times of emergency? What should be our expectation? 

Mr. POWELL. Mr. Chairman, interest on excess reserves is currently the principal policy tool that we use to keep the Federal 

funds rate in the range that we designate. We have not made a decision in the longer run whether that will continue to be our framework or whether we will return to something more like what we 

did before the crisis. 

I don’t have a schedule for—I don’t expect to be returning to that 

decision in the near term. I would just say that our current approach seems to be working very well. It gives us control over 

rates, and the market seems to understand it. 

Chairman HENSARLING. It remains an open question? 

Mr. POWELL. In the long run. The long-run operating framework, 

does remain open, yes. 

Chairman HENSARLING. OK. As you heard in my opening statement, it still remains a concern. You would be hard-pressed to find 

in the Congressional Record or any testimony from members of the 

Federal Reserve at the time Congress granted this power that it 

would be used to supplant open market operations of the FOMC. 

I trust we will be having further discussions about that. 

With respect to normalization, I think you have said publicly 

that you expect the new normal, with respect to the size of the balance sheet, to be roughly $2.5 trillion to $3 trillion and get there 

over 3 to 4 years. Do I understand that correctly, Mr. Chairman? 

Mr. POWELL. Yes. 

Chairman HENSARLING. OK. As I understand it, though, I have 

not been able to see on the public record the expectation with respect to the composition of the balance sheet. I believe that currently you are carrying $2.4 trillion of treasuries, $1.8 trillion of 

mortgage-backed securities. Is our expectation—that is roughly 

back of the envelope, one-third, two-thirds ratio. Is it your intention to keep that same ratio of mortgage-backed securities? 

Again, many of us are concerned about the possibility of the Fed 

involved in credit allocation decisions. Because right now, I don’t 

really see a glide path to a treasuries-only balance sheet. 

Mr. POWELL. No, sir. Our intention over the long term is that the 

balance sheet would be no larger than it needs to be to implement 

monetary policy, and that it would consist primarily of treasury securities. 

We purchased the mortgage-backed securities in the aftermath of 

the crisis. That was an unusual practice, and it was something that 

we did in unusual circumstances. Those will run off over time, and 

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I don’t expect that we would use that tool again, other than in a 

very severe situation. 

Chairman HENSARLING. The Monetary Policy Report that came 

out days ago shows the balance sheet roll off caps. What I am having a little trouble with is, as I look at the charts in the report, 

Mr. Chairman, you don’t seem to have sufficient MBS (mortgagebacked security) redemptions that allow you to reach your $20 billion runoff pace. 

As I read the charts, I think the expectation is by the end of the 

year, we are looking at a $50 billion balance sheet roll off. But as 

of today, I don’t think you have sufficient treasuries in MBS to do 

that. How do you achieve it? 

Mr. POWELL. In the case of mortgage-backed securities, the roll 

off is less predictable. Of course with treasuries, you know when 

they are going to mature and you can really see what that roll off 

is going to be. With mortgage-backed securities, roll off will depend 

on the level of interest rates and the level of people refinancing 

their mortgages. 

As rates go up, refis will go down and you will see slower roll 

off— 

Chairman HENSARLING. But should the public expect, by year’s 

end, a $50 billion roll off? 

Mr. POWELL. No, I would say that the public should expect that 

there will be a consistent substantial roll off this year and the next 

year, that over the period of maybe 4 years will get us back to 

something approaching a new normal. I don’t know that you can 

say it will be— 

Chairman HENSARLING. But we don’t know the exact pace. 

Mr. POWELL. Yes, and I don’t think that the—the caps are not 

going to be binding in the case of the MBS. 

Chairman HENSARLING. My time is starting to wind down. I 

would like to explore inflation targeting. In your testimony, it appears the Fed is keeping to their 2 percent inflation target. I am 

still trying to—I struggle with how this is commensurate with a 

statutory mandate for achieving price stability. 

But I also saw from the FOMC minutes, the most recent minutes, that there was at least discussion about moving from the 2 

percent target to a target range. At least 2 percent is a linear function. A range, obviously, is not. 

I am really struggling with how is this commensurate with price 

stability? Some commentators are calling for a 3 percent, 4 percent 

target. 

Two questions, number one, do we have an expectation the Fed 

will move from its 2 percent target? At some point, at 3 percent, 

4 percent, 5 percent inflation targeting, have you violated your 

price-stability mandate? 

Mr. POWELL. Our current framework says that the committee 

would be concerned with sustained or persistent deviations of inflation above or below 2 percent. We understand that inflation is 

going to be buffeted by various factors, and that it may not be exactly at 2 percent. It will be above; it will be below. We see it as 

a symmetric objective. 

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I would say that framework is working. The market understands 

it. We have been trying to get up to 2 percent. But generally speaking, inflation has been low and stable for 15 or 20 years now. 

Chairman HENSARLING. My time has long since expired. 

The Chair now recognizes the Ranking Member for 5 minutes. 

Ms. WATERS. Thank you very much. 

Chairman Powell, with a permanent voting seat on the FOMC, 

and its role in supervising some of the largest and most complex 

financial institutions in the country, the president of the New York 

Federal Reserve has one of the most important economic policymaking roles in the Nation. 

Bill Dudley will step down this year. The search for his replacement is under way. Historically, the New York Fed’s close proximity to Wall Street has led to the selection of an individual with 

close ties to the financial sector. 

In your view, how important is it that the individual chosen is 

a diverse candidate, with demonstrated independence from Wall 

Street and a strong commitment to the Fed’s maximum employment mandate and regulatory responsibilities? 

What steps is the board taking to ensure that candidates from 

diverse gender, racial, and ethnic backgrounds are given due consideration? If diverse candidates are not afforded due consideration, are you prepared to exercise your power as Chair to reject 

such candidates to serve as the next president of the New York 

Fed? 

I know you have a lot on your plate, but I have to put this question to you because we have to do better about diversity, in particular at the highest levels. Not only am I looking at what is happening with the New York Fed and the possibility there, but we 

have to look at our own Fed, and think about how diverse is it at 

the top levels, management levels. Help me out. What do you think 

about this? 

Mr. POWELL. Thank you, Ranking Member Waters. I have been 

involved. This is the seventh process to select a reserve bank president that I have been involved in since I joined the Fed in 2012, 

so I am very familiar with the way the process works. 

We always insist that the search committee, which consists of 

the B and C directors of the Reserve Bank, hire a national search 

firm. We always insist—and they don’t need to be pushed into this, 

this is something they want to do—we always insist that there is 

a highly diverse candidate pool and that diverse candidates are 

given serious consideration and every chance to become the successful participant in that process. 

I can absolutely guarantee you that that will continue to be the 

case. We will always have diverse candidates. They will always 

have a fair shot. 

I cannot in any individual case guarantee that there will be a diverse outcome, but I can guarantee that the process will be working in that direction. 

Ms. WATERS. I appreciate that. I am sure that you are committed 

to that. But the diverse candidate question is a question that many 

of us have, and we don’t know that there has been consideration 

for diverse candidates with these very, very important positions. I 

am wondering where do the recommendations come from? How is 

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11 

the outreach done and how can you ensure that there are diverse 

candidates to be considered? 

Mr. POWELL. Different Reserve Banks have done new and different things. We have really raised our game in this area. For example, the New York Fed has done extensive outreach to community groups and of that nature, universities and all sorts of things 

around the New York region and around the Nation. 

In addition, the national search firms have a very large presence 

in the candidate population and know who is out there, know who 

would be a good candidate. They are always trying to find new candidates, and we are too. 

It is something we work very hard at and are always interested 

in having new ideas for qualified candidates as well. We invite the 

general public generally to offer their thoughts, as well as some of 

the interest groups. 

Ms. WATERS. There is an organization, maybe more than one 

that is made up of minorities in financial services, that include everything from those who are doing management in the financial 

services industry, working with hedge funds, with equity firms, et 

cetera. Have you reached out to those—not you, but do you know 

if those firms have been contacted? 

Mr. POWELL. I know that our search committees and our headhunters have reached out to many, many groups of that nature. 

Ms. WATERS. How can I follow up on that? Is it possible that 

those of us who know about these organizations can ask them if 

they have been contacted? If not, how can we refer them? 

Mr. POWELL. We will be happy to provide you with the contact 

person at the New York Fed who is responsible for the current 

search and in case of any future searches will be able to do the 

same. 

Ms. WATERS. I will follow up on that, and I thank you very much. 

I yield back the balance of my time. 

Chairman HENSARLING. The gentlelady yields back. 

The Chair now recognizes gentleman from Kentucky, Mr. Barr, 

Chairman of our Monetary Policy Subcommittee, for 5 minutes. 

Mr. BARR. Thank you, Mr. Chairman. 

Chairman Powell, congratulations again on your confirmation. I 

appreciate your commitment in our conversations to transparency 

and your demonstration of that commitment to date to clearly communicate the Fed’s monetary policy trajectory. 

You have noted on numerous occasions that the remaining slack 

that may exist in the labor market is at least in part attributable 

to stagnant wage growth. In your confirmation hearing, a Senator 

on the Banking Committee cited a 2016 Fed research paper concluding that corporate tax cuts do not translate into higher wages. 

But we have seen a wave of corporate announcements of bonuses 

and raises since the tax cuts were enacted. Specifically over 4 million workers and counting have received over $3 billion in bonuses 

and raises during the last 8 weeks. The Labor Department recently 

announced the largest increase in wages since the end of the recession. 

Based on these numbers, is the Senator in question, and are the 

Fed researchers that he cites, are they wrong and have tax cuts in 

fact helped increase wages as your testimony indicates that wages 

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12 

should be increasing at a faster pace as a result of a more stimulative fiscal policy? 

Mr. POWELL. Thank you, Chairman Barr. It is very hard to trace 

through the effects of a change in tax policy into things like wage 

growth in the economy. But let me try. 

Lower corporate taxes should lead to higher investment. The effect is not easy to estimate but you would think and the studies 

find that it should lead to higher investment. Higher investment 

should lead to higher productivity over time, and higher productivity should lead to higher wages over time. 

It is very hard to put your hands on exactly how much that 

would be, but higher productivity, of course, is very, very welcome, 

and will be driven by higher investment. 

Mr. BARR. Clearly the wave of bonuses and raises and the announcements certainly suggest that there is upward pressure on 

wages as a result of these tax cuts. 

In a 2015 speech, you expressed concern that quantitative easing 

and unconventional monetary accommodation could fuel dangerous 

risk-taking. Specifically, you said, quote, ‘‘The current extended period of very low nominal rates calls for a high degree of vigilance,’’ 

unquote. Can you elaborate? What specific risks have been created 

that the Fed now has to watch? 

Mr. POWELL. I do think this is a time when we need to be alert 

to buildup of either financial imbalances or to inflation building up. 

We don’t really see those right now. I think I also said that in my 

2015 speech. 

But if you look at the financial stability situation broadly, we do 

see some high asset prices. What we don’t see is the buildup of leverage among households. We see the banking system and the financial system generally as being very resilient. I think the financial stability picture shows at most modest risks. 

Mr. BARR. If I could point out a possible risk that is out there 

and have you react to it that was created by the unconventional 

monetary policy. Some have blamed the Fed for contributing to the 

2008 financial crisis by producing an inverted yield curve, where 

short-term interest rates exceeded long-term rates. 

At the beginning of 2011, the spread between the 10-year and 2- 

year Treasury notes was almost 3 percent. But as of February of 

this year, that same spread has been whittled down to a mere 0.5 

percent, and this is a 450 percent drop. Given a flattening yield 

curve, and economic conditions that you can see, call for raising the 

Fed funds rate, how will the Fed avoid another inverted yield 

curve? 

Are there any plans within the balance sheet normalization 

strategy to roll off longer-term assets more quickly to counteract 

that flattening yield curve? 

Mr. POWELL. Flattening of yield curves in the past has been a 

precursor of recessions, but largely because in many prior recessions the Fed had to raise rates quickly to hold inflation down. 

That is not the situation we have now. It is very typical for the 

yield curve to flatten as short-term rates come up, as the economy 

strengthens. I don’t see a particularly large—there is always a risk 

of a recession at any given point in time. I don’t see it as at all 

high at the moment. 

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13 

Mr. BARR. I don’t either. But it is a risk that normalization after 

this unprecedented, unconventional policy is created. To dovetail 

off of what the Chairman’s point was in terms of the roll off strategy, it would be important if there are not enough maturing mortgage-backed securities, that mature in order for the Fed to actually 

hit its monetary roll off targets. To that end, to avoid an inverted 

yield curve, do you anticipate perhaps selling assets? 

Mr. POWELL. No, I certainly feel that our balance sheet normalization plan was carefully crafted and carefully rolled out, and the 

markets took it without much of a reaction. I think I would have 

little inclination to change the general parameters of it. 

Mr. BARR. Thank you. My time has expired. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentlelady from New York, Mrs. 

Maloney, Ranking Member of our Capital Markets Subcommittee. 

Mrs. MALONEY. Thank you. 

Chairman Powell, the Fed’s median projection is for three interest rate increases in 2018. What would cause you to raise rates 

more than three times this year? Would you have to see a material 

increase in inflation, faster GDP growth, higher wage growth? 

What would cause you to raise rates more? 

Mr. POWELL. Thank you, Mrs. Maloney. You are right that every 

quarter each participant in the FOMC submits a projection of what 

they feel is going to happen in the economy and also their projection for appropriate monetary policy. At the December meeting, the 

median participant called for three rate increases in 2018. 

Now, we will submit another projection, all of us, in 3 weeks. But 

since then, what we have seen is incoming data that suggests a 

strengthening in the economy. We have seen continuing strength 

in the labor market. We have seen some data that will, in my case, 

add some confidence to my view that inflation is moving up to target. 

We have also seen continued strength around the globe. We have 

seen fiscal policy become more stimulative. I think each of us is 

going to be taking the developments since the December meeting 

into account and writing down our new rate pass as we go into the 

March meeting, and I wouldn’t want to prejudge that. 

Mrs. MALONEY. OK, the last time the Fed released its projections 

for the pace of interest rate increases was in mid-December. Since 

then, we have had two major financial events. One was the tax-reform legislation and the other was the major budget agreement. 

My question is, has your outlook for how quickly the Fed should 

tighten monetary policy changed in light of tax reform and budget 

agreement? 

Mr. POWELL. I would say that my personal outlook for the economy has strengthened since December. Again, each member of the 

FOMC is going to be writing down a new set of projections and a 

new estimate of appropriate monetary policy as we go into the 

March meeting, which begins 3 weeks from today. So I wouldn’t 

want to prejudge that new set of projections, but we will be taking 

into account everything that has happened since December. 

Mrs. MALONEY. Yesterday, Fed Governor Quarles, who is leading 

the Fed’s review of post-crisis regulations stated, and I quote, ‘‘We 

are not looking to relax regulation,’’ end quote. He also said, and 

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14 

I quote, ‘‘We are not looking to reduce capital for banks,’’ end 

quote. Do you agree with Governor Quarles that your goal is not 

to either relax regulations or to reduce bank’s capital requirements? 

Mr. Chairman, I ask unanimous consent to place his comments 

in the record. 

Chairman HENSARLING. Without objection. 

Mr. POWELL. The way I think about it is this. We have several 

primary pillars of post-crisis financial regulation that we want to 

strengthen and protect, and those are high-risk based capital, high 

liquidity, stress testing, and resolution. We want to make sure that 

we keep those strong and, by the way, transparent as they apply 

particularly to our largest institutions. 

I think as we move down into smaller and smaller institutions, 

down to the community banks, we want to make absolutely sure 

that we have tailored regulation so that we are achieving our safety and soundness goals without creating excessive burden. That is 

really the way I think about what we are doing. 

Mrs. MALONEY. Last, Chairman Powell, last week, several academics published a paper claiming that the Fed’s quantitative easing programs during the Great Recession were largely ineffective at 

stimulating the economy. New York Fed President Dudley and Boston Fed President Rosengren disagreed and said that they thought 

that quantitative easing had been effective. 

My question to you is, do you think the Fed’s quantitative easing 

program was effective, and do you believe the Fed should keep this 

tool in its toolbox for future challenges? 

Mr. POWELL. I do think our post-crisis policies were effective. I 

haven’t carefully studied that report yet, but let me say that what 

these reports try to do is they try to identify the surprise element 

in a particular Fed announcement and isolate that from what was 

already priced into the market. 

Most things that happen on announcement day are already 

priced in. It is very hard to isolate that surprise element. This 

paper takes a different way of doing that, and it comes up with the 

answer that comes in. 

Overwhelmingly, studies of the effects of asset purchase programs suggest that asset purchase programs did their job, which 

was to create downward pressure on longer-term interest rates 

through the term premium. I would say that that is very likely the 

case. 

Mrs. MALONEY. Thank you. My time is up. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from Missouri, Mr. 

Luetkemeyer, Chairman of our Financial Institutions Subcommittee. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman, and welcome, 

Chairman Powell. Congratulations, and it is nice to see a banker 

actually being the chief banker of this country instead of an economist. To me, I think we get to look at some different policies, and 

I think we have a different perspective, and I think that is healthy. 

Just want to start by talking about leverage lending a little bit. 

I want to follow up on the GAO (Government Accountability Office), which determines that agency leverage lending guidance is a 

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15 

rule under the Congressional Review Act (CRA), and is therefore 

ineffective because it was never submitted to Congress. 

As I pointed out in the past, the same would presumably be true 

for other agency guidance. I have heard reports from banks that 

many of them have outstanding matters requiring attention, or 

MRAs, based on such guidance, and that they are still being told 

either by examiners or their compliance departments to treat guidance as binding regulations. 

Mr. LUETKEMEYER. Although no one seems to be disputing GAO’s 

conclusion, the word does not appear to be getting out. Would you 

agree that rules are rules and guidance is guidance, and guidance 

is not binding? 

Mr. POWELL. Yes, Mr. Luetkemeyer, I would agree absolutely 

with that. I think in the case of the leveraged lending guidance, we 

do accept and understand that that is nonbinding guidance. In fact, 

since the GAO ruling, we have made it a point to go out and make 

sure that that message is getting out to supervisors of banks. 

We are also thinking of—we are in discussions and thinking 

about other ways we can underscore that, perhaps putting it out 

for further comment. 

Mr. LUETKEMEYER. I just left another meeting before I got here, 

of a group of bankers from more of the States around the country. 

We were discussing issues similar to this with regards to the culture within agencies and the ability of change to be taking place. 

Even though we changed the head of the agency, sometimes the 

message doesn’t get all the way to the bottom. 

When I made that comment, I saw a lot of heads nodding in the 

audience. There is concern that while the leadership has changed, 

good intentions may be there, that, again, this needs to filter down 

all the way through the entire agency and an understanding needs 

to take place by everybody that this is a new way of doing business, that guidance is guidance, rules are rules, and there is a big 

difference between how they are adjudicated and administered and 

enforced by the body itself. I sure appreciate your taking that into 

consideration. 

Mr. POWELL. It is an important point, and it is a feature of our 

distributed Federal Reserve system, of which I am a big supporter, 

of the structure of our system. I think we know how to manage 

that problem, and I think we actually do a pretty good job at it. 

We are going to continue to try to do the best job we can. 

The heads of supervision at all Reserve Banks are in close and 

constant conversation and discussion with Vice Chair Quarles and 

others at the board. I don’t sense any reluctance to engage in those 

discussions, and I think it is on us to communicate well and successfully. We will try to do that. 

Mr. LUETKEMEYER. I look forward to working with you on that, 

because I told the bankers when I left them, if you see a problem, 

let me know, because I have a chance to talk to Mr. Powell myself 

here this morning, so we will carry the message. Thank you for 

that. 

With regards to data security and cybersecurity, this is an issue 

that we are working on right now. My committee, my subcommittee, has a bill that we are putting together. Data security, 

cybersecurity threats have the potential to wreck our economy, to 

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16 

wreak havoc with it. We subject financial companies to an absurd 

maze of cybersecurity regulations. 

The Federal Reserve is one of the many entities that examines 

for cybersecurity. There is zero harmonization between the agencies. The result is that financial firms spend thousands of hours 

complying with regulations, rather than actually protecting their 

systems and their customers. Do you see this as a problem? 

Mr. POWELL. I do. I think cybersecurity overall is one of the really significant threats and we can never feel like we have done 

enough to deal with it. We have tried to harmonize through the 

FFIEC process, our supervisory guidance on what we expect from 

firms on cybersecurity issues and data safety and that kind of 

thing. I am sure we can do a better job, and we are committed to 

trying. 

Mr. LUETKEMEYER. I know that is an issue that—financial institutions in particular are right in the crosshairs of this because of 

the amount of personal data that they hold and the risk that is 

there. They are an easy target. We want to make sure that we 

work on that issue and work with you. 

You sit in a position where you can harmonize those rules and 

regulations, I think, pretty easily with the different discussions and 

different groups of regulatory agencies that actually meet on a regular basis discussing things. 

Is this ever discussed at all in your meetings with the Fed, the 

Treasury, FDIC (Federal Deposit Insurance Corporation), Comptroller, CFPB (Consumer Financial Protection Bureau), any of 

those meetings? Is this ever discussed at length? 

Mr. POWELL. Yes, it is. In fact, there is a group Chaired by 

Treasury which focuses on cybersecurity issues which the Chair— 

I haven’t attended one of those yet, but as Chair, I will attend 

those meetings. It is certainly a very big focus for Treasury and for 

us. 

Mr. LUETKEMEYER. My time has expired. 

Thank you, Mr. Chairman. I yield back. 

Chairman HENSARLING. Time of the gentleman has expired. 

The Chair now recognizes the gentleman from California, Mr. 

Sherman. 

Mr. SHERMAN. Chairman Powell, welcome. As the Chair of our 

committee points out, you are required to be independent and accountable. You are also required to be tall and short. 

Your opening statement mentions great exports. But you don’t mention that our trade deficit has gone up by $60 billion in the last 

year. I would point out that the entire economic establishment in 

this country has made it almost prohibited to discuss the trade deficit. That is why the country elected Donald Trump President. 

Now, the Chair of the subcommittee boasts that we had a good 

economy in 2017. He is right. We had Obama’s fiscal policies, 

Obama’s tax policies, Obamacare, Dodd-Frank, Janet Yellen’s monetary policies and her big balance sheet, and we had a great year. 

As a matter of fact, we have been on a roll since 2011. We were 

closing in on having a high enough employment rate so that we 

would have a labor shortage and higher wages. We were going well, 

and so instead of continuing to be on a roll, we have abandoned 

those policies and adopted a profligate tax and spending policy, 

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throwing away the budget caps, $1.5 trillion plus interest of the 

debt from the tax bill. 

But I think that we will still do well because our scientists, our 

entrepreneurs, and our workers are the best in the world, and they 

will make up for all the mistakes we are making here in Washington. 

I see behind you, sir, the green shirts that call for full employment. It is not enough to go with the economists’ definition of full 

employment, say 4 percent. We need real full employment that 

causes a labor shortage and desperate employers bidding up the 

price of labor. 

That is also consistent with the fact that many economists are 

saying that you should be aiming not for 2 percent, but 2–1/2 percent inflation. That is the kind of expansionary economy that will 

allow these folks to come back in fancy polo shirts with the same 

slogan on it in a couple years from now. 

Now, when we talk about some workers getting a $1,000 bonus, 

yes, a few have, but a family of five’s share of the increase in the 

national debt from the tax bill is $26,000. What greater proof do 

we need of the need for financial literacy in this country than that 

some charlatan can say, ‘‘Here is the deal. I will give you $1,000. 

It is money in your pocket, and we will just slap a $26,000 mortgage on your future.’’ 

Now, Chairman Powell, in your confirmation hearings, you said 

that, I believe, that no bank is any longer too big to fail. I would 

point out that the biggest banks are bigger now than in 2008 when 

they came to us and said they were too big to fail; they would pull 

the entire economy down. We had to bail them out with $700 billion. 

I would point out that the Wall Street prices into the value of 

the banks’ stock, but more importantly, to the value of their unsecured debt, an implicit Federal guarantee, an assumption that they 

will be bailed out. 

I have a number of questions for the record, but I will actually 

ask one for you to respond to. We have adopted these profligate fiscal policies. Huge tax cuts leading to a massive increase in the deficit number that is right behind you, then we busted the budget 

caps. 

Is our monetary policy going to need to be more restrictive this 

year than it would have been had we not adopted these profligate 

fiscal and tax policies? 

Mr. POWELL. Thank you. Of course when we are setting monetary policy we are focused on achieving stable prices and maximum 

employment. In doing that, we consider many, many factors all 

around, the global economy, et cetera. 

Fiscal policy changes can have an effect, and changes of this size 

can have an effect. That can be seen, of course, in the path to policy. It is very hard to say in advance what that would be, but the 

answer to your question is generally we take all those things into 

account. 

Mr. SHERMAN. The more profligate the fiscal and tax policies, the 

higher the interest rates you need to set all other things being 

equal? 

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Mr. POWELL. I would just say our own job is to focus not on fiscal 

policy, but on monetary policy, and so that is our frame of reference. 

Mr. SHERMAN. Thank you for evading my question. 

Chairman HENSARLING. Time of the gentleman has expired. 

The Chair now recognizes the gentleman from California, Mr. 

Royce, Chairman of House Foreign Affairs Committee. 

Mr. ROYCE. Thank you, Mr. Chairman. Chairman Powell, thank 

you very much for being with us here today. I also wanted to thank 

you for another effort you undertook, and that was in 2011. You 

spent a considerable amount of time with members of the House, 

trying to walk them through the debate that we had on raising the 

debt ceiling. 

You were trying to get us focused on all the unintended consequences, which would occur if we did not raise that debt ceiling, 

and I very much appreciated the time, effort, and facts that you 

put forward. 

You have a new voice now at the Fed. I assume your opinions 

on the severe consequences of failing to raise the debt ceiling remain. I know that in August, it looks as though the Federal Government is going to have to borrow, or have to roll over, $500 billion of debt in August. 

If we are in a quasi-default situation in August, then clearly it 

is a real question as who would want to purchase that debt and 

at what cost would they purchase that debt? Clearly a premium on 

that, a 10 percent premium, it would be a $50 billion hit right 

there to the interest expense, but there is much more than that 

that would befall the impact on our markets and, frankly, at corporate debt. 

Maybe I could just give you this opportunity to explain some of 

the concerns about that issue? 

Mr. POWELL. Thank you, Mr. Royce. Of course we don’t do fiscal 

policy at the Fed, but I will accept your invitation and just say that 

it is very important that the Federal Government and government 

generally be on a sustainable fiscal path, meaning as the baby 

boomer generation retires, we will need to address the significant 

fiscal issues that are coming to us over time. I think it is important 

that Congress do that. 

At the same time, the debt ceiling should be something that we 

always raise in a timely fashion. There is no other country in the 

world that has a separate vote over whether to pay bills that we 

have already agreed to incur. I think the United States has never 

defaulted on a principal or interest payment and never should. 

I think doing so would be something I would really hate to see 

and could bring very significant consequences. 

Mr. ROYCE. I appreciate your articulating that. You have also 

said that raising the ceiling is only the first step. The job that must 

be attacked is deficit reduction and addressing the cost associated 

with mandatory spending. 

We heard a similar thing from Chairman Greenspan, we heard 

that from Chairman Bernanke and Chairman Yellen. We are on an 

unsustainable budget path, are the remarks that Fed Chairmen 

have traditionally shared with us. 

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As I have raised with previous Chairs, I don’t think the American public really understands the magnitude of the problem we 

are facing. We certainly haven’t galvanized the political action necessary to address it. 

What do you think we, and what do you think you can do to raise 

the alarm that the biggest and fastest growing costs in mandatory 

spending must be addressed? 

Mr. POWELL. I think I will follow the path of my predecessors 

and not become a regular commentator on fiscal issues, but rather 

limit myself to a couple of overarching points. 

Mr. ROYCE. Fair enough. 

Mr. POWELL. The first of which is just that we really need to get 

on a sustainable fiscal path, and that the time to really be doing 

that is now. The second thing I will say is that when fiscal changes 

are made, it is important that, to the extent possible, they be directed at enhancing the productive capacity of the economy. 

We can’t affect productivity other than through keeping prices 

stable and regulation on a balanced basis. Productivity is the thing 

that allows incomes to rise, per capita incomes to rise, over time. 

We don’t control the potential long-run growth rate. You have 

much more authority over that, and I think to the extent fiscal policy can focus on ways to increase attachment to the labor force, create incentives for more skills and aptitudes among our labor force 

and greater investment in R&D and that kind of thing, that is a 

healthy thing. 

Mr. ROYCE. Thank you very much, Chairman. 

Chairman HENSARLING. Time of the gentleman has expired. 

The Chair now recognizes the gentleman from New York, Mr. 

Meeks. 

Mr. MEEKS. Thank you, Mr. Chairman. Mr. Powell, welcome. 

The Treasury Department is currently undergoing a review of 

the CRA, Community Reinvestment Act’s regulations. We will be 

recommending changes to the banking agencies, including the Federal Reserve. 

My question to you, Mr. Powell, is do you believe that a financial 

firm’s demonstrated pattern and practice of racial discrimination in 

lending should be considered during a CRA examination? 

Mr. POWELL. Thank you, Mr. Meeks. I am familiar with that 

process, and I take the point of it to be, what I am understanding 

about it, is to inquire into whether CRA policies are, in fact, providing benefits to their intended beneficiaries. I think we are part 

of that. We are providing our own input into that process. 

In terms to the answer to your question, I think it is currently 

the practice that such considerations are considered in CRA exams. 

Mr. MEEKS. It is currently, but I am concerned that some want 

to defang CRA and take away as part of the process the history as 

far as discrimination practices and pattern. That is why I am asking you, since the Treasury will be looking at a new—and I am a 

fan—I think we need to update CRA, but I believe that in looking 

at CRA you should take into consideration one’s practice and pattern of racial discrimination. I am asking you, sir, what is your position on that? 

Mr. POWELL. I haven’t taken a position on that. I want to see the 

overall work that comes out of this and evaluate it on that basis. 

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I may well come to the view that you have, but I really haven’t 

thought carefully enough about it. 

Mr. MEEKS. All right. I just want to remind you, sir, that the 

CRA was Congress’ response to widespread racial discrimination, 

and in the form of redlining. That was one of the primary reasons 

of the implementation of CRA. If you are even thinking about stripping out practice and patterns of discrimination, you are thereby 

gutting the reason Congress did CRA in the first place. 

It seems to me that that should not even be a part of the dialog. 

In fact, as just given to me by the Ranking Member, we have an 

article, Lending Discrimination and Redlining Still Plaguing St. 

Louis, that all the new data shows. We can go from city to city 

across America. 

I have real concerns about your answer just now, because to even 

think about removing that from the CRA, as much as I am an advocate of renewing, because I think that when you look at where 

we are now and how banking is done and financial services are 

rendered, is completely different than when it was done when we 

initiated, but the essence of it was to stop redlining and racial discrimination. 

Mr. POWELL. Let me say that we take a very serious view of any 

kind of racial discrimination in lending, and we look at it through 

a variety of our consumer affairs tools, and it is something we take 

very seriously. 

Mr. MEEKS. Now, let me ask this question, and I would like to 

follow up with you on this matter particularly. 

But let me ask you this when we just talk about these tax cuts. 

How much of corporate tax savings do you think will actually go 

toward wages, as opposed to stock buybacks, capital investments, 

and mergers? 

I say this because I want to just let you know, even before you 

answer, Morgan Stanley announced it is estimated that 43 percent 

of corporate tax savings will go to buybacks and dividends, which 

enriches just the top 1 percent of those major investors; 19 percent 

would go toward mergers and acquisitions; 17 percent would go toward investments; and only the crumbs, 13 percent, would go to 

one-time bonuses and scant raises. 

In fact, there are nine pharmaceutical companies that have already announced over $50 billion in buybacks since the tax law 

was passed. How much of these taxes will go into salaries and 

wages? Or how much of it will really help the income disparity to 

increase and grow wider? 

Mr. POWELL. We have particular responsibilities, maximum employment, stable prices. We don’t have estimates of that kind of 

thing. There are many other estimates out there, but honestly we 

don’t have a Fed estimate for what that number would be. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Minnesota, Mr. 

Emmer. 

Mr. EMMER. Thank you, Chair Hensarling. 

Thank you, Chair Powell, for being here. Good to see you again. 

I want to go back to something that I think was touched on when 

you began your testimony this morning. During your confirmation 

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hearing, you spoke about the importance of tailoring regulations to 

fit the specific scope and practices of a financial institution. 

I think your quote was actually, ‘‘Even as we have worked to implement improvements to the banking system, financial system, we 

have also sought to tailor regulation and supervision to the size 

and risk profile of banks, particularly community institutions.’’ 

I just want to make sure that your view on continuing to tailor 

regulations to the specific institution has remained the same. You 

are still committed to doing that? 

Mr. POWELL. Very much so. It is at the heart of what we are 

doing at the moment, which is to focus on smaller institutions and, 

without losing any safety and soundness, try make sure that our 

regulation is no more burdensome than it needs to be and then 

work our way up the food chain. 

Mr. EMMER. Right, because you would agree that we need everyone in the financial services food chain, all the way from the largest banks in the world to the small family community banks on 

Main Streets all across this country? 

Mr. POWELL. Indeed. Small businesses create a lot of the jobs 

and small banks have a disproportionate share of small business 

lending, although the bigs lend to the small businesses. We really 

want that credit to flow and we don’t want regulation to inappropriately create too much burden. 

Mr. EMMER. Right. Earlier this month, Secretary Mnuchin testified before this committee. He expressed his commitment to working with Congress to make changes in statute to the way regulators tailor regulations based on the size and complexity of a financial institution. Would you also support this type of legislative 

effort, where necessary, to put these tailored regulations in statute? 

Mr. POWELL. Yes, we would and we have. Of course, the devil is 

in the details. But as a general matter, I think we could see some 

law changes that would enable us to better and further tailor regulation to small or medium-sized institutions. 

Mr. EMMER. I want to move onto another topic, but continuing 

the discussion on the importance of getting our regulations right to 

benefit Main Street and rural America. 

Minnesota’s 6th Congressional District, which I represent, is 

home to some of the finest and most productive farmers and manufacturers in the world. Many of these same individuals and businesses, who are making such a positive economic impact on my district, are inadvertently harmed by the current formulation of the 

supplemental leverage ratio (SLR) that fails to recognize the exposure-reducing nature of initial client margin. 

This bank capital rule is increasing clearance costs for farmers 

and manufacturers, making it more expensive for them to use the 

cleared derivatives market. 

I hope that as you and your colleagues at the Fed review the 

SLR that you come to the same conclusion that a coalition of Republican and Democrat members on this committee have, that we 

must recognize the exposure-reducing nature of initial client margin in a revised bank capital rule. 

Will you commit to working with us and our colleagues on the 

Ag Committee who want their constituents to have access to affordable and competitive cleared derivatives markets? 

mcarroll on FSR431 with DISTILLER

22 

Mr. POWELL. Yes, I will. We think we need the leverage ratio as 

a high and hard backstop to risk-based capital. We think that the 

current calibration of the enhanced supplemental leverage ratio is 

not appropriate. We are looking at a recalibration that would address that exact concern. 

Mr. EMMER. Thank you. I want to move on to one other topic before my time runs out. Pages 1 and 5 of your monetary policy report dated February 23 refers to the labor market. There are a couple of specific entries with respect to numbers of people that our 

unemployment rate is at 4.1. It is essentially full employment. 

But I believe it is on page 5 where it references the percentage 

of—and I am going to add able-bodied working aged adults that are 

actually in the workforce is about 62 percent. 

This is still abnormally low. Don’t you have any concern about 

that number and, well, why don’t I add this? You talk about retirements being part of this, the baby boomers leaving the marketplace, the labor force. 

But doesn’t this also have something to do with the disincentives 

created by our welfare system in terms of giving people an opportunity to get back into the job market? 

Chairman HENSARLING. Time of the gentleman has expired. A 

very brief answer from the witness, please? 

Mr. POWELL. We focus on labor force participation all the time. 

It is a really important thing and certainly worthy of a longer discussion, which I would be delighted to have with you. 

Mr. EMMER. We will do that, thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Massachusetts, 

Mr. Capuano. 

Mr. CAPUANO. Thank you, Mr. Chairman. Thank you, Mr. Powell, for being here, welcome. 

Some of my colleagues have talked about how we are, where we 

are. The economy is—clearly seems to be getting better. We all 

agree with that. We will disagree on why and how. I personally 

think that a lot of the good we are seeing today is the result of the 

actions we took several years ago to stabilize, secure, and improve 

the economy and is now working its way through the system. But 

I will leave that debate for another day. 

I also want to associate myself with the comments made by Mr. 

Meeks. I would encourage you as well to keep a close eye on the 

CRA. 

I also want to take that and I will expand it a little bit, just a 

little bit more. I presume that the Fed would not be interested in 

an economy that just worked for Wall Street and did not work for 

Main Street. 

I assume that the Fed would not be interested in an economy 

that just worked for Texas and didn’t work for New York. Therefore, I presume the Fed has some degree of interest not in perfect 

equity, but at least some equitable distribution of the benefits of 

a good economy. Is that a fair assumption, or am I completely off? 

Mr. POWELL. I would say I think we want prosperity to be high 

and broadly spread. We don’t actually have a lot of tools for—distributional tools. 

Mr. CAPUANO. I understand that. 

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23 

Mr. POWELL. There are much more things that the Congress has. 

Mr. CAPUANO. I respect that. I understand you have limited tools 

for lots of things but as long—I agree that that is obviously one of 

the things. A good economy for three people doesn’t help for the 

300 and some odd million people that live here. Thank you for that. 

Are you familiar with a relatively new British law that has just 

been enacted just being imposed that requires companies of over 

250 employees to report income and wages on the basis of gender? 

Are you familiar with that at all? 

Mr. POWELL. No, sir, I am not. 

Mr. CAPUANO. OK, well that just came out. The first company to 

do that report was Barclays, one of the largest banks in the world. 

That report, pursuant to British law, shows that women at 

Barclays earn 26 percent less than men and receive bonuses that 

are 60 percent lower than men. 

Now, I know that some of those reasons might be reasons as to 

who owns which position. But it certainly goes toward the idea of 

equitable distribution of the benefits of the economy. 

Are you familiar with a rule that was proposed by the Equal Employment Opportunity Commission in 2016 that was supposed to go 

into effect in March that would have required similar reporting by 

American companies over 100 employees, not just on the basis of 

gender but also on the basis of race and ethnicity? 

Mr. POWELL. No, sir. 

Mr. CAPUANO. OK, fair enough. The reason you are not familiar 

with it is because the Trump Administration stopped it. It was proposed in 2016. Companies were given 2 years to work their way in. 

But as of last August, the Trump Administration said no, we don’t 

want to know how you pay women, how you pay people of racial 

groups or ethnicity groups. We don’t care about that. 

Now, I personally think that is horrendous and I would actually 

say that, again, if you are interested in an economy that has some 

degree of equitability you need statistics. You need numbers. Anecdotal answers are very interesting and they make for good political 

commentary, but they don’t help us address the problems. 

I would ask therefore if something like that, that is new to Britain, doesn’t seem to have impacted Barclays in any particularly 

bad way, but provides us the information we have to go forward 

to argue for pay equity across the board. 

Now, I am a white male, but I am not interested in my success 

being at the expense of people who are not white men. I would ask, 

is the Fed interested in all, would you be interested in pursuing 

something—you oversee 7,000 entities, some of them large, some of 

them small, most of them pretty large. 

Would you be interested in pursuing some degree of, not intrusive, but some degree of investigation as to how they pay their employees, if it is equitable or not? 

Mr. POWELL. First, again, I am not at all familiar with either the 

British bill or the EEOC proposed rule that was—I am not familiar 

with either of those. These are the things that Congress should 

consider. We have a job, we have a really important job to do that 

you have assigned us to do. For now we are going to stick to that 

and try to achieve— 

mcarroll on FSR431 with DISTILLER

24 

Mr. CAPUANO. I respect that, and I want you to stick to that. But 

as we talked about earlier, some degree of equitable distribution of 

the benefits of a good economy is your job. Not perfect equity, not 

every aspect, but in the one aspect you can control—overseeing 

7,000 financial institutions. 

Don’t you think it is a fair thing to ask how they pay their 

women, how they pay their African Americans, how they pay their 

Hispanics, if it is based on fairness or if it is based on some degree 

of discrimination? You don’t think that is a fair thing for you to 

ask? 

Mr. POWELL. I don’t think it is a question for the Fed. I think 

it is a question for other agencies and for really— 

Mr. CAPUANO. You think it would be—boy, that is a great answer. I think we are going to hear more about this. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from North Carolina, 

Mr. Pittenger. 

Mr. PITTENGER. Thank you Mr. Chairman. Thank you Chairman 

Powell for coming before the committee, congratulations on your 

confirmation. We look forward to working with you. 

Chairman Powell, it is my understanding that the Fed has been 

actively involved in developing a potential alternative to LIBOR 

(London Inter-bank Offered Rate), called SOFR—the Secured Overnight Funding Rate. 

Has there been a robust cost-benefit analysis conducted by the 

Fed regarding the potential economic impact to consumers and 

commercial borrowers relative to shifting from LIBOR to SOFR? 

Mr. POWELL. Let me say that the situation with LIBOR is such 

that the Financial Conduct Authority (FCA) in London has said 

that they will no longer compel banks to submit their submissions 

to the LIBOR panel after the end of 4 years. 

At that time, the FCA can no longer guarantee the continuation 

of LIBOR. Now if LIBOR were to stop being published then, there 

are $300 plus trillion worth of LIBOR-based contracts in the world. 

That has all the potential of being a pretty significant financial stability problem. 

Solving it is very high priority for us and I think for financial 

regulators around the world. There will be costs to doing so, but 

they would be trivial in comparison to the failure to be ready for 

this change, should it be necessary. 

Mr. PITTENGER. What type of borrowing costs do you project for 

businesses as a result of the impact of this change? 

Mr. POWELL. We are actually seeking a lot of input from businesses that will be subject to this at the moment. But honestly, 

though, the cost of failure to act would be, potentially, quite high. 

Mr. PITTENGER. Yes, sir. Since repo rates go the opposite direction to LIBOR during market stress, do you anticipate any new 

systemic risks that arise in the banking sector from shifting to 

SOFR? 

Mr. POWELL. Yes, I do, I think systemic risk would be decreased 

by moving to SOFR. LIBOR spreads blew out during the crisis, and 

I think a risk-free rate, which is really used to price the vast derivative markets and not so much the bank lending markets. It is 

really much more in a derivatives based now, would be an improvemcarroll on FSR431 with DISTILLER

25 

ment from a financial stability perspective to have SOFR over 

LIBOR. 

Mr. PITTENGER. When, SOFR was selected through the process 

of the Alternative Reference Rates Committee in 2014, were community banks and regional banks a part of that process? 

Mr. POWELL. Some of the regional banks were. It is principally 

affecting the derivatives business, at least in the first instance. We 

had a lot of different groups around the table, and at this point we 

are very much broadening that circle to include other financial institutions, including community banks and other parts of the financial system. 

Mr. PITTENGER. Do you anticipate any potential cost relative to 

community banks in this shift? 

Mr. POWELL. I don’t think it—there shouldn’t be meaningful 

costs, and we would sure like to know if there are. 

Mr. PITTENGER. If banks do continue to participate in the LIBOR 

panel, would you encourage a multiple rate approach that was 

driven by market choice? 

Mr. POWELL. Yes, we are— 

Mr. PITTENGER. Or would you support LIBOR for banking lending for SOFR, for derivatives? 

Mr. POWELL. Yes sir, we have always said that if people want to 

keep using LIBOR, that is fine, as long as it is continuing to be 

published. What we are doing is preparing for the risk that it 

wouldn’t be published. We are not saying that that is what will 

happen. But we need to be ready, just in case that does happen. 

Mr. PITTENGER. Yes, sir. On another subject, what do you anticipate will be any changes you will bring to the Fed relative to transparency in the Fed? 

Mr. POWELL. I think we are committed to being as transparent 

as we possibly can about monetary policy and about regulation. I 

think, if I remember what it was like back when I was an undersecretary of the Treasury in the 1990’s, the Fed didn’t even publish 

a post-meeting statement. 

Now you look at the massive number of things we publish, we 

are much more transparent. I think we can continue on that path. 

We are never done with that. 

In regulation, I think it is very important that we be transparent. In fact, we are working across a broad range of issues 

there, including, I would point out, stress testing. We have a package of transparency regulations. In general, I think it is appropriate for us to always be working on that, and it is just— 

Mr. PITTENGER. One last quick question, I have 50 percent fewer 

banks in North Carolina today than we had in 2010. Do you foresee 

Fed policies that would enhance and assist community banks in 

particular? 

Chairman HENSARLING. Time of the gentleman has expired. A 

very brief answer from the witness, please? 

Mr. POWELL. It is a long running trend and we don’t like to see 

it and we don’t want to make it any worse. I would be happy to 

continue this with you. 

Mr. PITTENGER. Thank you. 

Chairman HENSARLING. Again, the time of the gentleman from 

North Carolina has expired. 

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26 

The Chair now recognizes the gentleman from Missouri, Mr. 

Clay, Ranking Member of our Financial Institutions Subcommittee. 

Mr. CLAY. Thank you, Chairman Hensarling, for holding this 

hearing. 

Thank you, Chairman Powell, for your testimony today. 

Chairman Powell, do you agree that the U.S. housing is in a recovery mode, as far as transactions and housing market in general 

is healthy? 

Mr. POWELL. Yes, sir, it has been a gradual recovery, but it is 

ongoing. 

Mr. CLAY. Along those lines, I want to pick up where Mr. Meeks 

and Mr. Capuano questioned you. I have shared with your staff a 

recent article from my hometown newspaper about black home 

buyers continuing to be denied conventional mortgage loans at a 

much higher rate than whites, even when controlling for income, 

loan amount, and neighborhood. 

In the St. Louis metropolitan area, African Americans who applied for conventional mortgages are two and a half times more 

likely to be denied than non-Hispanic whites. That is according to 

2 years of recent HMDA (Home Mortgage Disclosure Act) data. 

Where there is loan activity houses have a chance to sell. Where 

houses sell, people move in. Where people move in, restaurants, 

community centers, and grocery stores are built. None or very little 

of that is happening in low- to moderate-income neighborhoods in 

St. Louis or elsewhere in this country. 

My question is, what can the Federal Reserve do to ensure that 

applicants for home mortgages are treated equally and the bad actors who steer and redline communities of color are eliminated 

from this process or change their policies? Can you give me any direction in that area? 

Mr. POWELL. I would be glad to, sir. First of all, racial discrimination in mortgage lending, in any kind of lending, is completely 

unacceptable. Wherever we have authority we will use it to stop 

that from happening and punish it when it does happen. 

We have some authority here. The CFPB has quite a lot of authority in this area as well, but where we have it for the banks 

that we supervise, we supervise carefully and aggressively to try to 

find these problems and address them. 

Mr. CLAY. As you know, the Fair Housing Act of 1968, a law that 

has been on the books for 50 years prohibited those practices of 

steering and redlining. Now, I share with you this article because 

I want a more extensive response from you on what action we can 

take against bad actors like U.S. Bank, who is cited in that article, 

the fifth largest financial institution in this country, who have denied mortgages across the board in the community that I represent. 

That stymies economic activity. It doesn’t help it. 

I would love to collaborate with your office on how we stop these 

policies and practices that are discriminatory and hopefully you 

will be willing to work with me on that. 

Mr. POWELL. Yes, sir. 

Mr. CLAY. While President Trump recently tried to take credit 

for December unemployment numbers, showing African American 

unemployment at its lowest recorded level, this too is part of a 

long-term trend that started under the Obama Administration in 

mcarroll on FSR431 with DISTILLER

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which African American unemployment has steadily declined for 

the past 7 years. 

In addition, racial disparities continue to persist, with the unemployment rate for whites currently at 3.5 percent, unemployment 

for African-Americans stands at 7.7 percent. With African American unemployment more than twice as high as white unemployment, clearly more progress is needed. 

Share with us your vision for the Fed attacking persistent unemployment among African Americans. 

Mr. POWELL. What we can do on that front, sir, is we can take 

seriously our obligation to pursue maximum employment. We understand fully that while the national unemployment rate is low 

and while, in many regions, the unemployment is actually even 

lower than 4.1 percent, you meet a lot of Congressmen and Senators who come from places where unemployment is in the twos. 

Mr. CLAY. I would like to explore that with you— 

Chairman HENSARLING. Time of the gentleman has expired. 

The Chair now recognizes the gentleman from Oklahoma, Mr. 

Lucas. 

Mr. LUCAS. Thank you, Mr. Chairman. 

Chairman Powell, I thank you for being here. Before I ask a general question and a broader question, I do note that I think you are 

my fourth Chairman to be able to visit within this environment 

since I have been a member of this committee. 

I would like to discuss an issue with you today that you and I 

have already discussed. My good colleague, Subcommittee Chairman Mr. Luetkemeyer has a bill regarding, and that is the supplemental leverage ratio clearing margin. 

I know that Blaine’s bill has strong bipartisan support from 

members of this committee and the Ag Committee. In essence, it 

would offset those margin amounts for purposes of SLR because 

margin is inherently a risk management tool and legally must be 

kept separate from a bank’s own funds. 

The Fed can effect this change without legislation, however, and 

your predecessor showed a willingness to look at the issue. I was 

hoping you might be willing to consider that situation, that sort of 

a fix yourself? 

Mr. POWELL. Thank you, Mr. Lucas. What we are doing right 

now is we are taking a careful look at the enhanced supplemental 

leverage ratio. I think our view is that the leverage ratio is a very 

important requirement for banks, but it should be a backstop. It 

should be a high and hard backstop to risk-based capital. 

I think that the enhancement to the supplemental leverage ratio 

that we put into place in, I guess 2013 in that range, went a little 

too far. It unfortunately seems to be deterring some low-risk wholesale-type activities that we really want financial institutions to engage in. One of those is client clearing, and particularly not counting margin. 

But I think our way of addressing that is going to be, I think, 

to lower the calibration of the enhancement to the supplemental leverage ratio. That does seem to get done what needs doing there. 

Mr. LUCAS. Clearly something needs to be addressed. 

Now, let me ask a more broader question. I represent the northwest half of the great State of Oklahoma. It is ag and it is energy 

mcarroll on FSR431 with DISTILLER

28 

and it is Main Street business. We are a commodity-driven economy and the price of commodities, of course, is a reflection of both 

supply and demand. 

While supply is not an issue for the Fed to be concerned about, 

I represent industries where technology advancement has been 

used successfully, whether it is precision agriculture and increasing 

the output of our farms and ranches with fewer inputs or, on the 

energy side of the equation, 3D seismographic, horizontal drilling, 

just the most amazing technological advances of the last 10 years. 

That is increased supply. 

But my producers see, since 2014, that whether it is oil and gas 

or wheat and cattle, that literally prices are half of what they were 

in 2014. Let us discuss for just a moment, expand on your comments earlier about where you think the Fed projections would 

have economic growth and demand in a year or two or three down 

the road in the United States. Because we have a supply equation, 

that is our challenge. But if demand picks up, life gets better economically at home. 

Mr. POWELL. That is typically the case, as you know. I haven’t 

updated my own projections, but I will just say generally that it 

does feel to me that the next couple of years look quite strong, and 

you should see strong demand from consumers. You should see 

businesses investing. I would expect the next 2 years on the current path to be good years for the economy. 

Labor markets continuing to improve, inflation moving up to 2 

percent, and I would think that that should create a good environment for people in your district who are in the commodities businesses as well. 

Mr. LUCAS. The old adage about the rising tide raises all ships. 

Thank you, Mr. Chairman. 

Mr. POWELL. Thank you. 

Chairman HENSARLING. Would the gentleman yield to the Chairman? 

Mr. LUCAS. Of course, Mr. Chairman. 

Chairman HENSARLING. In the 1–1/2 minutes that he had remaining, I had a question, Chairman Powell, back on the interest 

on excess reserves. 

I had asked your predecessor this question, and the answer was 

not clear to me. I think as you know, under statute, that the rate 

must be—and I am trying to find the exact language—cannot be 

above the usual level of short-term market interest rates. 

Yet we know that the Fed has been paying a price over the Fed 

funds rate—paying over LIBOR and certainly I think it is currently 

paying 150 basis points, yet our constituents typically receive about 

10 basis points on their savings account. I am just curious on what 

does the phrase above the usual level of short-term market interest 

rates mean? 

In your 2012 rulemaking that implemented IOER, it allowed the 

rate to get pegged to your primary credit rate, but that is an administered rate, which means you can set it where you want to set 

it. Legally is there any cap to the interest rate you can pay in 

IOER? Could you pay 300 basis points, 400 basis points, 500 basis 

points? 

mcarroll on FSR431 with DISTILLER

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Mr. POWELL. I think, as you have suggested, we are not permitted under the law to pay above—I think the language is the 

general level of short-term interest rates. That is, I think, something like that. 

I would look at that and I would see commercial paper, I would 

see repo, I would see wholesale deposits, I would see short-term interest rates, money market funds, things like that, less than a 

year. 

I think where IOER is set is—the whole idea of IOER is to use 

it as a tool to move those kinds of interest rates around and they 

tend to be highly— 

Chairman HENSARLING. But you are paying 150 basis points, our 

constituents are getting 10 basis points. You can— 

Mr. POWELL. Retail deposits are sticky on the way up. They generally come up with a lag. 

Chairman HENSARLING. Time of the gentleman has expired. 

The Chair now recognizes the gentleman from Massachusetts, 

Mr. Lynch. 

Mr. LYNCH. Thank you, Mr. Chairman. Thank you, Mr. Chairman. Thank you for your attendance, appreciate that. A couple of 

weeks ago, there was a story in the Wall Street Journal around 

ETFs (exchange-traded funds), and I wanted to get your thoughts 

on this. 

The particular story noted that shares of everything from manufacturers to banks to oil production companies are all rebounding 

together after tumbling in unison earlier in the month. 

The article noted that one factor contributing to the close correlation among the S&P’s various sectors was driven by the growing 

popularity of exchange-traded funds. I know that ETFs usually invest in wide swaths of the market, and when that is all correlated 

it can sometimes increase the volatility. At least that is what the 

data would suggest. 

I am just wondering, does the Fed think that there are risks to 

the broader financial system associated with complex ETFs? Is the 

Fed concerned about that? Any ideas? 

Mr. POWELL. It is an interesting question. I saw that article and, 

of course, we looked after the volatility came and then subsided. 

We looked carefully to try to understand, really, what did happen. 

It seems that the markets were generally orderly through almost 

all of that time. 

ETFs are a particular form of fund, and I don’t think they were 

particularly at the heart of what went on in those days. But it is 

something we are talking to our fellow agencies, particularly the 

SEC, I think, would be best positioned to look at this. But it is a 

question that we are looking into. 

Mr. LYNCH. OK. Thank you. On a completely different topic, in 

your remarks you talked about the historically low unemployment 

rate among people of color. But again, you acknowledge that the 

rate of unemployment for people of color is much higher than for 

white workers. 

Given the fact that the participation rate, according to your own 

testimony, has been fairly constant, does the Fed have any suggestions to the Trump Administration about if the wind is at our 

backs now, if we are putting more people to work, how do we close 

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that gap? How do we get more people of color into the workforce 

so that, again, we close that gap? 

Mr. POWELL. As I mentioned, Mr. Lynch, our part of it is to take 

seriously our obligation to achieve maximum employment, and I 

think we are doing that. We don’t have tools that are good at addressing these kind of disparities, and those— 

Mr. LYNCH. I am not asking you to do it. I am asking you to suggest recommendations to the White House. That is they have the 

power to do it. They have the tools to do it. 

Mr. POWELL. Right. I wouldn’t want to presume to recommend 

policies that are away from our general mandate, but I will just 

say, generally, that I think that policy— 

Mr. LYNCH. Let us just say we are trying to reduce unemployment. That is certainly part of your— 

Mr. POWELL. I think the constructive thing in this area is really 

to focus on—and it is a long-run problem—but to focus on education and training. We want everyone to have opportunity. We 

want this to be a society where everyone has opportunities to succeed. Part of that is reaching people through the educational system, and I would point you in that direction. 

Mr. LYNCH. Very good. 

Thank you, Mr. Chairman, I yield back. 

Chairman HENSARLING. The gentleman yields back. 

The Chair now recognizes the gentleman from Illinois, Mr. 

Hultgren. 

Mr. HULTGREN. Thank you, Chairman Hensarling. 

Chairman Powell, good to see you. Thank you for your work. 

Thank you for being with us today. 

On June 22, 2017, you testified before the Senate Banking Committee. You said, and I quote, ‘‘We believe that the leveraged ratio 

is an important backstop to the risk-based capital framework, but 

that it is important to get the relative calibrations of the leverage 

ratio and the risk-based capital requirements right. 

Doing so is critical to mitigating any perverse incentives, and 

preventing distortions in money markets and other safe asset markets. Changes along these lines also could address concerns of custody banks, that their business model is disproportionately affected 

by the leverage ratio,’’ end quote. 

I have worked with my colleagues on this committee, especially 

Keith Rothfus and Bill Foster, on legislation that was passed out 

of the committee, 60 to 0, that would provide relief from the supplementary leverage ratio for institutions who are predominantly 

in the business of providing custody services. 

The Treasury Department’s June 2017 report recommends 

changes to the supplementary leverage ratio for cash on deposit 

with central banks, which is in line with legislation reported by the 

committee. 

I wonder, do you support the Treasury Department’s recommendation, and how will you work with the OCC and FDIC to 

make those changes? 

Mr. POWELL. I agree with you, sir, that the leverage ratio can 

deter banks from engaging in low-risk wholesale activities, particularly the custody banks. We have looked carefully for some time 

now at how to provide relief. 

mcarroll on FSR431 with DISTILLER

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Our preference for the way to do that, is to just recalibrate the 

enhanced supplemental leverage ratio. The custody banks would 

feel significant relief because they have the smallest surcharges. 

That is our preferred way to do that. 

Mr. HULTGREN. Following up on that, with these considered 

changes to the enhanced supplementary leverage ratio, they only 

cover the G-SIBs (global systemically important banks). Do you believe changes to the Basel leverage ratios are only necessary for the 

G-SIBs, or would you also support changes to the larger supplementary leverage ratio? 

Mr. POWELL. The regular supplementary leverage ratio, based on 

my conversations with financial institutions including the custody 

banks, is not particularly binding for them, certainly as it relates 

to the custody banks. 

We chose to make this enhancement, and I think we have the 

calibration a little bit wrong and so our plan is to roll that back. 

Mr. HULTGREN. OK. One last thing on this, then I will move on, 

but CBO (Congressional Budget Office) recently provided a cost estimate for the implementation of H.R. 2121. As you probably know, 

the CBO oftentimes relies upon input from the Executive Branch 

for such estimates. 

I wonder if you could commit to sharing this correspondence between the Fed and CBO with my staff and with the committee of 

determination of costs for implementation of 2121? Would you be 

willing to work with us on that? 

Mr. POWELL. I would be willing to work with you. I have to look 

into how we would do that sort of thing. 

Mr. HULTGREN. That is great. My concern for this is that the 

bank regulators are only providing relief to the G-SIBs. G-SIBs are 

subject to the enhanced SLR, as you said, while the less-large 

banks are only subject to SLR. 

Northern Trust is important in Chicago, amazing institution. 

120-some years, more than that, that they have been around, but 

they are not a G-SIB and, thus, not subject to the eSLRs. However, 

they are still subject to binding capital constraints, so it is a concern of mine. 

Moving on, similar to my question regarding adjustment to the 

Basel leverage ratios, I want to ask you about the treatment of centrally cleared options. 

The Treasury Department’s October 2017 report on capital markets notes, and I quote, ‘‘The current exposure method model, for 

example, requires options contracts to be sized in their notional 

face value, rather than allowing for a risk adjustment to notional 

to reflect the actual exposure associated with these derivatives. 

Specifically, CME does not permit delta adjustment for the notional 

value measurements of options,’’ end quote. 

It also notes, and I quote, ‘‘The CME may be responsible for a 

corresponding reduction in a bank’s ability and willingness to facilitate access for the market-makers’ clients, who are the primary liquidity providers in these markets,’’ end quote. I understand this 

concern was realized by some market-makers during some of the 

volatility incurred by markets in recent months. 

I wonder if you agree with the Treasury report’s recommendations. Specifically, do you believe there should be a risk-adjusted 

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approach for valuing options for purpose of the capital rules to better reflect the exposure, such as potentially weighting options by 

their delta? 

Mr. POWELL. I actually believe there is an alternative, a more 

risk-sensitive approach that we are moving to in that area. But I 

want to check back with our experts and I will follow up with you. 

Mr. HULTGREN. That would be great, if you can let us know that. 

My time is up, but thank you again. I appreciate your willingness 

to work with us. 

I yield back to the Chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Georgia, Mr. 

Scott. 

Mr. SCOTT. Thank you very much, Mr. Chairman. Welcome 

Chairman Powell. What is disturbing me and what is remarkable 

and I think downright disturbing to me are the policies coming out 

of this Trump Administration in three specific areas that you, as 

the Chairman of the Fed, our chief economic balancing officer, shall 

we say, has direct input on. 

Did you know, for example, there are three areas particularly? 

First, the tax cuts of the President. Are you aware that 83 percent 

of the President’s tax cuts go to benefit just 1 percent of the American families? That is not fair at all. 

If we go to his budget cuts, you know who is impacted the most 

because of his budget cuts? It is the African American community. 

Let me go to his draconian, terrible proposals to cut $17.2 billion 

away from food stamp recipients. Then if that is not mean and ugly 

enough, they want to turn out and now stop food stamp recipients 

from even being able to go into the grocery stores and buy groceries, just like you and I. This is mean, man. 

I want you—you seem like a very reasonable person. Tax cuts 

going to 1 percent, the wealthiest people? Then on the same token, 

they want to send food? We can do without a lot of things, but not 

food. They want to send food in boxes, canned food, dried milk, 

powder milk, to the poor people in this country. 

Now, Mr. Chairman, you have the dual mission of inflation, unemployment. On top of that, they are crushing. The most primary 

group that’s being crushed are African Americans and people of 

color, and I am here to tell you, we are going to stand up and fight 

this Administration. 

I want to ask you to get on our side, the side of the American 

people, because it is clear to me that President Trump is not on the 

side of the American people. You tell me, getting 83 percent of the 

benefits of the tax cut to the 1 percent of the wealthiest? Then turn around, cutting $17.2 billion out of the thing we need 

the most; food for the poorest people? Then on top of that, shipping 

their food in boxes to sit on their porch. Dried milk for their babies. 

You tell me, Mr. Chairman, is this the way you think about 

America? 

Mr. POWELL. Thank you, sir. I can only say these are very important issues, and I take it to heart. But these are not issues that 

we have authority over or— 

Mr. SCOTT. Now, I was waiting on you to say that, Mr. Chairman. 

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There is nobody better suited. You are the Chairman of the Federal Reserve. Do you know when you sneeze Wall Street crumbles? 

That is why I am pointing this at you, Mr. Powell. I have looked 

at your background. You are well-prepared for this. 

Your experience, as I have read it, shows that you have a deep 

compassion for people. All I am asking you to do is to every once 

in a while, if you could say hold on, Mr. President, this isn’t right, 

to be shipping the food to the poorest people in this country and 

denying them a right to go into the grocery store, just like me and 

you buy food. It is not— 

Chairman HENSARLING. Time of the gentleman has expired. 

The Chair now recognizes the gentleman from Pennsylvania, Mr. 

Rothfus. 

Mr. ROTHFUS. Thank you, Mr. Chairman, and welcome Chairman. It is good to have you here. The Fed supervises several insurance companies that own thrifts. An insurance company that has 

been designated as a non-bank SIFI (systemically important financial institution), Congress has taken a strong interest in ensuring 

that Fed supervision reflects the business of insurance and the privacy of State regulation of insurance. 

Most notably, Congress passed legislation in 2014 to ensure that 

capital rules for insurance companies are tailored to the business 

of insurance. We appreciate all your work on this rule. 

Separate from the pending capital rule, I believe that more could 

be done to ensure that on-the-ground supervision of insurance companies is proportional to the risk these companies pose in terms of 

safety and soundness and also reflect the existing system of State 

supervision. What are you doing to ensure this, and what more 

could the Federal Reserve do here? 

Mr. POWELL. Thank you, sir. Thanks for your comments. We do. 

I think from the beginning, as I think you see, we have tried hard 

to look at insurance as a new area for us where we needed to develop expertise and where it is different from banking and it needs 

to reflect the risks of the insurance business. 

We have really invested in that and we have tried to be open 

with it. Continue to do that in developing our capital requirement. 

We have tried to reflect that. I think we were very open to the 

views of experienced insurance regulators, some of whom we have 

hired, and also people from the industry. 

Mr. ROTHFUS. By my count, there are four vacancies on the 

Board of Governors. How do these vacancies impact the ability of 

the Fed to fulfill its mission? 

Mr. POWELL. I am glad you mention that. We could really use 

some more faces on the hall. I don’t think we have been down to 

three Governors, certainly not for an extended period before, so I 

am eager to have more colleagues. 

As you may know, I wore an awful lot of hats before I took over 

my current role, and so I have handed those hats out to my two 

colleagues. We are all three quite eager to have more people on 

board. We don’t necessarily need all seven immediately, but we 

would sure love to get there. 

Mr. ROTHFUS. We have talked a little bit about diversity of backgrounds, I would like to talk a little bit about diversity of experiences. Professor Charles Calomiris of Columbia University has 

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highlighted the importance of bringing individuals with a diversity 

of experiences to the table when discussing monetary and regulatory policy. 

He describes the culture of the Federal Reserve system as academic dominated. While academics surely need to have an important voice in these highly technical debates, I can also see how a 

nonacademic practitioner perspective can be helpful. Can diversity 

of experiences like yours help support a more reliable monetary 

and regulatory policy? 

Mr. POWELL. I strongly believe that. Let me say, I think we need 

great economists around the table and we need lots of them, but 

we also need people from other backgrounds, people experienced in 

business and from managing profit and nonprofit institutions and 

from the financial markets. I think—and from law. Those people 

bring diverse perspectives and they make our decisions better and 

our discussions better. 

Mr. ROTHFUS. As you may know, our national debt exceeds $20 

trillion and continues to grow rapidly. At the same time, the Fed 

has been engaged in an unprecedented monetary policy experiment. Some have argued that in carrying out this experiment, the 

Fed has stepped beyond what is necessary for the conduct of monetary policy and ventured into credit policy. 

Do you worry that unsustainable public debts and the Fed’s engagement credit policy may increase political pressures on the Fed? 

Mr. POWELL. It is not a near-term risk, I would say. I just would 

mention, of course, that we are now in the process of normalizing 

our balance sheet and shrinking it. We are moving back to a more 

normal level balance sheet, and I think we will be there in 3, 4, 

5 years. 

Mr. ROTHFUS. One thing that has always puzzled me is this target 2 percent inflation rate. Just as a layman and looking at this 

and this suggestion seems like it is benign. But, over 20 years, you 

mentioned about 20 years, then we hear about 100 bucks, 20 years 

ago and you had 2 percent every year the purchasing power for 

that 100 bucks went down. Can you educate us a little bit from 

your perspective about this 2 percent target? 

Mr. POWELL. Sure. 

Mr. ROTHFUS. Because my count, what was $100, 20 years ago 

at 2 percent it might cost around 150 bucks today. 

Mr. POWELL. This was a big debate which was settled around 2 

percent as opposed to 0 for central banks to aim at, and it has become a global standard all around the world. Central banks are 

aiming at 2 percent. The reason why that was picked over 2, in essence is that it gives us a little more room to cut real interest 

rates. 

If the interest rate—if inflation is 0 then interest rates would be, 

in the 1, 2, 3 range. Then when a recession comes, we would have 

very little to cut. Having 2 percent inflation we think oils the 

wheels of the economy and gives central banks a little more ammunition. It has now become the global standard. It would be hard for 

any bank to diverge from it. 

Mr. ROTHFUS. I yield back. 

Chairman HENSARLING. The gentleman yields back. 

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The Chair now recognizes the gentleman from Texas, Mr. Green, 

the Ranking Member of our Oversight and Investigations Subcommittee. 

Mr. GREEN. Thank you, Mr. Chairman, thank the Ranking Member. Also I would like to thank the persons who were here who call 

themselves full employment defenders, welcome. 

Mr. Chairman, what do you consider full employment? I have the 

number 5.5 percent, but if you differ, I would like to hear your 

number please. 

Mr. POWELL. Yes, so if I had to make an estimate, I would say 

it is somewhere in the low 4s, but I would stress that it could be 

that—what that really means is it could be 5 and it could be 3.5 

Mr. GREEN. Let us take the low 4s or 3.5. When is the last time 

that African American unemployment was in the low 4s or 3.5? 

Mr. POWELL. I don’t think it ever has been in the years we have 

been measuring it. 

Mr. GREEN. Quite frankly speaking, it hasn’t been since slavery. 

That is the last time there was full employment for black people. 

Mr. Chairman, 6.8 percent seems to be the lowest number that 

I can find since we have been keeping numbers. For the last 47 of 

the last 54 years, it has always been twice that of white unemployment, twice. Do you agree? 

Mr. POWELL. Do I agree? 

Mr. GREEN. Yes sir. 

Mr. POWELL. That is— 

Mr. GREEN. Do you agree that black unemployment is, generally 

speaking, twice that of white unemployment? 

Mr. POWELL. I think that is what the numbers would support, 

yes. 

Mr. GREEN. Mr. Chairman, do you agree? 

Mr. POWELL. I agree. Yes. 

Mr. GREEN. OK. Thank you. 

Mr. POWELL. It is a true statement. 

Mr. GREEN. All right. Thank you. It is a true statement. Mr. 

Chairman, do you also agree that invidious discrimination still exists in the United States of America? 

Mr. POWELL. I would. 

Mr. GREEN. Do you agree that when we have had an opportunity 

to test banks we have found that invidious discrimination exists in 

lending? 

Mr. POWELL. Yes. 

Mr. GREEN. Do you agree that testing is an effective means by 

which we can acquire empirical evidence necessary to show that 

discrimination exists? 

Mr. POWELL. I do believe it is used in that way, yes. 

Mr. GREEN. Then Mr. Chairman, would you support legislation 

to help us acquire the empirical evidence to show that this exists 

so that we can do something about it? 

You see, we now know the facts. The question is what are we 

going to do about it? Your charge is the promotion of full employment. I take that to mean full employment not just for white people. I take that to mean for everyone. 

At some point, black unemployment has to be addressed because 

it is chronically twice that of white people. We have to use terms 

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36 

like black people and white people to make the point. We also have 

to ask that our friends on the other side join black people in doing 

something about this. 

Mr. Chairman, that which we will tolerate, we will not change. 

We have learned to tolerate African American unemployment being 

twice that of white unemployment. I refuse to tolerate it. That is 

why I use language that is clear and concise. There is no question 

about what I say. The question is what are we going to do about 

it? 

We know that discrimination exists in banking in terms of lending. We know that it exists in other areas of the economy as it relates to African Americans. The question is what will we do about 

it? 

By the way, I am not assigning all of the responsibility to you. 

That is why I mentioned my friends on the other side and my 

friends on this side. I am a liberated Democrat. Democrats and Republicans have to do more about black unemployment. 

Unfortunately, when a black person challenges the system, such 

as I do, it becomes playing the race card. Let me say today that 

I am playing the race card because we have for too long allowed 

this condition to exist. 

Mr. Chairman, I am going to send you a letter and in the letter 

I will request that you explain the role that covert and overt unemployment plays in this issue of black unemployment being twice 

that of whites. I will ask you to identify the primary factors that 

limit African Americans’ access to employment opportunities in sectors that are protected from cyclical downturns in the economy. 

I am going to ask you, if allowed, would testing provide beneficial 

empirical data? You have have already said that you think it 

would. I will ask you to put that in writing, Mr. Chairman. 

I respect you and I ask that you be of service to all Americans, 

not just white Americans. 

I yield back. 

Chairman HENSARLING. The time of the gentleman is expired. 

The Chair now recognizes the gentleman from Colorado, Mr. Tipton. 

Mr. TIPTON. Thank you Mr. Chairman. Chairman Powell, appreciate you taking the time to be able to be here. 

One of the big challenges I think we have really faced as a country is the policies in the previous Administration have yielded a lethargic growth that impacted communities across the country. 

We are now seeing policies starting to step into place that are 

actually getting the economy moving, creating job opportunities, 

putting the resources back into the pockets of the individuals who 

actually earn it, and creating that opportunity for people to be able 

to increase their prospects for their families, for their communities 

as well, which I applaud but want to make sure that they are applied across the board in the country, as well to each community. 

Now, I would like to be able to highlight one of the benefits that 

I have seen in my district from the Tax Cut and Jobs Act in Colorado. The Bank of Colorado, which has a significant presence in the 

western slope of Colorado, the Four Corners region that I represent, wrote me after passage of the Tax Cut and Jobs Act that 

they anticipate the passage of the reform is going to be having a 

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positive effect on the growth of their businesses and our local economy. 

In fact, the Bank of Colorado added a special bonus at the end 

of the year for all 641 of their associates in Colorado and New Mexico. They are going to be receiving $1,000 in terms of a bonus and 

part-time associates are going to be receiving $250 to $500. 

Mr. Chairman, in my part of the country, that is real money. It 

is not a crumb. It is how we pay a mortgage. It is how we pay for 

the electric bill. It is how we provide, literally, for our children. To 

be able to boost those opportunities for those employees is actually 

helping Main Street right now. 

The Bank of Colorado’s actions, I think, provide an example for 

us in terms of new possibilities that exist in the current economy 

and also looking forward. 

I guess what I would like to able to speak to you on is in my 

State of Colorado we have—and I often spoke to it as a tale of two 

economies—urban Colorado has been doing well. Their unemployment is down. 

However, when we move into rural Colorado, we are just now 

starting to see the signs of the recovery and those opportunities for 

the people who live at those rural areas. 

One of the real challenges that I have heard in our communities 

has been from our small community banks, in terms of the 

trickledown effect over regulation that came out of Dodd-Frank. 

The best practices that are being employed that may not have been 

on paper but are implied and they are feeling those real impacts. 

I know Mr. Loudermilk had brought up with you earlier in the 

questioning, in regards to being able to tailor some of the rules and 

regulations to be able to meet the size, the risk portfolio, the institution. 

Can you give us an idea of what you see as that real tailoring? 

When we could expect that to start to take place, to be able to open 

up those doors of economic opportunity for rural America? 

Mr. POWELL. In the regulatory space for smaller institutions, 

first of all, we are mindful that the number of small banks in rural 

and non-urban areas has declined very sharply over the years. We 

don’t see that as a good trend and we don’t want to be any part 

of making it worse. There are bigger forces at work there as people 

move to the cities and that kind of thing. 

But as it relates to our regulation, I think we have, just recently 

here, dramatically reduced the scope and burden of the call report. 

We have made exam frequency longer so you have longer gaps between exams. 

I think we tried hard to find ways to simplify the capital requirements because you just don’t need that kind of—you don’t have the 

resources to be managing these highly complex capital requirements. We went through and, in a number of areas, we simplified. 

We tried to address the shortage of appraisers in many rural areas. 

But, honestly, you could go on forever. I think there are a lot of 

small things. I will just tell you that we are committed to doing 

more, and I hope you will hold us accountable for that. 

Mr. TIPTON. I appreciate that Mr. Chairman. I have a piece of 

legislation, the Taylor Act, to be able to make sure that we have 

rules and regulations that are going to be written to be able to 

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meet the size risk portfolio of the institution and appreciate your 

commitment and hopefully willingness to be able to work with us. 

Because the objective is to be able to open up those doors of economic opportunity for all of our communities across the country. 

One issue which has been brought up to me is also in regards to 

the Community Reinvestment Act, and if you would be able to 

work with us on that as well. 

Our banks do want to be able to make those real contributions 

back in but we have some outdated rules that I think we need to 

address. 

Thank you, and I yield back Mr. Chairman. 

Chairman HENSARLING. Time of the gentleman has expired. 

The Chair now recognizes the gentlelady from Wisconsin, Ms. 

Moore, Ranking Member of the Monetary Policy and Trade Subcommittee. 

Ms. MOORE. Thank you, Mr. Chairman, and thank you again, 

Mr. Chairman, for appearing. 

Just want to appreciate the fact that in your written and your 

oral statement you have doubled down on your commitment to tend 

to your dual mandate to look at unemployment as well as the monetary policy. I just want to thank you for—appreciate you for that. 

Given that, I just want to focus a little bit on some of the things 

that I think previously Mr. Green just talked about and also my 

good friend, colleague, Mr. Barr, talked about in terms of trying to 

figure out how the Fed is going to balance things. 

When we look at unemployment for the general public, I am wondering if we continue to have 2 percent as our inflation rate, is 

that, in fact, discouraging toward getting some of those groups, like 

African Americans, mobilized and moved toward more full employment? Do you take any guidance from some suggestions that perhaps the target, inflation target, ought to be 2.5 percent? 

Mr. POWELL. I think we are pretty committed to our—we are 

strongly committed to our 2 percent inflation goal. Over time the 

level of employment in the economy is not a function of—you can’t 

increase it by increasing the inflation rate. 

We are committed to having a symmetric 2 percent goal so that 

we would be equally concerned with persistent undershoots of 2 

percent and persistent overshoots. 

Ms. MOORE. OK. Given that, I am wondering what your thoughts 

are about the increased income inequality we see in this country. 

According to the United Nations Rapporteur Report, the United 

States is on track for being the most unequal, having the most inequality in the world. Given the recent tax bill where we see, despite what Mr. Barr has indicated about all the bonuses and wage 

increases, that about 43 percent of these moneys are being spent 

in buybacks, another 19 percent mergers and acquisitions. That is 

like 62 percent, those two together. 

Only 17 percent in capital investment improvements and then 

the 13 percent that are in bonuses and raises. We know bonuses 

are one-time only events, which pale in comparison to the economic 

benefit that the company gets. What concerns does the Fed have 

about the increase of income inequality? 

Mr. POWELL. It is a big, very complicated set of issues, and I will 

just point to a couple of things. The first is that we have seen stagmcarroll on FSR431 with DISTILLER

39 

nation of middle-class median incomes. That seems to be closely 

tied to the flattening out of educational attainment and skills attainment by our workers. 

I think we need to have the best-trained workforce and the most 

highly educated workforce. That will translate into productivity. 

That will translate into higher wages. I think that should be an important focus for us. 

Ms. MOORE. OK. Before my time expires, Mr. Chairman, and 

thank you for your patience, I am wondering if you think, as the 

Chair, that we are going to have this tremendous GDP growth? 

As you might know, the CBO and the JCT (Joint Committee on 

Taxation) put additional GDP growth of the tax bill, under 1 percent, despite the $1.5 trillion tax cuts which will increase the deficits by that amount over 10 years. Do you agree with the CBL and 

JCT that this GDP growth is going to be under 1 percent? 

Mr. POWELL. The tax bill was passed about a week and a half 

after our December meeting and then the spending bill was about 

a week and half after our January meeting. In each case, we didn’t 

really have the full set of information. 

I think my personal view would be that there will be a meaningful increment to demand, at least for the next couple of years, from 

the combination of those two things. 

Ms. MOORE. There will be increased demand. 

Mr. POWELL. Yes. 

Ms. MOORE. Although wages aren’t necessarily going to keep up 

with that, given the way these moneys are being spent. 

Mr. POWELL. I would expect wages to increase this year, too, as 

I mentioned. 

Chairman HENSARLING. Time of the gentlelady has expired. 

The Chair now recognizes the gentleman from Texas, Mr. Williams. 

Mr. WILLIAMS. Thank you, Mr. Chairman. Chairman Powell, 

thank you for being here this morning. 

Sound monetary policy is critically important to unleashing the 

economic opportunity of this great Nation and her citizens. In 2018, 

I can tell you—I am a small business owner for 47 years on Main 

Street—we are off to a great start. With a booming economy, low 

unemployment, and Americans having more money in their pocket 

due to the Tax Cuts and Jobs Act. 

While I am encouraged by the strides we have made in the last 

year, I do acknowledge that there is still so much work to do. I look 

forward to working with you to ensure that our economy is fully 

empowered and never unnecessarily restricted. 

Question: Federal Reserve Bank presidents serve a critical role 

in providing local information to the FOMC. This bottom-up flow 

of information is one of the Federal Reserve system’s most productive features. However, the voting rotation exposes an inconsistency in that some of the largest district economies cast a vote every 

3 years while smaller economies are represented annually or every 

other year. 

Chairman, is it your opinion that each region is properly represented under the current voting structure? 

Mr. POWELL. Let me begin by saying that I am a very strong 

supporter of our federated system and I think that what the Remcarroll on FSR431 with DISTILLER

40 

serve Bank system does, among other things, is it guarantees that 

we will have a diversity of perspectives around the table. 

You have 12 reserve banks. You have 12 economic staffs. I think 

you make mistakes when everybody agrees, generally, has been my 

experience, when you have diverse perspectives and people disagreeing. 

In terms of the structure, I really don’t think it is broken. I will 

just say when we have an FOMC meeting, you look around the 

table, all 12 Reserve Bank presidents are there and they all speak. 

Honestly, I have to go find the list to remember who the voters are 

and who aren’t the voters. It is really not so much about who has 

the vote. It is who has persuasive things to say. 

I really do think the current equilibrium served us well, and I 

wouldn’t see a reason to change it. 

Mr. WILLIAMS. OK. I believe that monetary policy would be better informed if district representative, voted consistently and San 

Francisco, Atlanta, Richmond, and Dallas vote every 3 years, while 

New York votes every year and Chicago and Cleveland every other 

year. I fear that this underrepresents certain economies and that 

the needs of regions that vote more frequently could be unjustly 

prioritized. 

The presence of Federal Reserve Bank presidents on the FOMC 

helps to drive power away from Washington and New York and 

empower every economic constituency across the country. 

For that reason, I have introduced H.R. 4759, the FOMC Representation Improvement Act that would provide every Federal Reserve Bank president consistent voting rights, just as New York 

currently enjoys. 

Chairman, do you support a policy that would allow all districts 

consistent voting rights? Be as detailed as you want to be. 

Mr. POWELL. I would just say I really think the current system 

has served us well, and I think you have a great Reserve Bank 

president in Texas and his voice is certainly well heard, as it 

should be. 

Mr. WILLIAMS. OK. 

Mr. Chairman, I yield my time back. Thank you. 

Mr. POWELL. Thank you. 

Chairman HENSARLING. If you would yield to the Chairman? 

Mr. WILLIAMS. I yield to the Chairman. I yield my time to the 

Chairman. 

Chairman HENSARLING. Following up on the gentleman from 

Texas, though, Mr. Chairman, again, as we rely more on the IOER 

and less on the FOMC to determine the Fed funds rate, then 

haven’t we diminished the role of these regional Fed presidents? I 

know that the FOMC is similar to the Board of Governors, but it 

is the Board of Governors that set IOER, correct? 

Mr. POWELL. As a legal matter, yes. But it is always set consistent with the broader decision of the FOMC. 

Chairman HENSARLING. OK. 

Mr. POWELL. We don’t disagree on that. 

Chairman HENSARLING. I would just say, Mr. Chairman, perhaps 

that is one more reason we should attempt to normalize monetary 

policy to ensure that this diversity of view is represented at the 

table. 

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Speaking of diversity of view, last year in a speech, New York 

Fed Reserve Bank President William Dudley commented on the 

Volcker Rule and said, quote, ‘‘The line between market making 

and proprietary trading is not always clear-cut, which makes regulation in this space difficult. It may be worth considering giving 

greater discretion to trading desks that facilitate client business to 

intervene when markets are illiquid and volatile.’’ 

We know we have seen historic volatility and illiquidity in our 

fixed income market since the advent of the Volcker Rule. Do you 

agree or disagree with President Dudley’s analysis? 

Mr. POWELL. I would agree. My view is that we can—and we are 

taking a fresh look at the Volcker Rule to try to implement it in 

a way that is faithful to the spirit and letter of the law, but do it 

in a way that is— 

Chairman HENSARLING. We have had a lot of testimony in this 

committee about how this does inhibit job creation and economic 

growth. In the Financial Choice Act, we repeal the Volcker Rule. 

An alternative, we have legislation to make at least the Fed the 

lead regulator so there would be one centralized regulator in exempt community banks. Would the Fed be ready to take on that 

role should this be signed into law? 

Mr. POWELL. We would. I think we would probably take it on 

even without law. I think we are the natural group to have the pen 

there, and it is a multiagency rule and someone needs to coordinate 

it and we would be happy to do that. 

Chairman HENSARLING. Thank you, the time of the gentleman 

from Texas has expired. 

The Chair now recognizes the gentleman from Nevada, Mr. 

Kihuen. 

Mr. KIHUEN. Thank you, Mr. Chairman, and thank you, Chairman Powell, for being here and for your testimony. 

I just have a couple of quick questions. I represent Nevada, 

which had the highest unemployment rate in the country during 

the recession. Despite the progress in reducing the overall level of 

unemployment since the recession, wage growth has largely remained low and stagnant for the vast majority of Americans. 

In fact, the average American hasn’t seen a real pay increase 

since the early 1990’s. Many working people have not seen one 

since the 1970’s. 

According to the Economic Policy Institute, middle-aged workers, 

hourly wage is up only 6 percent since 1979. Low-wage workers’ 

wages have decreased by 5 percent, while those with very high 

wages have seen an increase of 41 percent. 

Piggybacking on what Mrs. Beatty was saying, we live right now 

in a country where the rich are getting richer at the expense of 

middle-class people. 

I say this, from somebody who has been unemployed before, who 

has woken up, gotten dressed up, and having nowhere to go, but 

just knowing that if you keep your head up, you are going to find 

something and everything will be OK. But most of the people who 

are receiving the tax breaks today don’t understand that struggle 

that most Americans have gone through. 

With that in mind, what steps can the Fed or Congress take to 

help combat this wage inequality, to piggyback on what Mrs. 

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Beatty was saying, and ensure that further wage gains are shared 

by middle-wage and lower-wage workers? 

Mr. POWELL. I think our part of this, sir, is to take seriously our 

obligation to achieve maximum employment. That is what we are 

doing. I would say more broadly on wages, over long periods of time 

the only sustainable way for wages to go up is for productivity to 

increase. Productivity is a function of investment in people’s skill 

and investment in plant and equipment by businesses and by people. 

Those are things that, I think, that Congress should—we don’t 

have those tools. Those aren’t things we control. But those are 

things that Congress and the Administration, I believe, would be 

well served to focus on. 

Mr. KIHUEN. Thank you, Mr. Chairman. Do you think that the 

minimum wage requirements offset the failure of the private market to afford workers a livable wage? We have seen this discussion 

in the last couple of years, whether we should be raising the minimum wage nationally. 

People have been talking about $12 an hour. People have been 

talking about $15 an hour. Do you think that this is something 

that needs to happen here in America? 

Mr. POWELL. Minimum wage policy is really a form of fiscal policy, it is really not for us. There is research that shows, for example 

that people who provide less value than the minimum wage, entrylevel workers and that kind of thing, can be disadvantaged. 

Then there is research that shows that they aren’t. I think these 

are questions that are really best left for you. 

Mr. KIHUEN. Mr. Chairman, you are the Chairman of the Federal 

Reserve, and I know you are an expert. You probably know more 

about this than I do. But I believe that when you increase the 

wages of workingclass families, they spend more money. 

They go out there and stimulate the economy. Businesses make 

more money, they hire more people, they expand. They open up a 

second and a third store and so on and so on. 

I know some of my colleagues believe that somehow you give 

these big tax breaks to the millionaires and the billionaires and 

somehow it is going to trickle down to the workers. I don’t believe 

in that. 

I represent part of Las Vegas where a lot of the folks are hardworking people—janitors, housekeepers, cooks, chefs, waiters. 

Those folks are the people who make Las Vegas run. If you increase the wages to those folks, they are going to go out there and 

spend more money and stimulate the economy. That is the reason 

why I believe we have had this wage inequality in this country. 

But with that being said, Mr. Chairman, my last question is why 

has the Fed been so focused on pre-empting inflation since the 

1980’s, when wages have barely budged? 

Mr. POWELL. I think it serves all constituencies well, including 

by the way, the people in the lower income groups to have inflation 

low and under control. It really hits those groups the hardest when 

inflation gets out of control. 

I think it is a good thing for the economy that we have managed 

to control inflation. I think the way we get at wages, again, is by 

taking maximum employment seriously. I think, at the moment we 

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have really done that, and for some years we have really done that. 

It will show up in wages. 

Mr. KIHUEN. Thank you, Mr. Chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Arkansas, Mr. 

Hill, the Majority Whip of the committee. 

Mr. HILL. Thank the Chairman. I thank Chairman Powell for his 

testimony today. In listening to the discussion this morning, I 

think we need to be clear on the record, both Chairmen—Chairman 

of the committee and Chairman of the Fed—that the biggest thief 

for working people in this country and across the world is inflation. 

Nothing depresses buying power more than inflation, and nothing cuts into those at the hardest working part of our society than 

inflation. I think minimizing inflation and having dollar stability 

and safe and sound capital markets are a worthy objective of the 

Fed. Thank you and your colleagues for fighting for modest inflation so that people have real wage increases. 

I do believe that one of the benefits of the restructuring of our 

tax system will be to increase productivity, and productivity will 

see wages go up. We have certainly seen that here in the first 2 

months of the year, as company after company has talked about 

that. 

Ms. Moore referenced it as well, but I saw a Morgan Stanley research study this week that calls for earning projections for 2018 

to be up 8 percent. 

That over 44 percent of those companies fully expect to reinvest 

in their companies, in training and capital expenditures and both 

these efforts will produce higher wages. Another 30 percent of companies plan to increase CapEx to increase productivity, as well as 

distribute more earnings. I view these things as positive for our 

economy. 

I want to follow up on Chairman Hensarling’s comments a bit, 

Chairman Powell, about your exchange you had on the Volcker 

Rule. The Chairman talked about a bill I have introduced to harmonize regulatory oversight, because you have noted in previous 

testimony, President Dudley has, even Mr. Tarullo has about the 

complex of this rule that we are not getting it done. We are not 

doing a good job of even enforcing the rule. 

But on this harmonization bill, I have had some difficulty in getting members to understand that giving relief to banks under $10 

billion, community banks, which is what is in Senator Crapo’s bill 

over in the Senate, is somehow letting those community institutions off the hook of safe and sound banking practices. I would like 

for you to respond to what I told them. 

Saying our community banks are not subject to the Volcker Rule, 

that doesn’t mean that they are not subject to the careful scrutiny 

of our bank regulators for safe and sound banking practices. 

Isn’t it true that if one of your regulators went in a bank under 

$10 billion, a holding company, and they were doing something 

that you deemed unsafe and unsound related to Volcker-type activities, that they could be disciplined for that under the existing 

banking rules? 

Mr. POWELL. Yes, sir. It is absolutely true that we don’t need 

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tion, certainly in the bill you mentioned that Senator Crapo has introduced, you can’t have anything more than a very small trading 

book in the first place— 

Mr. HILL. Right. 

Mr. POWELL. —Even if you are under $10 billion. 

Mr. HILL. Right. 

Mr. POWELL. We don’t see significant safety and soundness implications at all from that. 

Mr. HILL. I appreciate that. I just think it needs to be clear in 

this committee that we have the tools necessary to enforce safe and 

sound banking practices for banks of all sizes, particularly those in 

the smaller size that is referenced in my legislation. 

But that the real mission here, by designating the Fed as the 

principal regulator among your colleagues, that we will get better, 

more discrete, interpretive guidance on how to properly enforce the 

Volcker Rule, which I think is a big source of confusion around the 

capital market system. Do you agree with that? 

Mr. POWELL. I do. It has been difficult with these multi-agency 

groups to get to agreement. Just the Volcker Rule in particular, I 

think, is quite complex and we can certainly simplify it. 

Mr. HILL. I think when you have testified previously, said that 

some trading desks needed a Ouija board to figure out the decision 

to make. That freezes up capital markets in times of illiquidity that 

I am the most concerned about is misinterpreting that rule by compliance departments 

Mr. POWELL. I think we— 

Mr. HILL. Have you seen that in your work with your district 

bank presidents about that exact thing where we are hurting illiquid securities? 

Mr. POWELL. We do hear that. I think it stands to reason, if you 

provide more certainty about where the law applies and where it 

doesn’t, if you don’t have to convene a giant meeting and break out 

the Ouija board to find out whether you are complying with the 

law or not, then you are going to have more certainty and you are 

going to have people being able to do their business better. 

Mr. HILL. I appreciate you, and I wish you my very best wishes 

for your service as our Chairman of the Federal Reserve. 

Chairman HENSARLING. Time of the gentleman has expired. 

The Chair now recognizes the gentleman from Minnesota, Mr. 

Ellison. 

Mr. ELLISON. Thank you, Mr. Chairman, Ranking Member. 

Welcome to the committee, Mr. Chairman. 

Now, Mr. Chairman, the Cato Institute estimates that ending the 

Deferred Action for Childhood Arrivals program and making those 

young people deportable could cost the U.S. economy over $280 billion in reduced economic growth over 10 years. 

The Center for American Progress puts that number at about 

$460 billion—bigger, but still a loss. The U.S. Chamber of Commerce does not put a number on it, but they do say, and I will 

quote, ‘‘Ending DACA would be a nightmare for America’s economy.’’ What economic impact would ending DACA and making 

700,000 Dreamers deportable have on our economy? 

Mr. POWELL. Let me say that these are difficult and important 

issues. We, of course, don’t do immigration policy at the Fed— 

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Mr. ELLISON. But I am not asking you about immigration policy. 

I am asking about economic impact of taking 700,000 people, 90 

percent of whom are employed, out of the economy suddenly. That 

is what I am asking you about. 

Mr. POWELL. I don’t want to wade into a very hot political discussion. But I will say this. You think about economic growth, it can 

really come from only two ways. You can simplify it. It is either 

going to be more people working or it is going to be higher productivity. 

We have talked a lot about productivity, but the workforce is now 

growing, only at about 0.5 percent per year. Some of that has been 

from immigration. To the extent you care about potential growth, 

you need to be considering that in your discussions about immigration. 

Mr. ELLISON. What I hear you saying is that taking 700,000 people, 90 percent of whom are employed, out of the workforce could 

cause problems. 

Mr. POWELL. I am just not going to comment on that particular 

situation. 

Mr. ELLISON. I hear you. But I am asking you about the economics of it. I am asking you as somebody who leads an institution that 

has a mandate not just to keep inflation down, but to pursue full 

employment. You have a dual mandate. I am asking you about employment. You are declining to answer my question. 

Would you like to just talk about what it means—what it would 

mean to take 700,000 people out of the economy? Let us just say 

they all went to Mars for some reason. 

Mr. POWELL. In fairness, Congressman, I really am not going to 

get into the debate over DACA. I am just not going to do that. 

Mr. ELLISON. I am not asking you to, sir. I am just asking you 

to talk about the economics of it. 

Mr. POWELL. Well, and I— 

Mr. ELLISON. Let me ask you this. 

Mr. POWELL. I said the— 

Mr. ELLISON. Let me see if you can answer this. What does it 

mean to have a group of people in their prime working years suddenly disappear from the economy? 

Mr. POWELL. All else held equal you would lose some productivity from that, some output from that. 

Mr. ELLISON. OK. Thank you very much. There is a research 

group known as REVEAL. They did a study looking at, literally, 

millions of HMDA reports. 

I would like to ask for unanimous consent to have their report 

submitted for the record? 

Chairman HENSARLING. Without objection. 

Mr. ELLISON. Yes. But they looked at 31 million HMDA records 

in a year-long analysis and found that 61 municipal areas across 

the United States had denied people of color, black and brown people, the right to take on a mortgage compared to equally qualified 

whites. 

What is the economic impact of that discrimination, in your 

view? When people can afford a mortgage and are told you can’t 

have one, what sort of impacts could we expect to see when that 

happens on a systematic basis? 

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Mr. POWELL. I think it is so fundamental to our society that 

there should not be racial discrimination along the lines of credit 

availability— 

Mr. ELLISON. But see, that is a moral position, and I agree with 

you. But I want to know how does it affect the economy? 

Mr. POWELL. Start with those people. I think if people are denied 

access to credit, then they are going to be less able to attend school, 

perhaps less able to start a family, less able to move to a new job, 

all kinds of things. 

Economic outcomes for individuals would be, potentially, significantly reduced. I think if you take that out across a broad population, it would certainly hurt the growth of the country. 

Mr. ELLISON. I do want to get your views on whether you agree 

with Fed Chairman Neel Kashkari that increasing legal immigration would grow our economy. But I will probably have to get that 

answer another time. 

I yield back, Mr. Chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from North Carolina, 

Mr. Budd. 

Mr. BUDD. Thank you, Mr. Chairman. 

Chairman Powell, again, congratulations. I know you have heard 

it many times today, but we are glad to have you here. 

Would it be fair to say that the current Administration is willing 

to review and perhaps even question decisions made by the FSB, 

the Financial Stability Board, in the past? I would love to have 

some of your thoughts on that, about looking back at decisions that 

they have made. Would you be willing to review and question 

those? 

Mr. POWELL. Sure. I think we always—the FSB doesn’t make decisions about U.S. regulation. They make recommendations. Then 

if we were to enact something into law, in a regulation we would 

put that out for comment and anything like that could be reconsidered in principle, sure. 

Mr. BUDD. Sure. As much as their— 

Mr. POWELL. I can’t think of anything that comes to mind, but 

maybe you will help me. 

Mr. BUDD. Certainly. As much as—I have one in particular, but 

as much as their opinions have influenced policy, here is one in 

particular that I am thinking about. 

In 2013, FSB instructed the International Association of Insurance Supervisors (IAIS) to create a new international capital standard for internationally active insurance groups. There seems to be 

universal concern among U.S.-based insurers that the current trajectory of these discussions would be bad for the U.S. market and 

U.S. policyholders. 

Many times when questioned, the IAIS leadership attempts to 

hide behind the FSB. They say, FSB told us to do this, they told 

us to do that. It is my view that these negotiations on an international capital standard, if they don’t move in a more positive direction, we might just need to rethink how the FSB just gets affected by this. 

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Just wanted to have your thoughts on that and about going back 

and reviewing that, particularly with the international capital 

standards? 

Mr. POWELL. I served on the supervisory committee for several 

years but I haven’t been involved with it for some time now, and 

I am not exactly sure where that one is. But I know that we had 

rolled out a capital requirement in broad form. I will have to come 

back to you on where that stands, if that is all right? 

Mr. BUDD. Sure. One of the things is just, and it may have the 

FSB involved, new directives, but just can I have you confirm or 

that you are willing to work through the FSB to redirect the IAI— 

excuse me, there are so many acronyms in this place, aren’t there? 

Mr. POWELL. There are a lot. 

Mr. BUDD. But the IAIS if needed, would you have the FSB review that? 

Mr. POWELL. Can I just confer with our people who do insurance 

regulation? 

Mr. BUDD. Absolutely. 

Mr. POWELL. I promise to come right back to you. 

Mr. BUDD. No problem at all, thank you. 

Mr. POWELL. Thank you. 

Mr. BUDD. I yield back. 

Chairman HENSARLING. Would you yield to the Chairman? 

Mr. BUDD. Yield to the Chairman. 

Chairman HENSARLING. I appreciate the gentleman for yielding. 

Chairman Powell, I just want to revisit an area that we had spoken 

about briefly during my questioning, and I am still not sure I am 

completely clear on the answer. This has to do with the run off of 

the balance sheet. 

Again, the monthly cap on your security rolloffs, your treasury security rolloffs, rather, will rise to $30 billion, in the report that 

you just released Friday. 

But according to data from the system’s open market account, you don’t have $30 billion of treasury securing every month. I am 

trying to figure out, are you making up the shortfalls? Did I understand you to say these caps are flexible? I still don’t quite understand what you intend to do when you don’t have enough treasuries that are actually maturing to hit the $30 billion. 

Mr. POWELL. The purpose of the caps was to give us a way to 

gradually start the run off. You are right. The caps are not going 

to be binding either for treasuries or MBS in most months. I think 

only for treasuries in the big treasury refinancing months. 

You can think of them as not really restraining either. We didn’t. 

We weren’t saying—our projections don’t say we are going to roll 

off exactly $50 billion per month. That is not how it works. 

That is never how it was intended. Of course we don’t know how 

fast MBS are going to run off because they run off depending on 

where interest rates are. We do know with treasuries, and we do 

know that we are moving right along. These are significant reductions this year and next year in the size of the balance sheet. 

Chairman HENSARLING. As of a couple of weeks ago, the balance sheet, if I saw it right, was at $4.4 trillion. By year’s end, at the 

current rate of roll off, it ought to be at $4 trillion. If you kept to 

the pace, $3 trillion, 2 additional years of roll offs, about $2 trillion 

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4 years from now. Does that sound about right? Is that the current 

expectation? 

Mr. POWELL. Something like that, yes. 

Chairman HENSARLING. OK. But that still leaves your balance 

sheet roughly twice of what it was pre-crisis era. Do you expect it 

again to stay there? Do you not expect the demand for cash to 

wane as interest rates rise? 

Mr. POWELL. Right now we have $2.2 trillion in non-reserve liabilities. That is to say—and when we shrink the balance sheet, 

what goes away is the reserves. That is the liability that goes 

away. That $2.2 trillion in liabilities, you then have to add on whatever 

the equilibrium demand for reserves is. It is probably going to be 

at least several hundred billion no matter what we do. That is how 

I get to 2.5 to 3. 

Chairman HENSARLING. Time of the gentleman has expired. 

The Chair now recognizes the gentleman from Illinois, Mr. Foster. 

Mr. FOSTER. Thank you for appearing here. This is an important 

part of communication with Congress. 

I would like to follow up on Representative Royce’s line of questioning about the dangers of default. I would like to repeat his 

thanks to you for being involved in educating Members of Congress 

about the necessity of taking seriously our payments on principal 

and interest. They are really two different kinds of defaults. 

They are defaults driven by fundamentals. When a country simply does not have the ability to repay its debt if you think about 

Iceland where there were debts from the banking crisis of 700 percent of GDP, and just no way to get people to pay it off, much less 

the country. 

There are other ones that are just self-inflicted wounds, like our 

voluntary failure. This is when a country that has more than 

enough money to pay its debts, simply has, for some political reason, refuses to do it. Over time, both parties have been guilty of 

abusing and weaponizing the debt limit. 

I just want to encourage you that there is a bipartisan consensus 

that could be assembled to permanently get rid of it. It is always 

being abused by whichever party is in the minority. At some point, 

I think everyone should step back. You are an important part of 

opinion-making in Washington and in financial circles so I wanted 

to—anything you can do to encourage that to actually happen. 

There may be a moment when the stars align and we can just 

get rid of this uniquely dumb thing that we do, of threatening to 

not pay our debt. 

Now, there is also the question of, is there enough money? You 

hear often, oh, there is just not enough money because of things 

like the publicly held debt. There is just not enough money and we 

have to cut Medicare, and that we have to cut all the things that, 

frankly, poor people depend on. I would like to go into that. 

The U.S. household net worth sometime this year it is going to 

go over $100 trillion. OK? $100 trillion and debt, publicly held debt, 

is 75 percent of GDP, so it is around 16, 17, I would guess. Would 

you agree that there is clearly enough money in the United States 

to pay off our national debt? 

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Will we ever reach a situation where the world says there is so 

much debt in the United States, public or private, that we simply 

cannot do it? We cannot cover our debts? 

Mr. POWELL. I wouldn’t want to run the test. I do think there 

would come a time that which—and it is not this time by a long 

shot. But there could come a time where the public, the global 

debt-buying public would come to the view that we either weren’t 

prepared to honor our debts or that we couldn’t service them. But 

we are a long way from that. 

Mr. FOSTER. But that is different. For example, in Japan where 

the debt is more than 200 percent GDP, the markets are not concerned simply because the amount of private wealth in Japan is 

more than enough to cover that. 

The situation is different in China where there is a huge amount 

of often unacknowledged private-sector debt. When you think of 

what will happen when that debt fails that will land first on regional banks and then the main banks and basically on the government’s balance sheet. 

There is a real danger in the case of China that there is just not 

enough money in China and enough wealth in China to cover the 

debt. Would you agree there is a fundamental difference in the 

United States, that we actually do have the money to pay off our 

debts by a long margin, because of the large public wealth in this 

country? That really it is a political problem that we face rather 

than one of just not having enough money? 

Mr. POWELL. Yes. We certainly have enough money to service our 

debts and honor them without question. 

Mr. FOSTER. Yes. 

Mr. POWELL. But really the issue, I think, is servicing them gets 

more and more expensive as they accumulate, as the numbers go 

up and those bills are going to be borne by our children. 

Mr. FOSTER. No, I agree completely. The wisdom of lowering 

taxes at a time when the economy, frankly, doesn’t need to be stimulated is something that, well, it is elementary macroeconomics 

that you run a deficit when the economy is in trouble and then 

when the economy recovers you pay off the debt that you have accumulated in order to smooth things out. 

You have a section on pages 14 and 15 of your report that you 

are presenting on the low inflation in advanced economies, which 

is something that is a wide spread. Do you have any thoughts on 

really what your main suspicion is for why that is taking place? 

Mr. POWELL. It has been a long-run trend. Inflation has been 

coming down for 25 to 30 years all over the world. It probably has 

something to do with the aging of the population and with low productivity and those sorts of things. It probably also has to do 

though with—sorry. 

Chairman HENSARLING. Time of the gentleman has expired. 

The Chair now recognizes the gentleman from Maine, Mr. 

Poliquin. 

Mr. POLIQUIN. Thank you, Chairman Hensarling, very much, and 

welcome Chair Powell. It is wonderful to meet with you again, and 

I know it is your first time before us and thanks for being so direct 

and giving us the answers to the questions that we ask. 

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Sir, I represent probably the most stunningly beautiful part of 

the world. It is rural Maine. If you haven’t been there Mr. Powell, 

we are blessed with such natural beauty. We have 3,600 miles of 

breathtaking coastline. We have thousands and thousands of lakes 

and ponds and hundreds of miles of rivers and streams. We are 

also called Vacationland. 

Now, you look like a fellow that probably needs a vacation, and 

I am not sure if you booked your Maine vacation yet but if you 

have a problem, Mr. Powell, you just call up our office and we will 

help you out. 

Now, when you go on your Maine vacation, and this is a great 

time to go by the way, if you like to snowmobile or the summer, 

you are going to find throughout our district, the rural part of 

Maine mostly, that we have a lot of shutdown factories and mills. 

When I was a kid growing up we had maybe 2 dozen paper mills. 

We have six left and they are healthy. You look at a lot of our textile and tanneries and shoe factories, mostly shutdown. 

We have in many cases, Mr. Powell, done that to ourselves with 

trade agreements that were unfair and hurt our workers, high 

taxes that didn’t allow us to be competitive. I know we have partially fixed that problem back in December with passing the tax 

cuts and then costly regulations. 

Now, I am sure you are familiar, Mr. Powell, with the Competitive Enterprise Institute computation, which says, and I summarize, about $1.9 trillion a year cost is paid by our employers and 

through them, pass through to some of our consumers. $1.9 trillion 

cost just to comply with Federal regulations, not State and local, 

just Federal. 

Is it fair to say, Mr. Powell, that unnecessary and costly regulatory burdens hurt the economy’s growth and hurt job creation? Is 

that a fair thing to say? 

Mr. POWELL. I think it is. Yes. 

Mr. POLIQUIN. OK. Would you look at the past year, 2017, and 

up until now when you have the economy growing at roughly 3 or 

so percent as compared to about 1.7 percent the last, roughly, 8 to 

10 years, is part of that increased economic growth and more jobs 

and fatter paychecks, the result of repealing unnecessary and expensive regulations? 

Mr. POWELL. Intuitively I would guess that it is, but it is very 

hard to pin that down. It is very hard to— 

Mr. POLIQUIN. I think anybody, with all due respect, Mr. Powell, 

who has run a business as I have, realizes that if it is less burdensome to run my business and sell product or services, that I am 

going to be more competitive. I will be able to hire more people and 

do better. 

Let me give you an example. This morning I met with about 100 

folks from our credit unions in Maine. These are wonderful people 

who are spending more time or too much time dealing with compliance as compared to pushing money into community so businesses 

can grow and hire more workers. 

Can you commit today, Mr. Powell, that you will do everything 

humanly possible within your purview to make sure that the regulatory burden for our small financial institutions are controlled and 

hopefully repealed? 

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Mr. POWELL. I will make you that commitment. 

Mr. POLIQUIN. You will or will not? 

Mr. POWELL. Will. 

Mr. POLIQUIN. Thank you, sir. Have you taken a look at Senate 

Bill 2155 which deals with part of the Choice Act that we sent over 

to the Senate and they are dealing with issues, in particular with 

small credit unions, community banks that help them deal with the 

regulatory burden. Have you taken a look at that sir? 

Mr. POWELL. I am not so good on the numbers of the bill. Does 

this bill have a name? 

Mr. POLIQUIN. It is, I believe, Mr. Crapo’s bill. 

Mr. POWELL. Yes. No. I am familiar with that bill. 

Mr. POLIQUIN. Great. You are supportive of that I take it, because it deals with exactly with what you and I are talking about. 

Mr. POWELL. It is a big bill. There is a lot in there. I think it 

is a very constructive enterprise, and I think the aspects of it that 

you are talking about and I certainly think are sensible. 

Mr. POLIQUIN. Perfect. Let us move on. Thank you, Mr. Powell. 

I appreciate that. Let us talk a little bit about what Mr. Foster was 

talking about. 

This is just wonderful talking about the national debt. We have 

$21 trillion and Chairman Hensarling is very good to put that 

number up every time we come in here and you can see it on both 

sides of the room. I am looking at it, and I tell you it makes my 

belly sick. 

Now, we have had other folks in the last Administration, Mr. 

Powell, that have come here and said, well, this no big deal, Bruce, 

$21 trillion in national debt. I used to be the State treasurer in 

Maine and I will tell you we knew how to balance our books and 

spend only what we took in. When I was there, the debt clock was 

unwinding. 

Now we have about $240 billion, $245 billion per year interest 

payments on that debt. Mr. Powell, do you take a different tack 

from the folks that were here earlier, the last Administration? Do 

you think this is a problem? 

Mr. POWELL. Do I think is a— 

Mr. POLIQUIN. Yes, this $21 trillion in debt. 

Mr. POWELL. Yes, I think we are not on a sustainable fiscal path 

and I think— 

Mr. POLIQUIN. I would agree with that. We can agree that this 

is a problem. With that said, sir, my second day here in Congress, 

I co-sponsored—the first bill I co-sponsored was a balanced budget 

amendment to the United States Constitution to finally force 

Washington to live within its means, stop balancing our books and 

start paying down the debt. Do you, sir, think that is a good idea? 

Mr. POWELL. Not a supporter of the balanced budget approach. 

Am a supporter of a sustainable fiscal path. 

Mr. POLIQUIN. Mr. Chairman, I am going to come back to Mr. 

Powell on that at some time. 

Chairman HENSARLING. Time of the gentleman has expired. 

Mr. POLIQUIN. Yes, sir. 

Chairman HENSARLING. The Chair now recognizes the gentlelady 

from Ohio, Mrs. Beatty. 

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Mrs. BEATTY. Thank you, Mr. Chairman, thank you, Ranking 

Member, and thank you, Mr. Chairman. 

Certainly, as one would expect, with you being the Chair of the 

Federal Reserve, that the questions would be centered around economic projections, economic developments, financial stability, monetary policy. 

But I am going to keep in my true form of asking you the same 

question that I have asked everyone who has sat in that seat. Are 

you familiar with Section 342 of Dodd-Frank? 

Mr. POWELL. Yes, ma’am, I am. 

Mrs. BEATTY. OK, the OMWI, so with that, the Office of Minority 

and Women Inclusion, can you tell me, in your short time, which 

I recognize, but you also have almost a half-decade of being Chairman of that board. Tell me what you are proud about that is under 

your leadership with OMWI. 

Mr. POWELL. I will be glad to. A couple of things, first, as I mentioned, I have been involved in now my seventh Reserve Bank 

Presidential search, and I think, in every case, we have been able 

to expand the universe of diverse candidates and select diverse candidates, too. I am proud of that. I think the Reserve Banks do a 

good job, by the way, on this. 

I think, at the board, Chair Yellen started a group of us to meet 

regularly and try to advance diversity and inclusion agendas at the 

board. I was an enthusiastic— 

Mrs. BEATTY. Let me ask you this. Who is your OMWI person? 

Mr. POWELL. Sheila Clark. 

Mrs. BEATTY. OK. Do you think you can increase your numbers, 

as Chairman Yellen had worked on rising them? While it was a 

fair job under her, I asked her the same question, and she admitted it could be better. 

While I am saying you the entity, has done something, I want 

to hear how we can do more, because it is still not at bragging 

rights, in my opinion. I want you to think about that. 

We have a lot of people who are in the audience today in green 

T-shirts, who represent many of the people who I represent in the 

3rd Congressional District, many of them women, many of them 

women of color, who also are concerned. 

The only difference with them is they put the people face, the 

human resources, on the same monetary policy and all the questions my colleagues on the other side have been asking you about 

numbers. 

Have you met with these individuals? 

Mr. POWELL. Yes, I have. 

Mrs. BEATTY. OK. Can you share with me some positive progress 

that you or the people who work with you are doing with them? 

Mr. POWELL. We met with a group with the green T-shirts a couple years back. They just wanted to tell us about what was going 

on in their communities, and frankly, I thought it was a proud day. 

We sat there and listened to what was going on in their communities, and it was very respectful, and it was useful. We also have 

other meetings. 

Mrs. BEATTY. Would someone on your staff be able to send me 

a report so I would have something in writing to know some benchmarks? Because I know, in meeting with them and their representmcarroll on FSR431 with DISTILLER

53 

atives, they have specific questions that they want to see, and they 

are asking about interest rates. They are asking about how we can 

help improve the economy for what we call working middle-class 

Americans. 

Let me put it a different way. I would like to get a report from 

your staff sharing with me, since you have had a meeting, what 

type of commitments or things you are going to work on. I would 

like to have that. 

Second, let me move to another financial question. I noticed in 

your report that there wasn’t anything about the stock market. 

Can you tell me if you think the stock market is one of the best 

or better indicators of the strength of the economy or the strength 

of the financial conditions for everyday Americans? 

I ask you this because a lot of my colleagues on the other side 

have been bragging a lot about the stock market and how the stock 

market is going up. 

Mr. POWELL. There was one reference in there about the recent 

volatility. I don’t think we called out the stock market by name, 

but that was what we were talking about. We don’t manage to the 

stock market. We manage to stable prices and maximum employment. 

The stock market enters into our thinking. It is an important 

place for businesses to raise capital. It is an important place for investors to invest. 

Mrs. BEATTY. Is that a yes or a no, in your opinion? 

Mr. POWELL. In my opinion is it what? Is it an important indicator of the overall state of the economy? 

Mrs. BEATTY. Yes. 

Mr. POWELL. I think the general thing is the stock market is not 

the economy, but it is a factor. It plays a factor as a role— 

Mrs. BEATTY. Would you say that only 50 percent of Americans 

own stock market, so the other 50 percent, who may be women and 

minorities, don’t? 

Mr. POWELL. That is right, yes. 

Mrs. BEATTY. I yield back. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from Georgia, Mr. 

Loudermilk. 

Mr. LOUDERMILK. Thank you, Mr. Chairman. Chairman Powell, 

thank you for being here today and spending so much of your day 

with us. We really appreciate it. But it is important that we have 

this dialog. 

I want to talk about something. I don’t know that it has been discussed much here today, but it is something that is very important 

for me, especially spending over 20 years in the IT industry, dealing with securing data. That is something that has been on the 

mind of most Americans, and that is cybersecurity and protecting 

the data of Americans. 

One of the areas of interest of mine, and I have stated this in 

almost every hearing that we have had on this topic, when I was 

in the military working intelligence, I worked on the technology 

side of it. Of course, when you are dealing with the Nation’s secrets, there is a huge responsibility to protect that information. 

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54 

We had a simple principle. That principle was, you don’t have to 

protect what you don’t have, which means, if you don’t absolutely 

need it, get rid of it. Otherwise, it becomes a risk. 

The Federal Board of Governors has experienced more than 50 

data breaches since 2011. Of course, that is very alarming, given 

how much data the Government collects, and not only collects 

itself, but requires private sector businesses to collect, which means 

they have to protect it, as well. 

Your predecessor, Chair Yellen, told me, when I asked these type 

of questions, that the Fed follows the NIST cybersecurity framework and was working on minimizing access to sensitive data. 

I would like to follow up. What are you working on to strengthen 

the Fed’s cybersecurity profile and to protect the data that you 

have? 

Mr. POWELL. Thank you. 

I am just getting started on this. I am going to place a high priority. I think Chair Yellen and others did before her, too. We need 

to protect the sensitive information that we do have, and we don’t 

need to collect sensitive information that we don’t need. That is a 

very fair point. 

Mr. LOUDERMILK. Thank you. Yes. 

Mr. POWELL. I think we have done a good job. We can certainly 

do better. It is going to be a high priority. 

Mr. LOUDERMILK. I appreciate that, and that is one of the areas, 

and I am glad to hear you say that you are looking at disposing 

of or not keeping certain data unless you need it, because that is 

something I think that we overlook as a Government, because access to information is power. But when you have it, you have to secure it. 

Transition over into another area that we have been dealing with 

here. I understand that you are supportive of some of the regulatory relief proposals that we have pending in Congress, such as 

increasing the SIFI threshold to $250 billion from the current $50 

billion. 

While I believe that Mr. Luetkemeyer’s SIFI designation reform 

bill takes a more thoughtful approach to measuring and designating systemic risk, I think it is still a step in the right direction. 

Can you help explain why banks under $250 billion in assets 

don’t pose a systemic risk to the economy? 

Mr. POWELL. As a general matter, banks under $250 billion are 

more engaged in the traditional business of banking, less complex 

activities and, of course, they are much smaller. They have smaller 

footprints. 

The way that Senator Crapo’s bill works is we would still have 

the ability to create a framework to look below $250 billion down 

to $100 billion institutions, to identify places where, perhaps, enhanced prudential standards might need to be applied. 

That is the way the bill works. But I think our view has been 

that that combination of raising the threshold and giving us the 

ability to go below it, in cases where needed, gives us the tools that 

we need. 

Mr. LOUDERMILK. From what I understand, even some of the authors of the Dodd-Frank bill are saying that $50 billion was the 

wrong threshold and we need to adjust it. I appreciate that. 

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55 

One last question. What is the Fed doing with the private sector 

on faster payment technologies? Are you engaged in that at all? 

Mr. POWELL. I am glad you asked. I was right in the middle of 

that in my prior life at the Fed. This really came out of the thought 

that we are falling behind other countries in faster, widely available mobile payments and that sort of thing. 

We have really convened a group of companies and consumer 

groups and regulators and customers and everything around a 

table and tried to make progress toward faster mobile payments. 

I am really proud of what we have done. 

Esther George at the Kansas City Fed has had the lead on that 

the last several years and has done a great job at it. It is something we are continuing to work on. We think it is very important. 

Mr. LOUDERMILK. All right. I thank you for your leadership. I am 

looking forward to working with you over the next few years. 

Thank you. 

I yield back. 

Chairman HENSARLING. Time of the gentleman has expired. 

The Chair now recognizes the gentleman from Washington, Mr. 

Heck. 

Mr. HECK. Thank you, Mr. Chairman. Chairman Powell, congratulations on assuming this incredible and awesome responsibility for the country. 

I am going to ask you the same question I have asked each of 

your predecessors since I have been a member of this committee. 

When does America get a raise? 

The reason I am asking that question is because we have obviously been through a protracted period of time in which wage 

growth has been fairly stagnant. 

Before you answer, sir, I know you are probably going to make 

some indication of the uptick in the latest report to wage growth 

of 2.9 percent. I just want to qualify your response by reminding 

you that that 2.9 percent was probably impacted by some transitory or one-time bonus payments. 

If you disaggregate the data between supervisory and non-supervisory employees, non-supervisory employees didn’t get anywhere 

near 2.9 percent. It was quite a bit below that. 

2.9 percent, even in and of itself, despite how encouraging we 

may or may not put it in the context of the last 18 months or so, 

is significantly below modern historical averages of closer to 4 percent. I am really interested in when is this economy going to function and grow in a fashion that enables Americans to get a meaningful raise? 

Mr. POWELL. Over time, wages should grow in keeping with the 

sum of inflation and increased productivity. If we assume inflation 

is going to be around 2 percent, it really comes down to productivity. 

Productivity since the financial crisis has averaged, output per 

hour, has averaged an increase of about 0.5 percent, and if you 

think about wages have been increasing at about 2.5 percent. That 

is why. Before the crisis, wages were increasing, at full employment, maybe 3.5 percent, and that is because productivity was 1.5 

percent. 

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If we want wages to go up on a sustainable basis over a long period of time, and that is what we want, we need to have more productivity. Unfortunately, those are not the things that we have the 

tools for. But that really is— 

Mr. HECK. But is that true, Mr. Chair? It seems to me that they 

are not unrelated. To the degree that you keep your foot off the 

brake and allow unemployment to continue to fall, and I am going 

to return to this issue in some things you have said on the record 

in the past about whether or not we should be looking at unemployment rates or wage growth as a measure of full employment 

per se. 

But to the degree that we keep our foot off the brake and allow 

U-3 or U-6 or pick your measure to continue to drop and continue 

to create pressures in the economy for wage growth to continue, 

does that not in and of itself incentivize businesses and employers 

to invest in labor-saving devices, read here, improve productivity? 

Is it not possible that improved wages themselves can help lead 

to improved productivity, which can create a virtuous cycle with 

wage growth over time? 

Mr. POWELL. Yes. That is exactly what we hope is happening 

right now. 

Mr. HECK. You are committing to keep your foot off the brake? 

When I was getting ready for this hearing, I went back and read 

something that you said in your very first year on the FOMC committee. At the very first meeting, one of the bank presidents mentioned tighter labor markets. You noted that you haven’t seen anything in the wage data yet to support that. 

It struck me as interesting, because it got me into thinking about 

U-3 and U-6 and my frustration with both, and how it has been, 

I think, 2–1/2 years since we hit the supposed definition of full employment, yet U-3 keeps dropping and the definition of full employment keeps chasing it. 

It made me wonder, as it relates to what you said earlier, why 

don’t we just use wage data to help define what full employment 

is? 

Mr. POWELL. We use it as a factor to look at. But, look, I think 

it is important to see, though, that for a long time, there was slack 

in the labor market. That argued for continuing to support lower 

unemployment. 

We have reached the point where the risks are really two-sided, 

now. We need to take that into account, because if we do get behind and the economy does overheat—we don’t see that now, I hasten to add—but if that does happen, then we will have to raise 

rates faster, and that raises the chances of a recession. Recessions 

tend to hit vulnerable populations the most. 

That is why we are raising rates on a gradual path. We are trying to balance the risk of getting inflation up to 2 percent with the 

risk of the economy overheating. 

Mr. HECK. Fair enough, Mr. Chair, but I would only observe that 

you tap the brakes at the expense of the people who have, over a 

long period of time, not received a raise. 

Thank you, sir. 

Chairman HENSARLING. The time of the gentleman has expired. 

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The Chair now recognizes the gentlelady from New York, Ms. 

Tenney. 

Ms. TENNEY. Thank you, Mr. Chairman. Thank you, Mr. Powell. 

I appreciate your long time here. I think I am the end of the line 

here for you today. I just have a couple of quick questions that deal 

with in-the-weeds policy. 

First, would like to ask you about the Federal Open Markets 

Committee and their role in determining interest on excess reserves. Back in 2006, Congress passed the Financial Services Regulatory Relief Act, which authorized the Federal Reserve to pay interest on excess reserves at Reserve Banks. 

However, when the bill was amended, the Federal Reserve, in determining those interest rates, was left to the Board of Governors 

and not to the entire Federal Open Markets Committee. We know 

this is a valuable tool, using the entire committee to determine 

monetary policy. 

My question for you is would you support an initiative or a legislation that would give the full role of determining what the excess 

interest on reserve—interest on excess to an entire expanded 

FOMC and the Federal Reserve? 

Mr. POWELL. I would say this is less of a problem than it seems 

to be. 

Ms. TENNEY. OK. 

Mr. POWELL. The full FOMC decides the range for the Federal 

funds rate, and the IOER is only set at the top of that range. So 

it really is the voting members of the FOMC who decide that. 

It would have been a reasonable decision for Congress to do that. 

I always loathe to support changes to the Federal Reserve Act, because that opens up the act. But I would say, as a practical matter, 

this is not a problem that we need to solve, because there is no difference between the two things. 

Ms. TENNEY. Would you be supportive or not supportive of legislation that would allow the district presidents to weigh in on that 

decision, as well? 

Mr. POWELL. Yes, I— 

Ms. TENNEY. If not, why not? 

Mr. POWELL. I don’t think we are looking for legislation. 

Ms. TENNEY. OK. Obviously, I always like less legislation. But in 

this case we are looking for more stakeholders to be part of the decision process, I think. 

Mr. POWELL. I think that the real decision that is made is the 

one that the bank presidents do take part in. It is the one that sets 

the range for the Federal funds rate. They make that decision with 

us, under the law. 

This is just an implementing thing. If I thought it was really unfair or a problem, then I would support a change. But I don’t really 

think it is a problem. It is less so than it would appear. 

Ms. TENNEY. OK. It has been expressed by them that they would 

be interested in having input on that. I just wanted—if you would 

consider support of that. 

Let me go to the next thing, and that would be the Federal Open 

Markets Committee blackout period and how you feel about that 

and whether we could restore some transparency to that period, 

whether it is necessary to go through that part? Just so we know 

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we have an ability to find out what is going on during that period, 

that 8 times a year when the committee is meeting, where we don’t 

have an opportunity to hear from the stakeholders. 

Mr. POWELL. I would want to look at what you are proposing. 

Ms. TENNEY. OK. 

Mr. POWELL. The whole idea of that period is that we don’t speak 

publicly to market participants or anybody about monetary policy 

during that period. That gives us a chance to keep our mouths shut 

for a while and let us get in a room and do our thinking. Then we 

come out of that at the end of the FOMC meeting and make an announcement. Then there is a day or two, and then people can give 

speeches and that kind of thing. 

Ms. TENNEY. Do you think there would be anywhere in there on 

certain parts of the policy that would be better off with more transparency on certain issues? Obviously, there are some that you 

would like to keep in the negotiating process, but others where we 

could at least speak on it and know what was going to come out 

at that point? 

Mr. POWELL. I think I would be happy to discuss this with you 

offline. 

Ms. TENNEY. OK. 

Mr. POWELL. Why don’t we commit to do that? I don’t— 

Ms. TENNEY. Thank you. I know I would love to talk. It is just 

I have legislation that would just offer a little more transparency 

in that aspect of it. Just not to eliminate the blackout period, but 

to minimize some of the issues that we are not allowed to be revealed during that blackout period. 

Mr. POWELL. We are concerned that when we are actually thinking about what to do at the next meeting, that we take a step away 

from our public conversations. That generally has been seen by us 

as a healthy thing. 

Ms. TENNEY. OK. One other quick question on another topic. 

The Wall Street Journal recently reported that two monetary policy specialists will serve as your senior advisers. You may recall 

that our House-passed FORM Act, the Federal Oversight Reform 

and Modernization Act, provides for each Federal Reserve board 

Governor to also have access to two senior advisers. 

Chairman Powell, would you be willing to allow two senior advisers to help a more diverse set of perspectives to your committee’s 

monetary policy deliberations? 

Mr. POWELL. I do remember that provision of the bill, as a matter of fact. 

But, I think the board has changed, really, in the time since I 

have been there. We are back to where every Governor has one or 

two advisers. We don’t need legislation on that. 

Ms. TENNEY. OK. That is something you would support. 

Chairman HENSARLING. Time of the gentlelady has expired. 

Ms. TENNEY. Thank you. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Ohio, Mr. Davidson. 

Mr. DAVIDSON. Thank you, Mr. Chairman. Chairman Powell, 

thank you so much for your testimony today. 

Before I get into my prepared questions, I have two follow-ups 

to previous questions. 

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One, Chairman Barr asked you about intervention in terms of 

selling assets in a particular scenario where the yield curve may 

become inverted, whether monetary policy might be appropriate, 

up to and including selling assets, in order to prevent a yield curve 

inversion. 

Just for clarity, if yield curve inversions are generally seen as 

bad, why wouldn’t intervention to prevent a yield curve inversion 

be seen as good? 

Mr. POWELL. In terms of yield curve inversions, I think the history is what it is, but it really is a history of times when the Fed, 

to some extent, has gotten behind and had to raise rates really 

fast. That is not where we are right now. I think most observers 

of this environment don’t see that problem. 

If you look at projections of the likelihood of a recession in the 

next year or so, they are very low. They are as low as they normally are. I don’t look at the current yield curve situation as a 

problem needing solution. 

Also, going to the issue of selling assets, though, I really like our 

current plan of allowing these MBS and treasury securities to roll 

off passively. The market has accepted it. I would have a high bar 

for wanting to change something that is working very well. 

Four years is not a long time. We will be back to some kind of 

new normal within 4 years. I think my strong prior would be to let 

the successfully announced and created program just run its 

course. 

Mr. DAVIDSON. Thank you. Thank you, Chairman. 

Also, Chairman Hensarling asked you about the IOER payments, 

and I think your answer was that they are constrained by commercial rates, so things that are available in the marketplace. But I 

would note that an interest rate consists, generally, of two parts. 

One is time value of money and the other is default risk. 

Presumably IOERs don’t have a default risk, so I am not sure 

that is the right metric. Would you care to comment on that? 

Mr. POWELL. What the law, I think, says is that we shouldn’t pay 

interest on reserves that is greater than the general level of shortterm interest rates. That is— 

Mr. DAVIDSON. But those short-term interest rates—so I see perhaps a need for clarification on the law, because those short-term 

interest rates contain time value of money risk, but also default 

risk, whereas IOER does not contain default risk. 

The real alternative for a financial institution in the market isn’t 

a one-for-one rate. It is if they make loans out in the marketplace, 

they inherently have default risk that the IOER does not have. 

Mr. POWELL. We are trying to manage—what we are trying to 

use that tool to do is to set short-term interest rates for the public. 

A lot of those will have a credit risk component. These short-term 

interest rates really don’t have a big window, particularly repo, 

which is secured by treasuries. 

Mr. DAVIDSON. Great. All right. Thank you, Chairman. 

I do have a question about the two roles of the Fed, two basic 

roles, as a regulator and as a monetary policy entity. Would that 

be consistent with how you see the structure of the Fed? 

Mr. POWELL. Yes. 

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Mr. DAVIDSON. OK. To understand the internal operations, do 

you actually track the budget between the two activities separately? Are there people who are generally involved in regulatory 

activity and then a different body of people that are generally involved in monetary policy? 

Mr. POWELL. Different divisions do have different budgets, and 

we do look at it from a functional basis. But it is pretty intertwined, as a matter of fact. 

We do call upon what we learn in the supervisory, regulatory 

space. We do get a lot of input. The board gets briefed on that all 

the time. It informs our monetary policy. I think our knowledge of 

the transmission mechanism also informs supervision. There is 

quite a lot of intertwining there. It is not a clean separation. 

Mr. DAVIDSON. OK. But internally there is already at least some 

level of a separate budget for the activities involving regulators. My 

particular curiosity involves a bill that we have put together called 

H.R. 4755. It is the Federal Reserve Regulatory Oversight Act. 

This would put the regulatory component of the Federal Reserve 

on appropriations, which would be, to me, a compromise position, 

because we could propose putting the entire Federal Reserve on appropriations. 

The purpose would be to focus on the regulatory side so that all 

the standard strings attached to an executive agency that is engaged in rulemaking apply to the regulatory side of the Federal Reserve in the same way that others do. I hope that we can enact 

that later in the year. 

My time is expired. 

Chairman HENSARLING. Time of the gentleman has expired. 

The Chair now recognizes the gentleman from Indiana, Mr. Hollingsworth, and informs all members that a vote is currently pending on the floor. The gentleman is recognized. 

Mr. HOLLINGSWORTH. I appreciate you being here and I have 

heard great things about the testimony that you have given so far. 

Looking forward to the opportunity to continue to interact with you 

and work with you in supporting the Fed’s stated goals. 

I wanted to ask some questions that I hear a lot about in district, 

which is as we continue to see unemployment tick lower and lower, 

one of the questions I get a lot is why aren’t we seeing more wage 

growth across the country? 

What is constraining some of the wage growth that may be happening as we tend to push down unemployment, whether that reflects on—whether the Phillips curve theory is somehow incorrect, 

or whether it is kinked and a nonlinear curve, or what your views 

are on that? 

Mr. POWELL. There are two ways to think about it. One is that 

for wages to go up sustainably you need higher productivity. We 

have had very low productivity since the crisis, and it is averaging 

about 0.5 percent per year. We need to get that up if we want 

wages to go up sustainably. 

Mr. HOLLINGSWORTH. Right. 

Mr. POWELL. But maybe more relevant to your question is, as 

you get this close to full employment, you would think that there 

would be some tightness in the labor market. You would think 

wages would be getting bid up. We are going to be looking at that 

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as one of many indicators of where the natural rate of unemployment is. 

Mr. HOLLINGSWORTH. Yes. 

Mr. POWELL. I wouldn’t say it is a great mystery, but I would 

have expected to see more increases in wages. Frankly, I do expect 

to see more increases in wages in the next year or so. 

Mr. HOLLINGSWORTH. I know one of the theories that I think the 

Fed has put out quite a bit is that there is a—called a shadow 

labor market. There are a great number of people that aren’t currently participating in the labor market, either looking for employment or currently employed, that might be tempted to come back 

in or lured back in. 

Do you still think that is the case, that higher wages or just 

more employment opportunities might lead to more people getting 

to the workforce? Or is there some sort of decay in their skill set 

if they have been unemployed for a period of time that might lead 

to them not being able to participate meaningfully in the workforce 

and need some help getting back into it? 

Mr. POWELL. We have seen the labor force participation rate go 

sideways now for 4 straight years. 

Mr. HOLLINGSWORTH. Right. 

Mr. POWELL. That is actually a big gain against what is a downward trend due to aging and other things. I think we have seen 

some of that. We have seen people either not leaving or coming 

back into the labor force as it has gotten tighter. How much more 

of that can there be? I hope there is a lot more, but I am not really 

sure— 

Mr. HOLLINGSWORTH. There are still some statistics about working-age population individuals, though, that are less employed or 

less likely to be looking for employment than they were 20 or 30 

or 40 years ago. 

I have certainly heard the demographic argument made quite a 

bit, and I think you made it in one of our private meetings before, 

is that holding on to current labor force participation is actually a 

gain, once you look at those that demographically would be falling 

out. 

But it seems like working-age population individuals are still 

somewhat challenged to get back into the workforce. Have you guys 

seen some of that or seen some anecdotal or statistical evidence as 

to what that might be leading to or what the cause might be? 

Mr. POWELL. Actually, labor force participation by prime-age 

workers is still more than a full percentage point below where it 

was before the crisis. 

Mr. HOLLINGSWORTH. Right. 

Mr. POWELL. That is the other—the two things were, you are getting a signal that there might be more slack on wages, and primeage labor force participation. 

Mr. HOLLINGSWORTH. Right. 

Mr. POWELL. That is the other place. There are many other ones 

that suggest that we are at or above full employment. 

It may be that there are some portion of those people that can 

come back in. It may be that it is mostly structural. The only way 

to know is to is to find out. 

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I think we are, with relatively low unemployment, we are close 

to full employment now. We should be finding out whether we can 

keep these people, get them back in the labor force. 

Mr. HOLLINGSWORTH. Right. 

Does that imply, and I have read in other comments that you 

have made, and please don’t let me misconstrue them, because I 

don’t want to mischaracterize what you are trying to say, that 

there might be a tolerance to continue to see more and more tightening in the labor market and maybe run above historical average 

inflation and a goal to try to drive more wage growth and get more 

people back into the workforce? Is that a fair characteristic of what 

you have said before, or— 

Mr. POWELL. I think we are engaged in a process of discovering 

the natural rate. I think the median SEP participant says it is in 

the mid-fours. That sounds about right to me. 

Mr. HOLLINGSWORTH. Yes. 

Mr. POWELL. I think, in terms of inflation we haven’t said that 

we are seeking inflation above target. What we say is that we 

would look at persistent deviations from inflation, both above and 

below target, as being undesirable. We will conduct policy to move 

inflation back to target. 

Mr. HOLLINGSWORTH. When you think about—just one last question, maybe more generic. When you think about the economy 

today, you think about monetary policy today and maybe its future, 

as well, what keeps you up at night? What are you most worried 

about with regard to the economy; you mentioned productivity, 

monetary policy? 

Mr. POWELL. Yes. I think right now the economy is in the best 

shape it has been in a while, and that is true around the globe. We 

are having a moment of global growth. It is great to see. 

We have the problems associated with strong growth, and that 

is a great relief. My hope is that we can sustain that for as long 

as possible. 

Mr. HOLLINGSWORTH. Understood. 

With that, I yield back, Mr. Chairman. 

Chairman HENSARLING. Time of the gentleman has expired. 

There being no further Members in the queue, I would like to 

thank the witness for his testimony today. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

This hearing now stands adjourned. 

[Whereupon, at 1:19 p.m., the committee was adjourned.] 

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(63) 

A P P E N D I X 

February 27, 2018 

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For release on delivery 

8:30 a.m. EST 

February 27, 2018 

Statement by 

Jerome H. Powell 

Chairman 

Board of Governors of the Federal Reserve System 

before the 

Committee on Financial Services 

U.S. House of Representatives 

February 27, 2018 
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Chairman Hensarling, Ranking Member Waters, and members of the Committee, I am 

pleased to present the Federal Reserve's semiannual Monetary Policy Report to the Cont,>ress. 

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 collea~o'Ues on the Federal Open Market Conunittee (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 of2017 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 
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2 

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 arc 

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 hy 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, inf1ation 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 

I. 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 
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-3-

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 b>Towth 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 near-tenn risks to the 

economic outlook as roughly balanced but will continue to monitor inflation developments 

closely. 

Monetary Policy 

I will now tum to monetary policy. The Congress has assigned us the goals of promoting 

maximum employment and stable prices. Over the second half of2017, the FOMC continued to 

gradually reduce monetary policy accommodation. Specifically, we raised the target range for 

the federal funds rate by I /4 percentage point at our December meeting, bringing the target to a 

range of 1-1/4 to 1-l/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 
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- 4-

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 tix 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. Wl1ile 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 finner 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 infom1ed 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. 
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For people of color, banks are shutting the door to 

homeownership 

Fifty years after the federal Fair Housing Act banned racial discrimination in 

lending, African Americans and Latinos continue to be routinely denied 

conventional mortgage loans at rates far higher than their white counterparts. 

This modern-day redlining persisted in 61 metro areas even when controlling for 

applicants' income, loan amount and neighborhood, according to a mountain of 

Home Mortgage Disclosure Act records analyzed by Reveal from The Center for 

Investigative Reporting. 

The yearlong analysis, based on 31 million records, relied on techniques used by 

leading academics, the Federal Reserve and Department of Justice to identify 

lending disparities. 

It found a pattern of troubling denials for people of color across the country, 

including in major metropolitan areas such as Atlanta, Detroit, Philadelphia, St. 

Louis and San Antonio. African Americans faced the most resistance in Southern 

cities- Mobile, Alabama; Greenville, North Carolina; and Gainesville, Floridaand Latinos in Iowa City, Iowa. 
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:MODERN-DAY RED LINING 

No matter their location, loan applicants told similar stories, describing an uphill 

battle with loan officers who they said seemed to be fishing for a reason to say no. 

"I had a fair amount of savings and still had so much trouble just left and right," 

said Raehelle Faroul, a 33-year-old black woman who was rejected twice by lenders 

when she tried to buy a brick row house close to Malcolm X Park in Philadelphia, 

where Reveal found African Americans were 2. 7 times as likely as whites to be 

denied a conventional mortgage. 

Faroul. 33. called the experience of being rejected twice by lenders when she tried to buy 

a Philadelphia home mz her own "humiliating. "Credit: Sarah Blesener for Reveal 

The analysis independently reviewed and confirmed by The Associated Press 

showed black applicants were turned away at significantly higher rates than whites 

in 48 cities, Latinos in 25, Asians in nine and Native Americans in three. In 

Washington, D.C., the nation's capital, Reveal found all four groups were 

significantly more likely to be denied a home loan than whites. 
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"It's not acceptable from the standpoint of what we want as a nation: to make sure 

that everyone shares in economic prosperity," said Thomas Curry, who served as 

America's top bank regulator, the comptroller of the currency, from 2012 until he 

stepped down in May. 

Yet Curry's agency was part of the problem, deeming 99 percent of banks 

satisfactory or outstanding based on inspections administered under the Community 

Reinvestment Act, a 40-year-old law designed to reverse rampant redlining. And 

the Justice Department has sued only a handful of financial institutions for failing to 

lend to people of color in the decade since the housing bust. Curry argued that the 

law shares part of the blame; it needs to be updated and strengthened. 

"The Community Reinvestment Act has aged a lot in 40 years," he said. 

Since Curry departed nine months ago, the Trump administration has gone the other 

way, weakening the standards banks must meet to pass a Community Reinvestment 

Act exam. During President Donald Trump's first year in office, the Justice 

Department did not sue a single lender for racial discrimination. 

The disproportionate denials and limited anti-discrimination enforcement help 

explain why the homeownership gap between whites and African Americans, which 

had been shrinking since the 1970s, has exploded since the housing bust. It is now 

wider than it was during the Jim Crow era. 

This gap has far-reaching consequences. In the United States, "wealth and financial 

stability are inextricably linked to housing opportunity and homeownership," said 

Lisa Rice, executive vice president of the National Fair Housing Alliance, an 

advocacy group. "For a typical family, the largest share of their wealth emanates 

from homeownership and home equity." 

The laJt::s_t_tigug::s from the U.S. Census Bureau show the median net worth for an 

African American family is $9,000, compared with $132,000 for a white family. 

Latino families did not fare much better at $12,000. 

What lenders keep secret 

Lenders and their trade organizations do not dispute the fact that they tum away 

people of color at rates far greater than whites. But they maintain that the disparity 

can be explained by factors the industry has fought to keep hidden, including the 

prospective borrowers' credit history and overall debt-to-income ratio. They singled 
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out the three-digit credit score- which banks use to determine whether a borrower 

is likely to repay a loan- as especially important in lending decisions. 

"While quite informative regarding the state of the lending market," the records 

analyzed by Reveal do "not include sufficient data to make a determination 

regarding fair lending," the Mortgage Bankers Association's chief economist, Mike 

Fratantoni, §i!is! it1Jl5ta(QJ11Cl1t. 

The American Bankers Association ;mi<l the lack of federal enforcement proves 

discrimination is not rampant, and individual lenders told Reveal that they had hired 

outside auditing firms, which found they treated loan applicants fairly regardless of 

race. 

"We are committed to fair lending and continually review our compliance 

programs to ensure that all loan applicants are receiving fair treatment," Bostonbased Santander Bank §i!i~l i!J iLsilltC:!llC:lJt. 

New Jersey-based TD Bank, which denied a higher proportion of black and Latino 

applicants than any other major lender, saig it "makes credit decisions based on 

each customer's credit profile, not on factors such as race or ethnicity." 

Reveal's analysis included all records publicly available under the Home Mortgage 

Disclosure Act, covering nearly every time an American tried to buy a home with a 

conventional mortgage in 2015 and 2016. It controlled for nine economic and social 

factors, including an applicant's income, the amount of the loan, the ratio of the size 

of the loan to the applicant's income and the type of lender, as well as the racial 

makeup and median income of the neighborhood where the person wanted to buy 

property. 

Credit score was not included because that information is not publicly available. 

That's because lenders have deflected attempts to force them to report that data to 

the government, arguing it would not be useful in identifYing discrimination. 

In an Aprilrrilli9'12'ill.Qr, the American Bankers Association said reporting credit 

scores would be expensive and "cloud any focus" the disclosure law has in 

identifYing discrimination. America's largest bank, JPMorgan Chase & Co., 

has 'lffi~Jgd that the data should remain closed off even to academics, citing privacy 

concerns. 
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At the same time, ~!lldie~ have found proprietary credit score algorithms to have a 

discriminatory impact on borrowers of color. 

The "decades-old credit scoring model" currently used "does not take into account 

consumer data on rent, utility, and cell phone bill payments," Republican Sen. Tim 

Scott of South Carolina_wm1~ in August, when he unveiled_<iJ2iU to require the 

federal government to vet credit standards used for residential mortgages. "This 

exclusion disproportionately hurts African-Americans, Latinos, and young people 

who are otherwise creditworthy." 

Point Breeze is a rapidly gentrifying in Philadelphia. Most of' the loans there are 

going to white newcomers. Credit: Sarah Blesener for Reveal 

A case study: Philadelphia 

Philadelphia was one of the largest cities in America where African Americans 

were disproportionately turned away when they tried to buy a home. About the 

same number of African Americans and non-Hispanic whites live in the City of 

Brotherly Love, but the data showed whites received 10 times as many conventional 

mortgage loans in 2015 and 2016. 
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Banks also focused on serving the white parts of town, placing nearly three-quarters 

of their branches in white-majority neighborhoods. Reveal's analysis also showed 

that the greater the number of African Americans or Latinos in a neighborhood, the 

more likely a loan application would be denied there even after accounting for 

income and other factors. 

Conventional home purchase loans in 

Philadelphia, 2015 and 2016 

- When Faroul applied for a loan in April2016, she thought she was an ideal 

candidate. She holds a degree from Northwestem University, had a good credit 

score and estimates she was making $60,000 a year while teaching computer 

programming as a contractor for Rutgers University. Still, her initial loan 

application was denied by Philadelphia Mortgage Advisors, an independent broker 

that made nearly 90 percent of its loans to whites in 2015 and 2016. 

"I'm sorry," broker Angela Tobin wrote to Faroul in an email. Faroul's contract 

income wasn't consistent enough, she said. So Faroul got a full-time job at the 

University of Pennsylvania managing a million-dollar grant. 

But that still wasn't enough. When she tried again a year later, this time at 

Santander Bank, a Spanish firm with U.S. headquarters in Boston, the process 

dragged on for months. Her loan officer kept asking for new information, she said 

or sometimes the same information again. 
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By this time, Faroul had been trying to get a mortgage for over a year, and the 

process itself was damaging her credit. Every time a lender pulls a hard inquiry on a 

credit report, the score goes down to guard against people who are trying to take on 

a lot of debt. 

"They had done so many hard pulls that my credit score had dropped to 635," she 

said. 

Then, an unpaid $284 electric bill appeared on Faroul's credit report. It was for an 

apartment she didn't live in anymore. She paid the bill right away, but the bank said 

it couldn't move forward. 

Civil rights groups and real estate professionals said Faroul's experience follows a 

familiar pattern of discrimination by banks and mortgage lenders that has kept 

people of color from building wealth. 

"It's one thing after another. It's like pulling layers off an onion," said Arlene 

Wayns-Thomas, president of the Philadelphia chapter of the National Association 

of Real Estate Brokers, which represents African American real estate 

professionals. 

Wayns-Thomas, who has been selling real estate for 30 years, said her black clients 

are treated differently by lenders. 

"They may not like what happened between the last time you were working on this 

particular job to this one. They may see there was a gap," she said. "I have seen 

situations where they've asked people for the children's birth records." 

"The things that happen behind the scenes is what's disturbing," she said. 
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Rochelle Faroul (right) and her partner, Hanako Franz, sit outside their new home in Philadelphia 

in November. Faroul, who works at the Universitv of Pennsylvania, wasn't abfe to get a mortgage 

Toan until Franz agreed to sign on to her loan application. Credit: Sarah Blesener for Reveal 

A change of tune from lenders 

For Faroul, things suddenly took a tum for the better after her partner, Hanako 

Franz, agreed to sign on to her loan application. At the time, Franz -who is half 

white, half Japanese was working part time for a grocery store. Her most recent 

pay stub showed she was making $144.65 every two weeks. Faroul was paying for 

her health insurance. 

The loan officer had "completely stopped answering Rachelle's phone calls, just 

ignored all of them," said Franz, 32. "And then I called, and he answered almost 

immediately. And is so friendly." 

A few weeks later, the couple got the loan from Santander and bought a threebedroom fixer-upper. But Faroul remains bitter. 
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"It was humiliating," she said. "I was made to feel like nothing that I was 

contributing was of value, like I didn't matter." 

Contacted by Reveal, the lenders defended their records. Tobin, who turned down 

Faroul on her first application, said race played no role in the rejection. 

"That's not what happened," she said and abruptly hung up. A stlt~mtJ1Jfollowed 

from Philadelphia Mortgage Advisors' chief operating officer, Jill Quinn. 

"We treat every applicant equally," the statement said, "and promote 

homeownership throughout our entire lending area." 

Faroul's loan officer at Santander, Dennis McNichol, referred Reveal to the 

company's public affairs wing, which issued ;Lstilltallent: "While we are 

sympathetic with her situation, ... we are confident that the loan application was 

managed fairly." 

Reveal's analysis oflending data shows that nationally, Santander turned away 

African American homebuyers at nearly three times the rate of white ones. The 

company did not address that disparity in its statement but said it was more likely to 

grant a loan application from an African American borrower than five of its 

competitors. 
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Pedestrians pass a now-closed Santander Bank branch in Philadelphia late last year. Credit: 

Sarah Blesener for Reveal 

Redlining history repeating 

Lending patterns in Philadelphia today resemble redlining maps drawn across the 

country by government officials in the 1930s, when lending discrimination was 

legal. 

Back then, surveyors with the federal Home Owners' Loan Corporation drew lines 

on maps and colored some neighborhoods red, deeming them "hazardous" for bank 

lending. Leading causes of risk, according to government officials, included the 

presence of African Americans or immigrants. 
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A 1937 map .from the .federal Home Owners' Loan Cmporation shows Philadelphia's Nicetown 

neighborhood (labeled D6) colored red, marking it as "hazardous "for bank lending. Credit: 

Mapping Inequality at the University of Richmond Digital Scholarship Lab 

This practice has been outlawed for half a century. And for the last 40 years, banks 

have had a legal obligation under the C::mnrnunityJ~gi)lvesti11~n_t_A_ct to solicit 

clients borrowers and depositors - from all segments of their communities. 

But in many places, the law hasn't made much difference. When you combine 

home purchase loans, refinancing and home equity lines of credit, banks were more 

likely to deny a conventional loan application than grant it in more than 40 percent 

of Philadelphia. People of color were the majority in nearly all those 

neighborhoods. 

"You're killing us here," said Cindy Bass, a member of the Philadelphia City 

Council, who worked for a mortgage company before entering politics. The data 

shows banks have frozen out borrowers in much of her district including 

Nicetown, a North Philadelphia neighborhood where boarded-up row houses dot the 

landscape. 

"We need dollars. We need investment," Bass said, "like every neighborhood needs 

investment." 
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In a Philadelphia was in the 1930s, banks 

mortgage brokers largely stay away. Lenders have been particularly stingy when it comes to home 

improvement loans. Credit: Sarah Blesener for Reveal 

Nicetown is among the neighborhoods redlined in the 1930s. In his assessment, 

government surveyor W.R. Hutzel said the hazardous neighborhood had some 

positives, including "new industry- good transportation" and a high school. On the 

other hand, he wrote, it had a "heavy concentration of negro." 

Today, the economic recovery largely has bypassed Nicetown. Blight is a major 

concern. Some of the vacant homes, empty for years, have attracted squatters. 

Although it's just a few blocks from Temple University Hospital, banks and 

mortgage brokers largely stay away. Lenders have been particularly stingy when it 

comes to home improvement loans. From 2012 to 2016, they made 67 home 

improvement loans here and denied 315. 

"It creates this cycle where properties fall into dilapidation for a long period of 

time," said contractor Eric Marsh Sr., 48, whose family has lived in Nicetown for 

three generations. 

Marsh started his own construction business "because I saw dilapidation and empty 

houses," he said, and wanted to help. But because banks rarely lend here, there's no 
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capital to improve the neighborhood. So Marsh gets most of his jobs in more 

affluent sections near the center of town. 

"I was wondering why people weren't purchasing these houses or renovating 

them," he said. "As I've gotten older and talked to people, I've found out that a big 

part of it is the lack of lending in neighborhoods like this." 

'It's like a glass ceiling' 

It's not only historically redlined areas that suffer from a lack of credit. Some 

neighborhoods that were predominantly African American decades ago have since 

gentrified and are now majority white. Today, they benefit from a large number of 

home mortgages from banks. 

LISTEN TO THIS STORY 

Other neighborhoods that experienced white flight after World War II have become 

home to a substantial black middle class. And in those neighborhoods, banks are 

more likely to tum away borrowers. 

Four miles from Nicetown, toward the suburbs near the Awbury Arboretum, the 

homes of Gennantown are set back from the street behind garden patios and 

beautiful stone facades. 

This area wasn't redlined in the 1930s. Government officials colored it green "the 

best"- and blue, which meant "still desirable," and told banks to lend here. Back 

then, most residents of Germantown were white. 

Today, this part of Philadelphia is majority African American, and the homes are 

occupied by middle-class workers teachers, nurses and union craftsmen. Yet in 

every year from 2012 to 2016, banks denied more conventional loans of all types 

than they made in Germantown. 

"It's like a glass ceiling," said Angela Mciver, CEO of the Fair Housing Rights 

Center in Southeastern Pennsylvania. "OK, we'll allow you to go this far, but ... 

you're not going to go any further." 
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AMERICAN RANKER 

The latest (1/51 

'We are not looking to relax: regulation': Fed's Quarles 

By John Heitman 

Published February 26 2018, 5:01pm EST 

More in Monetary policy, Risk-based capital rule, Regulatory reform, Regulatory relief, Volcker Rule, Randal Quarles, Federal Reserve 

Print 

WASHINGTON- The Federal Reserve's top regulator said Monday that he did not view the agency's 

review of post-crisis regulations as an exercise in relaxing rules or reducing capital levels, emphatically 

pushing back against claims that certain proposals could lead to weaker supervision. 

"It's not just semantically that I want to stress this: As we are looking at enhancing the efficiency of 

regulation, we are not looking to relax regulation," said Federal Reserve Vice Chairman for Supervision 

Randal Quarles. "We are not looking to significantly reduce the level of risk-weighted capital in the 

[banking] system. That has been a strength .. a global competitive advantage, relative to the capital 

levels of non-U.S. competitive institutions." 
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"We are not looking to relax regulation. We are not looking to significantly reduce the level of risk-weighted 

capital in the [banking] system; said Federal Reserve Vice Chairman for Supervision Randal Quarles. 

Bloomberg News 

Speaking at a conference sponsored by the National Association for Business Economists, Quarles said 

the aim of current and any forthcoming regulatory proposals is simply to improve the efficiency of postcrisis regulation, not to ease ar lower the requirements for their own sake. 

"We're not looking to reduce capitol, or really, I don't view our objective as relaxing regulation," he said. 

"We're looking to achieve regulatory objectives in the most efficient way, and it would be the first time in 

the history of man since the expulsion from the Garden [of Eden] that a project like this [Dodd-Frank] has 

been undertaken that could not be improved and mode more efficient." 

Quarles added that areas the agency is reviewing, along with other regulators, are the supplementary 

leverage ratio and Volcker Rule, as well as previously announced changes to the transparency of the 

Fed's stress testing models. 

"I think there will be calibrations ... calibrations to the supplementary leverage ratio, we'll certainly look 

at that The leverage ratio should be a backstop, not a predominant feature," Quarles said. "I think ... 

there are Volcker Rule recalibrations over the next several months, which, again, is on area where I think 

we can make regulation much more efficient without in any way undermining its statutory mandate." 
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Quarles' comments come as he delivered remarks on his perspectives on the U.S. economy. In those 

remarks, he said that investments sparked by lost year's tax bill could improve long-term growth by 

increasing productivity, undergirding on argument forwarded by the administration that the economy 

will grow foster than most economists suggest. 

Quarles who was appointed by President Trump and sworn in last October said that while the 

prognosis for long-term economic growth is inherently uncertain, there are reasons to believe that the 

recent bump in the economy since Trump's inauguration may be more durable than it might otherwise 

appear. 

"The sustoinobility of the recent upturn in growth will depend importantly on whether some of the factors 

that hove been holding bock growth for the post decode diminish, including weak investment and 

productivity," he said. "On balance, I om cautious, but I om also optimistic enough to believe that the 

factors that hove been holding bock growth need not be permanent and could turn, even fairly rapidly." 

The primary growth impediments, Quarles said, ore slow growth in the productivity of the workforce and 

a lock of capital investment since the financial crisis. 

He argued that recent indications that capitol investment is on the rise could lead to a secondary effect 

of increasing worker productivity, thus overcoming some of the other secular trends in workforce 

productivity and paving the way for a more robust economic growth pattern. 
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"Slow investment growth - which, os already mentioned, hod prevailed until recently -damps the 

contribution of new capitol to worker productivity," he said. "It could also be that new investment is a 

necessary step for the spread of new technologies, especially if technology is embodied in capital 

equipment." 

Quarles said that recent fiscal policies - including last December's tax bill and the recently passed twoyear budget deal could lead to higher long-run growth than what was prevalent since the crisis. 

"After subtracting from growth over much of the period from 2011 onward, the impetus from fiscal policy 

has turned distinctly positive with the passage of recent tax and budget legislation," he said. "Fiscal 

policy is likely to import considerable momentum to growth over the next couple of years not only by 

increasing demand, but also by boosting, to some degree, the potential capacity of the economy." 

John Heitman 

lili "" 

~ Comment 

Print 
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Questions for The Honorable Juome H. Powell, Chairman, Board of Governors of the 

Federal Reserve System from Representative Royce: 

1. You have previously called for housing finance reform stating that "we need to move to 

a system that attracts ample amounts of private capital to stand between housing sector 

credit risl• and taxpayers." 

I could not agree more. Even in their current state, I think there is much more Fannie & 

Freddie could do to offload credit risk. 

To be fair, you said, last summer, that this is not a normal issue on which the Fed would 

comment, but that we are in a "now or never moment" for reform as there is "not a 

current risk" with a healthy economy and housing system. 

How long will this "now or neve.r moment" last and what are the consequences of inaction? 

The Federal Reserve is responsible for regulating and supervising banking institutions to ensure 

their safety and soundness, and more broadly for the stability of the financial system. A robust, 

well-capitalized, well-regulated housing system is vital to achieving those goals, and the longterm health of our economy. 

Considering housing finance reform in the current environment is important for two key reasons. 

First, the economy and housing sector are healthy. It would be far more disruptive to implement 

fundan1ental structural changes during difficult economic times. Second, as we move further out 

from the crisis, we are at risk of settling for the status quo -- a government-dominated mmigage 

market with insufficient private capital to protect taxpayers. 

Housing is the single largest asset class in our financial system, with total outstanding residential 

real estate owned by households of over $24 trillion and roughly $10 trillion in single-family 

mortgage debt W11ile post-crisis regulation has addressed mortgage lending from a consumer 

protection standpoint, the important risks to taxpayers and the broader economy and fmancial 

system have not been robustly addressed. 

There has been some meaningful progress in reforming the system. In 2008, Congress enacted 

the Housing and Economic Recovery Act, which, among other things, created the Federal 

Housing Finance Agency (FHFA), modeled on and with similar powers to the Federal Deposit 

Insurance Corporation. Under the FHFA's oversight, the two govemment-sponsored enterprises' 

(GSE) retained investment portfolios have declined to about half of their pre-crisis size, and arc 

expected to continue to shrink. :Further, the GSEs have raised about $50 billion in private capital 

through their credit risk transfers programs, in essence laying off some credit risk to private 

investors. 

The primary consequence of inaction is a government dominated mDltgage market with 

insufficient capital. The federal government's domination of the housing sector has grown 

significantly since the financial crisis. Fannie Mae, Freddie Mac, FHA, and U.S. Depaiiment of 

V ctcrans Affairs have a combined market share of about 80 percent of new purchase mortgages. 
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While Fatmie Mae and Freddie Mac have more than $5 trillion of mortgage backed securities 

and corporate debt outstanding, they hold only about $3 billion of capital each. 

Enacting housing finance reform will protect taxpayers, be good for households and the 

economy, and go some distance toward mitigating the systemic 1isk that the GSEs still pose. 

2. Before the Senate Banking Committee you mentioned that the Federal Reserve had 

"started a unit of economists and policy makers" focused on the cost/benefit analysis of 

financial regulations. 

Can you give us an update on these efforts? 

The Policy Effectiveness and Assessment section has begun the work on the type of cost/benefit 

analysis offrnancial regulations mentioned in my testimony. The section has a manager in place 

(an economist by training). Presently, the team consists of a small number of Ph.D. economists 

and support staff. Additional Ph.D. economists were recently hired and will be joining in the 

coming months. These additions will enable the section to engage more fully. 

Section staff are currently working on an intemal evaluation of the effectiveness of the postcrisis regulatory refmms. In addition, building upon our existing effmt, the section staff are 

working with the leadership of the Supervision and Regulation division on crafting a policy 

document that lays out how the division will approach cost-benefit analysis. Similar documents 

are used to guide cost-benefit analyses that are conducted at other agencies. Once this work has 

been completed, staff will pmiicipate more actively in the rulemaking process. 

3. Also, specifically, does the Fed weigh the impact of regulation on U.S. economic growth 

when we create standards that are higher than global norms as with the so-called "gold 

plating" of the largest U.S. institutions? 

Strong regulatory standm·ds enhance the stability of the U.S. financial system. The recent 

financial crisis showed that the standards in place before the crisis were not strong enough to 

constrain banks' risk-taking. Since the crisis, the Federal Reserve, working with the other U.S. 

bank regulatory agencies, has put stronger standards in place, notably for capital m1d liquidity. 

The United States now has a strong banking system that has eamed back the market's 

confidence, allowing U.S. banks to expand their lending at a healthy pace in recent years. 

The Federal Reserve considers the impact of a regulation prior to putting it in place. This 

includes consideration of the potential benefits of a regulation from the increased safety and 

soundness of the banking and broader finm1cial system, as well as any costs associated with 

adverse effects on economic activity. Such considerations also apply when we are implementing 

global standards. 

Importantly, standm·ds discussed or recommended by international bodies are not binding in the 

United States. None of the policy actions recommended by international fmums have any effect 

in the United States unless they arc adopted by U.S. authorities, acting under U.S. laws and 

tln·ough a public notice and comment period. The Federal Reserve and the other banking 

agencies can, of course, adopt different standards in the United States than those discussed 
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internationally, and we have often done so to better reflect the nuances of U.S. financial 

institutions and markets. In addition, the international forums on financial regulation in which 

the Federal Reserve participates typically put their policy proposals through a public notice and 

comment process, similar to that of the mlemaking process in the United States, which provides 

additional valuable transparency. 

4. Do you share the concern voiced by some that an unlevel playing field could impact the 

capacity of U.S. banks to lend to consumers and businesses as these activities become 

increasingly expensive vis-a-vis foreign banks'! 

Our financial system is stronger and more resilient than it was a decade ago, in large part as a 

result of higher levels of high quality capital and liquidity in the system. Stronger risk-based 

capital and liquidity regulations, together with our stress testing program, help ensure that large 

U.S. banks are better positioned to continue lending through periods of economic stress and 

market turbulence. Although U.S. banking organizations are subject to high regulatory capital 

and liquidity standards, these firms have been successful competitors in the global financial 

mmkets in recent years. U.S. banking organizations have been able to expand lending while 

maintaining high capital and liquidity buffers required by the Federal Reserve. 

Since the crisis, the U.S. banking system has provided substantial supp01t for the economy, with 

total loans and leases increasing by over 34 percent since December 2010. As of September 

2017, domestic banks held 84.7 percent of total loans and leases in the United States, which has 

grown slightly since a post-crisis low of83.8 percent at year-end 2014. We have seen no 

evidence that U.S. bank lending has been constrained relative to foreign banks, and we believe 

that strong prudential requirements, particularly for large banking firms, will produce more 

sustainable credit availability and economic growth tlu·ough the economic cycle. 

5. Your colleague Randall Quarles noted in a recent speech that there are 24 different loss 

absorbing requirements coming out of Dodd-Frank and that be was "reasonable certain" 

that this was too many. A1·c there specific work streams underway at the Fede1·al Reserve 

that will better 'tailor' such 1·equirements in an efficient, effective manner, and which 

utilize a more measured/streamlined approach to supervision and enforcement? 

Yes, the Federal Reserve Board (Board) is actively working to streamline such requirements. 

One good example of this is our recently issued proposal for banking organizations subject to 

Comprehensive Capital Analysis and Review that would integrate the forward-looking stress test 

results into the Board's non-stress capital requirements. A result of this proposal would be to 

reduce tbe current capital-related ratio requirements these firms are subject to from 24 down to 

14. 

6. On a related supervisory issue, please elaborate on your earlier public comments about 

it being "important to acknowledge that a [bank] board's role is one of oversight, not 

management." Have you completed the reassessment you noted of whether the Federal 

Reserve's supervisory expectations for boards needs to change to ensure that this is the 

guiding principal and not an "ever increasing checklist?" 
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On August 3, 2017, the Federal Reserve armounced that it was seeking public comment on a 

proposal regarding supervisory expectations for boards of directors. The Federal Reserve is in 

the process of finalizing the proposal based on consideration of the comments received. 

The proposal includes proposed supervisory guidance on board effectiveness that is intended to 

shift our supervisory focus to boards' core responsibilities and better distinguish supervisory 

expectations for boards from those for senior management. The guidance focuses on five key 

attributes of an effective board rather than on process-oriented supervisory expectations that do 

not directly Ielate to the board's core responsibilities. 

The proposal also discusses the Federal Reserve's comprehensive review of all existing 

supervisory expectations and regulatory requirements relating to boards of directors of bank and 

savings and loan holding companies of all sizes. The purpose of the review is to identify 

supervismy expectations for boards of directors that do not relate to their core responsibilities or 

do not clearly delineate the roles and responsibilities of boards from those of senior management. 

The Federal Reserve believes that revising or eliminating unnecessary, redundant, or outdated 

expectations, as appropriate, will allow boards to focus more of their time and resources on 

fulfilling their core responsibilities. 

The Federal Reserve is conducting this review in two phases. The first phase is focused on 

reviewing supervisory expectations for boards set forth in existing Supervision and Regulation 

(SR) letters that co!lllllunicate Board guidance. The preliminary results of the review, as 

discussed in the proposal, identified 27 SR letters for potential elimination or revision, which 

collectively include more than 170 supervisory expectations for holding company boards. 

The Federal Reserve is in the process of considering comments received on the first phase of the 

review and will publish the final results of the review when the proposal is finalized. 

The second phase of the review will focus on requirements and supervisory expectations for 

boards set fmih in Board regulations or in various forms of interagency guidance. Revising 

Board regulations will take more time to complete, and revisions to interagency guidance involve 

consultation and collaboration with other federal banking agencies. 
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Questions for The Honorable Jerome H. Powell, Chairman, Board of Governors of the 

Federal Reset'Ve System from R1mresentative Sherman: 

1. Recently, you discussed the need for comprehensive, legislative GSE reform. What arc 

the elements of a reformed system that you believe are "must-haves"? Do you believe 

competition in the secondary market is one of these must-haves? 

The Federal Reserve is responsible for regulating and supervising banking institutions to ensure 

their safety and soundness, and more broadly for the stability of the financial system. A robust, 

well-capitalized, well-regulated housing system is vital to achieving those goals, and !be longterm health of our economy. 

There are a number of principles that should be considered as a part of housing finance ref01m. 

First, we ought to do whatever we ean to make the possibility of future housing crises as remote 

as possible. Refmm should be designed to attract large amounts of private capital into the 

housing finance system. As with banks, the goal should be to ensure !bat our housing finance 

system and its underlying institutions can continue to function even in the face of significant 

house price declines and severe economic conditions. 

Second, any government guarantee resulting from housing finance reform should be explicit and 

transparent, and should apply to securities, not to institutions. Reform should not leave us with 

any institutions that are so impmiant as to be candidates for too-big-to-fail. 

Third, we should promote greater competition in the secondary m01igage market. The 

economics of securitization do not require a duopoly. Yet there is no way for private finns to 

acquire a government-sponsored enterprise (GSE) charter and enter !be industry. Greater 

competition would help to reduce the systemic impmiance of the GSEs, and spur more 

innovation. Greater competition also requires a level playing field, allowing secondary market 

access to a wide-range of lenders and thereby giving homebuyers a choice among many potential 

mortgage lenders and products. 

Fourth, we should consider simple approaches that restructure and repurpose parts of the existing 

architecture of our housing finance system. We know that housing reform is difficult; 

completely redrawing the system may not be necessary and could complicate the search for a 

solution. Using the existing architecture would allow for a continued smooth, gradual transition. 

Fifth, we need to identify and build upon areas ofbipa:tiisan agreement. We should be looking 

for the best feasible plan to escape the unacceptable status quo of indefinite conservatorship. 

2. Large data breaches are wreaking havoc on small and midsized financial institutions. Is 

the I<ederal Reserve reviewing >my policies to ensure that financial institutions do not 

remain solely liable for the cost of breaches? 

The Federal Reserve requires financial institutions, and the service providers supporting their 

activities, to have robust information security programs. The Federal Reserve tailors its 

supervisory approach based on the risks, size, and complexity of the organizations it supervises. 

This tailored approach is reflected in our rulemaking, supervisory guidance, reporting 
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requirements, as well as in the execution of supervision. Under the authority of the Bank Service 

Company Act, the Federal Reserve provides the report of examination to serviced financial 

institutions, which they can use to better manage Information Technology (IT) risk. 

In lieu of issuing new guidance, the Federal Reserve has been working with other financial 

regulatory agencies on harmonizing cybersecurity regulatory expectations across the financial 

services sector. Specifically, we are focused on aligning our cybersecurity expectations with 

existing best practices and identifYing opportunities to further coordinate cyber risk supervisory 

activities. 

Our analysis of many cyber breaches indicates most breaches could have been prevented through 

basic information security practices and routine security training. It is essential that financial 

institutions implement controls to effectively maintain basic security hygiene practices and adopt 

security training programs for all employees. 

It also is essential that banks have appropriate cyber risk management programs in place to 

mitigate the risk of a data breach. Management should understand the institution's insurance 

needs and the limitations of insurance coverage. 1 These policies generally exclude, or may not 

include, liability for all areas ofiT operations and cybersecurity. Financial institutions of all 

sizes may use cyber insurance to manage their exposure to breaches. 

Financial institutions supervised by the Federal Reserve are required to follow the GrammLeach-Biiley Act2 (GLBA) and maintain an information security program to protect customer 

data. The Federal Financial Institutions Examination Council (FFIEC) member agencies design 

and supervise examinations and publish the Information Technology (IT) Handbook,3 which 

provides guidance for the IT security controls that can be used by financial institutions to 

safeguard their customers' data. 

The Federal Reserve and FFIEC members recommend that financial institutions of all sizes 

participate in information sharing forums as a part of their process to identifY, respond to, and 

mitigate rapidly evolving cybersecurity threats and vulnerabilities4 Financial institution 

management is expected to monitor and maintain sufficient awareness of cybersccurity threat 

and vulnerability information so that they may evaluate risk and adjust their information security 

programs accordingly. 

3. Is the Federal Reserve coordinating in any way with the Treasury Department to 

provide access to banking for state-legal marijuana businesses'! 

In general, the decision to open, close, or decline a customer account or relationship is made by a 

bank, without involvement by the Federal Reserve. The Federal Reserve's supervisory 

1 Per the FFIEC IT Examination InfoBase: https://ithandbook.ffiec.gov/it-bookletslmanagement/iii-it-riskmanagement/iiic-risk-mitigationliiic7-insurance.aspx. 2 GLBA, also known as The Financial Services Modernization, requires companies acting as "financial 

institutions,)) to explain their information-sharing practices and to safeguard sensitive customer data; CFR part 

208, Appendix D. 3 https:llithandbook.fftec.gov/it-booklets.aspx. 4 The FFIEC recommended that regulated financial institutions pmticipate in information sharing forums in a press 

release, November 3, 20!4. 
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expectation is that a banking organization should develop and maintain adequate controls to 

address appropriately the xisks associated with a particular customer relationship, and comply 

with applicable laws and regulations, including the requirements of the Bank Secrecy Act (BSA). 

In 2014, the Financial Crimes Enforcement Network (FinCEN), a bureau of the Treasury 

Department and the administrator ofBSA, issued guidance addressing the obligation of a bank to 

file suspicious activity reports (SARs) with respect to marijuana-related business customers.5 

This guidance was issued in connection with a Department of Justice (DOJ) statement of 

enforcement priorities related to marijuana-related businesses, which stated that the DOJ did not 

intend to prosecute those in compliance with state law, but in violation of the federal law, unless 

the conduct implicated one ofDOJ's stated priority matters. 6 As you may know, the DOJ 

rescinded the 20 I 4 statement of enforcement priorities earlier this year, however, the FinCEN 

guidance remains in place.7 

Consistent with the Federal Reserve's longstanding practice, we have incorporated FinCEN's 

expectations related to SAR filings into our supervisory program. Specifically, in 2014, the 

Federal Reserve and other federal banking regulators modified the Federal Financial Institutions 

Examination Council's BSA/Anti Money Laundering Examination Manual and added 

expectations for examiners to assess whether a bank is complying with the requirement to file 

SARs for marijuana-related transactions.8 We are not aware of any additional coordination 

efforts by the Treasury Department with the Federal Reserve to provide banking access for 

marijuana-related businesses. 

' FinCEN, "!3SA Expectations Regarding Marijuana-Related Businesses", FIN-2014-001, (Feb. 14, 2014), at 

https ://www. fmcen.gov /sites/defau lt/files/shared/FIN-20 14-GOO !.pdf. 6 Memorandum to United States Attorneys from James M. Cole, Deputy Attomey General, "Guidance Regarding 

Marijuana Enforcement" (Aug. 29, 20!3), at https://www.justice.gov/iso/opa/resources/ 

30520 l3829132756857467.pdf. 7 Memorandum to United States Attomeys from Jefferson B. Sessions, lll, Attorney General, "Marijuana 

Enforcement" (Jan. 4, 20 18), at https://www.justice.gov/opa/press-release/file/1022196/download. 8 See Federal Financial Institutions Examination Council, "Bank Secrecy Act/ Anti~Money Laundering Examination 

Manual" (20!4). 
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Questions for The Honorable Jerome H. Powell, Chairman, Board of Governors of the 

Federal Reserve System from Representative Wagner: 

1. Thank you, Chairman Powell. 

In comments you made shortly after being sworn in as Chairman of the Federal Reserve, 

you noted that you were committed to "explaining what we're doing and why we at·e doing 

it( ... ) and will continue to pursue ways to improve transparency both in monetary policy 

and in regulation." 

How much value to you place on being as transparent as possible, so that not only 

Congress, but the American people understand the decisions the Fed is making? 

In 2012, the Fed dealt with a leak of confidential information relating to the deliberation of 

the Federal Open Markets Committee (FOMC). Information relating to the confidential 

documents and deliberations of the FOMC were obtained by a political intelligence firm, 

who shared the information in a newsletter to their clients. As you know, access to that 

information is valuable to markets and investors because the Fed does not make clear what 

it is likely to do in the future. 

The leak has plagued two Fed Chairmen, and triggered an internal investigation and two 

Inspector General investigations, one of which that was conducted jointly with the FBI. 

The leaker of the information has not been found. 

The Committee believes that a monetary policy rule would provide the public transparency 

into future monetary policy decisions, and eliminate the value of leaks. 

Again, you have talked a lot about being transparent, but you are the new boss- what is 

going to change on the issues of securing confidential information and transparency to 

prevent this going forward? 

Were you satisfied with how the Ieaker was dealt with? 

Chairman Powell, the Fed is helping neither itself nor the economy here. When will the 

Board improve its internal governance so episodes like these don't repeat themselves? 

The Congress established the Federal Reserve more than a century ago to provide a safer and 

more flexible monetary and financial system. The Federal Reserve is committed to transparency, 

which is important for any govemment institution. We are and should be accountable to the 

American people. 

The need to be clear and transparent is a core principle of om approach to monetary policy, as 

well as our approach to regulatory and supervisory responsibilities. However, we would not be 

serving the goal of transparency about our conduct of monetary policy by setting the federal 

funds rate in a mechanistic way that would frequently be inconsistent with the achievement of 

our mandate. And of course transparency in supervision must balance the need to maintain 

confidentiality in the supervisory process. 
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I plan to continue our tradition of independence and nonpartisanship by fostering an environment 

that supports objective analysis and research, and promoting a culture in which policymakers 

express their viewpoints and achieve consensus. I will also continue my predecessors' 

commitment to transparent communications with the Congress and the public, so that the 

Federal Reserve can be held accountable for its work. I welcome opportunities to discuss with 

members of Congress ways to further improve transparency and accountability. 

The Federal Open Market Committee (FOMC) and I take seriously our commitment to maintain 

the confidentiality of our deliberations and planning. We recognize, in particular, the importance 

of safeguarding confidential information that could advantage individuals who obtain access to 

it. For this reason, the FOMC adopted a Program for Security ofFOMC Information (Program) 

and Policies on External Communications of FOMC Participants and Staff (together with the 

Program, refened to as the Policies) that require confidential treatment of all FOMC information. 

FOMC participants (all members of the Federal Reserve Board and all Reserve Bank presidents, 

whether voting or non-voting) and all FOMC staff must ammally agree to the Program, and must 

abide in their contacts with the public by the principles laid out in the Policies. (fhe Program for 

Security ofFOMC Information and FOMC Policies on External Communications are available 

on the Board's public website.) 

The Policies aim to protect the confidentiality of the FOMC's monetary policy deliberations, and 

to prevent the disclosure of information in a manner such that any individual, firm, or 

organization could profit from acquiring that information. To this end, the Policies contain a 

variety of self-imposed limitations on communications by FOMC participants and 

Federal Reserve staff with access to FOMC information. For example, the Policies state that: 

An FOMC participant may publicly discuss his/her own views about monetary policy. 

However, participants have agreed not to describe the views or statements of other 

participants if the other participant has not already made his/her views public. 

Participants have agreed not to describe discussions at FOMC meetings beyond what is 

disclosed in the public mirtutes. 

Participants have agreed to refrain from describing their personal views about monetary 

policy in any meeting or conversation with any individual, firm, or organization who 

could profit financially from acquiring that infmmation unless those views have already 

been expressed in their public communications. 

• Participants have agreed to avoid giving a "prestige advantage" to outsiders through 

meetings or discussions. 

Similar policies apply to staff with access to FOMC information. 

Over recent years, the Federal Reserve has taken numerous steps to further enhance its overall 

program for FOMC information security. 

• All staff members with access to FOMC information must complete annual training on 

FOMC information security policies and procedures. 

• Documents prepared for the FOMC are stored in a very secure way. Access to paper and 

electronic versions of such documents is limited and carefully controlled. 

Various controls in automated systems have been implemented to guard against 

accidental breaches of information seemity protocols. 
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With respect to the 2012 disclosure of confidential FOMC information, the Federal Reserve fully 

cooperated with the law enforcement community that investigated this matter. I am confident 

that they had access to all infmmation and individuals and records to make the judgment they 

made in concluding their work.